-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KICkSubVxayaZyHjt9CpVn8RMCtVQqktq42Oi8LuU1fHBlhw1DAU/K2/YkvDzIOp ImsQxHm5mTg7FTUobdO/KQ== 0000950152-02-001947.txt : 20020415 0000950152-02-001947.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950152-02-001947 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 18 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEXMARK INTERNATIONAL INC /KY/ CENTRAL INDEX KEY: 0001001288 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER & OFFICE EQUIPMENT [3570] IRS NUMBER: 061308215 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-14050 FILM NUMBER: 02579000 BUSINESS ADDRESS: STREET 1: ONE LEXMARK CENTRE DR CITY: LEXINGTON STATE: KY ZIP: 40550 BUSINESS PHONE: 8592322000 MAIL ADDRESS: STREET 1: 740 WEST NEW CIRCLE ROAD CITY: LEXINGTON STATE: KY ZIP: 40550 FORMER COMPANY: FORMER CONFORMED NAME: LEXMARK HOLDING INC \DE\ DATE OF NAME CHANGE: 19950922 FORMER COMPANY: FORMER CONFORMED NAME: LEXMARK INTERNATIONAL GROUP INC DATE OF NAME CHANGE: 19951114 10-K 1 l92467ae10-k.txt LEXMARK INTERNATIONAL INC. 10-K/12-31-2001 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NO. 1-14050 LEXMARK INTERNATIONAL, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 06-1308215 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) ONE LEXMARK CENTRE DRIVE 740 WEST NEW CIRCLE ROAD LEXINGTON, KENTUCKY 40550 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(859) 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 8, 2002, there were outstanding 129,493,036 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 8, 2002) was approximately $7,501,926,133. DOCUMENTS INCORPORATED BY REFERENCE Certain information in the company's definitive Proxy Statement for the 2002 Annual Meeting of Stockholders, which will be 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, INC. AND SUBSIDIARIES FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2001
PAGE OF FORM 10-K --------- PART I Item 1. BUSINESS.................................................... 1 Item 2. PROPERTIES.................................................. 11 Item 3. LEGAL PROCEEDINGS........................................... 11 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 12 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................................... 12 Item 6. SELECTED FINANCIAL DATA..................................... 13 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................. 14 Item 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.. 26 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 28 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................. 57 PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 57 Item 11. EXECUTIVE COMPENSATION...................................... 57 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................ 57 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 57 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K....................................................... 58
PART I ITEM 1. BUSINESS GENERAL Lexmark International, Inc., ("International") is a Delaware corporation which is the surviving company of a merger between itself and its former parent holding company, Lexmark International Group, Inc., ("Group") consummated on July 1, 2000. Group was formed in July 1990 in connection with the acquisition of IBM Information Products Corporation from International Business Machines ("IBM"). The acquisition was completed in March 1991. Group had as its only significant asset all of the outstanding common stock of International. On November 15, 1995, Group completed its initial public offering of Class A common stock. International now trades on the New York Stock Exchange under the symbol "LXK." Hereinafter, the "company" and "Lexmark" will refer to Group (including its subsidiaries, as the context requires) for all events prior to July 1, 2000 and will refer to International (including its subsidiaries, as the context requires) for all events subsequent to the merger. Lexmark is a leading developer, manufacturer and supplier of printing solutions -- including laser and inkjet printers, multifunction products, associated supplies and services -- for offices and homes. Lexmark develops and owns most of the technology for its laser and color inkjet printers and associated supplies, and that differentiates the company from a number of its major competitors, including Hewlett Packard ("HP"), which purchases its laser engines and cartridges from a third party. Lexmark also sells dot matrix printers for printing single and multi-part forms by business users and develops, manufactures and markets a broad line of other office imaging products. The company operates in the office products industry segment. Revenue derived from international sales, including exports from the United States, make up more than half of the company's consolidated revenue with Europe accounting for approximately two-thirds of international sales. 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. Currency translation has significantly affected international revenue and cost of revenue. Refer to Management's Discussion and Analysis of Financial Condition and Results of Operations -- Effect of Currency Exchange Rates and Exchange Rate Risk Management for more information. As the company's international operations continue to grow, additional management attention 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 revenue and long-lived assets by geographic area is found on page 52 of this Annual Report on Form 10-K. MARKET OVERVIEW In 2001, estimated industry-wide revenue for printer hardware and associated supplies in the 1-50 pages per minute ("ppm") speed category, including monochrome (black) and color laser, inkjet and dot matrix printers, exceeded $40 billion. Lexmark management believes that industry revenue was flat or declined slightly in 2001, due to difficult economic conditions. Industry analysts estimate that the market will in the aggregate experience modest growth through 2005. Management also believes that the total printer output opportunity will expand as copiers and - --------------- Certain information contained in the "Market Overview" section has been obtained from industry sources. Data available from industry analysts varies widely among sources. The company bases its analysis of market trends on the data available from several different industry analysts. 1 fax machines shift from being standalone analog devices to being part of multifunction printers. With the integration of print/copy/fax, traditional copy and fax pages are now becoming part of the total printing opportunity. Management believes that this shift should favor companies like Lexmark based on its experience in providing industry leading network printing solutions and multifunction printers. The laser printer market can be divided into two major categories -- shared workgroup printers, which are typically attached directly to networks, and lower priced desktop printers attached to PCs or small workgroup networks. The shared workgroup printers include all color and monochrome laser printers that are easily upgraded to include additional input and output capacity and may include high performance internal network adapters. Most shared workgroup printers also have sophisticated network management software tools. Based on industry data, within the overall laser printer market, Lexmark has gained market share over the past five years and it is currently second in the market. In the shared workgroup market, which is dominated by HP, Lexmark management believes that Lexmark is also second in worldwide market share with more than twice the market share of the next nearest competitor. In the lower priced desktop laser printer category, Lexmark was one of the top three vendors in 2001. Management believes the company has recently strengthened its market share position in the lower priced desktop laser category. Laser printer unit growth in recent years has generally exceeded the growth rate of laser printer revenue due to unit growth in lower priced desktop laser printers and unit price pressure and management believes this trend will continue. This pricing pressure is partially offset by the tendency for customers in the shared workgroup laser market to add optional features including network adapters, additional memory, paper handling and multifunction capabilities. Management believes that some business users may choose inkjet printers as a lower priced alternative or supplement to laser printers for personal desktop use. The consumer printer market today consists almost entirely of color inkjet printers. Based on industry data, over the last three years the company's unit market share has doubled to approximately 20%. Management believes the inkjet market, including multifunction printers, was flat or slightly declined in 2001. However, Lexmark's unit volumes grew slightly in 2001. Growth in color inkjet printer revenue has been slower than unit growth due to pricing pressure, which management expects to continue. The greater affordability of color inkjet printers as well as the growth in the inkjet-based multifunction devices (all-in-one printers) have been important factors in the growth of this market. The Internet is positively impacting Lexmark's business in several ways. Management believes that as more information is available over the Internet, and new products are being developed to access it, more of the information from the Internet is being printed. This is especially beneficial for printer and supplies manufacturers since so much of the Internet content is rich in color and graphics. The Internet also allows Lexmark to communicate with and provide support to customers in new and more valuable ways in addition to reducing costs through achieving operational efficiencies. The markets for dot matrix printers and most of the company's other office imaging products, including supplies for select IBM branded printers, aftermarket supplies for original equipment manufacturer ("OEM") products, and typewriters continue to decline. STRATEGY Lexmark's strategy is based on a business model of building an installed base of printers that will then generate demand for Lexmark's printer supplies and services. Lexmark is executing a three-pronged strategy in implementing its business model. First, the company is pursuing an increased share of printing solutions in the corporate and consumer markets. Second, Lexmark is 2 using its technological leadership to maintain a competitive difference in its printers, supplies, software and services. Third, the company uses a differentiated marketing and sales approach. Lexmark's corporate customer strategy is to target large corporations and the public sector. The strategy is 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 providing printing solutions that meet specific customer needs. For the corporate customer, Lexmark continues to offer an array of advanced laser printing solutions with superior features and functions at competitive prices. The company believes that it is well-positioned to take advantage of the potential growth in demand for network attached printers due to its development and ownership of all key hardware and software technology components, including network connectivity, management tools and work flow enhancement solutions. Lexmark continually focuses on creating industry-wide standards for laser printer performance and enhancing its laser printers to function efficiently in a networked environment and provide significant flexibility and manageability to the network administrator. The company's consumer market strategy is to generate demand for Lexmark color inkjet printers by offering high-quality, competitively-priced products to consumers and businesses through retail and OEM channels. The company expects that product improvements in this market will result in faster printing and better print quality and it continues to develop its own technology to meet these customer needs. The company continues to support all the major PC operating systems such as Windows, Mac O/S and Linux. The company continues to take advantage of the operating systems and increasing computing power of the PC to drive printing functions and to produce a product that is easier to use. Lexmark believes that its core product offerings in this market, including the "Z" and "X" families of color inkjet printers, will also permit it to build brand recognition in the retail channels. The company recognized early on that as PC prices fell below $1,000 there was a need for high-quality, low-priced printers that retailers could bundle with the PCs. Lexmark has aggressively reduced costs while pushing the performance and features of higher-end color inkjets into this sub-$100 segment. Because of Lexmark's exclusive focus on printing solutions, the company has successfully advanced a strategy of forming alliances and OEM arrangements with more than fifteen companies, including Dell, IBM and Samsung. The entrance of a competitor that is also exclusively focused on printing solutions could have a material adverse impact on the company's strategy and financial results. The company's strategy for dot matrix printers and other office imaging products is to continue to offer high-quality products while managing cost to maximize cash flow and profit. PRODUCTS Business Products In 2001, the company introduced a wide range of new monochrome and color business printers, multifunction printers, and associated features, application solutions, and software upgrades. The new monochrome laser printers begin at the high end with the wide format W820. At 45 ppm, the W820 is the fastest printer ever introduced by Lexmark and is supported with an array of paper handling and finishing options that make it well suited for departmental printing needs. The T622 and T620 monochrome laser printers at 40 and 30 ppm, respectively, are designed to support large and medium workgroups and have optional paper input and output features, including a new stapler and offset stacker. The T522 and T520 monochrome laser printers at 25 and 20 ppm, respectively, are designed to support medium and small workgroups. For the small workgroup and personal segments, the company introduced the E322, E320, and E210 monochrome laser printers at 16, 16, and 12 ppm, respectively. 3 The new color printers introduced in 2001 include the C910 and C750, both with single pass technology. The C910 prints both monochrome and color pages at 28 ppm and supports printing on tabloid size paper. The C750 is the first Lexmark color laser printer to feature the company's internally developed color laser technology. The C750 prints both monochrome and color pages at 20 ppm. At the time of their introduction, both printers set new industry standards for price per rated speed in their respective categories. The company also introduced the C720, a color laser printer that prints at 24 ppm in monochrome and six ppm in color. The new multifunction printers introduced in 2001 include the X820e, X522, X520, and X720. Multifunction options were also provided for the T620 and T622. Each of these products provide print/copy/fax/scan capability. The X820e comes with an intuitive touch screen display and the ability to integrate with corporate directories and leverage existing network security to regulate access. These characteristics make it very easy for X820e users to scan paper documents and fax or e-mail them. The company also introduced enhancements to its document routing software, the Lexmark Document Distributor, which enables customers to increase productivity and streamline business processes. An enhanced version of MarkVision Professional, Lexmark's print management software that provides remote configuration, monitoring, and problem resolution of network print devices, was also introduced. The company introduced new application solution cards that support web, bar code, and IPDS printing for the new T52x, T62x and W820 printers. In addition, the company introduced the new MarkNet N2003fx internal print servers to move its Lexmark C, M, T, and W families of printers into the next generation of connectivity technology by providing a fiber solution. Inkjet Printers During 2001, the company introduced the third generation "Z" family of color inkjet printers. The six models in this family offer up to 2,400 x 1,200 dpi at speeds ranging from eight to sixteen ppm in black and five to eight ppm in color and all feature the Accu-Feed paper handling system. In 2001, the company also introduced the new "X" series of all-in-one printers, all of which provide print, scan and copy capabilities. The X63 also provides standalone faxing capabilities. The Lexmark "X" series products have redefined the multifunction category by offering cutting edge technology at consumer-friendly prices. Dot Matrix Printers The company continues to market five dot matrix printer models for customers who print a large volume of multi-part forms. Supplies The company designs, manufactures, and distributes a variety of cartridges and other supplies for use in its installed base of laser, inkjet, and dot matrix printers. Lexmark is currently the exclusive source for new printer cartridges for the printers it manufactures. The company's revenue and profit growth from its supplies business is directly linked to the company's ability to increase the installed base of its laser and inkjet printers and customer usage of those printers. The company also offers a broad range of other office imaging products, including typewriter products with the IBM logo, and other OEM printers, using both impact and non-impact technology. Service and Support For the company's printer products, a warranty period of at least one year is included, and customers typically have the option to purchase an extended warranty. The warranties generally include a toll-free technical support service as well as on-line support via the Internet. 4 MARKETING AND DISTRIBUTION The company markets and distributes its corporate customer printers primarily through its well-established distributor network, which includes such distributors as Ingram Micro, Tech Data, Arrow, Synnex, Computer 2000 and Northamber. The company's products are also sold through solution providers, who offer custom solutions to specific markets. In addition to its distributors and reseller networks, the company employs large account sales and marketing teams whose mission is to generate demand for Lexmark printing solutions primarily among large corporations as well as the public sector. Sales and marketing teams have focused on industry segments such as financial services, retail/pharmacy, manufacturing, government, education and health care. Those teams, in conjunction with the company's development and manufacturing teams, are able to customize printing solutions to meet customer specifications for printing electronic forms, media handling, duplex printing and other document workflow solutions. The company distributes its color inkjet printers primarily through more than 15,000 retail outlets worldwide including office superstores such as Staples, Office Depot and OfficeMax, computer superstores such as CompUSA, and consumer electronics stores such as Best Buy and Circuit City. The company also distributes its color inkjet printers to other large chains such as Wal-Mart and Target and to overseas stores such as Dixon's, Carrefour, Harvey Norman, T-Zone, Musimundo and Vobis. The company also sells its printers through alliances and OEM arrangements with more than fifteen companies, including Dell, IBM and Samsung. Lexmark's Internet website enables customers to purchase the company's products and services directly. It also provides important information regarding the company's hardware and supplies products, services and technical support, as well as reseller locations in various countries. Lexmark is using the power of the Internet as it expands its business-to-business and business-to-consumer markets. 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 western 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, Dixon's in the United Kingdom and Carrefour in France. Australian and 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 eastern European, Middle East, African, Latin American and Asia Pacific markets, other than Australia, are served through a combination of Lexmark sales offices, strategic partnerships and distributors. The company also has sales and marketing efforts for OEM opportunities. The company's printer supplies and other office imaging products are generally available at the customer's preferred point of purchase through multiple channels of distribution. Although channel mix varies somewhat depending on the geography, substantially all of the company's supplies products sold commercially in 2001 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. No single customer has accounted for more than 10% of the company's consolidated revenues since 1996. 5 COMPETITION The company's 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. In recent years, the company and its principal competitors, many of which have significantly greater financial, marketing and/or 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. The markets for printers and supplies are highly competitive. The laser printer market is dominated by HP, which has a widely recognized brand name and has been estimated to have an approximate 50% market share. Several other large vendors such as Canon, Xerox, Brother and Minolta also compete in the laser printer market. The company's primary competitors in the color inkjet printer market are HP, Epson and Canon, who together account for approximately 75% to 80% of worldwide 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, the company must compete with HP, Epson and Canon for retail shelf space for its low-end laser printers, inkjet printers and their associated supplies. Although Lexmark is currently the exclusive supplier of new printer cartridges for its laser and inkjet printers, there can be no assurance that other companies will not develop new compatible cartridges for Lexmark printers. In addition, refill and remanufactured alternatives for some of 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 December 2004 and certain others until December 2007, there are many independent ribbon and toner manufacturers competing to provide compatible supplies for IBM branded printing products. The company is increasingly less dependent on revenue and profitability from its other office imaging products than it has been historically. Management believes that the operating income associated with its other office imaging products will continue to decline. MANUFACTURING The company operates manufacturing control centers in Lexington, Kentucky and Geneva, Switzerland, and has manufacturing sites in Lexington, Boulder, Colorado, Orleans, France, Sydney, Australia, Rosyth, Scotland, Juarez, Mexico, Chihuahua, Mexico, Reynosa, Mexico and 6 Lapu-Lapu City, Philippines. During 2001, the company expanded existing facilities in Lapu-Lapu City, Philippines and established a new Asian customization center in Shenzen, China. 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. The company has provided some of its technical expertise to several lower cost vendors who provide additional printer production capability. Lexmark oversees these vendors to ensure that products meet the company's quality standards. In 2001, the company relocated manufacturing, primarily laser printers, to Mexico and China. Refer to Note 3 of the Notes to Consolidated Financial Statements for more information related to the company's restructuring plans. 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. 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. From time to time, the company may be required to use air shipment to expedite product flow, which can adversely impact the company's operating results. Conversely, in difficult economic times, the company's inventory can grow as market demand declines. Some components of the company's products are only available from one supplier, including certain custom chemicals, microprocessors, application specific integrated circuits and other semiconductors. In addition, the company sources some printer engines and finished products from OEMs. Although the company purchases in anticipation of its future requirements, should these components not be available from any one of these suppliers, there can be no assurance that production of certain of the company's products would not be disrupted. Such a disruption could interfere with the company's ability to manufacture and sell products and materially adversely affect the company's business. Conversely, during economic slowdowns, the company may build inventory of components as demand decreases. RESEARCH AND DEVELOPMENT The company's research and development activity for the past several years has focused on laser and inkjet printers and supplies and on network connectivity products. The company has been able to keep pace with product development and improvement while spending less than its larger competitors by selectively targeting its research and development efforts. It has also 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 7 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 $246 million in 2001, $217 million in 2000 and $184 million in 1999. 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. BACKLOG Although the company experiences availability constraints from time to time for certain of its products, the company generally fills its orders within 30 days of receiving them. Therefore, the company usually has a backlog of less than 30 days at any one time, which the company does not consider material to its business. EMPLOYEES As of December 31, 2001, the company had approximately 12,700 employees worldwide of which 4,900 are located in the U.S. and the remaining 7,800 in Europe, Canada, Latin America, Asia, and the Pacific Rim. 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. EXECUTIVE OFFICERS OF THE REGISTRANT 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 - ------------------ --- -------- ----------- Paul J. Curlander 49 Chairman and Chief Executive Officer 11 Gary E. Morin 53 Executive Vice President and Chief Financial Officer 6 Kathleen J. Affeldt 53 Vice President of Human Resources 11 Najib Bahous 45 Vice President, Customer Services 11 Daniel P. Bork 50 Vice President, Tax 5 Kurt M. Braun 41 Treasurer 10 Vincent J. Cole, Esq. 45 Vice President, General Counsel and Secretary 11 Timothy P. Craig 50 Vice President and President of Consumer Printer Division 11 David L. Goodnight 49 Vice President, Asia Pacific and Latin America 8 Paul A. Rooke 43 Vice President and President of Printing Solutions and Services Division 11 Roger P. Rydell 47 Vice President of Corporate Communications 4 Gary D. Stromquist 46 Vice President and Corporate Controller 11
8 Dr. Curlander has been a Director of the company since February 1997. Since April 1999, Dr. Curlander has been Chairman and Chief Executive Officer of the company. From May 1998 to April 1999, Dr. Curlander was 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 the company. In 1993, Dr. Curlander became a Vice President of the company, and from 1991 to 1993 he was General Manager of the company's printer business. Mr. Morin has been Executive Vice President and Chief Financial Officer of the company since January 2000. From January 1996 to January 2000, Mr. Morin was Vice President and Chief Financial Officer of the company. 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 of the company 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. Bahous has been Vice President, Customer Services of the company since July 2001. From January 1999 to July 2001, Mr. Bahous served as Vice President and General Manager, Customer Services Europe. From January 1997 to January 1999, Mr. Bahous was a Vice President in the company's Imaging Solutions Division in Europe. Prior to such time and since joining the company in 1991, Mr. Bahous held various marketing, operations and financial management positions in Europe. Mr. Bork has been Vice President, Tax of the company since May 2001. From October 1996 to May 2001, he was Director of Taxes of the company. 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. Craig has been Vice President and President of the company's Consumer Printer Division since November 2000. From June 2000 to November 2000, Mr. Craig served as a Vice President of the company, reporting to the Chairman and Chief Executive Officer. From October 1997 to June 2000, Mr. Craig served as a Vice President in the company's Business Printer Division, and prior to such time, he served as a Director in the company's Business Printer Division. Mr. Goodnight has been Vice President, Asia Pacific and Latin America since June 2001. From May 1998 to June 2001, Mr. Goodnight served as Vice President and Corporate Controller of the company. From February 1997 to May 1998, he served as Controller of the company. 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, a division of Lockheed Martin Corporation. Mr. Rooke has been Vice President and President of the company's Printing Solutions and Services Division since May 2001 when it was formed. From December 1999 to May 2001, 9 Mr. Rooke was Vice President and President of the company's Business Printer Division, and from June 1998 to December 1999, Mr. Rooke was Vice President and President of the company's Imaging Solutions Division. Mr. Rooke served as Vice President, Worldwide Marketing for the company's Consumer Printer Division from September 1996 up to his appointment as a division president. Prior to such time, he held various positions within the company'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. Rydell has been Vice President of Corporate Communications since he joined the company in January 1998. Prior to joining the company, Mr. Rydell was Vice President of Corporate Communications for The Timberland Company from December 1994 to January 1998. Prior to that, Mr. Rydell served as Director of Worldwide Communications for Dell Computer Corporation. Mr. Stromquist has been Vice President and Corporate Controller of the company since July 2001. From July 1999 to July 2001, Mr. Stromquist served as Vice President of Alliances/ OEM in the company's Consumer Printer Division. From March 1997 to July 1999, he served as Vice President of Finance of the company's Consumer Printer Division. Prior to such time and since joining the company in 1991, Mr. Stromquist was Director of Corporate Planning. INTELLECTUAL PROPERTY The company's intellectual property is one of its major assets and the ownership of the technology used in its products is important to its competitive position. The company has about 120 patent cross-license agreements of various types with various third parties. These license agreements include agreements with, for example, Canon and HP. Most of these license agreements provide cross-licenses to patents arising from patent applications first filed by the parties to the agreements before certain dates in the early 1990s, with the date varying from agreement to agreement. Each of the IBM, Canon and HP cross-licenses grants worldwide, royalty-free, non-exclusive rights to the company to use the covered patents to manufacture certain of its products. Certain of the company's material license agreements, including those that permit the company to manufacture its current design of laser and inkjet printers and aftermarket 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 1,500 patents worldwide and has approximately 1,100 pending patent applications worldwide covering a range of subject matter. The company has filed over 2,600 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 10 owns a number of trademark applications and registrations for product names, such as the OPTRA laser printer name. 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 corporate headquarters and principal development facilities are located on a 386 acre campus in Lexington, Kentucky. At December 31, 2001, the company owned or leased 7.0 million square feet of administrative, sales, service, research and development, warehouse and manufacturing facilities worldwide. Approximately 4.5 million square feet is located in the United States and the remainder is located in various international locations. The company's principal international manufacturing facilities are in Mexico, the Philippines, Scotland and Australia. The principal domestic manufacturing facility is in Colorado. The company also owns and leases customer technical support call centers worldwide, the largest of which are in Kentucky, Florida and Ireland. The company owns approximately 63% of the worldwide square footage and leases the remaining 37%. The leased property has various lease expiration dates. The company believes that it can readily obtain appropriate additional space as may be required at competitive rates by extending expiring leases or finding alternative space. None of the property owned by the company is held subject to any major encumbrances and the company believes that its facilities are in good operating condition. ITEM 3. LEGAL PROCEEDINGS In late 2001, the company and certain of its officers and directors were named as defendants in four substantially identical securities class actions, which have been consolidated in the U.S. District Court for the Eastern District of Kentucky. The complaints seek unspecified damages on behalf of a purported class consisting of purchasers of the company's stock during the period March 20, 2001 through October 22, 2001. Plaintiffs allege that the defendants made false and misleading statements about the company's business and financial performance in violation of Sections 10(b) and 20(a) (as well as Rule 10b-5) of the Securities Exchange Act of 1934. The company believes the claims are without merit, and intends to vigorously defend them. The company and Pitney Bowes, Inc. ("PBI") are involved in litigation in the U.S. District Court for the Eastern District of Kentucky in which PBI alleges that certain of the company's printers infringe the claims of PBI's patent 4,386,272, and that such infringement is willful. The company believes, based on the opinion of outside counsel, that it does not infringe the patent. The company believes the claims are without merit, and intends to vigorously defend them. 11 The company is also 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 is likely to 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. There can be no assurance that any pending litigation or 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 financial position or results of operations. 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's Class A common stock is traded on the New York Stock Exchange under the symbol LXK. As of March 8, 2002, there were 1,911 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 in Part II, Item 8, Note 18 of the Notes to Consolidated Financial Statements. 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 various other factors. 12 ITEM 6. SELECTED FINANCIAL DATA The table below summarizes recent financial information for the company. For further information refer to the company's financial statements and notes thereto presented under Part II, Item 8 of this Form 10-K. (Dollars in Millions, Except per Share Data) - --------------------------------------------------------------------------------
2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- STATEMENT OF EARNINGS DATA: - ---------------------------------------------------------------------------------------------------------------- Revenue............................................... $4,142.8 $3,807.0 $3,452.3 $3,020.6 $2,493.5 Cost of revenue (1)................................... 2,865.3 2,550.9 2,222.8 1,934.4 1,623.5 - ---------------------------------------------------------------------------------------------------------------- Gross profit.......................................... 1,277.5 1,256.1 1,229.5 1,086.2 870.0 Research and development.............................. 246.2 216.5 183.6 158.5 128.9 Selling, general and administrative................... 631.9 582.6 569.3 544.9 466.5 Restructuring and related charges (1) (2)............. 58.4 41.3 -- -- -- - ---------------------------------------------------------------------------------------------------------------- Operating income...................................... 341.0 415.7 476.6 382.8 274.6 Interest expense...................................... 14.8 12.8 10.7 11.0 10.8 Other................................................. 8.4 6.5 7.0 6.4 9.1 - ---------------------------------------------------------------------------------------------------------------- Earnings before income taxes.......................... 317.8 396.4 458.9 365.4 254.7 Provision for income taxes (3)........................ 44.2 111.0 140.4 122.4 91.7 - ---------------------------------------------------------------------------------------------------------------- Earnings before extraordinary item.................... 273.6 285.4 318.5 243.0 163.0 Extraordinary loss (4)................................ -- -- -- -- (14.0) - ---------------------------------------------------------------------------------------------------------------- Net earnings.......................................... $ 273.6 $ 285.4 $ 318.5 $ 243.0 $ 149.0 Diluted earnings per common share before extraordinary item (5)............................................ $ 2.05 $ 2.13 $ 2.32 $ 1.70 $ 1.08 Diluted net earnings per common share (5)............. $ 2.05 $ 2.13 $ 2.32 $ 1.70 $ 0.99 Shares used in per share calculation (5).............. 133.8 134.3 137.5 142.8 150.3 STATEMENT OF FINANCIAL POSITION DATA: - ---------------------------------------------------------------------------------------------------------------- Working capital....................................... $ 562.0 $ 264.7 $ 353.2 $ 414.3 $ 228.6 Total assets.......................................... 2,449.9 2,073.2 1,702.6 1,483.4 1,208.2 Total debt............................................ 160.1 148.9 164.9 160.4 75.0 Stockholders' equity.................................. 1,075.9 777.0 659.1 578.1 500.7 OTHER KEY DATA: - ---------------------------------------------------------------------------------------------------------------- Operating income before unusual items (6)............. $ 428.7 $ 457.0 $ 476.6 $ 382.8 $ 274.6 Cash from operations (7).............................. $ 195.7 $ 476.3 $ 448.2 $ 300.3 $ 281.3 Capital expenditures.................................. $ 214.4 $ 296.8 $ 220.4 $ 101.7 $ 69.5 Debt to total capital ratio........................... 13% 16% 20% 22% 13% After tax return on net assets before unusual items (6)................................................. 26% 32% 37% 34% 24% Return on average equity before unusual items (6)..... 30% 42% 53% 47% 30% Number of employees (8)............................... 12,724 13,035 10,933 8,835 7,985 - ----------------------------------------------------------------------------------------------------------------
(1) Restructuring and other charges in 2001 were $87.7 million ($64.5 million, net of tax) and resulted in a 48 cent reduction in diluted net earnings per share. Inventory write-offs of $29.3 million associated with the restructuring actions were included in cost of revenue. (2) Restructuring and related charges in 2000 were $41.3 million ($29.7 million, net of tax) and resulted in a 22 cent reduction in diluted net earnings per share. (3) Provision for income taxes in 2001 includes a $40 million non-recurring benefit from the resolution of income tax matters. (4) Represents extraordinary after-tax loss caused by the early extinguishment of the company's senior subordinated notes. (5) All data prior to 1999 has been restated to reflect a two-for-one stock split on June 10, 1999. (6) Unusual item in 2001 represents the restructuring and other charges discussed in (1) above and the resolution of income tax matters discussed in (3) above. Unusual item in 2000 represents the restructuring and related charges discussed in (2) above. Unusual item in 1997 represents the extraordinary after-tax loss discussed in (4) above. (7) Cash flows from investing and financing activities, which are not presented, are integral components of total cash flow activity. (8) Represents the number of full-time equivalent employees at December 31 of each year. 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto: OVERVIEW Lexmark International, Inc. ("International," and together with its subsidiaries, the "company" or "Lexmark") is a leading developer, manufacturer and supplier of printing solutions -- including laser and inkjet printers, multifunction products, associated supplies and services -- for offices and homes. The company also sells dot matrix printers for printing single and multi-part forms for business users and develops, manufactures and markets a broad line of other office imaging products. In the past five years, the worldwide printer industry has seen growth in laser and inkjet printers as a result of the increasing penetration of personal computers and local area networks into home and office markets. During this period, the company's own product mix has evolved, with its laser and inkjet printers and associated supplies representing an increasing percentage of its sales volume and revenue, particularly as the increasing base of installed Lexmark printers generates additional revenue from recurring sales of supplies for those printers (primarily laser and inkjet cartridges). Lexmark believes that its total revenue will continue to grow due to projected overall market growth for 2001 to 2005, despite a flat to slightly declining market from 2000 to 2001. The company experienced increases in market share in both the laser and inkjet printer categories in 2001 despite a difficult economic environment and an increasingly aggressive competitive market with respect to product pricing. In recent years, the company's growth rate in sales of printer units has generally exceeded the growth rate of its printer revenue due to selling price reductions and the introduction of new lower priced products in both the laser and inkjet printer markets. In the laser printer market, unit price reductions are partially offset by the tendency of customers to add optional features including network adapters, additional memory, paper handling and multifunction capabilities. In the inkjet printer market, advances in color inkjet technology have resulted in printers with higher resolution and improved performance while increased competition has led to lower prices. The greater affordability of color inkjet printers as well as the growth in the all-in-one category have been important factors in the growth of this market. As the installed base of Lexmark laser and inkjet printers continues to grow, management expects the market for supplies will grow as well, as such supplies are routinely required for use throughout the life of the printers. While profit margins on printer hardware have been negatively affected by competitive pricing pressure, the supplies are a relatively high margin, recurring business, which the company expects to contribute to the stability of its earnings over time. The company's dot matrix printers and other office imaging products include many mature products such as supplies for IBM printers, typewriters and other impact supplies that require little ongoing investment. The company expects that the market for these products will continue to decline, and has implemented a strategy to continue to offer high-quality products while managing cost to maximize cash flow and profit. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Lexmark's discussion and analysis of its financial condition and results of operations are based upon the company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of consolidated financial statements requires the company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related 14 disclosure of contingent assets and liabilities. On an on-going basis, the company evaluates its estimates, including those related to customer programs and incentives, product returns, bad debts, inventories, intangible assets, income taxes, warranty obligations, restructuring, pensions and other post-retirement benefits, and contingencies and litigation. The company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. The company records estimated reductions to revenue for customer programs and incentive offerings including special pricing agreements, price protection, promotions and other volume-based incentives. If market conditions were to decline, the company may take actions to increase customer incentive offerings, possibly resulting in an incremental reduction of revenue at the time the incentive is offered. The company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The company provides for the estimated cost of product warranties at the time revenue is recognized. While the company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the company's warranty obligation is affected by product failure rates and material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from the company's estimates, revisions to the estimated warranty liability would be required. The company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value. Likewise, the company records an adverse purchase commitment liability when anticipated market sales prices are lower than committed costs. If actual market conditions are less favorable than those projected by management, additional inventory write-downs and adverse purchase commitment liabilities may be required. Management also considers potential impairment of both tangible and intangible assets when circumstances indicate that the carrying amount of an asset may not be recoverable. The company estimates the expected return on plan assets, discount rate, involuntary turnover rate, rate of compensation increase and future health care costs, among other things, and relies on actuarial estimates to assess the future potential liability and funding requirements of the company's pension, postretirement and postemployment plans. These estimates, if incorrect, could have a significant impact on the company's consolidated financial position, results of operations or cash flows. The company estimates its tax liability based on current tax laws in the statutory jurisdictions in which it operates. These estimates include judgments about deferred tax assets and liabilities resulting from temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes, as well as about the realization of deferred tax assets. If the provisions for current or deferred taxes are not adequate, if the company is unable to realize certain deferred tax assets or if the tax laws change unfavorably, the company could experience potential significant losses in excess of the reserves established. Likewise, if the provisions for current and deferred taxes are in excess of those eventually needed, if the company is able to realize additional deferred tax assets or if tax laws change favorably, the company could experience potential significant gains. RESTRUCTURING AND OTHER CHARGES During the fourth quarter of 2001, Lexmark's management and board of directors approved a restructuring plan (the "2001 restructuring") that includes a reduction in the company's global 15 workforce of up to 12 percent. This plan provides for a reduction in infrastructure and overhead expenses, the elimination of the company's business class inkjet printer, and the closure of an electronic card manufacturing facility in Reynosa, Mexico. Restructuring and related charges of $58.4 million ($42.9 million, net of tax) were expensed during the fourth quarter of 2001. These charges were comprised of $36.0 million of accrued restructuring costs related to separation and other exit costs, $11.4 million associated with a pension curtailment loss related to the employee separations and $11.0 million related to asset impairment charges. The company also recorded $29.3 million ($21.6 million, net of tax) of associated restructuring-related inventory write-offs resulting from the company's decision to eliminate its business class inkjet printer, to limit the period over which the company will provide replacement parts for products no longer in production, and to exit the electronic card manufacturing business. The inventory write-offs are included in the cost of revenue line on the statements of earnings. The accrued restructuring costs for employee separations of $26.3 million are associated with approximately 1,600 employees worldwide from various business functions and job classes. Employee separation benefits include severance, medical and other benefits. As of December 31, 2001, approximately 200 employees had exited the business under the 2001 restructuring plan. The other exit costs of $9.7 million are primarily related to vendor and lease cancellation charges. The $11.0 million charge for asset impairment was determined in accordance with Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and resulted from the company's decision to abandon certain assets consisting primarily of machinery and equipment used in the manufacture of the company's business class inkjet printers and electronic cards. The charge for asset impairments is included in the restructuring and related charges line of the statements of earnings. In total, the company expects the 2001 pre-tax charge of $87.7 million to result in cash payments of approximately $36.0 million and non-cash charges of approximately $51.7 million. The cash payments are primarily for employee separations and other exit costs. Restructuring activities are expected to be substantially completed during the year 2002. Annual savings from the 2001 restructuring should approximate $55 million, with about $40 million being achieved in 2002. These savings will be used to offset competitive pricing impacts and for new investments. During 2000, Lexmark's management and board of directors approved a plan to restructure its worldwide manufacturing and related support operations (the "2000 restructuring"). The 2000 restructuring plan involved relocating manufacturing, primarily laser printers, to Mexico and China, and reductions in associated support infrastructure. Restructuring and related charges of $41.3 million ($29.7 million, net of tax) were expensed during the fourth quarter of 2000. These charges were comprised of $24.3 million of accrued restructuring costs related to separation and other exit costs, $10.0 million related to asset impairment charges and $7.0 million associated with a pension curtailment loss related to the employee separations. The employee separation costs included severance, medical and other benefits. The other exit costs were related to vendor and lease cancellation charges and demolition and cleanup costs associated with the company's manufacturing relocation. The asset impairment charges resulted from the company's plans to abandon certain assets (primarily buildings) associated with the relocation of manufacturing and related support activities. As of December 31, 2001, substantially all of the employees identified in the 2000 restructuring had exited the business and received separation benefits. 16 The following table presents a rollforward of the liabilities (in millions) incurred in connection with the 2000 and 2001 restructuring. These liabilities are reflected as accrued liabilities in the company's consolidated statements of financial position.
RESTRUCTURING EMPLOYEE OTHER EXIT LIABILITIES SEPARATIONS COSTS TOTAL ------------------------------------------------------------------------------------------ January 1, 2000...................................... $ -- $ -- $ -- Additions............................................ 19.3 5.0 24.3 Payments............................................. (1.1) (1.8) (2.9) ------------------------------------------------------------------------------------------ December 31, 2000.................................... 18.2 3.2 21.4 ------------------------------------------------------------------------------------------ Additions............................................ 26.3 9.7 36.0 Payments............................................. (13.7) (7.7) (21.4) Other................................................ (6.0) 4.3 (1.7) ------------------------------------------------------------------------------------------ December 31, 2001.................................... $ 24.8 $ 9.5 $ 34.3 ------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS 2001 COMPARED TO 2000 Consolidated revenue in 2001 was $4,143 million, an increase of 9% over 2000. Revenue was adversely affected by foreign currency exchange rates due to weakening of European currencies against the U.S. dollar. Revenue growth was 11% year-to-year on a constant currency basis. Total U.S. revenue increased $212 million or 13% and international revenue, including exports from the U.S., increased $124 million or 6%. Revenue from sales to all OEM customers accounted for less than 10% of consolidated revenue in 2001 with no single OEM customer accounting for more than 5% of total revenue. The company is continually pursuing OEM and alliance relationships, and therefore, to the extent that any single relationship is discontinued, the company would not expect revenue to be significantly impacted. The revenue growth was primarily driven by increased sales of laser and inkjet supplies whose revenue increased 27% over 2000. Laser and inkjet supplies revenue was $1,962 million for 2001, versus $1,548 million a year earlier, and represents 47% of total revenue versus 41% in 2000. Laser and inkjet printer revenue was $1,657 million for 2001, a 2% decline from 2000. Consolidated gross profit was $1,278 million for 2001, an increase of 2% from 2000. Gross profit as a percentage of revenue was 30.8% for 2001, compared to 33.0% for 2000. Excluding the restructuring-related inventory write-offs of $29 million, consolidated gross profit was $1,307 million and increased 4% for 2001 compared to 2000. Gross profit, excluding restructuring-related charges, as a percentage of revenue for 2001 decreased to 31.5% from 33.0% in 2000 principally due to lower laser and inkjet printer margins, partially offset by an increased mix of supplies. Total operating expense was $937 million in 2001 and operating expense as a percentage of revenue was 22.6%. Excluding the restructuring and related charges of approximately $58 million, total operating expense was $878 million and increased 10% for 2001 compared to 2000. Operating expense, excluding restructuring and related charges, as a percentage of revenue increased to 21.2% in 2001 compared to 21.0% in 2000 primarily due to slightly higher research and development expense as a percentage of revenue. Consolidated operating income was $341 million in 2001. Excluding the restructuring and related charges, consolidated operating income was $429 million and decreased 6% from 2000 primarily due to the lower gross profit margin. In 2001, earnings before income taxes were $318 million. Excluding the restructuring and related charges, earnings before income taxes were $406 million, a decrease of 7% from 2000, reflecting lower operating margins. 17 In 2001, the company reached resolution with the Internal Revenue Service on certain adjustments related to the intercompany allocation of profits. As a result of this resolution the company has reversed previously accrued taxes, reducing the income tax provision in the fourth quarter of 2001 by $40 million, which reduced the effective income tax rate to 13.9% for 2001. Net earnings were $274 million in 2001. The restructuring and related charges net of taxes were approximately $65 million. Earnings excluding restructuring and related charges and the $40 million benefit from the resolution of income tax matters were $298 million, down 5% from 2000, primarily due to lower operating margins partially offset by a reduction in the effective income tax rate. Excluding the impact of the $40 million tax benefit, the income tax provision was 26.5% of earnings before taxes in 2001 as compared to 28.0% in 2000. The decrease in the effective income tax rate was primarily due to lower income tax rates on manufacturing activities in certain countries. Basic net earnings per share were $2.11 for 2001 compared to $2.22 in 2000. The restructuring and related charges resulted in a $.50 negative impact on basic net earnings per share for 2001 and the income tax benefit resulted in a $0.31 positive impact. Basic earnings per share, excluding restructuring and related charges and the tax benefit, were $2.30 for 2001 and $2.46 for 2000. Diluted net earnings per share were $2.05 in 2001 before adjusting for the $.48 per share impact related to the 2001 restructuring actions, and the $.30 income tax benefit. Diluted earnings per share after removing the restructuring impacts and the tax benefit were $2.23 in 2001, compared to $2.35 in 2000, a decrease of 5%. This decrease was due to the decline in net earnings. The following table sets forth the percentage of total revenue represented by certain items reflected in the company's statements of earnings, excluding restructuring and other charges:
2001 2000 1999 ------------------------------------------------------------------------------------- Revenue..................................................... 100.0% 100.0% 100.0% Cost of revenue............................................. 68.5% 67.0% 64.4% ------------------------------------------------------------------------------------- Gross profit................................................ 31.5% 33.0% 35.6% Research & development...................................... 5.9% 5.7% 5.3% Selling, general & administrative........................... 15.3% 15.3% 16.5% ------------------------------------------------------------------------------------- Operating income............................................ 10.3% 12.0% 13.8% -------------------------------------------------------------------------------------
2000 COMPARED TO 1999 Consolidated revenue in 2000 was $3,807 million, an increase of 10% over 1999. Revenue was adversely affected by foreign currency exchange rates due to weakening of European currencies against the U.S. dollar. Revenue growth was 16% year-to-year on a constant currency basis. Total U.S. revenue increased $143 million or 9% and international revenue, including exports from the U.S., increased $212 million or 11%. Revenue from sales to all OEM customers accounted for less than 15% of consolidated revenue in 2000 with no single OEM customer accounting for more than 5% of total revenue. The revenue growth was primarily driven by increased sales of laser and inkjet supplies whose revenue increased 35% over 1999. Printer volumes grew at double-digit rates and associated printer supplies revenue increased during 2000 as compared to 1999 primarily due to the continued growth of the company's installed printer base. Laser and inkjet supplies revenue was $1,548 million, versus $1,144 million a year earlier, and represented 41% of total revenue versus 33% in 1999. Laser and inkjet printer revenue was $1,689 million for 2000, a 2% increase from 1999. 18 Consolidated gross profit was $1,256 million for 2000, an increase of 2% from 1999. Gross profit as a percentage of revenue for 2000 decreased to 33.0% from 35.6% in 1999 principally due to lower hardware margins, unfavorable foreign currency impact, the cost of airfreight, and a mix shift among products. Total operating expense was $840 million in 2000. Excluding the restructuring and related charges of $41 million, total operating expense was $799 million and increased 6% for 2000 compared to 1999. Operating expense, excluding restructuring and related charges, as a percentage of revenue decreased to 21.0% in 2000 compared to 21.8% in 1999 primarily due to lower selling, general and administrative expense as a percentage of revenue. Consolidated operating income was $416 million in 2000. Excluding the restructuring and related charges, consolidated operating income was $457 million and decreased 4% from 1999. Higher revenue and lower selling, general, and administrative expense as a percentage of revenue were offset by lower hardware margins, unfavorable foreign currency impact, the cost of airfreight, and a mix shift among products. In 2000, earnings before income taxes were $397 million. Excluding the restructuring and related charges, earnings before income taxes were $438 million, a decrease of 5% from 1999, reflecting lower operating margins. Net earnings were $285 million in 2000. The restructuring and related charges net of taxes were $30 million. Earnings excluding restructuring and related charges were $315 million, down 1% from 1999, primarily due to lower operating margins partially offset by a reduction in the effective income tax rate. The income tax provision was 28.0% of earnings before taxes in 2000 as compared to 30.6% in 1999. The decrease in the effective income tax rate was primarily due to lower income tax rates on manufacturing activities in certain countries. Basic net earnings per share were $2.22 for 2000 compared to $2.46 in 1999. The restructuring and related charges resulted in a $.24 negative impact on basic net earnings per share. Basic earnings per share, excluding restructuring and related charges, were $2.46 for both 2000 and 1999. Diluted net earnings per share were $2.13 in 2000 before adjusting for the $.22 per share impact related to the restructuring actions. Diluted earnings per share after removing the restructuring impacts were $2.35 in 2000, compared to $2.32 in 1999, an increase of 1%. This increase was due to fewer shares outstanding partially offset by the decline in net earnings. LIQUIDITY AND CAPITAL RESOURCES Lexmark's primary source of liquidity has been cash generated by operations, which totaled $196 million, $476 million and $448 million in 2001, 2000 and 1999, respectively. Cash from operations generally has been sufficient to allow the company to fund its working capital needs and finance its capital expenditures during these periods along with the repurchase of approximately $209 million and $302 million of its Class A common stock during 2000 and 1999, respectively. In the event that cash from operations is not sufficient, the company has other potential sources of cash such as its revolving credit facility, accounts receivable financing program and other financing sources such as the public or private debt markets, which are discussed in greater detail below. Cash flows from operating activities in 2001 were $196 million, compared to $476 million in 2000. The decrease in 2001 was primarily due to unfavorable changes in working capital accounts, principally related to current liabilities. In 2000, cash provided by operating activities increased 6% over 1999 due to favorable changes in working capital accounts. The company has short-term non-cancelable purchase commitments with suppliers which arise in the normal course of business and provide the company with continuity of supply and lower product cost. If the company fails to anticipate customer demand properly, a temporary 19 oversupply of inventory could result in excess or obsolete components which could adversely affect gross margins. The company has a $300 million unsecured, revolving credit facility with a group of banks. The interest rate on the credit facility ranges from 0.2% to 0.7% above London Interbank Offered Rate (LIBOR), as adjusted under certain limited circumstances, based upon the company's debt rating. In addition, the company pays a facility fee on the $300 million of 0.1% to 0.3% based upon the company's debt rating. The interest and facility fees are payable quarterly. The $300 million credit agreement, as amended, contains customary default provisions, leverage and interest coverage restrictions and certain restrictions on the incurrence of additional debt, liens, mergers or consolidations and investments. Any amounts outstanding under the $300 million credit facility are due upon the maturity of the facility on January 27, 2003. As of December 31, 2001 and 2000, there were no amounts outstanding under this credit facility. The company has outstanding $150 million principal amount of 6.75% senior notes due May 15, 2008, which was initially priced at 98.998%, to yield 6.89% to maturity. The senior notes contain typical restrictions on liens, sale leaseback transactions, mergers and sales of assets. There are no sinking fund requirements on the senior notes and they may be redeemed at any time, at a redemption price as described in the related indenture agreement, as supplemented and amended, in whole or in part, at the option of the company. A balance of $149 million (net of unamortized discount of $1 million) was outstanding at December 31, 2001. The company is in compliance with all covenants and other requirements set forth in its debt agreements. The company does not have any rating downgrade triggers that would accelerate the maturity dates of its revolving credit facility and public debt. However, a downgrade in the company's credit rating could adversely affect the company's ability to renew existing, or obtain access to new, credit facilities in the future and could increase the cost of such facilities. In February 2001, the company filed a shelf registration statement with the Securities and Exchange Commission to register $200 million of debt securities. The company expects to use the net proceeds from the sale of the securities for capital expenditures, reduction of short-term borrowings, working capital, acquisitions and other general corporate purposes. The following table summarizes the company's contractual obligations at December 31, 2001: - --------------------------------------------------------------------------------
Less than 1-3 4-5 After 5 In millions Total 1 year years years years --------------------------------------------------------------------------------------------- Long-term debt.................................. $150 $ -- $-- $-- $150 Short-term borrowings........................... 11 11 -- -- -- Operating leases................................ 130 31 41 30 28 Non-cancelable purchase commitments............. 339 339 -- -- -- --------------------------------------------------------------------------------------------- Total contractual obligations................... $630 $381 $41 $30 $178 ---------------------------------------------------------------------------------------------
In October 2001, the company entered into a new agreement to sell its U.S. trade receivables on a limited recourse basis. The new agreement increased the maximum amount of financing available to $225 million. As collections reduce previously sold receivables, the company may replenish these with new receivables. The company bears a risk of bad debt losses on U.S. trade receivables sold, since the company over-collateralizes the receivables sold with additional eligible receivables. The company addresses this risk of loss in its allowance for doubtful accounts. Receivables sold may not include amounts over 90 days past due or concentrations over certain limits with any one customer. This facility contains customary affirmative and negative covenants as well as specific provisions related to the quality of the accounts receivables sold. The facility also contains customary cash control triggering events which, if triggered, could adversely affect the company's liquidity and/or its ability to sell trade 20 receivables. A downgrade in the company's credit rating could reduce the company's ability to sell trade receivables. The facility expires in October 2004, but requires annual renewal of commitments in October 2002 and 2003. At December 31, 2001, U.S. trade receivables of $85 million had been sold and, due to the revolving nature of the agreement, $85 million also remained outstanding. The company's previous agreement to sell its U.S. trade receivables on a limited recourse basis was amended in October 2000, and the maximum amount of U.S. trade receivables to be sold was increased from $150 million to $170 million. At December 31, 2000, U.S. trade receivables of $170 million had been sold and also remained outstanding. At December 31, 2001 and 2000, the company did not have any relationship with unconsolidated entities or financial partnerships, which other companies have established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Therefore, the company is not materially exposed to any financing, liquidity, market or credit risk that could arise if the company had engaged in such relationships. At the company's Annual Meeting of Stockholders on April 27, 2000, the stockholders approved an increase in the number of authorized shares of its Class A common stock from 450 million to 900 million shares. In February 2002, the company received authorization from the board of directors to repurchase an additional $200 million of its Class A common stock for a total repurchase authority of $1.2 billion. This repurchase authority allows the company, at management's discretion, to selectively repurchase its stock from time to time in the open market or in privately negotiated transactions depending upon market price and other factors. During 2001, the company did not repurchase shares of its Class A common stock. As of December 31, 2001, the company had repurchased approximately 29 million shares at prices ranging from $10.63 to $105.38 per share for an aggregate cost of approximately $882 million, leaving approximately $118 million of share repurchase authority. As of March 8, 2002, the company has repurchased approximately 30 million shares for an aggregate cost of approximately $959 million, leaving approximately $241 million of share repurchase authority. CAPITAL EXPENDITURES Capital expenditures totaled $214 million, $297 million and $220 million in 2001, 2000 and 1999, respectively. The capital expenditures during the past three years were primarily attributable to capacity expansion, the support of new products and research and development facilities. Looking forward to 2002, the company expects capital expenditures to be approximately $150 million primarily attributable to new product development, infrastructure support and the completion of capacity expansion projects initiated in prior years. The capital expenditures are expected to be funded primarily through cash from operations. EFFECT OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT Revenue derived from international operations, including exports from the United States, made up more than half of the company's consolidated revenue, with European revenue accounting for about two-thirds of international revenue. Substantially all foreign subsidiaries maintain their accounting records in their local currencies. Consequently, period-to-period comparability of results of operations is affected by fluctuations in exchange rates. Certain of the company's Latin American entities use the U.S. dollar as their functional currency. Lexmark's operations in Argentina were adversely impacted by currency devaluation in late 2001. This resulted in translation losses of approximately $2 million in December 2001. The company has continued to experience translation losses as a result of further deterioration in Argentina's currency, which could have an adverse impact in the future. 21 Currency translation has significantly affected international revenue and cost of revenue, and although it did not have a material impact on operating income for the years 1999 and 2001, the 2000 operating income was materially adversely impacted by exchange rate fluctuations. The company attempts to reduce its exposure to exchange rate fluctuations through the use of operational hedges, such as pricing actions and product sourcing decisions. The company's exposure to exchange rate fluctuations generally cannot be minimized solely through the use of operational hedges. Therefore, the company utilizes financial instruments such as forward exchange contracts and currency options to reduce the impact of exchange rate fluctuations on actual and anticipated cash flow exposures and certain assets and liabilities which arise from transactions denominated in currencies other than the functional currency. The company does not purchase currency related financial instruments for purposes other than exchange rate risk management. TAX MATTERS The company's effective income tax rate was approximately 14%, 28% and 31% for 2001, 2000 and 1999, respectively. The 2001 effective income tax rate was significantly impacted by the company's resolution with the Internal Revenue Service on certain adjustments related to the intercompany allocation of profits. As a result of this resolution, the company has reversed previously accrued taxes, reducing the tax provision in the fourth quarter of 2001 by $40 million, which reduced the effective income tax rate by 13%. Excluding the impact of this adjustment, the company's effective income tax rate was 27% for 2001. The decrease in the income tax rate was primarily due to the effect of lower tax rates on manufacturing activities in certain countries. The company and its subsidiaries are subject to tax examinations in various U.S. and foreign jurisdictions. The company believes that adequate amounts of tax and related interest have been provided for any adjustments that may result from these examinations. As of December 31, 2001, the company had non-U.S. tax loss carryforwards of $33 million, including $4 million which are not expected to provide a future benefit because they are attributable to certain non-U.S. entities that are also taxable in the U.S. NEW ACCOUNTING STANDARDS In May 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-14, Accounting for Certain Sales Incentives, which provides that some sales incentives should be treated as reductions in revenue and other sales incentives should be classified as cost of sales. In April 2001, the EITF deferred the effective date for this issue to quarters beginning after December 15, 2001. This statement is not expected to have a material impact on the company's financial position, results of operations or cash flows. The EITF has discussed several issues related to loyalty programs and vendor payments to retailers in connection with the promotion of the vendor's products. EITF 00-22, Accounting for "Points" and Certain Other Time-based or Volume-based Sales Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future, addresses loyalty programs that offer awards consisting of the vendor's products or services. In January 2001, a consensus was reached on one of the five issues discussed. The EITF concluded that offers to customers to rebate or refund a specified amount of cash that is redeemable only if the customer meets a specified cumulative level of revenue transactions should be recognized as a reduction of revenue. The effective date for application of this consensus was set for no later than the quarter ending after February 15, 2001. Adoption of this consensus did not have a material impact on the company's financial position, results of operations or cash flows. EITF 00-25, Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products, addresses when consideration paid to a retailer 22 should be classified as a reduction of revenue. In April 2001, a consensus was reached that consideration from a vendor to a purchaser of the vendor's products is presumed to be a reduction in the selling prices of the vendor's products and, therefore, should be characterized as a reduction of revenue. That presumption can be overcome and the consideration should be characterized as a cost incurred if certain criteria are met. The consensus is effective for annual or interim financial statements beginning after December 15, 2001. This statement is not expected to have a material impact on the company's financial position, results of operations or cash flows, although it will result in a reclassification from selling, general and administrative expense to revenue. In June 2001, the Financial Accounting Standards Board ("FASB") approved the issuance of Statement of Financial Accounting Standard ("SFAS") No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting. SFAS No. 142 states that goodwill should not be amortized, but should be tested for impairment annually at the reporting unit level. All other intangible assets should be amortized over their useful lives. Certain provisions of SFAS No. 141 and SFAS No. 142 are effective for companies with fiscal years beginning after December 15, 2001. These statements are not expected to have a material impact on the company's financial position, results of operations or cash flows. In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This Statement supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. SFAS No. 144 establishes a single accounting model, based on the framework established in SFAS No. 121, for the impairment or disposal of long-lived assets. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. This statement is not expected to have a material impact on the company's financial position, results of operations and cash flows. INFLATION The company is subject to the effects of changing prices and operates in an industry where product prices are very competitive and subject to downward price pressures. As a result, future increases in production costs or raw material prices could have an adverse effect on the company's business. However, the company actively manages its product costs and manufacturing processes in an effort to minimize the impact on earnings of any such increases. 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 beliefs 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, and there are a number of factors that could adversely affect the company's future operating results or cause the 23 company's actual results to differ materially from the estimates or expectations reflected in such forward-looking statements, including without limitation, the factors set forth below: - - Unfavorable global economic conditions may adversely impact the company's future operating results. Since the second quarter of 2001, the company has experienced weak markets for its products. Continued softness in these markets and uncertainty about the timing and extent of the global economic downturn by both corporate and consumer purchasers of the company's products could result in lower demand for the company's products. Weakness in demand may result in excess inventory for the company and/or its reseller channel which may adversely affect its operating results. - - 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 laser and inkjet 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, many of which have significantly greater financial, marketing and/or technological resources than the company, have regularly lowered prices on their printers and are expected to continue to do so. In particular, both the inkjet and laser printer markets have experienced and are expected to continue to experience significant price pressure. Price reductions on inkjet or laser printer products 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 believes that one of its competitive advantages is its exclusive focus on printing solutions. The entrance of a competitor that is also exclusively focused on printing solutions could offset this advantage and could have a material adverse impact on the company's strategy and financial results. - - The company's performance depends in part upon its ability to successfully forecast the timing and extent of customer demand and manage worldwide distribution and inventory levels to support the demand of its customers, and to address production and supply constraints, particularly delays in the supply of key components necessary for production, which may result in the company incurring additional costs to meet customer demand. 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. - - 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 pricing programs, the reaction of competitors to any such new products or programs, the life cycles of the company's products, as well as delays in product development and manufacturing, and variations in the cost of component parts, 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. - - Terrorist attacks, such as those that took place in the United States on September 11, 2001, and the potential for future terrorist attacks have created many political and economic uncertainties, some of which may affect the company's future operating results. Future terrorist attacks, the national and international responses to such attacks, and other acts of war or hostility may affect the company's facilities, employees, suppliers, customers, transportation networks and supply chains, or may affect the company in ways that are not capable of being predicted presently. - - Revenue derived from international sales make up over half of the company's revenue. Accordingly, the company's future results could be adversely affected by a variety of factors, including changes in a specific country's or region's political or economic conditions, foreign currency exchange rate fluctuations, trade protection measures and unexpected changes in regulatory requirements. Moreover, margins on international sales tend to be lower than those 24 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, in part, because of the higher investment levels for marketing, selling and distribution required to enter these markets. - - The company is beginning to rely more heavily on its international production facilities and international manufacturing partners for the manufacture of its products and key components of its products. Future operating results may be adversely affected by several factors, including, without limitation, if the company's international operations or manufacturing partners are unable to supply products reliably, if there are disruptions in international trade, if there are difficulties in transitioning such manufacturing activities from the company to its international operations or manufacturing partners, or if there arise production and supply constraints which result in additional costs to the company. - - 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 or business, as could expenses incurred by the company in obtaining intellectual property rights, enforcing its intellectual property rights against others or defending against claims that the company's products infringe the intellectual property rights of others. - - 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 or among its various sales channels. The company has advanced a strategy of forming alliances and OEM arrangements with many companies. One such OEM customer is Compaq Computer Corporation ("Compaq"), which represented less than three percent of the company's revenue in 2001, and the consummation of the HP/Compaq merger is likely to result in the loss of Compaq as a customer. - - Factors unrelated to the company's operating performance, including the loss of significant customers, manufacturing partners or suppliers; the outcome of pending and future litigation or governmental proceedings; and the ability to retain and attract key personnel, could also adversely affect the company's operating results. In addition, the company's stock price, like that of other technology companies, can be volatile. Trading activity in the company's common stock, particularly the trading of large blocks and intraday 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 the 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. 25 ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK SENSITIVITY The market risk inherent in the company's financial instruments and positions represents the potential loss arising from adverse changes in interest rates and foreign currency exchange rates. Interest Rates - -------------- At December 31, 2001, the fair value of the company's senior notes is estimated at $146 million using quoted market prices and yields obtained through independent pricing sources for the same or similar types of borrowing arrangements, taking into consideration the underlying terms of the debt. The carrying value of the senior notes as recorded in the statements of financial position exceeded the fair value at December 31, 2001 by approximately $3 million. Market risk is estimated as the potential change in fair value resulting from a hypothetical 10% adverse change in interest rates and amounts to approximately $5 million at December 31, 2001. Foreign Currency Exchange Rates - ------------------------------- The company employs a foreign currency hedging strategy to limit potential losses in earnings or cash flows from adverse foreign currency exchange rate movements. Foreign currency exposures arise from transactions denominated in a currency other than the company's functional currency and from foreign denominated revenue and profit translated into U.S. dollars. The primary currencies to which the company is exposed include the euro and other European currencies, the Japanese yen and other Asian and South American currencies. Exposures are hedged with foreign currency forward contracts, put options, and call options with maturity dates of less than eighteen months. The potential loss in fair value at December 31, 2001 for such contracts resulting from a hypothetical 10% adverse change in all foreign currency exchange rates is approximately $41 million. This loss would be mitigated by corresponding gains on the underlying exposures. 26 (This page intentionally left blank) 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (In Millions, Except Per Share Amounts) - --------------------------------------------------------------------------------
2001 2000 1999 ----------- ----------- ----------- Revenue............................................ $ 4,142.8 $ 3,807.0 $ 3,452.3 Cost of revenue.................................... 2,865.3 2,550.9 2,222.8 - -------------------------------------------------------------------------------------------- GROSS PROFIT.................................. 1,277.5 1,256.1 1,229.5 - -------------------------------------------------------------------------------------------- Research and development........................... 246.2 216.5 183.6 Selling, general and administrative................ 631.9 582.6 569.3 Restructuring and related charges.................. 58.4 41.3 -- - -------------------------------------------------------------------------------------------- OPERATING EXPENSE............................. 936.5 840.4 752.9 - -------------------------------------------------------------------------------------------- OPERATING INCOME.............................. 341.0 415.7 476.6 Interest expense................................... 14.8 12.8 10.7 Other.............................................. 8.4 6.5 7.0 - -------------------------------------------------------------------------------------------- EARNINGS BEFORE INCOME TAXES.................. 317.8 396.4 458.9 Provision for income taxes......................... 44.2 111.0 140.4 - -------------------------------------------------------------------------------------------- NET EARNINGS.................................. $ 273.6 $ 285.4 $ 318.5 Net earnings per share: Basic......................................... $ 2.11 $ 2.22 $ 2.46 Diluted....................................... $ 2.05 $ 2.13 $ 2.32 Shares used in per share calculation: Basic......................................... 129.6 128.4 129.4 Diluted....................................... 133.8 134.3 137.5 - --------------------------------------------------------------------------------------------
See notes to consolidated financial statements. 28 LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION AS OF DECEMBER 31, 2001 AND 2000 (In Millions, Except Par Value) - --------------------------------------------------------------------------------
2001 2000 -------- -------- ASSETS Current assets: Cash and cash equivalents................................. $ 90.7 $ 68.5 Trade receivables, net of allowances of $33.3 in 2001 and $22.2 in 2000.......................................... 702.8 594.0 Inventories............................................... 455.1 412.3 Prepaid expenses and other current assets................. 244.5 168.9 - --------------------------------------------------------------------------------- TOTAL CURRENT ASSETS................................... 1,493.1 1,243.7 Property, plant and equipment, net.......................... 800.4 730.6 Other assets................................................ 156.4 98.9 - --------------------------------------------------------------------------------- TOTAL ASSETS........................................... $2,449.9 $2,073.2 - --------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt........................................... $ 11.0 $ -- Accounts payable.......................................... 384.7 426.1 Accrued liabilities....................................... 535.4 552.9 - --------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES.............................. 931.1 979.0 Long-term debt.............................................. 149.1 148.9 Other liabilities........................................... 293.8 168.3 - --------------------------------------------------------------------------------- TOTAL LIABILITIES...................................... 1,374.0 1,296.2 - --------------------------------------------------------------------------------- Commitments and contingencies Stockholders' equity: Preferred stock, $.01 par value, 1.6 shares authorized; no shares issued and outstanding.......................... -- -- Common stock, $.01 par value: Class A, 900.0 shares authorized; 130.4 and 127.1 outstanding in 2001 and 2000, respectively.......... 1.6 1.6 Class B, 10.0 shares authorized; no shares issued and outstanding......................................... -- -- Capital in excess of par.................................. 806.2 715.7 Retained earnings......................................... 1,289.1 1,015.7 Treasury stock, at cost; 28.5 and 28.6 shares in 2001 and 2000, respectively..................................... (879.8) (881.1) Accumulated other comprehensive loss...................... (141.2) (74.9) - --------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY............................. 1,075.9 777.0 - --------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $2,449.9 $2,073.2
- -------------------------------------------------------------------------------- See notes to consolidated financial statements. 29 LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (In Millions) - --------------------------------------------------------------------------------
2001 2000 1999 ------ ------ ------ CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings................................................ $273.6 $285.4 $318.5 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization.......................... 125.6 91.2 80.1 Deferred taxes......................................... (56.4) (3.2) (8.9) Restructuring and related charges...................... 87.7 41.3 -- Other.................................................. 28.8 6.0 67.9 - -------------------------------------------------------------------------------------- 459.3 420.7 457.6 Change in assets and liabilities: Trade receivables.................................... (23.8) (116.7) (77.9) Trade receivables program............................ (85.0) 30.0 40.0 Inventories.......................................... (42.8) (24.6) (54.7) Accounts payable..................................... (41.4) 125.2 33.8 Accrued liabilities.................................. (17.5) 134.5 91.5 Tax benefits from employee stock plans............... 54.7 61.2 47.8 Other assets and liabilities......................... (107.8) (154.0) (89.9) - -------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES......... 195.7 476.3 448.2 - -------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment............. (214.4) (296.8) (220.4) Other.................................................. (0.2) (1.3) 0.2 - -------------------------------------------------------------------------------------- NET CASH USED FOR INVESTING ACTIVITIES............ (214.6) (298.1) (220.2) - -------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Increase (decrease) in short-term debt................. 11.0 (16.2) 8.2 Issuance of treasury stock............................. 1.3 0.1 -- Purchase of treasury stock............................. -- (208.9) (302.0) Proceeds from employee stock plans..................... 30.1 23.8 12.4 - -------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES..................................... 42.4 (201.2) (281.4) - -------------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (1.3) (2.4) (1.7) - -------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents........ 22.2 (25.4) (55.1) Cash and cash equivalents -- beginning of period............ 68.5 93.9 149.0 - -------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS -- END OF PERIOD.................. $ 90.7 $ 68.5 $ 93.9
- ------------------------------------------------------------------------------- See notes to consolidated financial statements. 30 LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE EARNINGS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (In Millions) - --------------------------------------------------------------------------------
CLASS A CLASS B CAPITAL IN COMMON STOCK COMMON STOCK EXCESS OF PAR --------------- --------------- ------------- SHARES AMOUNT SHARES AMOUNT ------ ------ ------ ------ BALANCE AT DECEMBER 31, 1998................................ 131.0 $0.8 -- $-- $564.8 Comprehensive earnings...................................... Net earnings.............................................. Other comprehensive earnings (loss):...................... Minimum pension liability adjustment (net of related tax liability of $0.7).................................... Cash flow hedges, net of reclassifications (net of related tax liability of $1.0)........................ Translation adjustment.................................. Other comprehensive earnings (loss)....................... - --------------------------------------------------------------------------------------------------------------- Comprehensive earnings...................................... Long-term incentive plan compensation....................... 2.9 Deferred stock plan compensation............................ 3.9 Shares issued upon exercise of options...................... 2.4 11.7 Tax benefit related to stock plans.......................... 47.8 Two-for-one stock split..................................... 0.7 (0.7) Treasury shares purchased................................... (5.3) Treasury shares issued...................................... - --------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1999................................ 128.1 1.5 -- -- 630.4 Comprehensive earnings...................................... Net earnings.............................................. Other comprehensive earnings (loss):...................... Minimum pension liability adjustment (net of related tax liability of $0.9).................................... Cash flow hedges, net of reclassifications (net of related tax benefit of $2.3).......................... Translation adjustment.................................. Other comprehensive earnings (loss)....................... - --------------------------------------------------------------------------------------------------------------- Comprehensive earnings...................................... Long-term incentive plan compensation....................... (3.2) Deferred stock plan compensation............................ 3.6 Shares issued upon exercise of options...................... 1.9 0.1 15.0 Shares issued under employee stock purchase plan............ 0.2 8.7 Tax benefit related to stock plans.......................... 61.2 Treasury shares purchased................................... (3.1) Treasury shares issued...................................... - --------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2000................................ 127.1 1.6 -- -- 715.7 Comprehensive earnings...................................... Net earnings.............................................. Other comprehensive earnings (loss):...................... Minimum pension liability adjustment (net of related tax benefit of $35.9)..................................... Cash flow hedges, net of reclassifications (net of related tax benefit of $0.6).......................... Translation adjustment.................................. Other comprehensive earnings (loss)....................... - --------------------------------------------------------------------------------------------------------------- Comprehensive earnings...................................... Long-term incentive plan compensation....................... 1.0 Deferred stock plan compensation............................ 4.7 Shares issued upon exercise of options...................... 3.0 21.9 Shares issued under employee stock purchase plan............ 0.2 8.2 Tax benefit related to stock plans.......................... 54.7 Treasury shares purchased................................... Treasury shares issued...................................... 0.1 - --------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2001................................ 130.4 $1.6 -- $-- $806.2
- -------------------------------------------------------------------------------- See notes to consolidated financial statements. 31 - --------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE EARNINGS (LOSS) ----------------------------------------------------- TOTAL RETAINED TREASURY MINIMUM TRANSLATION CASH FLOW STOCKHOLDERS' EARNINGS STOCK PENSION LIABILITY ADJUSTMENT HEDGES TOTAL EQUITY - -------- -------- ----------------- ----------- --------- ------- ------------- $ 411.8 $(370.3) $ (5.1) $(23.9) $ -- $ (29.0) $ 578.1 318.5 318.5 0.7 0.7 8.5 8.5 (11.0) (11.0) ------- (1.8) (1.8) - ------------------------------------------------------------------------------------------- 316.7 2.9 3.9 11.7 47.8 -- (302.0) (302.0) -- -- - ------------------------------------------------------------------------------------------- 730.3 (672.3) (4.4) (34.9) 8.5 (30.8) 659.1 285.4 285.4 0.8 0.8 (22.3) (22.3) (22.6) (22.6) ------- (44.1) (44.1) - ------------------------------------------------------------------------------------------- 241.3 (3.2) 3.6 15.1 8.7 61.2 (208.9) (208.9) 0.1 0.1 - ------------------------------------------------------------------------------------------- 1,015.7 (881.1) (3.6) (57.5) (13.8) (74.9) 777.0 273.6 273.6 (58.4) (58.4) (1.1) (1.1) (6.8) (6.8) ------- (66.3) (66.3) - ------------------------------------------------------------------------------------------- 207.3 1.0 4.7 21.9 8.2 54.7 -- (0.2) 1.3 1.1 - ------------------------------------------------------------------------------------------- $1,289.1 $(879.8) $(62.0) $(64.3) $(14.9) $(141.2) $1,075.9
- -------------------------------------------------------------------------------- 32 LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In Millions, Except per Share Amounts) 1. ORGANIZATION AND BUSINESS Lexmark International Group, Inc. ("Group") merged with and into its wholly-owned subsidiary, Lexmark International, Inc. ("International") effective July 1, 2000, whereby International became the surviving corporation (the "company"). Pursuant to the merger, Group's stockholders automatically received one share of the company's Class A common stock for each share of Group Class A common stock, along with the associated rights attaching pursuant to the Stockholder Rights Plan, to which the company is a successor. The company's Class A common stock and associated rights have the same rights and privileges as Group's Class A common stock and associated rights. The company also assumed all of Group's benefit plans for employees, retirees and directors and each outstanding Group stock based award was converted into an identical stock based award in the company. Hereafter, the "company" and "Lexmark" will refer to Group for all events prior to July 1, 2000 and will refer to International for all events subsequent to the merger. Lexmark is a leading developer, manufacturer and supplier of printing solutions -- including laser and inkjet printers, multifunction products, associated supplies and services -- for offices and homes. The company also sells dot matrix printers for printing single and multi-part forms by business users and develops, manufactures and markets a broad line of other office imaging products. The principal customers for the company's products are dealers, retailers and distributors worldwide. The company's products are sold in over 150 countries in North and South America, Europe, the Middle East, Africa, Asia, the Pacific Rim and the Caribbean. 2. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The accompanying consolidated financial statements include the accounts of the company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Foreign Currency Translation: Assets and liabilities of non-U.S. subsidiaries that operate in a local currency environment are translated into U.S. dollars at period-end exchange rates. Income and expense accounts are translated at average exchange rates prevailing during the period. Adjustments arising from the translation of assets and liabilities are accumulated as a separate component of accumulated other comprehensive earnings in stockholders' equity. Critical Accounting Policies and Estimates: The preparation of consolidated financial statements requires the company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the company evaluates its estimates, including those related to customer programs and incentives, product returns, bad debts, inventories, intangible assets, income taxes, warranty obligations, restructuring, pensions and other post-retirement benefits, and contingencies and litigation. The company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 33 The company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. The company records estimated reductions to revenue for customer programs and incentive offerings including special pricing agreements, price protection, promotions and other volume-based incentives. If market conditions were to decline, the company may take actions to increase customer incentive offerings, possibly resulting in an incremental reduction of revenue at the time the incentive is offered. The company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The company provides for the estimated cost of product warranties at the time revenue is recognized. While the company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the company's warranty obligation is affected by product failure rates and material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from the company's estimates, revisions to the estimated warranty liability would be required. The company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value. Likewise, the company records an adverse purchase commitment liability when anticipated market sales prices are lower than committed costs. If actual market conditions are less favorable than those projected by management, additional inventory write-downs and adverse purchase commitment liabilities may be required. Management also considers potential impairment of both tangible and intangible assets when circumstances indicate that the carrying amount of an asset may not be recoverable. The company estimates the expected return on plan assets, discount rate, involuntary turnover rate, rate of compensation increase and future health care costs, among other things, and relies on actuarial estimates to assess the future potential liability and funding requirements of the company's pension, postretirement and postemployment plans. These estimates, if incorrect, could have a significant impact on the company's consolidated financial position, results of operations or cash flows. The company estimates its tax liability based on current tax laws in the statutory jurisdictions in which it operates. These estimates include judgments about deferred tax assets and liabilities resulting from temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes, as well as about the realization of deferred tax assets. If the provisions for current or deferred taxes are not adequate, if the company is unable to realize certain deferred tax assets or if the tax laws change unfavorably, the company could experience potential significant losses in excess of the reserves established. Likewise, if the provisions for current and deferred taxes are in excess of those eventually needed, if the company is able to realize additional deferred tax assets or if tax laws change favorably, the company could experience potential significant gains. Cash Equivalents: All highly liquid investments with an original maturity of three months or less at the company's date of purchase are considered to be cash equivalents. Fair Value of Financial Instruments: The financial instruments of the company consist mainly of cash and cash equivalents, trade receivables, short-term debt and long-term debt. The fair value of cash and cash equivalents, trade receivables and short-term debt approximates their carrying values due to the relatively short-term nature of the instruments. The fair value of long-term debt is based on current rates available to the company for debt with similar characteristics. 34 Inventories: Inventories are stated at the lower of average cost or market. The company considers all raw materials to be in production upon their receipt. Property, Plant and Equipment: Property, plant and equipment are stated at cost and depreciated over their estimated useful lives using the straight-line method. Property, plant and equipment accounts are relieved of the cost and related accumulated depreciation when assets are disposed of or otherwise retired. Internal Use Software Costs: The costs for internal use software are capitalized and depreciated over the useful life of the software, generally three years. Long-Lived Assets: The company performs reviews for the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. If future expected undiscounted cash flows are insufficient to recover the carrying value of the assets, then an impairment loss is recognized based upon the excess of the carrying value of the asset over the anticipated cash flows on a discounted basis. Revenue Recognition: The company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is probable. These criteria are generally met at the time product is shipped and title passes. At the time revenue is recognized, the company provides for the estimated cost of post-sales support and product warranties and reduces revenue for estimated product returns. When other significant obligations remain after products are delivered, revenue is recognized only after such obligations are fulfilled. Revenue earned from services is recognized ratably over the contractual period or as the services are performed. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial Statements. SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. The company adopted SAB 101 as required by December 31, 2000 and the adoption did not have a material impact on the company's financial position, results of operations or cash flows. Advertising Costs: The company expenses advertising costs when incurred. Advertising expense was approximately $116.6 million, $128.3 million and $121.4 million in 2001, 2000 and 1999, respectively. Postretirement Benefits: The company accrues the cost of providing postretirement benefits for medical and life insurance coverage over the active service period of the employee. These benefits are funded by the company when paid. 35 Stock-Based Compensation: The company measures compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed by APB Opinion 25, Accounting for Stock Issued to Employees, and has provided in Note 13 of the Notes to Consolidated Financial Statements the pro forma disclosures of the effect on net income and earnings per common share as if the fair value-based method had been applied in measuring compensation expense. Income Taxes: The provision for income tax is computed based on pre-tax income included in the statements of earnings. The company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Derivatives: Effective January 1, 1999, the company adopted Statement of Financial Accounting Standard ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires that all derivatives, including foreign currency exchange contracts, be recognized in the statement of financial position at their fair value. Derivatives that are not hedges must be recorded at fair value through earnings. If a derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative are either offset against the change in fair value of underlying assets or liabilities through earnings or recognized in other comprehensive earnings until the underlying hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value is to be immediately recognized in earnings. In June 2000, SFAS No. 138 was issued as an amendment to SFAS No. 133. This statement amended the treatment of certain transactions discussed in SFAS No. 133. This new amendment did not have a material impact on the company's results of operations or financial position. Net Earnings Per Share: Basic net earnings per share is calculated by dividing net income by the weighted average number of shares outstanding during the reported period. The calculation of diluted net earnings per share is similar to basic, except that the weighted average number of shares outstanding includes the additional dilution from potential common stock such as stock options and stock under long-term incentive plans. Comprehensive Earnings (Loss): Other comprehensive earnings (loss) refers to revenues, expenses, gains and losses that under generally accepted accounting principles are included in comprehensive earnings (loss) but are excluded from net income as these amounts are recorded directly as an adjustment to stockholders' equity, net of tax. The company's other comprehensive earnings (loss) is composed of deferred gains and losses on cash flow hedges, foreign currency translation adjustments and adjustments made to recognize additional minimum liabilities associated with the company's defined benefit pension plans. Segment Data: The company manufactures and sells a variety of printers and associated supplies that have similar economic characteristics as well as similar customers, production processes and distribution methods and, therefore, has aggregated similar divisions and continues to report one segment. 36 Recent Pronouncements: In May 2000, the Emerging Issues Task Force ("EITF") issued EITF 00-14, Accounting for Certain Sales Incentives, which provides that some sales incentives should be treated as reductions in revenue and other sales incentives should be classified as cost of sales. In April 2001, the EITF deferred the effective date for this issue to quarters beginning after December 15, 2001. This statement is not expected to have a material impact on the company's financial position, results of operations or cash flows. The EITF has discussed several issues related to loyalty programs and vendor payments to retailers in connection with the promotion of the vendor's products. EITF 00-22, Accounting for "Points" and Certain Other Time-based or Volume-based Sales Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future, addresses loyalty programs that offer awards consisting of the vendor's products or services. In January 2001, a consensus was reached on one of the five issues discussed. The EITF concluded that offers to customers to rebate or refund a specified amount of cash that is redeemable only if the customer meets a specified cumulative level of revenue transactions should be recognized as a reduction of revenue. The effective date for application of this consensus was set for no later than the quarter ending after February 15, 2001. Adoption of this consensus did not have a material impact on the company's financial position, results of operations or cash flows. EITF 00-25, Accounting for Consideration from a Vendor to a Retailer in Connection with the Purchase or Promotion of the Vendor's Products, addresses when consideration paid to a retailer should be classified as a reduction of revenue. In April 2001, a consensus was reached that consideration from a vendor to a purchaser of the vendor's products is presumed to be a reduction in the selling prices of the vendor's products and, therefore, should be characterized as a reduction of revenue. That presumption can be overcome and the consideration should be characterized as a cost incurred if certain criteria are met. The consensus is effective for annual or interim financial statements beginning after December 15, 2001. This statement is not expected to have a material impact on the company's financial position, results of operations or cash flows, although it will result in a reclassification from selling, general and administrative expense to revenue. In June 2001, the Financial Accounting Standards Board ("FASB") approved the issuance of Statement of Financial Accounting Standard ("SFAS") No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting. SFAS No. 142 states that goodwill should not be amortized, but should be tested for impairment annually at the reporting unit level. All other intangible assets should be amortized over their useful lives. Certain provisions of SFAS No. 141 and SFAS No. 142 are effective for companies with fiscal years beginning after December 15, 2001. These statements are not expected to have a material impact on the company's financial position, results of operations or cash flows. In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This Statement supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. SFAS No. 144 establishes a single accounting model, based on the framework established in SFAS No. 121, for the impairment or disposal of long-lived assets. The provisions of SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. This statement is not expected to have a material impact on the company's financial position, results of operations and cash flows. 37 Reclassifications: Certain prior year amounts have been reclassified to conform to the 2001 presentation. 3. RESTRUCTURING AND OTHER CHARGES During the fourth quarter of 2001, Lexmark's management and board of directors approved a restructuring plan (the "2001 restructuring") that includes a reduction in the company's global workforce of up to 12 percent. This plan provides for a reduction in infrastructure and overhead expenses, the elimination of the company's business class inkjet printer, and the closure of an electronic card manufacturing facility in Reynosa, Mexico. Restructuring and related charges of $58.4 million ($42.9 million, net of tax) were expensed during the fourth quarter of 2001. These charges were comprised of $36.0 million of accrued restructuring costs related to separation and other exit costs, $11.4 million associated with a pension curtailment related to the employee separations and $11.0 million related to asset impairment charges. The company also recorded $29.3 million ($21.6 million, net of tax) of associated restructuring-related inventory write-offs resulting from the company's decision to eliminate its business class inkjet printer, to limit the period over which the company will provide replacement parts for products no longer in production, and to exit the electronic card manufacturing business. The inventory write-offs are included in the cost of revenue line on the statements of earnings. The accrued restructuring costs for employee separations of $26.3 million are associated with approximately 1,600 employees worldwide from various business functions and job classes. Employee separation benefits include severance, medical and other benefits. As of December 31, 2001, approximately 200 employees had exited the business under the 2001 restructuring plan. The other exit costs of $9.7 million are primarily related to vendor and lease cancellation charges. The $11.0 million charge for asset impairment was determined in accordance with Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of " and resulted from the company's decision to abandon certain assets consisting primarily of machinery and equipment used to manufacture business class inkjet printers and electronic cards. The charge for asset impairments is included in the restructuring and related charges line of the statements of earnings. In total, the company expects the 2001 pre-tax charge of $87.7 million to result in cash payments of approximately $36.0 million and non-cash charges of approximately $51.7 million. The cash payments are primarily for employee separations and other exit costs. Restructuring activities are expected to be substantially completed during the year 2002. During 2000, Lexmark's management and board of directors approved a plan to restructure its worldwide manufacturing and related support operations (the "2000 restructuring"). The 2000 restructuring plan involved relocating manufacturing, primarily laser printers, to Mexico and China, and reductions in associated support infrastructure. Restructuring and related charges of $41.3 million ($29.7 million, net of tax) were expensed during the fourth quarter of 2000. These charges were comprised of $24.3 million of accrued restructuring costs related to separation and other exit costs, $10.0 million related to asset impairment charges and $7.0 million associated with a pension curtailment loss related to the employee separations. The employee separation costs included severance, medical and other benefits. The other exit costs were related to vendor and lease cancellation charges and demolition and cleanup costs associated with the company's manufacturing relocation. The asset impairment charges resulted from the company's plans to abandon certain assets (primarily buildings) associated with the relocation of manufacturing and related support activities. As of December 31, 2001, substantially all of the employees identified in the 2000 restructuring had exited the business and received separation benefits. 38 The following table presents a rollforward of the liabilities (in millions) incurred in connection with the 2000 and 2001 restructuring. These liabilities are reflected as accrued liabilities in the company's consolidated statements of financial position.
EMPLOYEE OTHER EXIT RESTRUCTURING LIABILITIES SEPARATIONS COSTS TOTAL - ------------------------------------------------------------------------------------------------ January 1, 2000.......................................... $ -- $ -- $ -- Additions................................................ 19.3 5.0 24.3 Payments................................................. (1.1) (1.8) (2.9) - ------------------------------------------------------------------------------------------------ December 31, 2000........................................ 18.2 3.2 21.4 - ------------------------------------------------------------------------------------------------ Additions................................................ 26.3 9.7 36.0 Payments................................................. (13.7) (7.7) (21.4) Other.................................................... (6.0) 4.3 (1.7) - ------------------------------------------------------------------------------------------------ December 31, 2001........................................ $ 24.8 $ 9.5 $ 34.3 - ------------------------------------------------------------------------------------------------
4. RECEIVABLES The company's trade receivables are reported in the consolidated statements of financial position net of allowances for doubtful accounts and product returns. In the U.S., the company sells its receivables to a wholly-owned subsidiary, Lexmark Receivables Corporation ("LRC"), which then sells the receivables to an unrelated third party. LRC is a separate legal entity with its own separate creditors who, in a liquidation of LRC, would be entitled to be satisfied out of LRC's assets prior to any value in LRC becoming available for equity claims of the company. The company accounts for the transfers of receivables as sales transactions. In October 2001, the company entered into a new agreement to sell its U.S. trade receivables on a limited recourse basis. The new agreement increased the maximum amount of financing available to $225.0 million. As collections reduce previously sold receivables, the company may replenish these with new receivables. The company bears a risk of bad debt losses on U.S. trade receivables sold, since the company over-collateralizes the receivables sold with additional eligible receivables. The company addresses this risk of loss in its allowance for doubtful accounts. Receivables sold may not include amounts over 90 days past due or concentrations over certain limits with any one customer. This facility contains customary affirmative and negative covenants as well as specific provisions related to the quality of the accounts receivables sold. The facility expires in October 2004, but requires annual renewal of commitments in October 2002 and 2003. At December 31, 2001, U.S. trade receivables of $85.0 million had been sold and, due to the revolving nature of the agreement, $85.0 million also remained outstanding. The company's previous agreement to sell its U.S. trade receivables on a limited recourse basis was amended in October 2000, and the maximum amount of U.S. trade receivables to be sold was increased from $150.0 million to $170.0 million. At December 31, 2000, U.S. trade receivables of $170.0 million had been sold and also remained outstanding. Expenses incurred under this program totaling $7.1 million, $8.5 million, and $5.4 million for 2001, 2000 and 1999, respectively, are included in other expense in the statements of earnings. In 1997, the company entered into three-year interest rate swaps with a total notional amount of $60.0 million, whereby the company paid interest at a fixed rate of approximately 6.5% and received interest at a floating rate equal to the three-month LIBOR. Since May 1998, the swaps served as a hedge of the receivables financings which were based on floating interest rates. These interest rate swaps expired during 2000. Expense of $0.1 million and $0.7 million for 2000 39 and 1999, respectively, related to these swaps is included in other expense in the statements of earnings. 5. INVENTORIES Inventories consisted of the following at December 31:
2001 2000 - ----------------------------------------------------------------------------- Work in process............................................. $146.9 $171.0 Finished goods.............................................. 308.2 241.3 - ----------------------------------------------------------------------------- $455.1 $412.3 - -----------------------------------------------------------------------------
6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following at December 31:
USEFUL LIVES (YEARS) 2001 2000 - ----------------------------------------------------------------------------------------------- Land and improvements...................................... 20 $ 22.0 $ 20.9 Buildings and improvements................................. 10-35 354.1 307.4 Machinery and equipment.................................... 5-10 759.1 683.4 Information systems, furniture and other................... 3-7 174.2 155.5 Internal use software...................................... 3 40.8 25.8 - ----------------------------------------------------------------------------------------------- 1,350.2 1,193.0 Less accumulated depreciation.............................. 549.8 462.4 - ----------------------------------------------------------------------------------------------- $ 800.4 $ 730.6 - -----------------------------------------------------------------------------------------------
Depreciation expense was $125.3 million, $91.1 million and $79.8 million for 2001, 2000 and 1999, respectively. 7. ACCRUED LIABILITIES Accrued liabilities consisted of the following at December 31:
2001 2000 - ----------------------------------------------------------------------------- Compensation................................................ $ 77.5 $ 63.7 Income taxes payable........................................ 54.3 33.9 Marketing programs.......................................... 49.4 49.2 Warranty.................................................... 48.6 40.1 Deferred revenue............................................ 43.1 64.6 Restructuring reserve....................................... 34.3 21.4 Value added taxes........................................... 28.1 21.7 Fixed assets................................................ 27.2 52.9 Derivative liabilities...................................... 18.8 56.9 Other....................................................... 154.1 148.5 - ----------------------------------------------------------------------------- $535.4 $552.9 - -----------------------------------------------------------------------------
8. DEBT The company has outstanding $150.0 million principal amount of 6.75% senior notes due May 15, 2008, which was initially priced at 98.998%, to yield 6.89% to maturity. A balance of $149.1 million (net of unamortized discount of $0.9 million) was outstanding at December 31, 2001. At December 31, 2000, the balance was $148.9 million (net of unamortized discount of $1.1 million). The senior notes contain typical restrictions on liens, sale leaseback transactions, mergers and sales of assets. There are no sinking fund requirements on the senior notes and 40 they may be redeemed at any time, at a redemption price as described in the related indenture agreement, as supplemented and amended, in whole or in part, at the option of the company. The company also has a $300.0 million unsecured, revolving credit facility with a group of banks. The interest rate on the credit facility ranges from 0.2% to 0.7% above London Interbank Offered Rate (LIBOR), as adjusted under certain limited circumstances, based upon the company's debt rating. In addition, the company pays a facility fee on the $300.0 million of 0.1% to 0.3% based upon the company's debt rating. The interest and facility fees are payable quarterly. The $300.0 million credit agreement, as amended, contains customary default provisions, leverage and interest coverage restrictions and certain restrictions on the incurrence of additional debt, liens, mergers or consolidations and investments. Any amounts outstanding under the $300.0 million credit facility are due upon the maturity of the facility on January 27, 2003. As of December 31, 2001 and 2000 there were no amounts outstanding under this credit facility. The company's Brazilian operation has a short-term, uncommitted line of credit with an outstanding balance of $11.0 million at December 31, 2001. There were no amounts outstanding under this line of credit at December 31, 2000. The interest rate on this line of credit varies based upon the local prevailing interest rates at the time of borrowing. During 2001, the interest rate on this line of credit averaged approximately 18%. In February 2001, the company filed a shelf registration statement with the Securities and Exchange Commission to register $200 million of debt securities. The company expects to use the net proceeds from the sale of the securities for capital expenditures, reduction of short-term borrowings, working capital, acquisitions and other general corporate purposes. Total cash paid for interest amounted to $14.3 million, $15.9 million and $14.3 million in 2001, 2000 and 1999, respectively. 9. INCOME TAXES The provision for income taxes consisted of the following:
2001 2000 1999 - ------------------------------------------------------------------------------------------ Current: Federal................................................... $ 48.4 $ 83.4 $100.4 Non-U.S................................................... 46.5 30.3 23.0 State and local........................................... 5.7 0.5 7.7 - ------------------------------------------------------------------------------------------ 100.6 114.2 131.1 - ------------------------------------------------------------------------------------------ Deferred: Federal................................................... (60.3) (6.1) 4.6 Non-U.S................................................... 6.2 2.7 0.9 State and local........................................... (2.3) 0.2 3.8 - ------------------------------------------------------------------------------------------ (56.4) (3.2) 9.3 - ------------------------------------------------------------------------------------------ Provision for income taxes.................................. $ 44.2 $111.0 $140.4 - ------------------------------------------------------------------------------------------
Earnings before income taxes were as follows:
2001 2000 1999 - ------------------------------------------------------------------------------------------ U.S......................................................... $168.6 $198.2 $261.6 Non-U.S..................................................... 149.2 198.2 197.3 - ------------------------------------------------------------------------------------------ Earnings before income taxes................................ $317.8 $396.4 $458.9 - ------------------------------------------------------------------------------------------
41 The company realized an income tax benefit from the exercise of certain stock options in 2001, 2000 and 1999 of $54.7 million, $61.2 million and $47.8 million, respectively. This benefit resulted in a decrease in current income taxes payable and an increase in capital in excess of par. In 2001, the company reached resolution with the Internal Revenue Service on certain adjustments related to the intercompany allocation of profits. As a result of this resolution, the company has reversed previously accrued taxes, reducing the tax provision in the fourth quarter of 2001 by $40.0 million or $0.30 per share. The company and its subsidiaries are subject to tax examinations in various U.S. and foreign jurisdictions. The company believes that adequate amounts of taxes and related interest have been provided for any adjustments that may result from these examinations. Significant components of deferred income taxes at December 31 were as follows:
2001 2000 - -------------------------------------------------------------------------------- Deferred tax assets: Tax loss carryforwards.................................... $ 9.8 $ 4.1 Credit carryforward....................................... 19.2 9.0 Inventories............................................... 18.8 9.3 Restructuring accrual..................................... 24.7 8.8 Pension................................................... 39.4 5.9 Other..................................................... 18.9 2.2 - -------------------------------------------------------------------------------- Total deferred tax assets.............................. 130.8 39.3 - -------------------------------------------------------------------------------- Deferred tax liabilities: Prepaid expenses.......................................... (8.7) (5.6) Property, plant and equipment............................. (40.8) (46.7) - -------------------------------------------------------------------------------- Total deferred tax liabilities......................... (49.5) (52.3) - -------------------------------------------------------------------------------- Net deferred tax assets (liabilities)....................... $ 81.3 $(13.0) - --------------------------------------------------------------------------------
The net decrease in the total valuation allowance for the years ended December 31, 2001 and 2000 was $0.0 million and $1.8 million, respectively. The company has non-U.S. tax loss carryforwards of $32.9 million which have an indefinite carryforward period. Of these non-U.S. tax loss carryforwards, $4.1 million are not expected to provide a future benefit because they are attributable to certain non-U.S. entities that are also taxable in the U.S. At December 31, 2001, the research and development tax credit carryforward available to reduce possible future U.S. income taxes amounted to approximately $19.2 million, which expire in the years 2019-2021. Deferred income taxes have not been provided on the undistributed earnings of foreign subsidiaries. Undistributed earnings of non-U.S. subsidiaries included in the consolidated retained earnings were approximately $332.4 million. These earnings have been substantially reinvested, and the company does not plan to initiate any action that would precipitate the payment of income taxes. It is not practicable to estimate the amount of additional tax that may be payable on the foreign earnings. 42 A reconciliation of the provision for income taxes using the U.S. statutory rate and the company's effective tax rate was as follows:
2001 2000 1999 - ---------------------------------------------------------------------------------------------------- AMOUNT % AMOUNT % AMOUNT % ----------------- ---------------- ---------------- Provision for income taxes at statutory rate..................... $111.3 35.0% $138.8 35.0% $160.6 35.0% State and local income taxes, net of federal tax benefit................ 5.7 1.8 6.3 1.6 9.6 2.1 Foreign tax differential............. (29.9) (9.4) (33.8) (8.5) (17.6) (3.8) Change in the beginning-of-the-year balance of the valuation allowance for deferred tax assets affecting provision.......................... -- -- (1.8) (0.5) (16.6) (3.6) Research and development credit...... (11.0) (3.5) (9.0) (2.3) (8.9) (1.9) Foreign sales corporation............ (4.1) (1.3) (4.1) (1.0) (6.1) (1.4) Reversal of previously accrued taxes.............................. (40.0) (12.6) -- -- -- -- Other................................ 12.2 3.9 14.6 3.7 19.4 4.2 - ---------------------------------------------------------------------------------------------------- Provision for income taxes........... $ 44.2 13.9% $111.0 28.0% $140.4 30.6% - ----------------------------------------------------------------------------------------------------
Cash paid for income taxes was $32.1 million, $35.1 million and $58.3 million in 2001, 2000 and 1999, respectively. 10. STOCK SPLIT On April 29, 1999, the company announced a two-for-one stock split. The stock split was effected in the form of a stock dividend on June 10, 1999 and entitled each stockholder of record on May 20, 1999 to receive one share of Class A common stock for each share of Class A common stock held on the record date. All share and per share data included in the accompanying consolidated financial statements and related notes have been restated to reflect this stock split. 11. STOCKHOLDERS' EQUITY The Class A common stock is voting and exchangeable for Class B common stock in very limited circumstances. The Class B common stock is non-voting and is convertible, subject to certain limitations, into Class A common stock. At the company's Annual Meeting of Stockholders on April 27, 2000, the stockholders approved an increase in the number of authorized shares of its Class A common stock from 450.0 million to 900.0 million shares. At December 31, 2001, approximately 718.4 million and 1.8 million shares of Class A and Class B common stock were unissued and unreserved. These shares are available for a variety of general corporate purposes, including future public offerings to raise additional capital and for facilitating acquisitions. In February 2002, the company received authorization from the board of directors to repurchase an additional $200 million of its Class A common stock for a total repurchase authority of $1.2 billion. This repurchase authority allows the company, at management's discretion, to selectively repurchase its stock from time to time in the open market or in privately negotiated transactions depending upon market price and other factors. During 2001, the company did not repurchase shares of its Class A common stock. As of December 31, 2001, the company had repurchased 28.6 million shares at prices ranging from $10.63 to $105.38 per share for an aggregate cost of approximately $882 million. As of December 31, 2001, the company had reissued 0.1 million shares of previously repurchased shares in connection with employee 43 benefit programs. As a result of these issuances, the net treasury shares outstanding at December 31, 2001 were 28.5 million. As of March 8, 2002, the company had repurchased 30.1 million shares for an aggregate cost of approximately $959 million. In 1998, the company's board of directors adopted a stockholder rights plan (the "Rights Plan") which now provides existing stockholders with the right to purchase one one-thousandth (0.001) of a share of Series A Junior Participating preferred stock for each share of common stock held in the event of certain changes in the company's ownership. The rights will expire on January 31, 2009, unless earlier redeemed by the company. 12. EARNINGS PER SHARE
FOR THE YEAR ENDED DECEMBER 31, 2001 --------------------------------------- EARNINGS SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- Net earnings............................................ $273.6 BASIC EPS Net earnings available to common stockholders......... 273.6 129.6 $2.11 EFFECT OF DILUTIVE SECURITIES Long-term incentive plan.............................. -- -- Stock options......................................... -- 4.2 ------ ----- DILUTED EPS Net earnings available to common stockholders plus assumed conversions................................ $273.6 133.8 $2.05 ---------------------------------------
Options to purchase an additional 1.9 million shares of Class A common stock at prices between $60.98 and $130.06 per share were outstanding at December 31, 2001 but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares.
FOR THE YEAR ENDED DECEMBER 31, 2000 --------------------------------------- EARNINGS SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- Net earnings............................................ $285.4 BASIC EPS Net earnings available to common stockholders......... 285.4 128.4 $2.22 EFFECT OF DILUTIVE SECURITIES Long-term incentive plan.............................. -- 0.1 Stock options......................................... -- 5.8 ------ ----- DILUTED EPS Net earnings available to common stockholders plus assumed conversions................................ $285.4 134.3 $2.13 ---------------------------------------
Options to purchase an additional 1.6 million shares of Class A common stock at prices between $108.00 and $130.06 per share were outstanding at December 31, 2000 but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares. 44
FOR THE YEAR ENDED DECEMBER 31, 1999 --------------------------------------- EARNINGS SHARES PER SHARE (NUMERATOR) (DENOMINATOR) AMOUNT ----------- ------------- --------- Net earnings............................................ $318.5 BASIC EPS Net earnings available to common stockholders......... 318.5 129.4 $2.46 EFFECT OF DILUTIVE SECURITIES Long-term incentive plan.............................. -- 0.1 Stock options......................................... -- 8.0 ------ ----- DILUTED EPS Net earnings available to common stockholders plus assumed conversions................................ $318.5 137.5 $2.32 ---------------------------------------
Options to purchase an additional 40 thousand shares of Class A common stock at prices between $82.81 and $87.06 per share were outstanding at December 31, 1999 but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares. 13. STOCK INCENTIVE PLANS The company has various stock incentive plans to encourage employees and non-employee directors to remain with the company and to more closely align their interests with those of the company's stockholders. In April 2001, the company's stockholders approved an amendment to the company's stock incentive plan to increase the number of shares authorized for issuance by 4.8 million shares. Under the employee plans, as of December 31, 2001 approximately 5.7 million shares of Class A common stock are reserved for future grants in the form of stock options, stock appreciation rights, restricted stock, performance shares or deferred stock units. Under the non-employee director plan, as of December 31, 2001 approximately 0.2 million shares of Class A common stock are reserved for future grants in the form of stock options and deferred stock units. As of December 31, 2001, awards under the programs have been limited to stock options, restricted stock, performance shares and deferred stock units. The exercise price of options awarded under stock option plans is equal to the fair market value of the underlying common stock on the date of grant. Generally options expire ten years from the date of grant and generally become fully vested at the end of five years based upon continued employment or the completion of three years of service on the board of directors. In some cases, option vesting and exercisability may be accelerated due to the achievement of performance objectives. The company applies APB Opinion 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its plans. Accordingly, no compensation expense has been recognized for its stock-based compensation plans other than for restricted stock, performance-based awards and deferred stock units. Had compensation expense for the company's stock option plans been determined based on the fair value at the grant date for awards under these plans consistent with the methodology prescribed under SFAS No. 123, Accounting for Stock-Based Compensation, net earnings and earnings per share would have been reduced to the pro forma amounts indicated in the table below:
2001 2000 1999 - -------------------------------------------------------------------------------------- Net earnings -- as reported................................. $273.6 $285.4 $318.5 Net earnings -- pro forma................................... 245.8 264.9 305.2 Basic EPS -- as reported.................................... $ 2.11 $ 2.22 $ 2.46 Basic EPS -- pro forma...................................... 1.90 2.06 2.36 Diluted EPS -- as reported.................................. $ 2.05 $ 2.13 $ 2.32 Diluted EPS -- pro forma.................................... 1.84 1.97 2.22 - --------------------------------------------------------------------------------------
45 The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:
2001 2000 1999 - --------------------------------------------------------------------------------- Expected dividend yield..................................... -- -- -- Expected stock price volatility............................. 48% 46% 43% Weighted average risk-free interest rate.................... 4.9% 6.6% 5.0% Weighted average expected life of option (years)............ 4.9 5.0 4.9 - ---------------------------------------------------------------------------------
The weighted average fair value of options granted during 2001, 2000 and 1999 was $23.02, $47.05 and $24.41 per share, respectively. A summary of the status of the company's stock option plans as of December 31, 2001, 2000 and 1999 and changes during the years then ended is presented below:
OPTIONS WEIGHTED AVERAGE (IN MILLIONS) EXERCISE PRICE - ---------------------------------------------------------------------------------------------- Outstanding at December 31, 1998............................ 13.6 $11.15 Granted..................................................... 2.7 52.59 Exercised................................................... (2.6) 8.83 Forfeited or canceled....................................... (0.4) 16.73 - ---------------------------------------------------------------------------------------------- Outstanding at December 31, 1999............................ 13.3 19.79 Granted..................................................... 2.2 93.76 Exercised................................................... (2.0) 11.51 Forfeited or canceled....................................... (0.4) 39.30 - ---------------------------------------------------------------------------------------------- Outstanding at December 31, 2000............................ 13.1 32.88 Granted..................................................... 4.0 48.09 Exercised................................................... (3.2) 9.01 Forfeited or canceled....................................... (0.6) 48.88 - ---------------------------------------------------------------------------------------------- Outstanding at December 31, 2001............................ 13.3 $42.44 - ----------------------------------------------------------------------------------------------
As of December 31, 2001, 2000 and 1999 there were 5.0 million, 6.5 million and 6.4 million options exercisable, respectively. The following table summarizes information about stock options outstanding and exercisable at December 31, 2001:
- ----------------------------------------------------------------------------------------------------------- OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------------- -------------------------------- WEIGHTED NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE EXERCISE PRICES (IN MILLIONS) CONTRACTUAL LIFE EXERCISE PRICE (IN MILLIONS) EXERCISE PRICE - ----------------------------------------------------------------------------------------------------------- $ 3.34 to $ 9.88 0.8 2.3years $ 6.28 0.8 $ 6.28 10.00 to 19.53 2.9 4.5 11.33 2.5 11.09 20.35 to 43.06 2.1 6.6 24.36 1.0 23.68 43.38 to 50.08 3.7 9.0 47.62 -- 45.53 50.11 to 87.06 2.3 7.5 56.73 0.5 56.97 87.63 to 130.06 1.5 8.1 110.05 0.2 109.43 - ----------------------------------------------------------------------------------------------------------- $ 3.34 to $130.06 13.3 6.9 $ 42.44 5.0 $ 22.05 - -----------------------------------------------------------------------------------------------------------
As of December 31, 2001, the company had granted approximately 420,000 restricted stock units with various vesting periods. During 2001, 2000, and 1999, respectively, the company granted 140,000, 86,000 and 26,000 restricted stock units with weighted average grant prices of $49.98, 46 $51.16 and $83.37. The cost of the awards, determined to be the fair market value of the shares at the date of grant, is charged to compensation expense ratably over the vesting periods. The company has also issued approximately 252,000 deferred stock units to certain members of management who have elected to defer all or a portion of their annual bonus into such units which are 100% vested at all times. In addition, the company awarded approximately 134,000 performance shares, the vesting of which was based on the attainment of certain performance goals by the end of the four year period 1997 through 2000. Based on the certification in early 2001 that such performance goals were satisfied, the shares are now fully vested. The compensation expense in connection with the performance shares was estimated over the four year period based on the fair market value of the shares during that period. In order to mitigate the impact of stock price changes on compensation expense, the company entered into a forward equity contract on its common stock during 2000 which was settled in cash in 2001. The company has recorded compensation expense of $4.4 million, $3.2 million and $4.3 million in 2001, 2000 and 1999, respectively, related to these stock incentive plans. During 1999, stockholders approved an Employee Stock Purchase Plan ("ESPP") which became effective January 1, 2000. The ESPP enables substantially all regular employees to purchase full or fractional shares of Lexmark Class A common stock through payroll deductions of up to 10% of eligible compensation. The price an employee pays is 85% of the closing market price on the last business day of each month. During 2001 and 2000, employees paid the company $8.2 million and $8.7 million, respectively, to purchase approximately 0.2 million shares and approximately 0.2 million shares, respectively. As of December 31, 2001, there were approximately 2.6 million shares of Class A common stock reserved for future purchase under the ESPP. 47 14. EMPLOYEE PENSION AND POSTRETIREMENT PLANS The company and its subsidiaries have retirement plans covering substantially all regular employees. Medical, dental and life insurance plans for retirees are provided by the company and certain of its non-U.S. subsidiaries. Plan assets are invested in equity securities, government and agency securities, corporate debt and annuity contracts. The changes in the benefit obligations and plan assets for 2001 and 2000 were as follows:
OTHER POSTRETIREMENT PENSION BENEFITS BENEFITS - -------------------------------------------------------------------------------------------- 2001 2000 2001 2000 ----------------- ---------------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year............ $ 506.6 $455.0 $ 31.9 $ 35.5 Service cost..................................... 13.7 12.3 1.9 1.9 Interest cost.................................... 38.7 34.8 2.7 2.3 Contributions by plan participants............... 0.4 0.3 0.7 0.6 Actuarial loss (gain)............................ 32.2 16.6 5.4 (2.1) Foreign currency exchange rate changes........... (2.7) (5.1) -- -- Benefits paid.................................... (30.2) (23.0) (1.7) (1.1) Plan amendments.................................. -- -- -- (5.6) Settlement or curtailment losses................. 16.5 15.7 0.3 0.4 - -------------------------------------------------------------------------------------------- Benefit obligation at end of year.................. 575.2 506.6 41.2 31.9 - -------------------------------------------------------------------------------------------- CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year..... 513.7 554.7 -- -- Actual return on plan assets..................... (30.0) (17.6) -- -- Foreign currency exchange rate changes........... (2.0) (4.4) -- -- Contributions by the employer.................... 4.0 3.7 1.0 0.5 Contributions by plan participants............... 0.4 0.3 0.7 0.6 Benefits paid.................................... (30.2) (23.0) (1.7) (1.1) - -------------------------------------------------------------------------------------------- Fair value of plan assets at end of year........... 455.9 513.7 -- -- - -------------------------------------------------------------------------------------------- Funded status...................................... (119.3) 7.1 (41.2) (31.9) Unrecognized loss (gain)......................... 129.7 14.4 (0.1) (5.5) Unrecognized prior service cost.................. (10.9) (15.3) (4.3) (5.2) - -------------------------------------------------------------------------------------------- Net amount recognized.............................. $ (0.5) $ 6.2 $(45.6) $(42.6) - -------------------------------------------------------------------------------------------- Amounts recognized in the consolidated statements of financial position: Prepaid benefit cost.......................... $ 18.6 $ 23.6 $ -- $ -- Accrued benefit liability..................... (123.2) (27.6) (45.6) (42.6) Intangible asset.............................. 4.1 4.5 -- -- Accumulated other comprehensive loss.......... 100.0 5.7 -- -- - -------------------------------------------------------------------------------------------- Net amount recognized.............................. $ (0.5) $ 6.2 $(45.6) $(42.6) - --------------------------------------------------------------------------------------------
48
OTHER POSTRETIREMENT PENSION BENEFITS BENEFITS - ---------------------------------------------------------------------------------------------- 2001 2000 1999 2001 2000 1999 ------------------------ -------------------- WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31: Discount rate.............................. 7.3% 7.7% 7.7% 7.5% 8.2% 8.2% Expected return on plan assets............. 9.7% 9.7% 9.7% -- -- -- Rate of compensation increase.............. 4.8% 5.2% 5.1% -- -- -- COMPONENTS OF NET PERIODIC (BENEFIT) COST: Service cost............................... $ 13.7 $ 12.3 $ 16.4 $ 1.9 $ 1.9 $3.1 Interest cost.............................. 38.7 34.8 31.5 2.7 2.3 2.4 Expected return on plan assets............. (54.0) (52.4) (47.0) -- -- -- Amortization of prior service cost......... (1.2) (1.4) (1.4) (0.4) (0.4) -- Amortization of net losses (gains)......... 0.3 (1.5) 0.7 -- (0.2) -- Settlement or curtailment losses (gains)... 0.1 0.1 0.1 (0.2) -- -- - ---------------------------------------------------------------------------------------------- Net periodic (benefit) cost.................. $ (2.4) $ (8.1) $ 0.3 $ 4.0 $ 3.6 $5.5 - ----------------------------------------------------------------------------------------------
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $523.4 million, $520.5 million and $413.2 million, respectively, as of December 31, 2001, and $41.0 million, $37.7 million and $11.1 million, respectively, as of December 31, 2000. The company's accumulated other comprehensive loss related to additional minimum pension liability as of December 31, 2001 and 2000 was $100.0 million ($62.0 million, net of tax) and $5.7 million ($3.6 million, net of tax), respectively, for plans where the accumulated benefit obligation exceeded the fair value of assets. In 1998, the U.S. converted to a new formula for determining pension benefits. As of December 31, 1999, benefits under the previous plan were frozen with no further benefits being accrued, resulting in a $5.5 million decrease in pension cost for 2000. Effective January 1, 2000, the U.S. postretirement plan was amended primarily to limit benefits paid to post-medicare recipients to a specified dollar amount beginning in 2003. This resulted in a $5.6 million reduction in the benefit obligation in 2000. For measurement purposes, an 11% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2002. The rate is assumed to decrease gradually to 5.25% in 2009 and remain at that level thereafter. Since the net employer costs for postretirement medical benefits reach the preset caps within the next four to six years, a 1% increase or decrease in trend has a de minimis effect on costs. Related to the company's acquisition of the Information Products Corporation from IBM in 1991, IBM agreed to pay for its pro rata share (currently estimated at $67.3 million) of future postretirement benefits for all the company's U.S. employees based on relative years of service with IBM and the company. The company also sponsors defined contribution plans for employees in certain countries. Company contributions are based upon a percentage of employees' contributions. The company's expense under these plans was $10.0 million, $8.5 million and $6.4 million in 2001, 2000 and 1999, respectively. 15. DERIVATIVES, FINANCIAL INSTRUMENTS AND RISK MANAGEMENT In 1999, the company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The company recorded a net-of-tax cumulative-effect-type loss adjustment of $0.4 million in accumulated other comprehensive earnings to recognize at fair value all derivatives that were designated as cash-flow hedging instruments upon adoption of SFAS No. 133 on January 1, 1999. This loss adjustment, which the company reclassified to earnings by 49 March 31, 2000, consisted of a $0.6 million loss related to interest rate swaps and a $0.2 million gain related to foreign currency options. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The company's activities expose it to a variety of market risks, including the effects of changes in foreign currency exchange rates and interest rates. The financial exposures are monitored and managed by the company as an integral part of its overall risk management program. The company's risk management program seeks to reduce the potentially adverse effects that the volatility of the markets may have on its operating results. The company maintains a foreign currency risk management strategy that uses derivative instruments to protect its interests from unanticipated fluctuations in earnings and cash flows caused by volatility in currency exchange rates. The company does not hold or issue financial instruments for trading purposes nor does it hold or issue leveraged derivative instruments. The company maintains an interest rate risk management strategy that may, from time to time use derivative instruments to minimize significant, unanticipated earnings fluctuations caused by interest rate volatility. The company's goal is to maintain a balance between fixed and floating interest rates on its financing activities. By using derivative financial instruments to hedge exposures to changes in exchange rates and interest rates, the company exposes itself to credit risk and market risk. The company manages exposure to counterparty credit risk by entering into derivative financial instruments with highly rated institutions that can be expected to fully perform under the terms of the agreement. Market risk is the adverse effect on the value of a financial instrument that results from a change in currency exchange rates or interest rates. The company manages exposure to market risk associated with interest rate and foreign exchange contracts by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. The company uses the following hedging strategies to reduce the potentially adverse effects that market volatility may have on its operating results: Fair Value Hedges: Fair value hedges are hedges of recognized assets or liabilities. The company enters into forward exchange contracts to hedge actual purchases and sales of inventories. The forward contracts used in this program mature in three months or less, consistent with the related purchase and sale commitments. Foreign exchange option contracts, as well as forward contracts, may be used as fair value hedges in situations where derivative instruments, for which hedge accounting has been discontinued, expose earnings to further change in exchange rates. Cash Flow Hedges: Cash flow hedges are hedges of forecasted transactions or of the variability of cash flows to be received or paid related to a recognized asset or liability. The company enters into foreign exchange options and forward exchange contracts expiring within eighteen months as hedges of anticipated purchases and sales that are denominated in foreign currencies. These contracts are entered into to protect against the risk that the eventual cash flows resulting from such transactions will be adversely affected by changes in exchange rates. The company also enters into currency swap contracts to hedge foreign currency risks that result from the transfer of various currencies within the company. The currency swap contracts entered into generally expire with one month. The company also may use interest rate swaps to convert a portion of its variable rate financing activities to fixed rates. ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES All derivatives are recognized in the statement of financial position at their fair value. Fair values for the company's derivative financial instruments are based on quoted market prices of comparable instruments or, if none are available, on pricing models or formulas using current 50 assumptions. On the date the derivative contract is entered into, the company designates the derivative as either a fair value or cash flow hedge. Changes in the fair value of a derivative that is highly effective as -- and that is designated and qualifies as -- a fair value hedge, along with the loss or gain on the hedged asset or liability are recorded in current period earnings in cost of revenues. Changes in the fair value of a derivative that is highly effective as -- and that is designated and qualifies as -- a cash flow hedge are recorded in other comprehensive earnings, until the underlying transactions occur. At December 31, 2001, the company had derivative assets of $26.6 million classified as prepaid expenses and other current assets as well as derivative liabilities of $18.8 million classified as accrued liabilities. At December 31, 2000, the company had derivative assets of $43.1 million classified as prepaid expenses and other current assets as well as derivative liabilities of $56.9 million classified as accrued liabilities. As of December 31, 2001, a total of $14.9 million of deferred net losses on derivative instruments were accumulated in other comprehensive earnings (loss), of which $13.9 million is expected to be reclassified to earnings during the next twelve months. As of December 31, 2000 a total of $13.8 million of deferred net losses on derivative instruments were accumulated in other comprehensive earnings (loss), of which $11.9 million was reclassified to earnings during 2001. The company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge items. This process includes linking all derivatives that are designated as fair value and cash flow to specific assets and liabilities on the balance sheet or to forecasted transactions. The company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair value or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge, the company discontinues hedge accounting prospectively, as discussed below. The company discontinues hedge accounting prospectively when (1) it is determined that a derivative is no longer effective in offsetting changes in the fair value or cash flows of a hedged item; (2) the derivative expires or is sold, terminated, or exercised or (3) the derivative is discontinued as a hedge instrument, because it is unlikely that a forecasted transaction will occur. As of December 31, 2001 no hedges were determined to be ineffective. When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair value hedge, the derivative will continue to be carried in the statement of financial position at its fair value. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the derivative will continue to be carried in the statement of financial position at its fair value, and gains and losses that were accumulated in other comprehensive earnings are recognized immediately in earnings. In all other situations in which hedge accounting is discontinued, the derivative will be carried at its fair value in the statement of financial position, with changes in its fair value recognized in current period earnings. A fair value hedge is entered into when the derivative instrument, for which hedge accounting has been discontinued, exposes earnings to further change in exchange rates. FINANCIAL INSTRUMENTS At December 31, 2001, the carrying value of the company's long-term debt was $149.1 million and the fair value was $146.2 million. At December 31, 2000, the carrying value of the company's long-term debt was $148.9 million and the fair value was $135.0 million. The fair value of the long-term debt was estimated based on current rates available to the company for debt with similar characteristics. At December 31, 2001, the carrying value of the company's short term debt was $11.0 million, which approximated the fair value. 51 CONCENTRATIONS OF CREDIT RISK The company's main concentrations of credit risk consist primarily of temporary cash investments and trade receivables. Cash investments are made in a variety of high quality securities with prudent diversification requirements. Credit risk related to trade receivables is dispersed across a large number of customers located in various geographic areas. The company sells a large portion of its products through third-party distributors and resellers and if the financial condition or operations of these distributors and resellers were to deteriorate substantially, the company's operating results could be adversely affected. However, the company performs ongoing credit evaluations of the financial position of its third-party distributors, resellers and other customers to determine appropriate credit limits. Collateral such as letters of credit and bank guarantees is required in certain circumstances. No individual distributor or reseller accounted for more than 10% of the company's trade receivables at December 31, 2001. The company has off-balance sheet credit risk for the reimbursement from IBM of its pro rata share of postretirement benefits to be paid by the company (see Note 14). The company generally has experienced longer accounts receivable cycles in its emerging markets, in particular, Asia Pacific and Latin America, when compared to its U.S. and European markets. In the event that accounts receivable cycles in these developing markets lengthen further, the company could be adversely affected. 16. COMMITMENTS AND CONTINGENCIES The company is committed under operating leases (containing various renewal options) for rental of office and manufacturing space and equipment. Rent expense (net of rental income of $2.0 million, $2.9 million and $3.3 million) was $42.2 million, $39.6 million, and $36.6 million in 2001, 2000 and 1999, respectively. Future minimum rentals under terms of non-cancelable operating leases at December 31 are: 2002-$31.0 million; 2003-$23.0 million; 2004-$18.0 million; 2005-$16.2 million; 2006-$13.4 million and thereafter-$28.3 million. The company is subject to legal proceedings and claims that arise in the ordinary course of business. The company does not believe that the outcome of any of those matters will have a material adverse effect on the company's financial position, results of operations or cash flows. 17. SEGMENT DATA The company manufactures and sells a variety of printers and associated supplies that have similar economic characteristics as well as similar customers, production processes and distribution methods and, therefore, has aggregated similar divisions and continues to report one segment. The following are revenue and long-lived asset information by geographic area for and as of December 31:
REVENUE -------------------------------- 2001 2000 1999 -------------------------------- United States........................................... $1,883.5 $1,671.5 $1,528.6 International........................................... 2,259.3 2,135.5 1,923.7 -------------------------------- Total.............................................. $4,142.8 $3,807.0 $3,452.3 --------------------------------
LONG-LIVED ASSETS ------------------ 2001 2000 ------------------ United States............................................... $411.8 $404.4 International............................................... 388.6 326.2 ------------------ Total.................................................. $800.4 $730.6 ------------------
Revenue reported above is based on the countries to which the products are shipped. 52 Revenue information is categorized by product among inkjet and laser printers, inkjet and laser supplies, and other. This revenue information is provided in order to give additional insight into Lexmark's strategic model by quantifying the company's printers and supplies revenue growth. The following is revenue by product category as of December 31:
REVENUE -------------------------------- 2001 2000 1999 -------------------------------- Inkjet and laser printers............................... $1,657.2 $1,688.5 $1,652.5 Inkjet and laser supplies............................... 1,962.4 1,547.6 1,143.7 Other................................................... 523.2 570.9 656.1 -------------------------------- Total.............................................. $4,142.8 $3,807.0 $3,452.3 --------------------------------
53 18. QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) QUARTER QUARTER QUARTER QUARTER - -------------------------------------------------------------------------------------------- 2001: Revenue....................................... $ 999.4 $ 987.9 $1,003.5 $1,152.0 Gross profit (1).............................. 333.9 343.0 309.8 290.8 Operating income (1).......................... 117.7 122.1 100.9 0.3 Net earnings (1) (2).......................... 79.7 87.1 70.0 36.8 Basic EPS* (1) (2)............................ $ 0.62 $ 0.67 $ 0.54 $ 0.28 Diluted EPS* (1) (2).......................... 0.60 0.65 0.52 0.27 Stock prices: High........................................ $ 59.80 $ 70.75 $ 67.75 $ 60.45 Low......................................... 40.81 42.51 41.20 42.00 2000: Revenue....................................... $ 891.7 $ 893.0 $ 926.6 $1,095.7 Gross profit.................................. 315.1 308.2 295.3 337.5 Operating income (3).......................... 120.4 113.9 98.4 83.0 Net earnings (3).............................. 80.2 84.1 66.1 55.0 Basic EPS* (3)................................ $ 0.62 $ 0.65 $ 0.52 $ 0.43 Diluted EPS* (3).............................. 0.59 0.62 0.50 0.42 Stock prices: High........................................ $135.88 $120.63 $ 79.81 $ 49.00 Low......................................... 76.63 56.00 33.56 28.75 - --------------------------------------------------------------------------------------------
*The sum of the quarterly earnings per share amounts do not necessarily equal the year-to-date earnings per share due to changes in average share calculations. This is in accordance with prescribed reporting requirements. (1) Amounts include the impact of the $87.7 million ($64.5 million, net of tax) restructuring and other charges recorded during the fourth quarter of 2001. Inventory write-offs of $29.3 million associated with the restructuring actions were included in gross profit, and operating income included the inventory write-offs and the restructuring and related charges of $58.4 million. Diluted EPS was reduced by 48 cents during the fourth quarter of 2001 as a result of the restructuring and other charges. (2) Net earnings were also impacted by a $40 million benefit from the resolution of income tax matters. Diluted EPS was increased by 30 cents during the fourth quarter of 2001 as a result of the resolution of income tax matters. (3) Amounts include the impact of the $41.3 million ($29.7 million, net of tax) restructuring and related charges recorded during the fourth quarter of 2000. Diluted EPS was reduced by 22 cents during the fourth quarter of 2000 as a result of the restructuring and related charges. 54 MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS The consolidated financial statements and related information included in this Financial Report are the responsibility of management and have been reported in conformity with accounting principles generally accepted in the United States of America. All other financial data in this Annual Report have been presented on a basis consistent with the information included in the consolidated financial statements. Lexmark International, Inc. maintains a system of financial controls and procedures, which includes the work of corporate auditors, which we believe provides reasonable assurance that the financial records are reliable in all material respects for preparing the consolidated financial statements and maintaining accountability for assets. The concept of reasonable assurance is based on the recognition that the cost of a system of financial controls must be related to the benefits derived and that the balancing of those factors requires estimates and judgment. This system of financial controls is reviewed, modified and improved as changes occur in business conditions and operations, and as a result of suggestions from the corporate auditors and PricewaterhouseCoopers LLP. The Finance and Audit Committee, composed of outside members of the Board of Directors, meets periodically with management, the independent accountants and the corporate auditors, for the purpose of monitoring their activities to ensure that each is properly discharging its responsibilities. The Finance and Audit Committee, independent accountants, and corporate auditors have free access to one another to discuss their findings. /s/ Paul J. Curlander Paul J. Curlander Chairman and chief executive officer /s/ Gary E. Morin Gary E. Morin Executive vice president and chief financial officer 55 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Lexmark International, Inc. In our opinion, the accompanying consolidated statements of financial position and the related consolidated statements of earnings, cash flows, and stockholders' equity and comprehensive earnings appearing on pages 28 through 53 of this annual report on Form 10-K present fairly, in all material respects, the consolidated financial position of Lexmark International, Inc. and subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. These consolidated financial statements are the responsibility of the company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Lexington, Kentucky February 12, 2002 56 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Except with respect to information regarding the executive officers of the Registrant, the information required by Part III, Item 10 of this Form 10-K is incorporated by reference herein, and made part of this Form 10-K, from the company's definitive Proxy Statement for its 2002 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission, pursuant to Regulation 14A, not later than 120 days after the end of the fiscal year. The information with respect to the executive officers of the Registrant is included under the heading "Executive Officers of the Registrant" in Item 1 above. 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 2002 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission, pursuant to Regulation 14A, not later than 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 2002 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission, pursuant to Regulation 14A, not later than 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 2002 Annual Meeting of Stockholders, which will filed with the Securities and Exchange Commission, pursuant to Regulation 14A, not later than 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. 57 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)1 FINANCIAL STATEMENTS: Financial statements filed as part of this Form 10-K are included under Part II, Item 8. (a)2 FINANCIAL STATEMENT SCHEDULE:
PAGES IN FORM 10-K ------------------ Report of Independent Accountants........................... 59 For the years ended December 31, 2001, 2000, and 1999: Schedule II -- Valuation and Qualifying Accounts.......... 60
All other schedules are omitted as the required information is inapplicable or the information is presented in the Consolidated Financial Statements or related notes. 58 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Stockholders of Lexmark International, Inc. Our audits of the consolidated financial statements referred to in our report dated February 12, 2002 appearing on page 56 of 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 60 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 12, 2002 59 LEXMARK INTERNATIONAL, INC. AND SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001 (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 ----------- ---------- ---------- ---------- ---------- ---------- 1999: Accounts receivable allowances............... $24.2 $ 6.5 $-- $ (6.6) $24.1 Inventory reserves.......... 38.2 28.4 -- (32.0) 34.6 Deferred tax assets valuation allowance...... 18.4 1.6 -- (18.2) 1.8 2000: Accounts receivable allowances............... $24.1 $ 6.3 $-- $ (8.2) $22.2 Inventory reserves.......... 34.6 36.8 -- (40.5) 30.9 Deferred tax assets valuation allowance...... 1.8 7.8 -- (9.6) -- 2001: Accounts receivable allowances............... $22.2 $ 20.6 $-- $ (9.5) $33.3 Inventory reserves.......... 30.9 103.1 -- (43.7) 90.3 Deferred tax assets valuation allowance...... -- -- -- -- --
60 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 Current Reports on Form 8-K dated October 22, 2001 and November 8, 2001 were filed by the company with the Securities and Exchange Commission to announce the company's restructuring plans and to provide Regulation FD disclosure information, respectively. 61 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, Commonwealth of Kentucky, on March 19, 2002. LEXMARK INTERNATIONAL, INC. By /s/ Paul J. Curlander ------------------------------------ Name: Paul J. Curlander Title: Chairman 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 Chairman and Chief Executive March 19, 2002 - ------------------------------------------------ Officer (Principal Executive Paul J. Curlander Officer) /s/ Gary E. Morin Executive Vice President and March 19, 2002 - ------------------------------------------------ Chief Financial Officer Gary E. Morin (Principal Financial Officer) /s/ Gary D. Stromquist Vice President and Corporate March 19, 2002 - ------------------------------------------------ Controller (Principal Gary D. Stromquist Accounting Officer) * Director March 19, 2002 - ------------------------------------------------ B. Charles Ames * Director March 19, 2002 - ------------------------------------------------ Teresa Beck * Director March 19, 2002 - ------------------------------------------------ Frank T. Cary * Director March 19, 2002 - ------------------------------------------------ William R. Fields * Director March 19, 2002 - ------------------------------------------------ Ralph E. Gomory * Director March 19, 2002 - ------------------------------------------------ Stephen R. Hardis * Director March 19, 2002 - ------------------------------------------------ James F. Hardymon * Director March 19, 2002 - ------------------------------------------------ Robert Holland, Jr. * Director March 19, 2002 - ------------------------------------------------ Marvin L. Mann * Director March 19, 2002 - ------------------------------------------------ Michael J. Maples * Director March 19, 2002 - ------------------------------------------------ Martin D. Walker /s/ Vincent J. Cole March 19, 2002 - ------------------------------------------------ * Vincent J. Cole, Attorney-in-Fact
62 INDEX TO EXHIBITS
NUMBER DESCRIPTION OF EXHIBITS ------ ----------------------- 2 Agreement and Plan of Merger, dated as of February 29, 2000, by and between Lexmark International, Inc. (the "company") and Lexmark International Group, Inc. ("Group"). (1) 3.1 Restated Certificate of Incorporation of the company. (2) 3.2 Company By-Laws, as Amended and Restated June 22, 2000. (2) 3.3 Amendment No. 1 to company By-Laws, as Amended and Restated June 22, 2000. (3) 4.1 Form of the company's 6.75% Senior Notes due 2008. (4) 4.2 Indenture, dated as of May 11, 1998, by and among the company, as Issuer, and Group, as Guarantor, to The Bank of New York, as Trustee. (4) 4.3 First Supplemental Indenture, dated as of June 22, 2000, by and among the company, as Issuer, and Group, as Guarantor, to The Bank of New York, as Trustee. (2) 4.4 Amended and Restated Rights Agreement, dated as of February 11, 1999, between the company and ChaseMellon Shareholder Services, L.L.C., as Rights Agent. (5) 4.5 Specimen of Class A common stock certificate. (2) 10.1 Agreement, dated as of May 31, 1990, between the company and Canon Inc., and Amendment thereto. (6)* 10.2 Agreement, dated as of March 26, 1991, between the company and Hewlett-Packard Company. (6)* 10.3 Patent Cross-License Agreement, effective October 1, 1996, between Hewlett-Packard Company and the company. (7)* 10.4 Amended and Restated Lease Agreement, dated as of January 1, 1991, between IBM and the company, and First Amendment thereto. (8) 10.5 Third Amendment to Lease, dated as of December 28, 2000, between IBM and the company. 10.6 Receivables Purchase Agreement, dated as of October 22, 2001, by and among Lexmark Receivables Corporation ("LRC"), as Seller, CIESCO L.P., as Investor, Citibank, N.A., Citicorp North America, Inc., as Agent, and the company, as Collection Agent and Originator. (3) 10.7 Purchase and Contribution Agreement, dated as of October 22, 2001, by and between the company, as Seller, and LRC, as Purchaser. (3) 10.8 Lexmark Holding, Inc. Stock Option Plan for Executives and Senior Officers. (8)+ 10.9 First Amendment to the Lexmark Holding, Inc. Stock Option Plan for Executives and Senior Officers, dated as of October 31, 1994. (9)+ 10.10 Second Amendment to the Lexmark Holding, Inc. Stock Option Plan for Executives and Senior Officers, dated as of September 13, 1995. (9)+ 10.11 Third Amendment to the Lexmark Holding, Inc. Stock Option Plan for Executives and Senior Officers, dated as of April 29, 1999. (10)+ 10.12 Fourth Amendment to the Lexmark Holding, Inc. Stock Option Plan for Executives and Senior Officers, dated as of July 29, 1999. (10)+ 10.13 Form of Stock Option Agreement pursuant to the Lexmark Holding, Inc. Stock Option Plan for Executives and Senior Officers. (9)+ 10.14 Lexmark Holding, Inc. Stock Option Plan for Senior Managers. + 10.15 First Amendment to the Lexmark Holding, Inc. Stock Option Plan for Senior Managers, dated as of September 13, 1995. +
E-1
NUMBER DESCRIPTION OF EXHIBITS ------ ----------------------- 10.16 Second Amendment to the Lexmark Holding, Inc. Stock Option Plan for Senior Managers, dated as of April 29, 1999. + 10.17 Third Amendment to the Lexmark Holding, Inc. Stock Option Plan for Senior Managers, dated as of July 29, 1999. + 10.18 Form of Stock Option Agreement pursuant to the Lexmark Holding, Inc. Stock Option Plan for Senior Managers. + 10.19 Lexmark International Group, Inc. Stock Incentive Plan, Amended and Restated Effective April 30, 1998. (11)+ 10.20 Amendment No. 1 to the Lexmark International Group, Inc. Stock Incentive Plan, as Amended and Restated, dated as of April 29, 1999. (10)+ 10.21 Amendment No. 2 to the Lexmark International Group, Inc. Stock Incentive Plan, as Amended and Restated, dated as of April 26, 2001. (12)+ 10.22 Form of Stock Option Agreement pursuant to the company's Stock Incentive Plan. + 10.23 Lexmark International Group, Inc. Nonemployee Director Stock Plan, Amended and Restated, Effective April 30, 1998. (4)+ 10.24 Amendment No. 1 to the Lexmark International Group, Inc. Nonemployee Director Stock Plan, dated as of February 11, 1999. (13)+ 10.25 Amendment No. 2 to the Lexmark International Group, Inc. Nonemployee Director Stock Plan, dated as of April 29, 1999. (10)+ 10.26 Form of Stock Option Agreement, pursuant to the company's Nonemployee Director Stock Plan, Amended and Restated effective April 30, 1998. (14)+ 10.27 Employment Agreement, dated as of July 1, 2001, by and between Paul J. Curlander and the company. + 10.28 Employment Agreement, dated as of July 1, 2001, by and between Gary E. Morin and the company. + 10.29 Employment Agreement, dated as of July 1, 2001, by and between Paul A. Rooke and the company. + 10.30 Employment Agreement, dated as of July 1, 2001, by and between Vincent J. Cole and the company. + 10.31 Employment Agreement, dated as of July 1, 2001, by and between Timothy P. Craig and the company. + 10.32 Form of Change in Control Agreement entered into as of April 30, 1998, by and among the company, Group and certain officers thereof and entered into as of July 1, 2001, by and between Timothy P. Craig and the company. (14)+ 10.33 Form of Indemnification Agreement entered into as of April 30, 1998, by and among the company, Group and certain officers thereof and entered into as of July 1, 2001, by and between Timothy P. Craig and the company. (14)+ 10.34 Credit Agreement, dated as of January 27, 1998, by and among Group, as Parent Guarantor, the company, 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. (15) 10.35 First Amendment to Credit Agreement, dated as of March 20, 2000, by and among Group, as Parent Guarantor, the company, 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. (2)
E-2
NUMBER DESCRIPTION OF EXHIBITS ------ ----------------------- 10.36 Second Amendment to Credit Agreement, dated as of February 1, 2001, by and among the company, 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. (16) 10.37 Third Amendment to Credit Agreement, dated as of October 15, 2001, by and among the company, 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. (3) 12 Computation of Ratio of Earnings to Fixed Charges. 21 Subsidiaries of the company as of December 31, 2001. 23 Consent of PricewaterhouseCoopers LLP. 24 Power of Attorney. 99 Financial Statements of Lexmark International Group, Inc. 1999 Employee Stock Purchase Plan for the year ended December 31, 2001.
- --------------- * Confidential treatment previously granted by the Securities and Exchange Commission. + Indicates management contract or compensatory plan, contract or arrangement. (1) Incorporated by reference to the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 (Commission File No. 1-14050). (2) Incorporated by reference to the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 (Commission File No. 1-14050). (3) Incorporated by reference to the company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 (Commission File No. 1-14050). (4) 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). (5) 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). (6) Incorporated by reference to the company's Form S-1 Registration Statement, Amendment No. 2 (Registration No. 33-97218) filed with the Commission on November 13, 1995. (7) Incorporated by reference to the company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1996 (Commission File No. 1-14050). (8) Incorporated by reference to the company's Form S-1 Registration Statement (Registration No. 33-97218) filed with the Commission on September 22, 1995. (9) Incorporated by reference to the company's Form S-1 Registration Statement, Amendment No. 1 (Registration No. 33-97218), filed with the Commission on October 27, 1995. (10) Incorporated by reference to the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (Commission File No. 1-14050). (11) 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). (12) Incorporated by reference to the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 (Commission File No. 1-14050). (13) Incorporated by reference to the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999 (Commission File No. 1-14050).
E-3 (14) 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). (15) 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). (16) Incorporated by reference to the company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2001 (Commission File No. 1-14050).
E-4 EX-10.5 3 l92467aex10-5.txt EXHIBIT 10.5 Exhibit 10.5 THIRD AMENDMENT TO LEASE AGREEMENT made as of the 28TH day of December, 2000, between INTERNATIONAL BUSINESS MACHINES CORPORATION, a New York corporation, having its principal office at New Orchard Road, Armonk, New York 10504 (hereinafter referred to as "Landlord") and LEXMARK INTERNATIONAL, INC. a Delaware corporation, having an office at 55 Railroad Avenue, P.O. Box 2868, Greenwich, Connecticut 06836 (hereinafter referred to as "Tenant"), W I T N E S S E T H WHEREAS, the Landlord and the Tenant entered into an Amended and Restated Lease dated January 1, 1991 as amended by Second Amendment dated January 1, 1994(hereinafter collectively called the "Lease"), covering space (the "Leased Premises") in the building designated as Buildings 030/031 (hereinafter referred to as the "Buildings") which Buildings are known by the name and street address of 6300 Diagonal Highway, Buildings 030/031, situated on a plot of land located in the City and County of Boulder, Colorado; and WHEREAS, the Tenant desires to extend the lease. NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration and of the mutual agreements hereinafter set forth, it is hereby mutually agreed as follows: 1. The Tenant hereby exercises the Second Extended Term of the Lease with the Landlord for a period of five (5) years commencing June 1, 2001 and expiring May 31, 2006. 2. (a) Section 3.02 of the Lease, entitled "Extended Term Rent", is hereby amended to provide that the annual rent due under the Second Extended Term shall remain the same as the First Extended Term for 200,464 net rentable square feet at One million seven hundred twenty-five thousand Dollars ($1,725,000.00) for the period from June 1, 2001 through March 31, 2003. The annual rent from April 1, 2003 through May 31, 2006 shall be increased from One million seven hundred twenty-five thousand 00/100 Dollars ($1,725,000.00) to One million eight hundred sixty-one thousand, one hundred eighty-four and 16/100 Dollars ($1,861,184.16), and the monthly rent shall be increased from One hundred forty-three thousand, seven hundred fifty 00/100 Dollars ($143,750.00) to One hundred fifty-five thousand, ninety-eight 68/100 Dollars ($155,098.68). (b) Effective April 1, 2003 through May 31, 2006 the annual rent for the 47,844 net rentable square foot addition shall be reduced from Seven hundred fifty-four thousand, four hundred forty 00/100 Dollars ($754,440.00) to Three hundred ten thousand, nine hundred eighty-six 00/100 Dollars ($310,986.00) and the monthly rent shall be reduced from Sixty two thousand, eight hundred seventy 00/100 Dollars ($62,870.00) to Twenty five thousand, nine hundred fifteen 50/100 Dollars ($25,915.50). 4. Except as herein modified, the Lease shall continue in full force and effect without change. IN WITNESS WHEREOF, this instrument has been executed by the duly authorized representatives of the parties hereto as of the day and year first above written. LANDLORD: INTERNATIONAL BUSINESS MACHINES CORPORATION By: /s/ Jeff Miller ---------------------------------- Title: Senior Program Manager ------------------------------- TENANT: LEXMARK INTERNATIONAL, INC. By: /s/ David L. Goodnight ---------------------------------- Title: Vice President and Controller ------------------------------- EX-10.14 4 l92467aex10-14.txt EXHIBIT 10.14 Exhibit 10.14 LEXMARK HOLDING, INC. STOCK OPTION PLAN FOR SENIOR MANAGERS ------------------------------------- Section 1. Purpose ------------------ The purpose of this Lexmark Holding, Inc. Stock Option Plan for Managers is to foster and promote the long-term financial success of Holding and the Company and to increase materially stockholder value by (a) motivating superior performance by participants in the Plan, (b) providing participants in the Plan with an ownership interest in Holding and (c) enabling the Company to attract and retain the services of an outstanding management team upon whose judgment, interest and special effort the successful conduct of its operations is largely dependent. Section 2. Definitions ---------------------- 2.1. DEFINITIONS. Whenever used herein, the following terms shall have the respective meanings set forth below: (a) "Alternative Option" has the meaning given in Section 8.2. (b) "Board" means the Board of Directors of Holding. (c) "C&D Fund" means the Clayton & Dubilier Private Equity Fund IV Limited Partnership, a Connecticut limited partnership, and any successor investment vehicle managed by Clayton & Dubilier, Inc. (d) "Cause" means (i) the willful failure by the Participant to perform substantially his duties as an employee of the Company or any Subsidiary (other than due to physical or mental illness) after reasonable notice to the Participant of such failure, (ii) the Participant's engaging in serious misconduct that is injurious to Holding, the Company or any Subsidiary, (iii) the Participant's having been convicted of, or entered a plea of NOLO CONTENDERE to, a crime that constitutes a felony or (iv) the breach by the Participant of any written convenant or agreement with Holding, the Company or any Subsidiary not to disclose any information pertaining to Holding, the Company or any Subsidiary or not to compete or interfere with Holding, the Company or any Subsidiary. (e) "Change in Control" means the first to occur of the following events after the Effective Date: (i) the acquisition by any person, entity or "group" (as defined in Section 13(d) of the Securities Exchange Act of 1934, as amended), other than Holding, the Company, the Subsidiaries, any employee benefit plan of Holding, the Company or the Subsidiaries, or the C&D Fund, of 50% or more of the combined voting power of Holding's or the Company's then outstanding voting securities; (ii) the merger or consolidation of Holding or the Company, as a result of which persons who were stockholders of Holding or the Company, as the case may be, immediately prior to such merger or consolidation, do not, immediately thereafter, own, directly or indirectly, more than 50% of the combined voting power entitled to vote generally in the election of directors of the merged or consolidated company; (iii) the liquidation or dissolution of Holding or the Company; and (iv) the sale of all or substantially all of the assets of Holding or the Company to one or more persons or entities that are not, immediately prior to such sale, affiliates of Holding or the Company. (f) "Change in Control Price" means the price per share of Common Stock offered in conjunction with any transaction resulting in a Change in Control (as determined in good faith by the Board if any part of the offered price is payable other than in cash). (g) "Code" means the United States Internal Revenue Code of 1986, as amended from time to time. (h) "Committee" means the Compensation and Pension Committee of the Board (or such other committee of the Board which shall have jurisdiction over the compensation of officers). If at any time no Committee shall be in office, the Board shall perform the functions of the Committee. (i) "Common Stock" means the Class A Common Stock, par value $.01 per share, of Holding. (j) "Company" means Lexmark International, Inc., a Delaware corporation, and any successor thereto. (k) "Early Retirement" means a termination of employment by a Participant before normal retirement age (as defined in the retirement plan sponsored by Holding, the Company or any Subsidiary, whichever employs such Participant). (l) "Effective Date" means March 27, 1991. (m) "Employee" means any employee of Holding, the Company or any Subsidiary that is classified by such employer as a manager, or any other employee of Holding, the Company or any Subsidiary holding a similar position as the Committee may designate. (n) "Fair Market Value" means, as of any date, the fair market value on such date per share of Common Stock as determined in good faith by the Board (or, if the authority to make such determination has been specifically delegated by the Board to the Committee, the Committee). (o) "Grant Date" means, with respect to any Option, the date on which such Option is granted pursuant to the Plan. (p) "Holding" means Lexmark Holding, Inc., a Delaware corporation, and any successor thereto. (q) "Incentive Stock Option" means any Option intended to be and designated as an "Incentive Stock Option" within the meaning of Section 422A of the Code. (r) "Involuntary Termination" means a termination by the New Employer for any reason. (s) "New Employer" means the Participant's employer, or the parent or a subsidiary of such employer, immediately following a Change in Control. (t) "Non-Qualified Stock Option" means any Option that is not an Incentive Stock Option. (u) "Option" means the right granted pursuant to the Plan to purchase one share of Common Stock at a price determined in accordance with Section 6.2. 2 (v) "Option Agreement" means an agreement between the Company and the Participant embodying the terms of any Options granted hereunder. (w) "Participant" means any Employee designated by the Committee to participate in the Plan. (x) "Permanent Disability" means a physical or mental disability or infirmity of a Participant, as defined in any disability plan sponsored by Holding, the Company or any Subsidiary, whichever employs such Participant, or, if no such plan is sponsored by Participant's employer, the Lexmark Long Term Disability Plan. (y) "Plan" means this Lexmark Holding, Inc. Stock Option Plan for Senior Managers. (z) "Public Offering" means the first day as of which sales of Common Stock are made to the public in the United States pursuant to an underwritten public offering of the Common Stock. (aa) "Retirement" means a Participant's retirement at or after normal retirement age under the terms of the retirement plan sponsored by Holding, the Company or any Subsidiary, whichever employs such Participant. (bb) "Special Registration" means the later of (i) the time at which a registration statement under the Securities Act of 1933, as amended, covering any offer to sell and sales of Common Stock issued upon exercise of Options granted pursuant to the Plan, becomes effective and (ii) the third anniversary of the Effective Date. Each of Holding and the Company shall use commercially reasonable efforts to effect such Special Registration as soon as audited historical statements required to be included in such registration statement are available for inclusion therein, but in any event not before the third anniversary of the Effective Date. (cc) "Special Termination" has the meaning given in Section 7.1. (dd) "Subsidiary" means any corporation a majority of whose outstanding voting securities is owned, directly or indirectly, by the Company or Holding. 2.2 GENDER AND NUMBER. Except when otherwise indicated by the context, words in the masculine gender used in the Plan shall include the feminine gender, the singular shall include the plural, and the plural shall include the singular. Section 3. Eligibility and Participation ---------------------------------------- Participants in the Plan shall be those Employees selected by the Committee to participate in the Plan. The selection of an Employee as a Participant shall neither entitle such Employee to nor disqualify such Employee from participation in any other award or incentive plan. Section 4. Powers of the Committee ---------------------------------- 4.1. POWER TO GRANT. The Committee shall determine the Participants to whom Options shall be granted and the terms and conditions of any and all Options granted to Participants. 4.2 ADMINISTRATION. The Committee shall be responsible for the administration of the Plan. Any authority exercised by the Committee under the Plan shall be exercised by the Committee under the Plan shall be exercised by the Committee in its sole discretion. Subject to the terms of the Plan, the Committee, by majority action thereof, is authorized to prescribe, amend and rescind rules and regulations 3 relating to the administration of the Plan, to provide for conditions and assurances deemed necessary or advisable to protect the interests of Holding and the Company, and to make all other determinations necessary or advisable for the administration and interpretation of the Plan in order to carry out its provisions and purposes. Determinations, interpretations or other actions made or taken by the Committee pursuant to the provisions of the Plan shall be final, binding and conclusive for all purposes and upon all persons. Section 5. Options Subject to Plan ---------------------------------- 5.1 NUMBER. Subject to the provisions of Sections 5.2 and 5.3, the maximum number of Options (and the maximum number of shares of Common Stock subject to Options) granted under the Plan may not exceed 235,000. The shares of Common Stock to be delivered upon the exercise of Options granted under the Plan may consist, in whole or in part, of treasury Common Stock or authorized but unissued Common Stock, not reserved for any purpose. 5.2 CANCELLED, TERMINATED, OR FORFEITED OPTIONS. Any Option which for any reason is cancelled, terminated or otherwise forfeited, in whole or in part, without having been exercised, shall again be available for grant under the Plan. 5.3 ADJUSTMENT IN CAPITALIZATION. The number and class of Options (and the number of shares of Common Stock available for issuance upon exercise of such Options) granted under the Plan, and the number, class and exercise price of any outstanding Options (and the number of shares of Common Stock subject to outstanding Options) may be adjusted by the Board, in its sole discretion, if it shall deem such an adjustment to be necessary or appropriate to reflect any Common Stock dividend, stock split or share combination or any recapitalization, merger, consolidation, exchange of shares, liquidation or dissolution of Holding. Section 6. Terms of Options --------------------------- 6.1 GRANT OF OPTIONS. Options granted under the Plan may be of two types: (a) Incentive Stock Options and (b) Non-Qualified Stock Options. Options may be granted to Participants at such time or times as shall be determined by the Committee. The Committee shall have complete discretion in determining the number of Options, if any, and the type of Options to be granted to a Participant. Without limiting the foregoing, it is anticipated that, prior to the Special Registration, each Participant will be granted two Non-Qualified Stock Options for each Incentive Stock Option granted to such Participant. It is also anticipated that the exercise of any Non-Qualified options granted to a Participant prior to the Special Registration shall be conditioned upon such Participant's exercise of any Incentive Stock Options held by him within 90 days after the Special Registration, and if such Participant fails to exercise such Incentive Stock Options before the end of such 90-day period, such Incentive Stock Options and (except as otherwise provided in Section 7.1) such Non-Qualified Stock Options shall terminate and be cancelled as of the last day of such 90-day period. Each Option granted to a Participant shall be evidenced by an Option Agreement that shall specify the type of Option, the exercise price at which a share of Common Stock may be purchased pursuant to such Option, the duration of such Option and such other terms consistent with the Plan as the Committee shall determine, including customary representations, warranties and covenants with respect to securities law matters. Unless otherwise determined by the Committee at the Grant Date, such Option Agreement shall also state that the holder thereof is entitled to the benefits of and bound by the obligations set forth in the Registration and Participation Agreement, dated as of March 27, 1991, among Holding and certain stockholders of Holding, to the extent set forth therein. 6.2 EXERCISE PRICE. The exercise price per share of Common Stock to be purchased upon exercise of an Option shall be determined by the Committee but shall not be less than the Fair Market Value on the Grant Date. 6.3 EXERCISE OF OPTIONS. Unless otherwise determined by the Committee at the Grant Date, 100% of any Incentive Stock Options granted to a Participant prior to the Special Registration shall become immediately exercisable at the time of the Special Registration and shall remain exercisable only for a 4 period of 90 days after the Special Registration. Unless otherwise determined by the Committee at the Grant Date, 20% of any Non-Qualified Stock Options granted to a Participant at any time, and 20% of any Incentive Stock Options granted to a Participant on or after the Special Registration, shall become exercisable on each of the first five anniversaries of the Grant Date of such Options, provided that, notwithstanding any other provision of the Plan, no Options shall be exercised prior to the Special Registration and (except as otherwise provided in Section 7.1) no Non-Qualified Stock Options shall be exercisable unless any corresponding Incentive Stock Options shall have been exercised as contemplated by the fifth sentence of Section 6.1. Notwithstanding any other provision of the Plan, each Option shall terminate and shall not be exercisable on or after the tenth anniversary of the Grant Date of such Option. 6.4 PAYMENT. The Committee shall establish procedures governing the exercise of Options, which procedures shall generally require that written notice of the exercise thereof be given and that the exercise price thereof be paid in full in cash or cash equivalents, including by personal check, at the time of exercise. If so determined by the Committee in its sole discretion at or after the Grant Date, the exercise price of any Options exercised after there has been a Public Offering may be paid in full or in part in the form of shares of Common Stock already owned by the Participant, based on the Fair Market Value of such Common Stock on the date of exercise (or at such other time as may be determined by the Committee). As soon as practicable after receipt of a written exercise notice on or after the Special Registration and payment in full of the exercise price of any exercisable Options, Holding shall deliver to the Participant a certificate or certificates representing the shares of Common Stock acquired upon the exercise thereof. 6.5 INCENTIVE STOCK OPTIONS. Anything in the Plan to the contrary notwithstanding, no provision of this Plan relating to Incentive Stock Options shall be interpreted, amended or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify the Plan under Section 422A of the Code or, without the consent of the Participants affected, to disqualify any Incentive Stock Option under such Section 422A. 6.6 CERTAIN SALES OF COMMON STOCK. To the extent permitted by applicable law, and in the sole discretion of the Board, prior to the Special Registration Holding may offer and sell shares of Common Stock to one or more Participants employed and residing outside the United States with the consideration for such shares to be paid in cash or by delivery of a promissory note of the Participant purchasing such shares. Shares of Common Stock to be sold to any such Participant in any such transaction are intended to be sold in lieu of Incentive Stock Options that might otherwise have been granted to such Participant hereunder, and it is anticipated that two Non-Qualified Stock Options will be granted to each such Participant for each share of Common Stock so purchased. Section 7. Termination of Employment ------------------------------------ 7.1 TERMINATION OF EMPLOYMENT PRIOR TO SPECIAL REGISTRATION. (a) Special Termination. Unless otherwise determined by the Committee at the Grant Date, in the event that a Participant's employment with Holding, the Company and the Subsidiaries terminates prior to the Special Registration by reason of such Participant's death, Permanent Disability or Retirement (each a "Special Termination"), (i) 100% of any Non-Qualified Stock Options held by such Participant shall vest and become exercisable at any time on or after the Special Registration and (ii) any Incentive Stock Options held by such Participant shall terminate and be cancelled immediately upon such termination of employment. (b) Other Termination of Employment. Unless otherwise determined by the Committee at or after the Grant Date, in the event that a Participant's employment with Holding, the Company and the Subsidiaries is terminated prior to the Special Registration for any reason other than a Special Termination, any Options held by such Participant shall terminate and be cancelled immediately upon such termination of employment. 5 7.2 TERMINATION OF EMPLOYMENT ON OR AFTER SPECIAL REGISTRATION. (a) SPECIAL TERMINATION. Unless otherwise determined by the Committee at the Grant Date, in the event that a Participant's employment with Holding, the Company and the Subsidiaries terminates on or after the Special Registration by reason of a Special Termination, 100% of any Options then held by such Participant shall become immediately exercisable, subject to the fifth sentence of Section 6.1. (b) TERMINATION FOR CAUSE. Unless otherwise determined by the Committee at the Grant Date, in the event that a Participant's employment with Holding, the Company or any Subsidiary is terminated for Cause on or after the Special Registration, any Options then held by such Participant shall terminate and be cancelled immediately upon such termination of employment. (c) OTHER TERMINATION OF EMPLOYMENT. Unless otherwise determined by the Committee at or after the Grant Date, in the event that a Participant's employment with Holding, the Company and the Subsidiaries terminates on or after the Special Registration for any reason other than (i) a Special Termination or (ii) for Cause, any Options held by such Participant and then exercisable shall remain exercisable (subject to the fifth sentence of Section 6.1), but any other Options held by such Participant shall terminate and be cancelled immediately upon such termination of employment. 7.3. CERTAIN RIGHTS UPON TERMINATION OF EMPLOYMENT PRIOR TO PUBLIC OFFERING. Unless otherwise determined by the Committee at the Grant Date, the Committee shall provide in each or any Option Agreement governing Options granted hereunder that prior to the Public Offering (a) Holding or the Company and the C&D Fund shall have successive rights to purchase any vested Options from the Participant upon the termination of his employment, provided that if such Participant's employment is terminated prior to the Special Registration, such repurchase shall be delayed until the Special Registration, and (b) the Participant may put his vested Options to Holding for purchase upon the termination of the Participant's employment (i) due to a Special Termination (but not upon the Early Retirement of such Participant) or (ii) by Holding, the Company or any Subsidiary not for Cause, provided in each case that if such Participant's employment is terminated prior to the Special Registration, such put shall be delayed until the Special Registration. Any purchase or sale as contemplated by the preceding sentence shall be for a purchase price per Option equal to the excess, if any, of (x) the Fair Market Value on the date of termination over (y) the exercise price per share of Common Stock pursuant to such Option, and upon such other terms and conditions as may be set forth in the Option Agreement. The foregoing right of a Participant to require Holding to repurchase any exercisable Options shall be subject to the Company having the ability to do so under the terms of its financing arrangements and Delaware law. Section 8. Change in Control ---------------------------- 8.1. ACCELERATED VESTING AND PAYMENT. Unless the Committee shall otherwise determine in the manner set forth in Section 8.2, in the event of a Change in Control, each Option shall be cancelled in exchange for a payment in cash of an amount equal to the excess, if any, of the Change in Control Price over the exercise price for such Option. 8.2. ALTERNATIVE OPTIONS. Notwithstanding Section 8.1, no cancellation, acceleration or exercisability, vesting or cash settlement or other payment shall occur with respect to any Option if the Committee reasonably determines in good faith, prior to the occurrence of a Change in Control, that such Option shall be honored or assumed, or new rights substituted therefor (such honored, assumed or substituted Option being hereinafter referred to as an "Alternative Option") by the New Employer, provided that any such Alternative Option must: 6 (a) provide the Participant that held such Option with rights and entitlements substantially equivalent to or better than the rights, terms and conditions applicable under such Option, including, but not limited to, an identical or better exercise and vesting schedule, identical or better timing and methods of payment and, if the Alternative Options or the securities underlying them are not publicly traded identical or better rights to put Options to Holding; (b) have substantially equivalent economic value to such Option (determined at the time of the Change in Control); and (c) have terms and conditions which provide that in the event such Participant suffers an Involuntary Termination within two years following a Change in Control: (i) any conditions on such Participant's rights under, or any restrictions on transfer or exercisability applicable to, each such Alternative Option shall be waived or shall lapse, as the case may be; or (ii) such Participant shall have the right to surrender such Alternative Option within 30 days following such termination in exchange for a payment in cash equal to the excess of the Fair Market Value of the Common Stock subject to the Alternative Option over the price, if any, that such Participant would be required to pay to exercise such Alternative Option. Section 9. Amendment, Modification, and Termination of the Plan --------------------------------------------------------------- The Board at any time may terminate or suspend the Plan, and from time to time may amend or modify the Plan. No amendment, modification, termination or suspension of the Plan shall in any manner adversely affect any Option theretofore granted under the Plan, without the consent of the Participant holding such Option. Shareholder approval of any such amendment, modification, termination or suspension shall be obtained to the extent mandated by applicable law, or if otherwise deemed appropriate by the Committee. Section 10. Miscellaneous Provisions ------------------------------------ 10.1 NONTRANSFERABILITY OF AWARDS. No Options granted under the Plan may be sold, transferred, pledged, assigned, encumbered or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution and provided that the deceased Participant's beneficiary or the representative of his estate acknowledges and agrees in writing, in a form reasonably acceptable to Holding, to be bound by the provisions of the Plan (including the purchase rights described in Section 7.3) and the Option Agreement covering such Options as if such beneficiary or estate were the Participant. All rights with respect to Options granted to a Participant under the Plan shall be exercisable during his lifetime by such Participant only. Following a Participant's death, all rights with respect to Options that were exercisable at the time of such Participant's death and have not terminated shall be exercised by his designated beneficiary or by his estate. 10.2 BENEFICIARY DESIGNATION. Each Participant under the Plan may from time to time name any beneficiary or beneficiaries (who may be named contingently or successively) by whom any right under the Plan is to be exercised in case of his death. Each designation will revoke all prior designations by the same Participant, shall be in a form reasonably prescribed by the Committee, and will be effective only when filed by the Participant in writing with the Committee during his lifetime. 10.3 NO GUARANTEE OF EMPLOYMENT OR PARTICIPATION. Nothing in the Plan or in any Option Agreement shall interfere with or limit in any way the right of Holding, the Company or any Subsidiary to 7 terminate any Participant's employment at any time, or confer upon any Participant any right to continue in the employ of Holding, the Company or any Subsidiary. No Employee shall have a right to be selected as a Participant or, having been so selected, to receive any Options. No Employee shall have any accrued or other rights in respect of the Plan, Options or the Common Stock other than those rights explicitly granted under the Plan. 10.4 TAX WITHHOLDING. The Company or any Subsidiary employing a Participant shall have the power to withhold, or to require such Participant to remit to the Company or such Subsidiary, subject to such other arrangements as the Committee may set forth in the Option Agreement to which such Participant is a party, an amount sufficient to satisfy all federal, state, local and foreign withholding tax requirements in respect of any Option granted under the Plan. 10.5 INDEMNIFICATION. Each person who is or shall have been a member of the Committee or of the Board shall be indemnified and held harmless by the Company and Holding to the fullest extent permitted by law from and against any and all losses, costs, liabilities and expenses (including any related attorneys' fees) in connection with, based upon or arising or resulting from any claim, action, suit or proceeding to which he may be made a party or in which he may be involved by reason of any action taken or failure to act under the Plan and from and against any and all amounts paid by him in settlement thereof, with the Company's approval, or paid by him in satisfaction of any judgment in any such action, suit or proceeding against him, PROVIDED that he shall give the Company an opportunity, at its own expense, to defend the same before he undertakes to defend it on his own behalf. The foregoing right of indemnification shall not be exclusive and shall be independent of any other rights of indemnification to which such persons may be entitled under Holding's or the Company's Certificate of Incorporation or By-laws, by contract, as a matter of law, or otherwise. 10.6 NO LIMITATION ON COMPENSATION. Nothing in the Plan shall be construed to limit the right of Holding, the Company or any Subsidiary to establish other plans or to pay compensation to its employees, in cash or property, in a manner that is not expressly authorized under the Plan. 10.7 REQUIREMENTS OF LAW. The granting of Options and the issuance of shares of Common Stock pursuant to such Options, and any purchases or sales pursuant to Section 7.3, shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. No Options shall be granted under the Plan and no shares of Common Stock shall be issued upon exercise of any Options granted under the Plan, and no Options shall be purchased or sold pursuant to Section 7.3, (a) if such grant or exercise would result in a violation of applicable law, including the federal securities laws and any applicable state securities laws, or (b) unless an order shall have been issued by the Securities and Exchange Commission pursuant to Section 12(h) of the Securities Exchange Act of 1934, as amended, exempting Holding from the registration requirements of Section 12(g) of such Act with respect to the Options. 10.8 FREEDOM OF ACTION. Subject to Section 9, nothing in the Plan or any Option Agreement shall be construed as limiting or preventing Holding, the Company or any Subsidiary from taking any action that it deems appropriate or in its best interest. 10.9 TERM OF PLAN. The Plan shall be effective as of the Effective Date. The Plan shall continue in effect, unless sooner terminated pursuant to Section 9, until the tenth anniversary of the Effective Date. The provisions of the Plan, however, shall continue thereafter to govern all outstanding Options theretofore granted. 10.10 CERTAIN MATERIAL INFORMATION. Holding will deliver to each Participant that holds any Options, within a reasonable time prior to the time that he terminates his employment with Holding, the Company and the Subsidiaries, all information with respect to such Options that is material to the decision whether to terminate employment, provided that Holding shall not be required to deliver to any such Participant any confidential or non-public information unless such Participant agrees to sign an appropriate confidentiality agreement. Such information shall not be required to be delivered at such times as Holding 8 is a reporting Company under the Securities Exchange Act of 1934, as amended, or following the expiration of the order referred to in Section 10.7. 10.11 NO VOTING RIGHTS. Except as otherwise required by law, no Participant holding any Options granted under the Plan shall have any right, in respect of such Options, to vote on any matters submitted to Holding's stockholders until such time as the shares of Common Stock issuable upon exercise of such Options have been so issued. 10.12 GOVERNING LAW. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Delaware. 9 EX-10.15 5 l92467aex10-15.txt EXHIBIT 10.15 Exhibit 10.15 FIRST AMENDMENT TO THE LEXMARK HOLDING, INC. STOCK OPTION PLAN FOR SENIOR MANAGERS WHEREAS, Lexmark Holding, Inc. (the "Company") adopted the Stock Option Plan for Senior Managers (the "Plan"), effective as of March 27, 1991; WHEREAS, at a meeting of the Board of Directors of the Company (the "Board") held on September 13, 1995, the Board resolved to exercise the authority reserved to the Board under Section 9 of the Plan to amend the Plan in the manner set forth herein; NOW, THEREFORE, the Plan is hereby amended as set forth below, subject to the closing thereof, effective upon the initial sale of the Common Stock to the public pursuant to the initial public offering of the Class A Common Stock of the Company pursuant to an effective Registration Statement of the Company on Form S-1 filed with the Securities and Exchange Commission: 1. Section 2.1(f) is amended by deleting the term "Board" appearing in the parenthetical thereof and inserting the term "Committee" in lieu thereof. 2. Section 2.1(h) is deleted in its entirety and a new Section 2.1(h) is added in lieu thereof, reading as follows: "(h) 'Committee' means the Compensation and Pension Committee of the Board (or such other committee of the Board as the Board shall designate), which shall consist of two or more members, each of whom shall be "disinterested persons" within the meaning of Rule 16b-3, as promulgated under the Securities and Exchange Act of 1934, as amended, and serving at the pleasure of the Board." 3. Section 2.1(n) is hereby amended by adding a new sentence at the end thereof, reading as follows: "Notwithstanding the foregoing, from and after the initial sale of Common Stock to the public pursuant to an initial Public Offering, the term 'Fair Market Value' shall mean, on any date of determination, the average of the highest and lowest sales prices of a share of Common Stock, as reported for such date on a national exchange, or the average of the highest and lowest bid and asked prices for a share of Common Stock on such date, as reported on a nationally recognized system of price quotation, provided that if there are no Common Stock transactions reported on such exchange or system on such date, Fair Market Value shall mean the closing price on the immediately preceding date on which Common Stock transactions were so reported." 4. Section 3 is amended by adding a new sentence at the end thereof, reading as follows: "Notwithstanding any other provision of the Plan, following the initial sale of Common Stock to the public pursuant to an initial Public Offering, no Employee shall be selected to participate in the Plan and no Participant shall be granted any new or additional award under the Plan." 5. Section 4.1 is amended by adding a new sentence at the end thereof, reading as follows: "Notwithstanding the foregoing, no Options may be awarded under the Plan at any time following the initial sale of Common Stock to the public pursuant to an initial Public Offering." 6. Section 4 is amended by adding a new Section 4.3 at the end thereof, reading as follows: "4.3 FOREIGN MATTERS. After a Public Offering, the Committee shall have the authority to take any action with respect to outstanding Options held by Participants who are, or with respect to which the exercise thereof would be, subject to the laws of any foreign jurisdiction, including the modification of the terms of any such Option, as appropriate to permit the exercise of such Options to comply with the laws of such jurisdiction and/or to permit the holder thereof to receive the benefit of any favorable tax treatment ordinarily associated with options or similar awards granted to individuals subject to the laws of such jurisdiction." 7. Section 5.1 is amended by deleting the reference to "235,000" and inserting a reference to "3,210,030, after giving effect to the stock split of the Common Stock effected immediately prior to the initial Public Offering" in lieu thereof. 8. Section 5.2 is amended by adding a new sentence at the end thereof, reading as follows: "Notwithstanding the foregoing, no Option will be available for grant pursuant to this Section 5.2 from or after the initial sale of Common Stock to the public pursuant to an initial Public Offering." 9. Section 5.3 is amended by deleting the term "Board" each time it appears herein and inserting the term "Committee" in lieu thereof. 10. Section 6.1 is amended by adding the phrase "Subject to Section 4.1," at the beginning thereof. 11. Section 6.6 of the Plan is amended by adding the following new sentence at the end thereof, reading as follows: "Notwithstanding the foregoing, no such offers or sales may be made at any time from or after the initial sale of Common Stock to the public pursuant to an initial Public Offering." EX-10.16 6 l92467aex10-16.txt EXHIBIT 10.16 Exhibit 10.16 SECOND AMENDMENT TO THE LEXMARK HOLDING, INC. STOCK OPTION PLAN FOR SENIOR MANAGERS (As amended September 13, 1995) This is the Second Amendment to the Lexmark Holding, Inc. Stock Option Plan for Senior Managers (as amended September 13, 1995) (the "Plan;" capitalized terms used herein and not defined have the meaning ascribed to such terms in the Plan). WHEREAS, pursuant to Section 5.3 of the Plan, the Committee, in its sole discretion, is authorized to adjust the number and class of Options, and the number of shares of Common Stock available for issuance upon exercise of such Options, granted under the Plan if it shall deem such an adjustment to be necessary or appropriate to reflect, among other things, a stock dividend or stock split of the Common Stock; WHEREAS, the Board has approved a two-for-one stock split of the Common Stock to be effected in the form of a 100% stock dividend on June 10, 1999; and WHEREAS, Section 5.1 of the Plan currently provides that the maximum number of Options and the maximum number of shares of Common Stock subject to Options granted under the Plan may not exceed 3,210,030. NOW, THEREFORE, the Plan is hereby amended, effective as of June 10, 1999, as follows: 1. Section 5.1 of the Plan is amended in its entirety to read as follows: "5.1 NUMBER. Subject to the provisions of Sections 5.2 and 5.3, the maximum number of Options (and the maximum number of shares of Common Stock subject to Options) granted under the Plan may not exceed 6,420,060 (after giving effect to the stock split of the Common Stock immediately prior to the initial public offering and the stock split of the Common Stock effective June 10, 1999). The shares of Common Stock to be delivered upon the exercise of Options granted under the Plan may consist, in whole or in part, of treasury Common Stock or authorized but unissued Common Stock, not reserved for any other purpose." In all other aspects, the Plan is hereby ratified and confirmed. EX-10.17 7 l92467aex10-17.txt EXHIBIT 10.17 Exhibit 10.17 THIRD AMENDMENT TO THE LEXMARK HOLDING, INC. STOCK OPTION PLAN FOR SENIOR MANAGERS (As amended September 13, 1995 and June 10, 1999) This is the Third Amendment to the Lexmark Holding, Inc. Stock Option Plan for Senior Managers (as amended September 13, 1995 and June 10,1999) (the "Plan;" capitalized terms used herein and not defined have the meanings ascribed to such terms in the Plan). WHEREAS, pursuant to Section 9 of the Plan, the Board is authorized to amend the Plan from time to time; WHEREAS, the Board has determined to permit certain transfers by Participants of Options granted to such Participant pursuant to the Plan for estate planning purposes, subject to certain approvals; and WHEREAS, the Board and the Committee have determined that this amendment to the Plan does not require the approval of stockholders of the Company. NOW, THEREFORE, the Plan is hereby amended, effective as of July 29, 1999 as follows: 1. Section 10.1 of the Plan is amended in its entirety to read as follows: "10.1 NONTRANSFERABILITY OF AWARDS. Unless the Board, the Committee or the Company's Vice President, Human Resources and Vice President and General Counsel shall permit an Option to be transferred by a Participant to a Participant's family member for estate planning purposes or to a trust, partnership, corporation or other entity established by the Participant for estate planning purposes, on such terms and conditions as the Board, the Committee or such officers may specify, no Option granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. All rights with respect to any Option granted to a Participant under the Plan shall be exercisable by the transferee only for as long as they could have been exercisable by such Participant. If any Option is transferred to a family member, trust partnership, corporation or other entity as contemplated by the first sentence hereof, all references herein and in the applicable Option Agreement to the Participant shall be deemed to refer to such permitted transferee, other than any such references with respect to the personal status of the Participant." In all other respects, the Plan is hereby ratified and confirmed. EX-10.18 8 l92467aex10-18.txt EXHIBIT 10.18 Exhibit 10.18 SENIOR MANAGERS NON-QUALIFIED STOCK OPTION AGREEMENT ---------------------------------------------------- SENIOR MANAGERS NON-QUALIFIED STOCK OPTION AGREEMENT, dated as of April 30, 1992, between Lexmark Holding, Inc., a Delaware corporation (the "Company"), and the Grantee whose name appears on the signature page hereof (the "Grantee"). W I T N E S E T H: - - - - - - - - - WHEREAS, pursuant to an Amended and Restated Master Acquisition Agreement, dated as of December 19, 1990, as amended (the "Master Acquisition Agreement"), among the Company, International Business Machines Corporation, a New York corporation ("IBM"), and Lexmark International, Inc. (formerly IBM Information Products Corporation), a Delaware corporation ("Lexmark"), the Company acquired all of the capital stock of Lexmark from IBM and subsidiaries of the Company acquired or will acquire certain assets of the foreign portions of the Information Products Division of IBM from subsidiaries of IBM (collectively, the "Acquisition"); WHEREAS, in connection with the Acquisition, the Company issued (a) 2,050,787 shares of its Class A Common Stock, par value $.01 per share (the "Common Stock"), to The Clayton & Dubilier Private Equity Fund IV Limited Partnership (together with any successor investment vehicle managed by Clayton & Dubilier, Inc. the "C&D Fund"), (b) an aggregate of 550,000 shares of the Company's Class B Common Stock, par value $.01 per share, to certain institutional investors pursuant to Note and Stock Purchase Agreements among the Company and Lexmark and each such investor, (c) an aggregate of 850,000 shares of Common Stock to certain other institutional investors (the "Institutional Investors") pursuant to a Securities Purchase Agreement among the Company and the Institutional Investors, (d) 375,000 shares of Common Stock to IBM pursuant to the Master Acquisition Agreement and (e) 50,000 shares of Common Stock to an individual investor pursuant to a stock subscription agreement between the Company and such investor; WHEREAS, in connection with the Acquisition, the Company also (A) issued shares of its Senior Cumulative Exchangeable Preferred Stock, having an aggregate $85 million initial liquidation preference, to the Institutional Investors, (B) issued 50,000 shares of its Non-Cumulative Junior Participating Preferred Stock to the Lexmark Savings Plan Trust, which stock is exchangeable for shares of Common Stock under certain circumstances, and (C) issued a warrant to purchase up to 79,000 shares of Common Stock to Lexmark, which in turn transferred such warrant to Spectrum Sciences B.V.; WHEREAS, following the Acquisition, up to 680,000 shares, and options to purchase shares, of Common Stock have been made available, sold and/or granted, respectively, to non-employee directors of the Company or its subsidiaries, and to existing and newly-hired members of the management and employees of and consultants to the Company and its subsidiaries; and up to 3,500 shares of Common Stock have been made available and/or sold to senior executives of corporations in which entities managed or sponsored by Clayton & Dubilier, Inc. have made equity investments; WHEREAS, the Board of Directors of the Company (the "Board") has designated the Compensation and Pension Committee of the Board (the "Committee") to administer the Company's Stock Option Plan for Senior Managers (the "Plan"); and WHEREAS, the Committee has granted to the Grantee, under the Plan, a non-qualified stock option to purchase the number of shares of the Common Stock set forth in the attached letter dated April 30, 1992, from Marvin Mann (the "Shares") at an exercise price of $115 per share; NOW, THEREFORE, to evidence the option so granted, and to set forth its terms and conditions under the Plan, the Company and the Grantee hereby agree as follows: 1. CONFIRMATION OF GRANT; OPTION PRICE. The Company hereby evidences and confirms its grant to the Grantee, effective as of the date hereof, of an option (the "Option") to purchase the Shares at an option price of $115 per share (the "Option Price"). The Option is not intended to be an Incentive Stock Option ("ISO") under the Internal Revenue Code of 1986, as amended. This Agreement is subordinate to, and the terms and conditions of the Option granted hereunder are subject to the terms and conditions of the Plan. 2. EXERCISABILITY. Except as otherwise provided in this Agreement, 60% of the Option shall become available for exercise upon Special Registration (as defined in Section 4 (d)), subject to the provisions hereof, and with an additional 20% becoming exercisable on each of the first and second anniversaries of the date of the Special Registration, PROVIDED that, in the event that the Grantee's employment with each of the Company and its subsidiaries that employ the Grantee terminates by reason of the Grantee's death, Permanent Disability (as defined in Section 4 (d)) or Retirement at Normal Retirement Age (as defined in Section 4 (d)), 100% of the Option shall become available for exercise upon the later to occur of the Special Registration or the date of the Grantee's termination of employment. In the event that the Grantee's employment with each of the Company and its subsidiaries that employ the Grantee terminates for any reason other than (i) death, Permanent Disability or Retirement at Normal Retirement Age or (ii) for Cause, then any portion of the Option held by the Grantee and then exercisable shall remain exercisable after such termination of employment at any time on or after the Special Registration, PROVIDED that the Committee may at any time determine that 100% of the Option shall become immediately available for exercise at any time on or after the Special Registration. Any Shares which have become eligible for purchase may thereafter be purchased, subject to the provisions hereof, and pursuant to and subject to the provisions contained in the Management Stock Subscription Agreement (as defined in Section 5) related to such Shares, at any time and from time to time on or after such anniversary until the date one day prior to the date on which the Option terminates. 3. TERMINATION OF OPTION. (a) NORMAL TERMINATION DATE. Unless an earlier termination date is specified in Section 3 (b), the Option shall terminate on the tenth anniversary of the date hereof (the "Normal Termination Date"). (b) EARLY TERMINATION. If the Grantee's active employment with each of the Company and its subsidiaries that employs the Grantee is voluntarily or involuntarily terminated for any reason whatsoever prior to the Normal Termination Date (i) any portion of the Option that has not become exercisable on or before the date of such termination shall terminate on such date, and (ii) if the Grantee's active employment is terminated by his employer for Cause, the Option (including any portion of such option that shall have become exercisable prior to such termination) shall no longer be exercisable on or after such termination date. Notwithstanding the foregoing, and except in the case of a termination by reason of death, Permanent Disability or Retirement at Normal Retirement Age prior to the Special Registration, if the corresponding ISO granted to the Grantee under the Plan shall not have been exercised in full within 90 days after the Special Registration, this Option shall terminate on the 91st day following the Special Registration as to the number of Shares equal to the product of (i) the total number of Shares times (ii) a fraction, (A) the numerator of which is the number of shares of Common Stock as to which the ISO is not exercised and (B) the denominator of which is the total number of shares of Common Stock which were originally subject to the ISO. Nothing in this Agreement shall be deemed to confer on the Grantee any right to continue in the employ of the Company or any of its subsidiaries, or to interfere with or limit in any way the right of the Company or any of its subsidiaries to terminate such employment at any time. 2 4. RESTRICTIONS ON EXERCISE; NON-TRANSFERABILITY OF OPTION; REPURCHASE OF OPTION. (a) RESTRICTIONS ON EXERCISE. The Option may be exercised only with respect to full shares of Common Stock. No fractional shares of Common Stock shall be issued. Notwithstanding any other provision of this Agreement, the Option may not be exercised in whole or in part, and no certificates representing Shares shall be delivered, (i) unless all requisite approvals and consents of any governmental authority of any kind having jurisdiction over the exercise of options shall have been secured, (ii) unless the purchase of the Shares upon the exercise of the Option shall be exempt from registration under applicable federal and state securities laws or the Shares shall have been registered under such laws, (iii) unless all applicable federal, state and local tax withholding requirements shall have been satisfied and (iv) if such exercise would result in a violation of the terms or provisions of or a default or an event of default under any of the Financing Agreements (as such term is defined in Section 8). (b) NON-TRANSFERABILITY OF OPTION. The Option may be exercised only by the Grantee or by his estate. The Option is not assignable or transferable, in whole or in part, and it may not, directly or indirectly, be offered, transferred, sold, pledged, assigned, alienated, hypothecated or otherwise disposed of or encumbered (including without limitation by gift, operation of law or otherwise) other than by operation of law to the estate of the Grantee upon his death, PROVIDED that the deceased Grantee's beneficiary or the representative of his estate shall acknowledge and agree in writing, in a form reasonably acceptable to the Company, to be bound by all of the provisions of this Agreement and the Plan as if such beneficiary or estate were the Grantee. (c) REPURCHASE OF OPTION ON TERMINATION OF EMPLOYMENT. If the Grantee's active employment with each of the Company and any subsidiaries of the Company that employ the Grantee is terminated for any reason whatsoever, each of the Company and Lexmark shall have an option to purchase all (but not less than all) of the portion of the Option that is then exercisable (the "Covered Option"), and shall have a period of 30 days beginning on the later of the date of termination of employment and the Special Registration (the "First Purchase Period") during which to give notice in writing to the Grantee of its exercise of such right to purchase the Covered Option, PROVIDED that if the Company gives notice during the First Purchase Period of its exercise of such right to purchase the Covered Option, Lexmark's right to purchase the Covered Option shall terminate. If the Company and Lexmark fail to exercise their rights to purchase the Covered Option within the First Purchase Period, the C&D Fund shall have the right to purchase the Covered Option and shall have 30 days following the end of the First Purchase Period, or 30 days from the date of receipt of notice of the Grantee's termination in accordance with Section 4 (e), whichever is later (the "Second Purchase Period"), to give notice in writing to the Grantee of the C&D Fund's exercise of its right to purchase the Covered Option. If the right to purchase the Covered Option of the Company, Lexmark and the C&D Fund granted in this sub-section is not exercised as provided herein (other than as a result of Section 8), the Grantee shall be entitled to retain the Covered Option, subject to all of the provisions of the Agreement. If the Company, Lexmark and the C&D Fund have failed to exercise their respective rights to purchase the Covered Option pursuant to this Section 4 (c) within the time periods specified herein, and if the Grantee's active employment with each of the Company and any subsidiaries of the Company that employ the Grantee is terminated (i) by such employer or employers without Cause (as defined in Section 4 (d)) or (ii) by the Grantee by Retirement at Normal Retirement Age (as defined in Section 4 (d)) or (iii) by reason of Permanent Disability (as defined in Section 4 (d)) or death, on notice from the Grantee (or his estate) in writing and delivered to the Company within 30 days following the end of the Second Purchase Period, the Company shall purchase the Covered Option. All purchases pursuant to this Section 4 (c) by the Company, Lexmark or the C&D Fund shall be for a purchase price and in the manner prescribed by Sections 4 (g), (h) and (i). (d) CERTAIN DEFINITIONS. As used in this Agreement the following terms shall have the following meanings: (i) "CAUSE" shall mean (A) the willful failure by the Grantee to perform substantially his duties as an employee of the Company or any of it subsidiaries (other than due to physical or mental illness) after reasonable notice to the Grantee of such failure, (B) the Grantee's engaging in serious misconduct that is injurious to the Company or any 3 subsidiary of the Company, (C) the Grantee's having been convicted of, or entered a plea of NOLO CONTENDERE to, a crime that constitutes a felony or (D) the breach by the Grantee of any written covenant or agreement with the Company or any subsidiary of the Company not to disclose any information pertaining to the Company or any of its subsidiaries or not to compete or interfere with the Company or any of its subsidiaries. (ii) "RETIREMENT AT NORMAL RETIREMENT AGE" shall mean retirement at or after normal retirement age under the terms of any retirement plan sponsored by the Company or any of its subsidiaries, whichever employs the Grantee. (iii) "PERMANENT DISABILITY" shall mean a physical or mental disability or infirmity of the Grantee, as defined in any disability plan sponsored by the Company, Lexmark or any Subsidiary, whichever employees such Grantee, or, if no such plan is sponsored by the Grantee's employer, the Lexmark Long Term Disability Plan. (iv) "SPECIAL REGISTRATION" means the later of (i) the time at which a registration statement under the Securities Act of 1933, as amended, covering any offer to sell and sales of Common Stock issued upon exercise of Option granted pursuant to the Plan, becomes effective and (ii) the third anniversary of the effective date of the Plan. (e) NOTICE OF TERMINATION. The Company shall give written notice of any termination of the Grantee's active employment with each of the Company and any subsidiaries of the Company that employ the Grantee to the C&D Fund, except that if such termination (if other than as a result of death) is by the Grantee, the Grantee shall give written notice of such termination to the Company and the Company shall give written notice of such termination to the C&D Fund. (f) PUBLIC OFFERING. In the event that an underwritten public offering in the United States of the Common Stock by an underwriter of nationally recognized standing (a "Public Offering") has been consummated, none of the Company, the C&D Fund or the Grantee shall have any rights to purchase or sell the Covered Option, as the case may be, pursuant to this Section 4, and this Section 4 shall not apply to a sale as part of a Public Offering. (g) PURCHASE PRICE. The purchase price to be paid to the Grantee for the Covered Option (the "Purchase Price") shall be equal to the difference between (i) the fair market value of the Shares which may be purchased upon exercise of the Covered Option (the "Fair Market Value") and (ii) the aggregate exercise price of the Covered Option. Whenever a determination of Fair Market Value is required by this Agreement, such Fair Market Value shall be determined as of the time of the event that gives rise to the repurchase and shall be an amount determined in good faith by the Board (or, if the authority to make such determination has been specifically delegated by the Board to the Committee, by the Committee). The Fair Market Value as determined in good faith by the Board (or the Committee, as the case may be) shall, in the absence of fraud, be binding and conclusive upon all parties hereto. If the Company at any time subdivides (by any stock split, stock dividend or otherwise) the Common Stock into a small number of shares, the Purchase Price shall be appropriately adjusted to reflect such subdivision or combination. (h) PAYMENT. Subject to Section 8, the completion of a purchase pursuant to this Section 4 shall take place at the principal office of the Company on the tenth business day following (i) the Grantee's receipt of the C&D Fund's, Lexmark's or the Company's notice of its respective exercise of the right to purchase the Covered Option pursuant to Section 4(c) or (ii) the Company's receipt of the Grantee's notice to sell the Covered Option pursuant to Section 4(c). The Purchase Price shall be paid by delivery to the Grantee of a check for the Purchase Price payable to the order of the Grantee, against delivery of such instruments as the Company may reasonably request, signed by the Grantee. (i) APPLICATION OF THE PURCHASE PRICE TO CERTAIN LOANS. The Grantee agrees that the Company, Lexmark and the C&D Fund shall be entitled to apply any amounts to be paid by the Company or the C&D Fund, as the case may be, to repurchase the Covered Option pursuant to this Section 4 to discharge any indebtedness of the Grantee to the Company or any of its subsidiaries, or that may be 4 guaranteed by the Company or any of its subsidiaries, including, but not limited to, any indebtedness of the Grantee incurred to purchase any shares of Common Stock under any other agreement with the Company. (j) WITHHOLDING. Whenever Shares are to be issued pursuant to the Option, the Company may require the recipient of the Shares to remit to the Company an amount sufficient to satisfy federal, state, local or other withholding tax requirements. In the event any cash is paid to the Grantee or his estate or beneficiary pursuant to this Section 4, the Company shall have the right to withhold an amount from such payment sufficient to satisfy any federal, state, local or other tax withholding requirements. If shares of Common Stock are traded on a national securities exchange or bid and ask prices for shares of Common Stock are quoted on the "NASDAQ National Market System" operated by the National Association of Securities Dealers, Inc., the Company may, if requested by the Grantee, withhold shares to satisfy applicable withholding requirements, subject to the provisions of the Plan and any rules adopted by the Board or any committee thereof regarding compliance with applicable law, including, but not limited to, Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 5. MANNER OF EXERCISE. To the extent that the Option shall have become and remains exercisable as provided in Section 2 and subject to such administrative regulations as the Board or the Committee may have adopted, the Option may be exercised from time to time, in whole or in part, by notice to the Secretary of the Company in writing given 30 days prior to the date on which the Grantee will so exercise the Option (the "Exercise Date"), specifying the number of Shares with respect to which the Option is being exercised (the "Exercise Shares") and the Exercise Date, PROVIDED that if shares of Common Stock are traded on a national securities exchange or bid and ask prices for Shares of Common Stock are quoted over the "NASDAQ National Market System" operated by the National Association of Securities Dealers, Inc., notice may be given five business days before the Exercise Date. On or before the Exercise Date, the Company and the Employee shall enter into a Management Stock Subscription Agreement (the "Management Stock Subscription Agreement") in a form reasonably satisfactory to the Company and containing rights by the Company and the C&D Fund to purchase the Exercise Shares, which rights are similar to the purchase rights with respect to the Options described in this Agreement, and a right of first refusal of the Company and the C&D Fund with respect to the Exercise Shares. In accordance with the Management Stock Subscription Agreement, (a) on or before the Exercise Date, the Employee shall deliver to the Company full payment for the Exercise Shares in United States dollars in cash, or cash equivalent satisfactory to the Company, and in an amount equal to the aggregate purchase price for the Exercise Shares and (b) on the Exercise Date, the Company shall deliver to the Employee a certificate or certificates representing the Exercise Shares, registered in the name of the Employee. If shares of Common Stock are listed for trading on a national securities exchange or bid and ask prices for shares of Common Stock are quoted over the "NASDAQ National Market System" operated by the National Association of Securities Dealers, Inc., the Employee may, in lieu of cash, tender shares of Common Stock having a Fair Market Value on the Exercise Date equal to the purchase price of the Exercise Shares or may deliver a combination of cash and shares of Common Stock having a Fair Market Value equal to the difference between the exercise price and the amount of such cash as payment for the purchase price of the Exercise Shares, subject to such rules and regulations as may be adopted by the Board or the Committee to provide for the compliance of such payment procedure with applicable law, including Section 16(b) of the Exchange Act. The Company may require the Grantee to furnish or execute such other documents as the Company shall deem necessary (i) to evidence such exercise, (ii) to determine whether registration is then required under the Securities Act of 1933, as amended (the "Securities Act"), and (iii) to comply with or satisfy the requirements of the Securities Act, state securities laws or any other law. 6. GRANTEE'S REPRESENTATIONS, WARRANTIES AND COVENANTS. (a) INVESTMENT INTENTION. The Grantee represents and warrants that the Option has been, and any Exercise Shares will be, acquired by him solely for his own account for investment and not with a view to or for sale in connection with any distribution thereof. The Grantee agrees that he will not, directly or indirectly, offer, transfer, sell, pledge, hypothecate or otherwise dispose of all or any portion of the Option or any of the Exercise Shares (or solicit any offers to buy, purchase or otherwise acquire or take a pledge of all or any portion of the Option or any of the Exercise Shares), except in compliance with the Securities Act and the rules and regulations of the Securities and Exchange Commission (the "Commission") thereunder, 5 and in compliance with applicable state securities or "blue sky" laws. The Grantee further understands, acknowledges and agrees that none of the Shares may be transferred, sold, pledged, hypothecated or otherwise disposed of (i) unless the provisions of the related Management Stock Subscription Agreement shall have been complied with or have expired, (ii) unless (A) such disposition is pursuant to an effective registration statement under the Securities Act, (B) the Grantee shall have delivered to the Company an opinion of counsel, which opinion and counsel shall be reasonably satisfactory to the Company, to the effect that such disposition is exempt from the provisions of Section 5 of the Securities Act or (C) a no-action letter from the Commission, reasonably satisfactory to the Company, shall have been obtained with respect to such disposition and (iii) unless such disposition is pursuant to registration under any applicable state securities laws or an exemption therefrom, except that if the Grantee is a citizen or resident of any country other than the United States, or the Grantee desires to effect any transfer in any such country, in addition to the foregoing, counsel for the Grantee (which counsel shall be reasonably satisfactory to the Company) shall have furnished the Company with an opinion or other advice reasonably satisfactory to the Company to the effect that such transfer will comply with the securities laws of such jurisdiction. Notwithstanding the foregoing, the Company acknowledges and agrees that no opinion of counsel is required in connection with a transfer to the Company, Lexmark or the C&D Fund. (b) LEGEND. Any certificate representing the Exercise Shares shall bear the following legends: "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE PROVISIONS OF A MANAGEMENT STOCK SUBSCRIPTION AGREEMENT, DATED AS OF ___________, 199_, AND NEITHER THIS CERTIFICATE NOR THE SHARES REPRESENTED BY IT ARE ASSIGNABLE OR OTHERWISE TRANSFERABLE EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF SUCH MANAGEMENT STOCK SUBSCRIPTION AGREEMENT, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE ENTITLED TO THE BENEFITS PROVIDED TO MANAGERS IN, AND ARE BOUND BY THE OBLIGATIONS SET FORTH IN, A REGISTRATION AND PARTICIPATION AGREEMENT, DATED AS OF MARCH 27, 1991, AMONG THE COMPANY AND CERTAIN STOCKHOLDERS OF THE COMPANY, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY." "THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER ANY STATE SECURITIES LAWS, AND MAY NOT BE TRANSFERRED, SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS (i) (A) SUCH DISPOSITION IS PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT, (B) THE HOLDER HEREOF SHALL HAVE DELIVERED TO THE COMPANY AN OPINION OF COUNSEL, WHICH OPINION AND COUNSEL SHALL BE REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT SUCH DISPOSITION IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF SUCH ACT OR (C) A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION, REASONABLY SATISFACTORY TO COUNSEL FOR THE COMPANY, SHALL HAVE BEEN OBTAINED WITH RESPECT TO SUCH DISPOSITION AND (ii) SUCH DISPOSITION IS PURSUANT TO REGISTRATION UNDER ANY APPLICABLE STATE SECURITIES LAWS OR AN EXEMPTION THEREFROM, EXCEPT THAT IF THE GRANTEE IS A CITIZEN OR RESIDENT OF ANY COUNTRY OTHER THAN THE UNITED STATES, OR THE GRANTEE DESIRES TO EFFECT ANY TRANSFER IN ANY SUCH COUNTRY, IN ADDITION TO THE FOREGOING, COUNSEL FOR THE GRANTEE (WHICH COUNSEL SHALL BE REASONABLY SATISFACTORY TO THE COMPANY) SHALL HAVE FURNISHED THE COMPANY WITH AN OPINION OR OTHER ADVICE REASONABLY SATISFACTORY TO THE COMPANY TO THE EFFECT THAT SUCH TRANSFER WILL COMPLY WITH THE SECURITIES LAWS OF SUCH JURISDICTION." 6 (c) SECURITIES LAW MATTERS. The Grantee acknowledges receipt of advice from the Company that the Option has not been registered under the Securities Act or qualified under any state securities or "blue sky laws" and, upon exercise of the Option, (i) the Exercise Shares will not be registered under the Securities Act or qualified under any state securities or "blue sky" laws, (ii) the Exercise Shares must be held indefinitely and the Grantee must continue to bear the economic risk of the investment in the Exercise Shares unless such Exercise Shares are subsequently registered under the Securities Act and such state laws or an exemption from such registration is available, (iii) it is not anticipated there will be any public market for the Exercise Shares, (iv) Rule 144 promulgated under the Securities Act is not presently available with respect to the sales of any securities of the Company, (v) when and if the Exercise Shares may be disposed of without registration in reliance upon Rule 144, such disposition can be made only in limited amounts in accordance with the terms and conditions of such Rule, (vi) if the exemption afforded by Rule 144 is not available, sales of the Exercise Shares may be difficult to effect because of the absence of public information concerning the Company, (vii) a restrictive legend in the form heretofore set forth shall be placed on the certificates representing the Exercise Shares and (viii) a notation shall be made in the appropriate records of the Company indicating that the Exercise Shares are subject to restrictions on transfer and, if the Company should in the future engage the services of a stock transfer agent, appropriate stop-transfer restrictions will be issued to such transfer agent with respect to the Exercise Shares. (d) COMPLIANCE WITH RULE 144. If any of the Exercise Shares are to be disposed of in accordance with Rule 144 under the Securities Act, the Grantee shall transmit to the Company an executed copy of Form 144 (if required by Rule 144) no later than the time such form is required to be transmitted to the Commission for filing and such other documentation as the Company may reasonably require in connection with such disposition. (e) ABILITY TO BEAR RISK. The Grantee covenants that he will not exercise all or any portion of the Option unless (i) the financial situation of the Grantee is such that he can afford to bear the economic risk of holding the Exercise Shares for an indefinite period and (ii) he can afford to suffer the complete loss of his investment in the Exercise Shares. (f) QUESTIONNAIRE. The Grantee agrees that he will furnish such documents and comply with such reasonable requests of the Company as may be necessary to substantiate his status as a qualifying investor in connection with any private offering of the Exercise Shares to the Grantee and that all information contained in any written materials concerning the status of the Grantee furnished by the Grantee to the Company in connection with such requests will be true and correct in all material respects. (g) ACCESS TO INFORMATION. The Grantee represents and warrants that (i) he has been granted the opportunity to ask questions of, and receive answers from, representatives of the Company concerning the terms and conditions of the Options and the purchase of the Exercise Shares upon exercise of the Options, (ii) his knowledge and experience in financial and business matter is such that he is capable of evaluating the risks of an investment in the Exercise Shares and (iii) he is a key employee or manager of the Company, Lexmark or a subsidiary of either on the date hereof. (h) REGISTRATION; RESTRICTIONS ON SALE UPON PUBLIC OFFERING. In respect of any Shares purchased upon exercise of all or any portion of the Option, the Grantee shall be entitled to the rights and subject to the obligations created under the Registration and Participation Agreement, dated as of March 27, 1991, among the Company and certain stockholders of the Company, to the extent set forth therein. The Grantee agrees that, in the event that the Company files a registration statement under the Securities Act with respect to an underwritten public offering of any shares of its capital stock, the grantee will not effect any public sale or distribution of any shares of the Common Stock (other than as part of such underwritten public offering) during the 20 days prior to and the 180 days after the effective date of such registration statement. (i) SECTION 83(b) ELECTION. The Grantee agrees that, within 20 days of any Exercise Date, he shall give notice to the Company as to whether or not he has made an election pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended, with respect to the Exercise Shares purchased on such date, and acknowledges that he will be solely responsible for any and all tax liabilities payable by him in 7 connection with his receipt of the Exercise Shares or attributable to his making or failing to make such an election. 7. REPRESENTATIONS AND WARRANTIES OF THE COMPANY, ETC. The Company represents and warrants to the Grantee that this Agreement has been duly authorized and executed and delivered by the Company. 8. CERTAIN RESTRICTIONS ON REPURCHASES. (a) FINANCING AGREEMENTS, ETC. Notwithstanding any other provision of this Agreement, the Company shall not be permitted or obligated to repurchase all or any portion of the Option if (i) there exists and is continuing a default or an event of default under (A) the Secured United States Credit Agreement, dated as of March 27, 1991, among the Company, Lexmark, the financial institutions named on the signature pages thereof and Morgan Guaranty Trust Company of New York, as agent for such institutions (the "Credit Agreement"), (B) the Note and Stock Purchase Agreements, dated as of March 27, 1991, among Lexmark and the Company and each of the institutional investors named on the signature pages thereof, relating to certain subordinated notes of Lexmark (the "Note Purchase Agreements"), (C) the Securities Purchase Agreement, dated as of March 27, 1991, among the Company and the Institutional Investors relating to the Company's senior cumulative exchangeable preferred stock (together with the Credit Agreement and the Note Purchase Agreements, the "Loan Agreements"), or (D) any other financing or security agreement or document entered into in connection with the Acquisition, or the financing of the Acquisition, or permitted under the Loan Agreements (such agreements and documents and the Loan Agreements, as each may be amended, modified or supplemented form time to time, are hereinafter referred to as the "Financing Agreements"), in each case as the same may be amended, modified or supplemented from time to time, (ii) such repurchase would result in a violation of the terms or provisions of or a default or an event of default under any of the Financing Agreements or (iii) such repurchase would violate any of the terms or provisions of the Certificate of Incorporation of the Company. In the event that a repurchase otherwise permitted or required under Section 4(c) is prevented solely by the terms of the foregoing sentence, such repurchase shall take place without the application of further conditions or impediments (other than as set forth in Section 4 or in this Section 8) at the first opportunity thereafter when no such default, event of default or violation exists or when such repurchase will not result in any such default, event of default or violation under any of the Financing Agreements or in a violation of any term or provision under the Certificate of Incorporation of the Company. (b) DELAWARE GENERAL CORPORATION LAW. Notwithstanding any other provisions of this Agreement, if any repurchase of all or any portion of the Option pursuant to Section 4 would otherwise take place at a time when the Company has no funds legally available therefor under the General Corporation Law of the State of Delaware, such repurchase will be postponed and will take place without the application of further conditions or impediments (other than as set forth in Section 4 or in this Section 8) at the first opportunity thereafter when the Company has funds legally available therefor. (c) PURCHASE PRICE ADJUSTMENT. In the event that the Company is prohibited from repurchasing all or any portion of the Option from the Grantee as contemplated by this Section 8, the Purchase Price therefor shall be (i) the Purchase Price of such Shares, determined in accordance with Section 4 at the time the purchase of such Shares would have occurred but for the operation of this Section 8 plus (ii) an amount equal to interest on such Purchase Price at the rate publicly announced from time to time by Morgan Guaranty Trust Company of New York as its reference rate for the period from the date on which the completion of the purchase would have taken place but for the operation of this Section 8 to the date on which such purchase actually takes place. 9. NO RIGHTS AS STOCKHOLDER. The Grantee shall have no voting or other rights as a stockholder of the Company with respect to any Shares covered by the Option until the exercise of the Option and the issuance of a certificate or certificates to him for such Shares. No adjustment shall be made for dividends or other rights for which the record date is prior to the issuance of such certificate or certificates. 8 10. CAPITAL ADJUSTMENTS. The number and price of the Shares covered by the Option shall be proportionately adjusted to reflect, as deemed equitable and appropriate by the Board in its sole discretion, any stock dividend, stock split or share combination of the Common Stock or any recapitalization of the Company. To the extent deemed equitable and appropriate by the Board in its sole discretion, subject to any required action by the stockholders of the Company, in any merger, consolidation, reorganization, exchange of shares, liquidation or dissolution, the Option shall pertain to the securities and other property, if any, that a holder of the number of shares of Common Stock covered by the Option would have been entitled to receive in connection with such event. 11. MISCELLANEOUS. (a) NOTICES. All notices and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given if delivered personally or sent by certified or express mail, return receipt requested, postage prepaid, or by any recognized international equivalent of such mail delivery, to the Company, Lexmark, the C&D Fund or the Grantee, as the case may be, at the following addresses or to such other address as the Company, Lexmark, the C&D Fund or the Grantee, as the case may be, shall specify by notice to the other parties: (i) if to the Company or Lexmark, to it at: 55 Railroad Avenue P.O. Box 2868 Greenwich, Connecticut 06836 ATTENTION: Secretary (ii) if to the Grantee, to the Grantee at the address set forth on the signature page hereof. (iii) if to the C&D Fund, to: The Clayton & Dubilier Private Equity Fund IV Limited Partnership 270 Greenwich Avenue Greenwich, Connecticut 06830 ATTENTION: Clayton & Dubilier Associates IV Limited Partnership, Joseph L. Rice, III All such notices and communications shall be deemed to have been received on the date of delivery or on the third business day after the mailing thereof. Copies of any notice or other communication given under this Agreement shall also be given to: Clayton & Dubilier, Inc. 126 East 56th Street New York, New York 10022 ATTENTION: Joseph L. Rice, III and Debevoise & Plimpton 875 Third Avenue New York, New York 10022 ATTENTION: Franci J. Blassberg, Esq. The C&D Fund also shall be given a copy of any notice or other communication between the Grantee and the Company under this Agreement at its address as set forth above. 9 (b) BINDING EFFECT; BENEFITS. This Agreement shall be binding upon and inure to the benefit of the parties to this Agreement and their respective successors and assigns. Except as provided in Section 4, nothing in this Agreement, express or implied, is intended or shall be construed to give any person other than the parties to this Agreement or their respective successors or assigns any legal or equitable right, remedy or claim under or in respect of any agreement or any provision contained herein. (c) WAIVER; AMENDMENT. (i) WAIVER. Either party hereto may by written notice to the other (A) extend the time for the performance of any of the obligations or other actions of the other under this Agreement, (B) waive compliance with any of the conditions or covenants of the other contained in this Agreement and (C) waive or modify performance of any of the obligations of the other under this Agreement, PROVIDED that any waiver of the provisions of Section 4 must be consented to by the C&D Fund. Except as provided in the preceding sentence, no action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with representations, warranties, covenants or agreements contained herein. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any preceding or succeeding breach and no failure by either party to exercise any right or privilege hereunder shall be deemed a waiver of such party's rights or privileges hereunder or shall be deemed a waiver of such party's rights to exercise the same at any subsequent time or times hereunder. (ii) AMENDMENT. This Agreement may be amended, modified or supplemented only by a written instrument executed by the Grantee and the Company, PROVIDED that any amendment adversely affecting the rights of the C&D Fund hereunder must be consented to by the C&D Fund. The parties hereto acknowledge that the Company's consent to an amendment or modification of this Agreement is subject to the terms and provisions of the Financing Agreements. (d) ASSIGNABILITY. Neither this Agreement nor any right, remedy, obligation or liability arising hereunder or by reason hereof shall be assignable by either the Company or the Grantee without the prior written consent of the other party. (e) APPLICABLE LAW. This Agreement shall be governed by and construed in accordance with the law of the State of Delaware, regardless of the law that might be applied under principles of conflict of laws. (f) SECTION AND OTHER HEADINGS. The section and other headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. In this Agreement all references to "dollars" or "$" are to United States dollars. (g) COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. 10 IN WITNESS WHEREOF, the Company and the Grantee have executed this Agreement as of the date first above written. LEXMARK HOLDING, INC. By: ------------------------------------ MARVIN L. MANN CHAIRMAN AND CHIEF EXECUTIVE OFFICER GRANTEE: ---------------------------------------- Name (Please Print) ---------------------------------------- Signature of Grantee ---------------------------------------- Serial Number Address of Grantee: ---------------------------------------- ---------------------------------------- BENEFICIARY: ---------------------------------------- Name (Please Print) ---------------------------------------- Address of Beneficiary: ---------------------------------------- ---------------------------------------- 11 EX-10.22 9 l92467aex10-22.txt EXHIBIT 10.22 Exhibit 10.22 NON-QUALIFIED STOCK OPTION AGREEMENT pursuant to LEXMARK INTERNATIONAL GROUP, INC. STOCK INCENTIVE PLAN This NON-QUALIFIED STOCK OPTION AGREEMENT (the "Agreement") between Lexmark International, Inc., a Delaware corporation (the "Company"), and the person specified on the signature page hereof (the "Optionee") is entered into as of __________ pursuant to the Lexmark International Group, Inc. Stock Incentive Plan, as the same may be amended from time to time (the "Plan"). WHEREAS, the Optionee is regarded as a key employee of the Company or one of the Subsidiaries and the Committee has determined that it would be to the advantage and in the interest of the Company to grant the option provided for herein to the Optionee as an inducement to the Optionee to remain in the service of the Company and the Subsidiaries over the long-term and as an incentive to the Optionee to devote his or her best efforts and dedication to the performance of such services and to maximize shareholder value; WHEREAS, the Optionee desires to accept from the Company the grant of the options evidenced hereby on the terms and subject to the conditions herein; NOW, THEREFORE, in consideration of the premises and subject to the terms and conditions set forth herein and in the Plan, the parties hereto hereby covenant and agree as follows: 1. GRANT OF OPTION; EXERCISE PRICE. (a) Grant of Option; Exercise Price. The Company hereby grants to the Optionee, effective as of ________ (the "Grant Date") and on the terms and conditions herein, an option (the "Option") to purchase _____Option shares (the "Option Shares"), of Class A Common Stock, par value $.01 per share (the "Common Stock") set forth on the signature page hereof, at an exercise price per Option Share equal to the fair market value on the Grant Date of _______, which was the closing price of a share of Common Stock on the Grant Date as reported for such day in The Wall Street Journal. The Option is not intended to be an incentive stock option under the United States Internal Revenue Code of 1986, as amended. (b) Stock Incentive Plan. This Agreement is subject in all respects to the terms of the Plan, all of which terms are made a part of and incorporated in this Agreement by reference. In the event of any conflict or inconsistency between the terms of this Agreement and the terms of the Plan, the terms of the Plan shall control. The Optionee hereby acknowledges that a copy of the Plan may be obtained from the Vice President of Human Resources and agrees to comply with and be bound by all of the terms and conditions thereof. Terms used in this Agreement with initial capital letters, but not defined herein, shall have the meanings assigned to them under the Plan. 1 2. VESTING; PERIOD OF EXERCISE OF OPTION (a) Vesting. Subject to the provisions of Section 4, the Option shall become vested and exercisable in five equal installments on each of the first five anniversaries of the Grant Date, subject in the case of each such installment to the continuous employment of the Optionee with the Company or a Subsidiary from the date hereof to the applicable anniversary of the Grant Date. Provided, however, if at the time of optionee's termination of employment (i) optionee has 30 years of continuous service, (ii) optionee is 58 years of age or older and has ten years of continuous service, or (iii) optionee is 65 years of age or older and has five years of continuous service; and, in each case, optionee agrees to the cancellation of any option grant made to him or her within 12 months prior to the date of his or her retirement, then vesting shall continue to occur on this Option for a period of 24 months following the date of his or her retirement (the "Post-Retirement Vesting Period"). (b) Termination of Employment. If the Optionee's employment with the Company and its Subsidiaries terminates for any reason, other than a termination by the Company or a Subsidiary for Cause (as defined below), any portion of the Option which is not then exercisable or subject to continued vesting during a Post-Retirement Vesting Period shall immediately terminate and be canceled effective upon such termination of employment and the remaining portion of the Option, if any, shall thereafter remain exercisable for the period provided in Section 4. In the event of the termination of the Optionee's employment by the Company or a Subsidiary for Cause, the Option shall immediately terminate and be canceled in full effective upon the date of such termination of employment. In accepting this Option, the Optionee acknowledges that the Option has been granted as an incentive to the Optionee to remain employed by the Company and to exert his or her best efforts to enhance the value of the Company over the long-term. Accordingly, the Optionee agrees that if he or she (a) within 12 months following termination of employment with the Company or within 12 months following any Post-Retirement Vesting Period, accepts employment with a competitor of the Company or otherwise engages in competition with the Company, or (b) within 36 months following termination of employment with the Company or within 36 months following any Post-Retirement Vesting Period, acts against the interests of the Company, including recruiting or employing, or encouraging or assisting his or her new employer to recruit or employ, any employee of the Company without the Company's written consent, or (c) discloses or otherwise misuses confidential Company information or material, each of these constituting a harmful action, then (i) any unexercised portion of this Option shall be canceled immediately (unless canceled earlier by operation of another term of this Agreement) and (ii) the Optionee shall pay to the Company an amount equal to the Option gains (represented by the closing market price on the date of exercise over the exercise price, multiplied by the number of options exercised, without regard to any subsequent market price decrease or increase) realized by the Optionee from the exercise of all or a portion of this Option within 18 months preceding the earlier of (w) the commitment of any such harmful action and (x) the Optionee's termination of employment with the Company and its Subsidiaries; and through the later of (y) 18 months following the commitment of any such harmful action and (z) such 2 period as it takes the Company to discover such harmful action. The Optionee agrees that the Company has the right to deduct from any amounts the Company may owe the Optionee from time to time (including amounts owed to the Optionee as wages or other compensation, fringe benefits or vacation pay, as well as any other amounts owed to the Optionee by the Company), the amounts the Optionee owes the Company. The Committee shall have the right, in its sole discretion, not to enforce the provisions of this paragraph with respect to the Optionee. (c) Acceleration. The Committee may, in its discretion, accelerate the date or dates as of which all or any portion of the Option shall become vested and exercisable and may establish accelerated times for vesting based upon the attainment of performance goals or such other factors as the Committee may from time to time determine. (d) Term of Option Exercise Period. Except to the extent that the Option or any portion thereof shall sooner terminate in accordance with Section 2 or 4 hereof, once any portion of the Option has become vested and exercisable, such portion shall remain exercisable until the end of the day preceding the tenth anniversary of the date hereof (the "Option Period"). 3. METHOD OF EXERCISE AND PAYMENT; RELOAD OPTION; CERTAIN RESTRICTIONS ON RESALE. (a) Exercise and Payment. Once vested and exercisable, the Option, or any vested portion thereof, may be exercised by the Optionee (or his or her beneficiary or estate) by delivery to the Company on any business day (the "Option Exercise Date") written notice (the "Option Exercise Notice"), in such manner and form as may be required by the Committee, specifying the number of Option Shares the Optionee then desires to purchase and the aggregate exercise price for such Option Shares (the "Option Exercise Price"). The Option Exercise Notice shall be accompanied by payment of the Option Exercise Price and any other amounts required to be paid pursuant to Section 5. The Optionee may pay the Option Exercise Price by delivering to the Company cash, shares of Qualifying Common Stock (as defined below) already owned by the Optionee or a combination of cash and such shares of Qualifying Common Stock provided that the aggregate Fair Market Value on the Option Exercise Date of the shares of Qualifying Common Stock delivered in payment of any portion of the Option Exercise Price shall be equal to the excess of (x) the Option Exercise Price over (y) the amount of any cash delivered by the Optionee in payment of the Option Exercise Price. For purposes of this Agreement, shares of Common Stock shall constitute Qualifying Common Stock that may be delivered in payment of the Option Exercise Price if such shares (i) are not subject to any outstanding loan or other obligation and are not pledged as collateral with respect to any loan or other obligation, other than any such loan or other obligation extended to the Optionee by the Company or any Subsidiary provided the Committee approves the delivery of such shares to pay the Option Exercise Price, and (ii) either (x) have been owned by the Optionee without certain restrictions for a continuous period of at least six months (or such greater 3 or lesser period as the Committee shall determine) or (y) were purchased by the Optionee on a U.S. national securities exchange. The Committee may also permit the Optionee to arrange for the payment of all or any portion of the Option Exercise Price and other amounts required to be paid pursuant to Section 5 by directing a securities broker approved for such purpose by the Committee to deliver to the Company, on behalf of the Optionee, the proceeds of the sale on the Option Exercise Date of a number of the Option Shares then being purchased by the Optionee having aggregate sales proceeds on the Exercise Date equal to the sum of all or the applicable portion of the Option Exercise Price and the amounts required to be paid pursuant to Section 5 that the Optionee elects to satisfy by using the proceeds of the sale of the Option Shares (the "Cashless Exercise Procedure"). Within a reasonable period of time after the Option Exercise Date, subject to payment of the Option Exercise Price and any amounts required to be paid by the Optionee pursuant to Section 5, the Company shall direct its stock transfer agent to make (or to cause to be made) an appropriate book entry reflecting the Optionee's ownership of the Option Shares then being purchased by the Optionee. Upon request, the Company shall deliver to the Optionee a certificate or certificates for the number of Option Shares (reduced, if applicable, by the number of Option Shares sold on the Option Exercise Date pursuant to the Cashless Exercise Procedure) purchased by the Optionee, registered in the name of the Optionee. In the event that the Company or the Committee, in its sole discretion, shall determine that, under applicable U.S. federal or state or non-U.S. securities laws, the transfer of any Option Shares must be subject to restriction, any certificates issued under this Section 3(a) shall bear an appropriate legend restricting the transfer of such Option Shares and appropriate stop transfer instructions shall be delivered to the Company's stock transfer agent. (b) Reload Option. Effective on the date of the exercise by the Optionee of any portion of the Option at a time when the Optionee is an active employee of the Company or a Subsidiary (the "Reload Grant Date"), if any portion of the Option Exercise Price in respect thereof is satisfied by the Optionee by delivery to the Company of Qualifying Common Stock, subject to the consent of the Committee, the Optionee shall automatically be granted a new option (the "Reload Option") to purchase a number of shares of Common Stock equal to the number of shares of Qualifying Common Stock so delivered, at an exercise price per share equal to the Fair Market Value of a share of Common Stock on the Reload Grant Date. The Reload Option shall be fully vested upon grant and shall become exercisable on the six month anniversary of the Reload Grant Date unless the Optionee's employment with the Company and the Subsidiaries is terminated due to the Optionee's death, Disability or Retirement, then such Reload Option shall become immediately exercisable and shall thereafter remain exercisable for the applicable period provided in Section 4. In all other respects, such Reload Option shall be subject to the same terms and conditions (including the same Option Period) as the Option and all references herein to the "Option" shall be deemed to include the Reload Option. 4 (c) Restrictions on Sale upon Public Offering. The Optionee hereby agrees that, during the 20 day period prior to and the 180 days following the effective date of any registration statement filed by the Company under the Securities Act of 1933, as amended, with respect to any underwritten public offering of any shares of the Company's capital stock, the Optionee will not effect any public sale or distribution of shares of Common Stock (other than as part of such underwritten public offering). 4. TERMINATION. The Option (or the indicated portion thereof) shall terminate and be canceled immediately upon the first to occur of any of the following events: (a) The date of the expiration of the Option Period. (b) The date of the termination of the Optionee's employment with the Company and its Subsidiaries for Cause. (c) The date of the termination of the Optionee's employment with the Company and its Subsidiaries for any reason, other than for Cause, with respect to any portion of the Option which is not subject to a Post-Retirement Vesting Period or has not become vested and exercisable in accordance with Section 2 on or prior to the date of such termination. (d) In the case of the Optionee's termination of employment with the Company and its Subsidiaries for any reason other than for Cause or other than by reason of the Optionee's Normal Retirement, Early Retirement, Disability or death (as each such term is defined below), or as a result of a reduction in force, cessation of operations, merger, consolidation or the sale or other disposition of the Company or a portion thereof (as set forth below) with respect to any portion of the Option which has become vested and exercisable in accordance with Section 2 on or prior to the date of such termination of employment, the last day of the 90 day period immediately following the date of such termination of employment. (e) Subject to Section 4(j), in the case of the Optionee's termination of employment with the Company and its Subsidiaries by reason of the Optionee's Normal Retirement, with respect to any portion of the Option which has become vested and exercisable on or prior to the date of such termination of employment or is subject to a Post-Retirement Vesting Period in accordance with Section 2, the last day of the 36 month period immediately following the date of such termination of employment. (f) Subject to Section 4(j), in the case of the Optionee's termination of employment with the Company and its Subsidiaries by reason of the Optionee's Early Retirement, with respect to any portion of the Option which has become vested and exercisable in accordance with Section 2 on or prior to the date of such termination of employment, the last day of the 12 month period immediately following the date of such termination of employment, and with respect to any Option, a portion of which is subject to a Post-Retirement Vesting Period in accordance with Section 2, the last day of the 12 month period immediately following the last day of the Post-Retirement Vesting Period. 5 (g) Subject to Section 4(j), in the case of the Optionee's termination of employment with the Company and its Subsidiaries as a result of a reduction in force, cessation of operations, merger, consolidation or the sale or other disposition of the stock or all or substantially all of the assets of the Company, a Subsidiary, or any division, business or other unit or function of the Company or any Subsidiary (which is designated as such by the Vice President of Human Resources), with respect to any portion of the Option which has become vested and exercisable in accordance with Section 2 on or prior to the date of such termination of employment, (i) the last day of the 24 month period immediately following the date of such termination of employment, provided that the Optionee has completed five or more years of continuous service with the Company or any of its Subsidiaries or (ii) the last day of the 12 month period immediately following the date of such termination of employment, if the Optionee has completed less than five years of continuous service with the Company or any of its Subsidiaries, and with respect to any Option, a portion of which is subject to a Post-Retirement Vesting Period in accordance with Section 2, the last day of the 12 month period immediately following the last day of the Post-Retirement Vesting Period. (h) Subject to Section 4(j), in the case of the Optionee's termination of employment with the Company and its Subsidiaries by reason of the Optionee's Disability, with respect to any portion of the Option which has become vested and exercisable in accordance with Section 2 on or prior to the date of such termination of employment, the last day of the 12 month period immediately following the date of such termination of employment, and with respect to any Option, a portion of which is subject to a Post-Retirement Vesting Period in accordance with Section 2, the last day of the 12 month period immediately following the last day of the Post-Retirement Vesting Period. (i) In the case of the Optionee's termination of employment with the Company and its Subsidiaries by reason of the Optionee's death, with respect to the portion of the Option which has become vested and exercisable in accordance with Section 2 on or prior to the date of such termination of employment, the last day of the 12 month period immediately following the date of such termination of employment, and with respect to any Option, a portion of which is subject to a Post-Retirement Vesting Period in accordance with Section 2, the last day of the 12 month period immediately following the last day of the Post-Retirement Vesting Period. (j) The last day of the 12 month period immediately following the date of the Optionee's death during any period in which the Optionee was entitled to exercise any portion of the Option pursuant to Section 4(e), 4(f), 4(g) or 4(h), and with respect to any Option, a portion of which is subject to a Post-Retirement Vesting Period in accordance with Section 2, the last day of the 12 month period immediately following the last day of the Post-Retirement Vesting Period. (k) For purposes of this Agreement, the following terms shall have the following meanings: 6 "Cause" shall mean (A) the willful failure by the Optionee to perform substantially his or her duties as an employee of the Company or any Subsidiary (other than due to physical or mental illness) after reasonable notice to the Optionee of such failure, (B) the Optionee's engaging in serious misconduct that is injurious to the Company or any Subsidiary, (C) the Optionee's having been convicted of, or entered a plea of nolo contendere to, a crime that constitutes a felony or (D) the breach by the Optionee of any written covenant or agreement with the Company or any Subsidiary not to disclose information pertaining to the Company or any Subsidiary or not to compete or interfere with the Company or any Subsidiary. "Disability" shall mean a physical or mental disability or infirmity of the Optionee as defined in any disability plan sponsored by the Company or any Subsidiary which employs the Optionee or, if no such plan is sponsored by the Optionee's employer at the relevant time, the Lexmark Long-Term Disability Plan. "Early Retirement" shall mean the Optionee's retirement at or after reaching age 55 and the completion of ten years continuous service with the Company or any of its Subsidiaries. "Normal Retirement" shall mean the Optionee's retirement (x) at or after the later of age 65 and the completion of five years of continuous service with the Company or any of its Subsidiaries or (y) at or after any earlier retirement age agreed to, in writing, by the Company after the date hereof and prior to the Optionee's termination of employment with the Company or any Subsidiary (other than any such termination with the Company or any Subsidiary in connection with the contemporaneous reemployment by another Subsidiary or the Company). 5. TAX WITHHOLDING. The delivery of any directions to the Company's stock transfer agent or any certificates for shares of Common Stock pursuant to Section 3 shall not be made until the Optionee, or, if applicable, the Optionee's beneficiary or estate, has made appropriate arrangements for the payment to the Company of an amount sufficient to satisfy any applicable U.S. federal, state and local and non-U.S. tax withholding or other tax requirements, as determined by the Company. To satisfy the Optionee's applicable withholding and other tax requirements, the Company shall be entitled, in its sole discretion, to withhold Option Shares having a Fair Market Value on the Option Exercise Date equal to the applicable amount of such withholding and other tax requirements, subject to any rules adopted by the Committee or required to ensure compliance with applicable law, including, but not limited to, Section 16(b) of the Securities Exchange Act of 1934, as amended. Any cash payment made pursuant to a Change in Control shall be made net of any amounts required to be withheld or paid with respect thereto (and with respect to any shares of Common Stock delivered contemporaneously therewith) under any applicable U.S. federal, state and local and non-U.S. tax withholding and other tax requirements. 6. ASSIGNABILITY. Unless otherwise provided in accordance with the provisions of the Plan, this Option may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated by the Optionee otherwise than by will or the laws of 7 descent and distribution. The term "Optionee" as used in this Agreement shall include any permitted transferee of the Option. 7. ADJUSTMENT IN CAPITALIZATION. (a) The aggregate number of shares of Common Stock subject to the Option and the option exercise price and/or exercisability criteria applicable to the Option shall be proportionately adjusted to reflect, as deemed equitable and appropriate by the Committee, an Adjustment Event. To the extent deemed equitable and appropriate by the Committee, subject to any required action by stockholders, in any merger, consolidation, reorganization, liquidation, dissolution or other similar transaction, the Option shall pertain to the securities and other property to which a holder of the number of shares of Common Stock then covered by the Option would have been entitled to receive in connection with such event. (b) Any shares of stock (whether Common Stock, shares of stock into which shares of Common Stock are converted or for which shares of Common Stock are exchanged or shares of stock distributed with respect to Common Stock) or cash or other property received with respect to the Option as a result of any Adjustment Event, any distribution of property or any merger, consolidation, reorganization, liquidation, dissolution or other similar transaction shall, except as otherwise provided by the Committee, be subject to the same terms and conditions, including restrictions on exercisability or transfer, as are applicable to the Option with respect to which such shares, cash or other property is received and stock certificate(s) representing or evidencing any shares of stock or other property so received shall be legended as appropriate. 8. PREEMPTION BY APPLICABLE LAWS AND REGULATIONS. Notwithstanding anything in the Plan or this Agreement to the contrary, the issuance of shares of Common Stock hereunder shall be subject to compliance with all applicable U.S. federal, state and non-U.S. securities laws. Without limiting the foregoing, if any law, regulation or requirement of any governmental authority having jurisdiction shall require either the Company or the Optionee (or the Optionee's beneficiary or estate) to take any action in connection with the issuance of any shares of Common Stock hereunder, the issuance of such shares shall be deferred until such action shall have been taken to the satisfaction of the Company. 9. INTERPRETATION; CONSTRUCTION. All of the powers and authority conferred upon the Committee pursuant to any term of the Plan or the Agreement shall be exercised by the Committee, in its discretion. All determinations, interpretations or other actions made or taken by the Committee pursuant to the provisions of the Plan or the Agreement shall be final, binding and conclusive for all purposes and upon all persons and, in the event of any judicial review thereof, shall be overturned only if arbitrary and capricious. The Committee may consult with legal counsel, who may be counsel to the Company, and shall not incur any liability for any action taken in good faith in reliance upon the advice of counsel. 10. AMENDMENT. The Committee shall have the right, in its sole discretion, to alter or amend this Agreement, from time to time, as provided in the Plan in any manner for the purpose of promoting the objectives of the Plan, provided that no such amendment shall impair the Optionee's rights under this Agreement without the 8 Optionee's consent. Subject to the preceding sentence, any alteration or amendment of this Agreement by the Committee shall, upon adoption thereof by the Committee, become and be binding and conclusive on all persons affected thereby without requirement for consent or other action with respect thereto by any such person. The Company shall give written notice to the Optionee of any such alteration or amendment of this Agreement as promptly as practicable after the adoption thereof. This Agreement may also be amended by a writing signed by both the Company and the Optionee. 11. NO RIGHTS AS A STOCKHOLDER. The Optionee shall have no voting or other rights as a stockholder of the Company with respect to any Option Shares until the exercise of the Option and the recording of the Optionee's ownership of the Option Shares on the stock transfer records for the Common Stock. No adjustment shall be made for dividends or other rights issued with respect to the Common Stock for which the record date is prior to the recording of such ownership of the Option Shares. 12. NO GUARANTEE OF EMPLOYMENT OR FUTURE INCENTIVE AWARDS. Nothing in the Plan or this Agreement shall be deemed to: (a) interfere with or limit in any way the right of the Company or any Subsidiary to terminate Optionee's employment at any time and for any reason; (b) confer upon Optionee any right to continue in the employ of the Company or any Subsidiary; and (c) provide Optionee the right to receive any Incentive Awards under the Plan in the future. 13. MISCELLANEOUS. (a) Notices. All notices and other communications required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been given if delivered personally or sent by certified or express mail, return receipt requested, postage prepaid, or by any recognized international equivalent of such delivery, to the Company or the Optionee, as the case may be, at the following addresses or to such other address as the Company or the Optionee, as the case may be, shall specify by notice to the others delivered in accordance with this Section 13(a): (i) if to the Company, to it at: One Lexmark Centre Drive 740 West New Circle Road Lexington, Kentucky 40550 Attention: Secretary (ii) if to the Optionee, to the Optionee at the address set forth on the signature page hereof. All such notices and communications shall be deemed to have been received on the date of delivery or on the third business day after the mailing thereof. (b) Binding Effect; Benefits. This Agreement shall be binding upon and inure to the benefit of the parties to this Agreement and their respective successors and 9 assigns. Nothing in this Agreement, express or implied, is intended or shall be construed to give any person other than the parties to this Agreement or their respective successors or assigns any legal or equitable right, remedy or claim under or in respect of any agreement or any provision contained herein. (c) Waiver. Any party hereto may by written notice to the other party (i) extend the time for the performance of any of the obligations or other actions of the other party under this Agreement, (ii) waive compliance with any of the conditions or covenants of the other party contained in this Agreement and (iii) waive or modify performance of any of the obligations of the other party under this Agreement. Except as provided in the preceding sentence, no action taken pursuant to this Agreement, including, without limitation, any investigation by or on behalf of any party, shall be deemed to constitute a waiver by the party taking such action of compliance with any representations, warranties, covenants or agreements contained herein. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any preceding or succeeding breach and no failure by a party to exercise any right or privilege hereunder shall be deemed a waiver of such party's rights or privileges hereunder or shall be deemed a waiver of such party's rights to exercise the same at any subsequent time or times hereunder. (d) Assignability. Neither this Agreement nor any right, remedy, obligation or liability arising hereunder or by reason hereof shall be assignable by the Company or the Optionee without the prior written consent of the other party. (e) Applicable Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, regardless of the law that might be applied under principles of conflict of laws and excluding any conflict or choice of law rule or principle that may otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction. (f) Section and Other Headings, Etc. The section and other headings contained in this Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. In this Agreement all references to "dollars" or "$" are to United States dollars. (g) Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall constitute one and the same instrument. 10 IN WITNESS WHEREOF, the Company and the Optionee have executed this Agreement as of the date first above written. LEXMARK INTERNATIONAL, INC. By: Name: Kathleen J. Affeldt Title: Vice President of Human Resources OPTIONEE: By: --------------------------- ---------- (Sign your name) (Date) ---------------------------------------- Beneficiary Name 11 EX-10.27 10 l92467aex10-27.txt EXHIBIT 10.27 Exhibit 10.27 EMPLOYMENT AGREEMENT -------------------- EMPLOYMENT AGREEMENT, dated as of July 1, 2001, between Lexmark International, Inc., a Delaware corporation (the "Employer"), and Paul J. Curlander (the "Employee"). W I T N E S S E T H: ------------------- WHEREAS, Employer and Employee desire to enter into an employment agreement; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, and for other good and valuable consideration, the parties hereto hereby agree as follows: 1. TERM; POSITION AND RESPONSIBILITIES. (a) TERM OF EMPLOYMENT. Unless the Employee's employment shall sooner terminate pursuant to Section 6, the Employer shall employ the Employee for a term commencing on the day hereof and ending on June 30, 2003 (the "Initial Term"); provided, however, that commencing on the date two years after the date hereof, and on each bi-annual anniversary (such date and each bi-annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Initial Term shall be automatically extended so as to terminate two years from such Renewal Date, unless prior to the Renewal Date the Employer or Employee shall give notice to the other that the Initial Term shall not be so extended; and the Employee's employment shall continue thereafter at will. (b) POSITION AND RESPONSIBILITIES. The Employee will serve as Chairman and Chief Executive Officer and in such other executive capacity or capacities as may be determined from time to time by or under the authority of the Board of Directors of the Employer ("Employer's Board"), and the Employee will devote all of his skill, knowledge and working time (except for reasonable vacation time and absence for sickness or similar disability) to the conscientious performance of his duties. The Employee represents that he is entering into this Agreement voluntarily and that his employment hereunder and compliance by him with the terms and conditions of this Agreement will not conflict with or result in the breach of any agreement to which he is a party or by which he may be bound. 2. BASE SALARY. As compensation for the services to be performed by the Employee hereunder, the Employer will pay the Employee an annual base salary of $800,000 during the term of his employment hereunder. The Employer will review the Employee's base salary from time to time during the period of his employment hereunder and, in the discretion of the Employer, may increase such base salary from time to time based upon the performance of the Employee, the financial condition of the Employer, prevailing industry salary scales and such other factors as the Employer shall consider relevant. (The annual base salary payable to the Employee under this Section 2, as the same may be increased from time to time, shall hereinafter be referred to as the "Base Salary".) The Base Salary payable under this Section 2 shall be reduced to the extent that the Employee elects to defer such Base Salary under the terms of any deferred compensation or savings plan maintained or established by the Employer, provided that any such reduction of the Base Salary shall not be taken into account for purposes of calculating the Base Amount (as defined in Section 3). The Employer shall pay the Employee the Base Salary in biweekly installments, or in such other installments as may be mutually agreed upon by the Employer and the Employee. 3. SHORT-TERM INCENTIVE COMPENSATION. The Employee shall receive an annual incentive bonus award (the "Annual Bonus") for each calendar year ending during the term of the Employee's employment hereunder equal to: (a) if the Operating Result (as defined below) for such year is equal to or greater than the Maximum Operating Target (as defined below) for such year, 200% of the amount of the Employee's Base Salary paid to the Employee during the calendar year for which such bonus is payable (such amount is hereinafter referred to as the "Base Amount"); (b) if the Operating Result for such year is greater than the Operating Target but less than the Maximum Operating Target for such year, 100% of the Base Amount plus, for each increase of 1/25th of the difference between the Operating Target and the Maximum Operating Target, an additional 4.00% of the Base Amount; (c) if the Operating Result for such year is equal to 100% of the Operating Target for such year, 100% of the Base Amount; (d) if the Operating Result for such year is greater than the Minimum Operating Target (as defined below) but less than the Operating Target for such year, 30% of the Base Amount plus, for each increase of 1/20th of the difference between the Minimum Operating Target and the Operating Target (100%), an additional 3.50% of the Base Amount; and (e) if the Operating Result for such year is equal to the Minimum Operating Target for such year, 30% of the Base Amount. (f) if the Operating Result for such year is greater than the Threshold Operating Target (as defined below) but less than the Minimum Operating Target for such year, 20% of the Base Amount plus, for each increase of 1/10th of the difference between the Threshold Operating Target and the Minimum Operating Target, an additional 1.0% of the Base Amount; and (g) if the Operating Result for such year is equal to the Threshold Operating Target for such year, 20% of the Base Amount. 2 Notwithstanding the foregoing, the Employer may increase or decrease the amount of the Annual Bonus based upon the Employer's judgment of Employee's overall contribution to the Employer's business results. No Annual Bonus shall be paid if the Operating Result is less than the Threshold Operating Target for such year. The "Operating Target", the "Maximum Operating Target", the "Minimum Operating Target" and the "Threshold Operating Target" in any year shall be jointly established by the Chief Executive Officer of the Employer and the Compensation and Pension Committee of Employer's Board (the "Committee"). The "Operating Result" for any year shall be equal to the annual financial results for the components that make up the Operating Target as of December 31 in such year, using United States generally accepted accounting principles consistently applied and taking into account such other factors as may be approved by the Committee. Notwithstanding anything else in this Agreement to the contrary, if the Employer does not meet its Threshold Operating Target, there shall be no annual bonus regardless of business unit, personal or other objectives that constitute individual incentive objectives. Funding for the Annual Bonus shall be based on the Employer's annual financial results. In the event that the funds available to pay the Employer's aggregate Annual Bonuses are less than the amount required to pay such Annual Bonuses, the Annual Bonus shall be reduced in a manner deemed appropriate by the Committee, in its sole discretion. The Annual Bonus, if any, shall be paid as soon as practicable after the close of the year for which the Annual Bonus is payable, unless the Employee elects to defer such amounts under the terms of any deferred compensation or savings plan maintained or established by the Employer. 4. EMPLOYEE BENEFITS. During the term of the Employee's employment hereunder, employee benefits, including, but not limited to, life, medical, dental and disability insurance, will be provided to the Employee in accordance with programs at the Employer then available to executive employees. The Employee shall also be entitled to participate in all of Employer's profit sharing, pension, retirement, deferred compensation and savings plans, as the same may be amended and in effect from time to time, at levels and having interests commensurate with the Employee's then current period of service, compensation and position. 5. PERQUISITES AND EXPENSES. (a) GENERAL. During the term of the Employee's employment hereunder, the Employee shall be entitled to participate in any special benefit or perquisite program available from time to time to executive employees of the Employer on the terms and conditions then prevailing under such program. (b) BUSINESS TRAVEL, LODGING, ETC. The Employer shall reimburse the Employee for reasonable travel, lodging and meal expenses incurred by him in connection with his performance of services hereunder upon submission of evidence, satisfactory to the Employer, of the incurrence and purpose of each such expense. 3 6. TERMINATION OF EMPLOYMENT. (a) TERMINATION DUE TO DEATH OR DISABILITY. In the event that the Employee's employment hereunder terminates due to death or is terminated by the Employer due to the Employee's Disability (as defined below), no termination benefits shall be payable to or in respect of the Employee except as provided in Section 6(f)(ii). For purposes of this Agreement, "Disability" shall mean a physical or mental disability that prevents the performance by the Employee of his duties hereunder lasting (or likely to last, based on competent medical evidence presented to Employer's Board) for a continuous period of six months or longer. The reasoned and good faith judgment of Employer's Board as to the Employee's Disability shall be final and shall be based on such competent medical evidence as shall be presented to it by the Employee or by any physician or group of physicians or other competent medical experts employed by the Employee or the Employer to advise Employer's Board. (b) TERMINATION BY THE EMPLOYER FOR CAUSE. The Employee may be terminated for Cause by the Employer. "Cause" shall mean (i) the willful failure of the Employee substantially to perform his duties hereunder (other than any such failure due to physical or mental illness) after a demand for substantial performance is delivered to the Employee by the executive to which the Employee reports or by Employer's Board, which notice identifies the manner in which such executive or Employer's Board, as the case may be, believes that the Employee has not substantially performed his duties, (ii) the Employee's engaging in willful and serious misconduct that is injurious to Employer or any of its subsidiaries, (iii) the Employee's regularly making a substantial, abusive use of alcohol, drug, or similar substances, and such abuse in the Employer's judgment has affected his ability to conduct the business of the Employer in a proper and prudent manner, (iv) the Employee's conviction of, or entering a plea of nolo contendere to, a crime that constitutes a felony, or (v) the willful and material breach by the Employee of any of his obligations hereunder, or the willful and material breach by the Employee of any written covenant or agreement with the Employer or any of its affiliates not to disclose any information pertaining to the Employer or any of its affiliates or not to compete or interfere with the Employer or any of its affiliates. (c) TERMINATION BY THE EMPLOYER WITHOUT CAUSE. The Employee may be terminated Without Cause by the Employer. A termination "Without Cause" shall mean a termination of employment by the Employer other than due to death or Disability as defined in Section 6(a) or Cause as defined in Section 6(b). (d) TERMINATION BY THE EMPLOYEE. The Employee may terminate his employment for "Good Reason". "Good Reason" shall mean a termination of employment by the Employee within 30 days following (i) any assignment to the Employee of any duties, functions or responsibilities that are significantly different from, and result in a substantial diminution of, the duties, functions or responsibilities that the Employee has on the date hereof or (ii) the failure of the Employer to obtain the assumption of this Agreement by any successor as contemplated by Section 12. (e) NOTICE OF TERMINATION. Any termination by the Employer pursuant 4 to Section 6(a), 6(b) or 6(c), or by the Employee pursuant to Section 6(d), shall be communicated by a written "Notice of Termination" addressed to the other parties to this Agreement. A "Notice of Termination" shall mean a notice stating that the Employee's employment hereunder has been or will be terminated, indicating the specific termination provisions in this Agreement relied upon and setting forth in reasonable detail the facts and circumstances claimed to provide a basis for such termination of employment. (f) PAYMENTS UPON CERTAIN TERMINATIONS. (i) In the event of a termination of the Employee's employment Without Cause or a termination by the Employee of his employment for Good Reason, the Employer shall pay to the Employee (A) (1) the greater of (x) his Base Salary, if any, for the period from the Date of Termination (as defined below) through the last day of the Initial Term and (y) an amount equal to one year's Base Salary; provided that Employer may, at any time, pay to the Employee in a single lump sum an amount equal to the Base Salary remaining to be paid to the Employee as of the date of such lump sum payment, less (2) any amounts paid or to be paid to the Employee under the terms of any severance plan or program of Employer, if any, as in effect on the Date of Termination, (B) the Annual Bonus with respect to a completed fiscal year to the extent not theretofore paid to the Employee and (C) a Pro Rata Share of the Annual Bonus (as defined below) for the fiscal year in which the Date of Termination occurred. In the event of the Employee's termination of employment pursuant to Section 6(c) or 6(d), the Employer shall also provide the Employee with a leave of absence from the date of termination of employment until June 17, 2004 for purposes of determining eligibility (but not the amount of, or time of commencement of, benefits) of the Employee for retiree benefits pursuant to any retiree benefit plan, practice and policy applicable to the Employee at the Date of Termination. Notwithstanding anything to the contrary in any document or statement, including but not limited to this Agreement, the Employer reserves the right to change without notice any benefit plan, practice or policy at its sole discretion. Changes may include reduction or termination of any benefit plan, practice or policy. (ii) If the Employee's employment shall terminate upon his death or Disability or if Employer shall terminate the Employee's employment for Cause, Employer shall pay the Employee his full Base Salary through the Date of Termination, plus, in the case of termination upon the Employee's death or Disability, a Pro Rata Share of the Annual Bonus. Any benefits payable to or in respect of the Employee under any otherwise applicable plans, policies and practices of the Employer shall not be limited by this provision. (iii) For purposes of this Section 6, the "Pro Rata Share of the Annual Bonus" shall be calculated and paid as follows. If the Employee is terminated prior to July 1 of any year, the Pro Rata Share of the Annual Bonus (A) will be equal to the product of (1) the Annual Bonus, calculated assuming that 100% of the 5 Operating Target is achieved in such year, and (2) a fraction equal to the number of full months in such year prior to the Date of Termination over 12, and (B) will be paid to the Employee within 30 days after the Date of Termination. If the Employee is terminated on or after July 1 of any year, the Pro Rata Share of the Annual Bonus (A) will be equal to the product of (1) the Annual Bonus, calculated based on the actual Operating Result for such year, and (2) a fraction equal to the number of full months in such year prior to the Date of Termination over 12, and (B) will be paid to the Employee within 90 days after the close of the year in respect of which the Pro Rata Share of the Annual Bonus is payable. (g) DATE OF TERMINATION. As used in this Agreement, the term "Date of Termination" shall mean (i) if the Employee's employment is terminated by his death, the date of his death, (ii) if the Employee's employment is terminated for Cause, the date on which Notice of Termination is given as contemplated by Section 6(e), and (iii) if the Employee's employment is terminated Without Cause, due to the Employee's Disability or by the Employee for Good Reason, 30 days after the date on which Notice of Termination is given as contemplated by Section 6(d) or, if no such Notice is given, 30 days after the date of termination of employment. (h) CONDITION TO PAYMENTS. The Employer's obligation to make any payments hereunder shall be conditioned upon the Employer's receipt of an appropriately signed "General Release and Covenant Not to Sue" in form and substance satisfactory to the Employer. 7. UNAUTHORIZED DISCLOSURE. During and after the term of his employment hereunder, the Employee shall not, without the written consent of Employer's Board, the General Counsel of the Employer, or the Chief Executive Officer of the Employer, disclose to any person (other than an employee or director of the Employer or its affiliates, or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Employee of his duties as an executive of the Employer) any confidential or proprietary information, knowledge or data that is not theretofore publicly known and in the public domain obtained by him while in the employ of the Employer with respect to the Employer or any of its subsidiaries or affiliates or with respect to any products, improvements, formulas, recipes, designs, processes, customers, methods of sales, distribution, operation or manufacture, sales, prices, profits, costs, contracts, suppliers, business prospects, business methods, techniques, research, plans, strategies, personnel, organization, trade secrets or know-how of the Employer or any of its subsidiaries or affiliates (collectively, "Proprietary Information"), except as may be required by law or in connection with any judicial or administrative proceedings or inquiry. 8. NON-COMPETITION. During the period of the Employee's employment and thereafter for a period equal to the number of months providing the basis for calculating any termination payments to the Employee under Section 6, if any such payments are required, but in any event for at least 12 months, the Employee shall not engage directly or indirectly in, become employed by, serve as an agent or consultant to, or become a 6 partner, principal or stockholder of, any partnership, corporation or other entity which competes with a business (including any product or service offering of such business) that represents 5% or more of the aggregate gross revenues of the Employer and its subsidiaries, or competes with the Employer's Lexmark Solution Services business, and which is then engaged in such competition in any geographical area in which the Employer or any of its subsidiaries is then engaged in such business without first obtaining written approval from the Employer, PROVIDED that the Employee's ownership of less than 1% of the issued and outstanding stock of any corporation whose stock is traded on an established securities market shall not constitute competition with the Employer. The Employer may grant or deny such approval in its sole discretion. 9. NON-INTERFERENCE. During the period of the Employee's employment and thereafter for a period equal to the number of months providing the basis for calculating any termination payments to the Employee under Section 6, if any such payments are required, but in any event for at least 36 months, the Employee will not, directly or indirectly, for his own account or the account of any other person or entity, (a) employ, solicit or endeavor to entice away from the Employer, or otherwise intentionally interfere with the Employer's relationship with, any person or entity who or which is at the time, OR WITHIN 6 MONTHS OF THAT TIME HAS BEEN, employed by or otherwise engaged to perform services for the Employer or (b) intentionally interfere with the Employer's relationship with any person or entity who or which is, or has been within the previous 36 months, a customer, client or supplier of the Employer. 10. RETURN OF DOCUMENTS. In the event of the termination of the Employee's employment for any reason, the Employee will deliver to the Employer all non-personal documents and data of any nature pertaining to his work with the Employer, and he will not take with him any documents or data of any nature or any reproduction thereof, or any documents containing or pertaining to any Proprietary Information. 11. FORFEITURE OF REALIZED AND UNREALIZED GAINS ON INCENTIVE AWARDS FOR BREACH OF THIS AGREEMENT. If the Employee violates any provision of Sections 7, 8, 9 or 10 of this Agreement, and the Employee is no longer employed by the Employer, whether or not the termination of employment occurs prior to or subsequent to such violation, then (1) all stock incentive awards, including but not limited to stock options, restricted stock awards and any deferred stock units, held by the Employee shall terminate effective the date on which Employee violates this Agreement, unless terminated sooner by operation of another term or condition of the Employee's stock incentive award agreement or the plan pursuant to which such award has been issued, and (2) any gain realized by Employee on the vesting of restricted stock or deferred stock units, and option gains (represented by the closing market price on the date of exercise over the exercise price, multiplied by the number of options exercised without regard to any subsequent market price decrease or increase) realized by Employee from exercising all or a portion of the Employee's options, within 18 months prior to termination of employment with Employer and until such time as the violation of Section 7, 8, 9, or 10 is discovered by Employer, shall be paid by the Employee to the Employer. The Employee agrees that the Employer has the right to withhold the amount owed to it from any amounts that Employer may owe the Employee from time to 7 time (including, but not limited to, wages or other compensation, fringe benefits, or vacation pay). 12. ASSUMPTION OF AGREEMENT. The Employer will require any successor (by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Employer, by agreement in form and substance reasonably satisfactory to the Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Employer would be required to perform it if no such succession had taken place. Failure of the Employer to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Employee to the greater of (x) compensation from the Employer in the same amount and on the same terms as the Employee would be entitled hereunder if the Employer terminated his employment Without Cause as contemplated by Section 6 and (y) amounts required to be paid to the Employee pursuant to the Change of Control Agreement by and among Lexmark International Group, Inc. ("Group", which was subsequently merged with and into Employer), Employer and Employee dated as of April 30, 1998 (the "CIC Agreement"). For purposes of implementing the foregoing clause (x), the date on which any such succession becomes effective shall be deemed to be the Date of Termination, and for purposes of implementing clause (y), the timing and amount of any payments required pursuant to the CIC Agreement shall be determined in accordance with the CIC Agreement. 13. ENTIRE AGREEMENT. Except as otherwise expressly provided herein, this Agreement, the CIC Agreement and the Indemnification Agreement made and entered into as of the 30th day of April, 1998 by and among Employer, Group and Employee (the "Indemnification Agreement") constitute the entire agreement among the parties hereto with respect to the subject matter hereof, and all promises, representations, understandings, arrangements and prior agreements relating to such subject matter (including those made to or with the Employee by any other person or entity) are merged herein, in the CIC Agreement and in the Indemnification Agreement and superseded hereby and thereby. To the extent that the amount and timing of payments required to be made under this Agreement are inconsistent with or different from the amount and timing of payments required to be made pursuant to the CIC Agreement and/or the Indemnification Agreement, the Employee shall be entitled to the most favorable benefits provided to the Employee under the provisions of any such agreements. 14. INDEMNIFICATION. The Employer agrees that it shall indemnify and hold harmless the Employee to the fullest extent (a) permitted by Delaware law from and against any and all liabilities, costs, claims and expenses arising out of the employment of the Employee hereunder, except to the extent arising out of or based upon the gross negligence or willful misconduct of the Employee and (b) provided by the Indemnification Agreement. 15. NO MITIGATION. The Employee shall not be required to mitigate the amount of any payment that the Employer becomes obligated to make in connection with this 8 Agreement, the CIC Agreement or the Indemnification Agreement, by seeking other employment or otherwise. 16. MISCELLANEOUS. (a) BINDING EFFECT. This Agreement shall be binding on and inure to the benefit of the Employer and its successors and permitted assigns. This Agreement shall also be binding on and inure to the benefit of the Employee and his heirs, executors, administrators and legal representatives. (b) GOVERNING LAW. This Agreement shall be governed by and constructed in accordance with the laws of the State of Delaware without reference to principles of conflict of laws. (c) TAXES. The Employer may withhold from any payments made under the Agreement all federal, state, city or other applicable taxes or social security governmental regulation or ruling. (d) AMENDMENTS. No provisions of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is approved by Employer's Board or General Counsel of the Employer and is agreed to in writing by the Employee and General Counsel of the Employer. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No waiver of any provision of this Agreement shall be implied from any course of dealing between or among the parties hereto or from any failure by any party hereto to assert its rights hereunder on any occasion or series of occasions. (e) REFORMATION; SEVERABILITY. If any provision of this Agreement is held by a court or arbitrator to be unreasonable in scope or duration or otherwise, the court or arbitrator shall, to the extent permitted by law, reform such provision so that it is enforceable, and enforce the applicable provision as so reformed. Reformation of any provision of this Agreement pursuant to this subsection (e) shall not affect any other provision of this Agreement or render this Agreement unenforceable or void. (f) NOTICES. Any notice or other communication required or permitted to be delivered under this Agreement shall be (i) in writing, (ii) delivered personally, by courier service or by certified or registered mail, first-class postage prepaid and return receipt requested, (iii) deemed to have been received on the date of delivery or on the third business day after the mailing thereof, and (iv) addressed as follows (or to such other address as the party entitled to notice shall hereafter designate in accordance with the terms hereof): (A) if to the Employer, to it at: One Lexmark Centre Drive 740 West New Circle Road 9 Lexington, Kentucky 40550 ATTENTION: General Counsel (B) if to the Employee, to him at the address listed on the signature page hereof. (h) SURVIVAL. Sections 7, 8, 9,10 and 11 and, if the Employee's employment terminates in a manner giving rise to a payment under Section 6(f), Section 6(f) shall survive the termination of the employment of the Employee hereunder. (i) COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. (j) HEADINGS. The section and other headings contained in this Agreement are for the convenience of the parties only and are not intended to be a part hereof or to affect the meaning or interpretation hereof. IN WITNESS WHEREOF, the Employer has duly executed this Agreement by its authorized representatives and the Employee has hereunto set his hand, in each case effective as of the date first above written. LEXMARK INTERNATIONAL, INC. By: /s/ Kathleen J. Affeldt ------------------------------------ Kathleen J. Affeldt Vice President, Human Resources THE EMPLOYEE: /s/ Paul J. Curlander ---------------------------------------- 10 EX-10.28 11 l92467aex10-28.txt EXHIBIT 10.28 Exhibit 10.28 EMPLOYMENT AGREEMENT -------------------- EMPLOYMENT AGREEMENT, dated as of July 1, 2001, between Lexmark International, Inc., a Delaware corporation (the "Employer"), and Gary E. Morin (the "Employee"). W I T N E S S E T H: ------------------- WHEREAS, Employer and Employee desire to enter into an employment agreement; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, and for other good and valuable consideration, the parties hereto hereby agree as follows: 1. TERM; POSITION AND RESPONSIBILITIES. (a) TERM OF EMPLOYMENT. Unless the Employee's employment shall sooner terminate pursuant to Section 6, the Employer shall employ the Employee for a term commencing on the day hereof and ending on June 30, 2003 (the "Initial Term"); provided, however, that commencing on the date two years after the date hereof, and on each bi-annual anniversary (such date and each bi-annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Initial Term shall be automatically extended so as to terminate two years from such Renewal Date, unless prior to the Renewal Date the Employer or Employee shall give notice to the other that the Initial Term shall not be so extended; and the Employee's employment shall continue thereafter at will. (b) POSITION AND RESPONSIBILITIES. The Employee will serve as Executive Vice President and Chief Financial Officer and in such other executive capacity or capacities as may be determined from time to time by or under the authority of the Board of Directors of the Employer ("Employer's Board"), and the Employee will devote all of his skill, knowledge and working time (except for reasonable vacation time and absence for sickness or similar disability) to the conscientious performance of his duties. The Employee represents that he is entering into this Agreement voluntarily and that his employment hereunder and compliance by him with the terms and conditions of this Agreement will not conflict with or result in the breach of any agreement to which he is a party or by which he may be bound. 2. BASE SALARY. As compensation for the services to be performed by the Employee hereunder, the Employer will pay the Employee an annual base salary of $370,000 during the term of his employment hereunder. The Employer will review the Employee's base salary from time to time during the period of his employment hereunder and, in the discretion of the Employer, may increase such base salary from time to time based upon the performance of the Employee, the financial condition of the Employer, prevailing industry salary scales and such other factors as the Employer shall consider relevant. (The annual base salary payable to the Employee under this Section 2, as the same may be increased from time to time, shall hereinafter be referred to as the "Base Salary".) The Base Salary payable under this Section 2 shall be reduced to the extent that the Employee elects to defer such Base Salary under the terms of any deferred compensation or savings plan maintained or established by the Employer, provided that any such reduction of the Base Salary shall not be taken into account for purposes of calculating the Base Amount (as defined in Section 3). The Employer shall pay the Employee the Base Salary in biweekly installments, or in such other installments as may be mutually agreed upon by the Employer and the Employee. 3. SHORT-TERM INCENTIVE COMPENSATION. The Employee shall receive an annual incentive bonus award (the "Annual Bonus") for each calendar year ending during the term of the Employee's employment hereunder equal to: (a) if the Operating Result (as defined below) for such year is equal to or greater than the Maximum Operating Target (as defined below) for such year, 150% of the amount of the Employee's Base Salary paid to the Employee during the calendar year for which such bonus is payable (such amount is hereinafter referred to as the "Base Amount"); (b) if the Operating Result for such year is greater than the Operating Target but less than the Maximum Operating Target for such year, 75% of the Base Amount plus, for each increase of 1/25th of the difference between the Operating Target and the Maximum Operating Target, an additional 3.00% of the Base Amount; (c) if the Operating Result for such year is equal to 100% of the Operating Target for such year, 75% of the Base Amount; (d) if the Operating Result for such year is greater than the Minimum Operating Target (as defined below) but less than the Operating Target for such year, 30% of the Base Amount plus, for each increase of 1/20th of the difference between the Minimum Operating Target and the Operating Target (100%), an additional 2.25% of the Base Amount; and (e) if the Operating Result for such year is equal to the Minimum Operating Target for such year, 30% of the Base Amount. (f) if the Operating Result for such year is greater than the Threshold Operating Target (as defined below) but less than the Minimum Operating Target for such year, 20% of the Base Amount plus, for each increase of 1/10th of the difference between the Threshold Operating Target and the Minimum Operating Target, an additional 1.0% of the Base Amount; and (g) if the Operating Result for such year is equal to the Threshold 2 Operating Target for such year, 20% of the Base Amount. Notwithstanding the foregoing, the Employer may increase or decrease the amount of the Annual Bonus based upon the Employer's judgment of Employee's overall contribution to the Employer's business results. No Annual Bonus shall be paid if the Operating Result is less than the Threshold Operating Target for such year. The "Operating Target", the "Maximum Operating Target", the "Minimum Operating Target" and the "Threshold Operating Target" in any year shall be jointly established by the Chief Executive Officer of the Employer and the Compensation and Pension Committee of Employer's Board (the "Committee"). The "Operating Result" for any year shall be equal to the annual financial results for the components that make up the Operating Target as of December 31 in such year, using United States generally accepted accounting principles consistently applied and taking into account such other factors as may be approved by the Committee. Notwithstanding anything else in this agreement to the contrary, if the Employer does not meet its Threshold Operating Target, there shall be no annual bonus regardless of business unit, personal or other objectives that constitute individual incentive objectives. Funding for the Annual Bonus shall be based on the Employer's annual financial results. In the event that the funds available to pay the Employer's aggregate Annual Bonuses are less than the amount required to pay such Annual Bonuses, the Annual Bonus shall be reduced in a manner deemed appropriate by the Committee, in its sole discretion. The Annual Bonus, if any, shall be paid as soon as practicable after the close of the year for which the Annual Bonus is payable, unless the Employee elects to defer such amounts under the terms of any deferred compensation or savings plan maintained or established by the Employer. 4. EMPLOYEE BENEFITS. During the term of the Employee's employment hereunder, employee benefits, including, but not limited to, life, medical, dental and disability insurance, will be provided to the Employee in accordance with programs at the Employer then available to executive employees. The Employee shall also be entitled to participate in all of Employer's profit sharing, pension, retirement, deferred compensation and savings plans, as the same may be amended and in effect from time to time, at levels and having interests commensurate with the Employee's then current period of service, compensation and position. 5. PERQUISITES AND EXPENSES. (a) GENERAL. During the term of the Employee's employment hereunder, the Employee shall be entitled to participate in any special benefit or perquisite program available from time to time to executive employees of the Employer on the terms and conditions then prevailing under such program. (b) BUSINESS TRAVEL, LODGING, ETC. The Employer shall reimburse the 3 Employee for reasonable travel, lodging and meal expenses incurred by him in connection with his performance of services hereunder upon submission of evidence, satisfactory to the Employer, of the incurrence and purpose of each such expense. 6. TERMINATION OF EMPLOYMENT. (a) TERMINATION DUE TO DEATH OR DISABILITY. In the event that the Employee's employment hereunder terminates due to death or is terminated by the Employer due to the Employee's Disability (as defined below), no termination benefits shall be payable to or in respect of the Employee except as provided in Section 6(f)(ii). For purposes of this Agreement, "Disability" shall mean a physical or mental disability that prevents the performance by the Employee of his duties hereunder lasting (or likely to last, based on competent medical evidence presented to Employer's Board) for a continuous period of six months or longer. The reasoned and good faith judgment of Employer's Board as to the Employee's Disability shall be final and shall be based on such competent medical evidence as shall be presented to it by the Employee or by any physician or group of physicians or other competent medical experts employed by the Employee or the Employer to advise Employer's Board. (b) TERMINATION BY THE EMPLOYER FOR CAUSE. The Employee may be terminated for Cause by the Employer. "Cause" shall mean (i) the willful failure of the Employee substantially to perform his duties hereunder (other than any such failure due to physical or mental illness) after a demand for substantial performance is delivered to the Employee by the executive to which the Employee reports or by Employer's Board, which notice identifies the manner in which such executive or Employer's Board, as the case may be, believes that the Employee has not substantially performed his duties, (ii) the Employee's engaging in willful and serious misconduct that is injurious to Employer or any of its subsidiaries, (iii) the Employee's regularly making a substantial, abusive use of alcohol, drug, or similar substances, and such abuse in the Employer's judgment has affected his ability to conduct the business of the Employer in a proper and prudent manner, (iv) the Employee's conviction of, or entering a plea of nolo contendere to, a crime that constitutes a felony, or (v) the willful and material breach by the Employee of any of his obligations hereunder, or the willful and material breach by the Employee of any written covenant or agreement with the Employer or any of its affiliates not to disclose any information pertaining to the Employer or any of its affiliates or not to compete or interfere with the Employer or any of its affiliates. (c) TERMINATION BY THE EMPLOYER WITHOUT CAUSE. The Employee may be terminated Without Cause by the Employer. A termination "Without Cause" shall mean a termination of employment by the Employer other than due to death or Disability as defined in Section 6(a) or Cause as defined in Section 6(b). (d) TERMINATION BY THE EMPLOYEE. The Employee may terminate his employment for "Good Reason". "Good Reason" shall mean a termination of employment by the Employee within 30 days following (i) any assignment to the 4 Employee of any duties, functions or responsibilities that are significantly different from, and result in a substantial diminution of, the duties, functions or responsibilities that the Employee has on the date hereof or (ii) the failure of the Employer to obtain the assumption of this Agreement by any successor as contemplated by Section 12. (e) NOTICE OF TERMINATION. Any termination by the Employer pursuant to Section 6(a), 6(b) or 6(c), or by the Employee pursuant to Section 6(d), shall be communicated by a written "Notice of Termination" addressed to the other parties to this Agreement. A "Notice of Termination" shall mean a notice stating that the Employee's employment hereunder has been or will be terminated, indicating the specific termination provisions in this Agreement relied upon and setting forth in reasonable detail the facts and circumstances claimed to provide a basis for such termination of employment. (f) PAYMENTS UPON CERTAIN TERMINATIONS. (i) In the event of a termination of the Employee's employment Without Cause or a termination by the Employee of his employment for Good Reason, the Employer shall pay to the Employee (A) (1) the greater of (x) his Base Salary, if any, for the period from the Date of Termination (as defined below) through the last day of the Initial Term and (y) an amount equal to one year's Base Salary; provided that Employer may, at any time, pay to the Employee in a single lump sum an amount equal to the Base Salary remaining to be paid to the Employee as of the date of such lump sum payment, less (2) any amounts paid or to be paid to the Employee under the terms of any severance plan or program of Employer, if any, as in effect on the Date of Termination, (B) the Annual Bonus with respect to a completed fiscal year to the extent not theretofore paid to the Employee and (C) a Pro Rata Share of the Annual Bonus (as defined below) for the fiscal year in which the Date of Termination occurred. (ii) If the Employee's employment shall terminate upon his death or Disability or if Employer shall terminate the Employee's employment for Cause, Employer shall pay the Employee his full Base Salary through the Date of Termination, plus, in the case of termination upon the Employee's death or Disability, a Pro Rata Share of the Annual Bonus. Any benefits payable to or in respect of the Employee under any otherwise applicable plans, policies and practices of the Employer shall not be limited by this provision. (iii) For purposes of this Section 6, the "Pro Rata Share of the Annual Bonus" shall be calculated and paid as follows. If the Employee is terminated prior to July 1 of any year, the Pro Rata Share of the Annual Bonus (A) will be equal to the product of (1) the Annual Bonus, calculated assuming that 100% of the Operating Target is achieved in such year, and (2) a fraction equal to the number of full months in such year prior to the Date of Termination over 12, and (B) will be paid to the Employee within 30 days after the Date of Termination. If the Employee is terminated on or after July 1 of any year, the Pro Rata Share of the Annual Bonus (A) will be equal 5 to the product of (1) the Annual Bonus, calculated based on the actual Operating Result for such year, and (2) a fraction equal to the number of full months in such year prior to the Date of Termination over 12, and (B) will be paid to the Employee within 90 days after the close of the year in respect of which the Pro Rata Share of the Annual Bonus is payable. (g) DATE OF TERMINATION. As used in this Agreement, the term "Date of Termination" shall mean (i) if the Employee's employment is terminated by his death, the date of his death, (ii) if the Employee's employment is terminated for Cause, the date on which Notice of Termination is given as contemplated by Section 6(e), and (iii) if the Employee's employment is terminated Without Cause, due to the Employee's Disability or by the Employee for Good Reason, 30 days after the date on which Notice of Termination is given as contemplated by Section 6(d) or, if no such Notice is given, 30 days after the date of termination of employment. (h) CONDITION TO PAYMENTS. The Employer's obligation to make any payments hereunder shall be conditioned upon the Employer's receipt of an appropriately signed "General Release and Covenant Not to Sue" in form and substance satisfactory to the Employer. 7. UNAUTHORIZED DISCLOSURE. During and after the term of his employment hereunder, the Employee shall not, without the written consent of Employer's Board, the General Counsel of the Employer, or the Chief Executive Officer of the Employer, disclose to any person (other than an employee or director of the Employer or its affiliates, or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Employee of his duties as an executive of the Employer) any confidential or proprietary information, knowledge or data that is not theretofore publicly known and in the public domain obtained by him while in the employ of the Employer with respect to the Employer or any of its subsidiaries or affiliates or with respect to any products, improvements, formulas, recipes, designs, processes, customers, methods of sales, distribution, operation or manufacture, sales, prices, profits, costs, contracts, suppliers, business prospects, business methods, techniques, research, plans, strategies, personnel, organization, trade secrets or know-how of the Employer or any of its subsidiaries or affiliates (collectively, "Proprietary Information"), except as may be required by law or in connection with any judicial or administrative proceedings or inquiry. 8. NON-COMPETITION. During the period of the Employee's employment and thereafter for a period equal to the number of months providing the basis for calculating any termination payments to the Employee under Section 6, if any such payments are required, but in any event for at least 12 months, the Employee shall not engage directly or indirectly in, become employed by, serve as an agent or consultant to, or become a partner, principal or stockholder of, any partnership, corporation or other entity which competes with a business (including any product or service offering of such business) that represents 5% or more of the aggregate gross revenues of the Employer and its subsidiaries, or competes with the Employer's Lexmark Solution Services 6 business, and which is then engaged in such competition in any geographical area in which the Employer or any of its subsidiaries is then engaged in such business without first obtaining written approval from the Employer, PROVIDED that the Employee's ownership of less than 1% of the issued and outstanding stock of any corporation whose stock is traded on an established securities market shall not constitute competition with the Employer. The Employer may grant or deny such approval in its sole discretion. 9. NON-INTERFERENCE. During the period of the Employee's employment and thereafter for a period equal to the number of months providing the basis for calculating any termination payments to the Employee under Section 6, if any such payments are required, but in any event for at least 36 months, the Employee will not, directly or indirectly, for his own account or the account of any other person or entity, (a) employ, solicit or endeavor to entice away from the Employer, or otherwise intentionally interfere with the Employer's relationship with, any person or entity who or which is at the time, OR WITHIN 6 MONTHS OF THAT TIME HAS BEEN, employed by or otherwise engaged to perform services for the Employer or (b) intentionally interfere with the Employer's relationship with any person or entity who or which is, or has been within the previous 36 months, a customer, client or supplier of the Employer. 10. RETURN OF DOCUMENTS. In the event of the termination of the Employee's employment for any reason, the Employee will deliver to the Employer all non-personal documents and data of any nature pertaining to his work with the Employer, and he will not take with him any documents or data of any nature or any reproduction thereof, or any documents containing or pertaining to any Proprietary Information. 11. FORFEITURE OF REALIZED AND UNREALIZED GAINS ON INCENTIVE AWARDS FOR BREACH OF THIS AGREEMENT. If the Employee violates any provision of Sections 7, 8, 9 or 10 of this Agreement, and the Employee is no longer employed by the Employer, whether or not the termination of employment occurs prior to or subsequent to such violation, then (1) all stock incentive awards, including but not limited to stock options, restricted stock awards and any deferred stock units, held by the Employee shall terminate effective the date on which Employee violates this Agreement, unless terminated sooner by operation of another term or condition of the Employee's stock incentive award agreement or the plan pursuant to which such award has been issued, and (2) any gain realized by Employee on the vesting of restricted stock or deferred stock units, and option gains (represented by the closing market price on the date of exercise over the exercise price, multiplied by the number of options exercised without regard to any subsequent market price decrease or increase) realized by Employee from exercising all or a portion of the Employee's options, within 18 months prior to termination of employment with Employer and until such time as the violation of Section 7, 8, 9, or 10 is discovered by Employer, shall be paid by the Employee to the Employer. The Employee agrees that the Employer has the right to withhold the amount owed to it from any amounts that Employer may owe the Employee from time to time (including, but not limited to, wages or other compensation, fringe benefits, or vacation pay). 7 12. ASSUMPTION OF AGREEMENT. The Employer will require any successor (by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Employer, by agreement in form and substance reasonably satisfactory to the Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Employer would be required to perform it if no such succession had taken place. Failure of the Employer to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Employee to the greater of (x) compensation from the Employer in the same amount and on the same terms as the Employee would be entitled hereunder if the Employer terminated his employment Without Cause as contemplated by Section 6 and (y) amounts required to be paid to the Employee pursuant to the Change of Control Agreement by and among Lexmark International Group, Inc. ("Group", which was subsequently merged with and into Employer), Employer and Employee dated as of April 30, 1998 (the "CIC Agreement"). For purposes of implementing the foregoing clause (x), the date on which any such succession becomes effective shall be deemed to be the Date of Termination, and for purposes of implementing clause (y), the timing and amount of any payments required pursuant to the CIC Agreement shall be determined in accordance with the CIC Agreement. 13. ENTIRE AGREEMENT. Except as otherwise expressly provided herein, this Agreement, the CIC Agreement and the Indemnification Agreement made and entered into as of the 30th day of April, 1998 by and among Employer, Group and Employee (the "Indemnification Agreement") constitute the entire agreement among the parties hereto with respect to the subject matter hereof, and all promises, representations, understandings, arrangements and prior agreements relating to such subject matter (including those made to or with the Employee by any other person or entity) are merged herein, in the CIC Agreement and in the Indemnification Agreement and superseded hereby and thereby. To the extent that the amount and timing of payments required to be made under this Agreement are inconsistent with or different from the amount and timing of payments required to be made pursuant to the CIC Agreement and/or the Indemnification Agreement, the Employee shall be entitled to the most favorable benefits provided to the Employee under the provisions of any such agreements. 14. INDEMNIFICATION. The Employer agrees that it shall indemnify and hold harmless the Employee to the fullest extent (a) permitted by Delaware law from and against any and all liabilities, costs, claims and expenses arising out of the employment of the Employee hereunder, except to the extent arising out of or based upon the gross negligence or willful misconduct of the Employee and (b) provided by the Indemnification Agreement. 15. NO MITIGATION. The Employee shall not be required to mitigate the amount of any payment that the Employer becomes obligated to make in connection with this 8 Agreement, the CIC Agreement or the Indemnification Agreement, by seeking other employment or otherwise. 16. MISCELLANEOUS. (a) BINDING EFFECT. This Agreement shall be binding on and inure to the benefit of the Employer and its successors and permitted assigns. This Agreement shall also be binding on and inure to the benefit of the Employee and his heirs, executors, administrators and legal representatives. (b) GOVERNING LAW. This Agreement shall be governed by and constructed in accordance with the laws of the State of Delaware without reference to principles of conflict of laws. (c) TAXES. The Employer may withhold from any payments made under the Agreement all federal, state, city or other applicable taxes or social security governmental regulation or ruling. (d) AMENDMENTS. No provisions of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is approved by Employer's Board or General Counsel of the Employer and is agreed to in writing by the Employee and General Counsel of the Employer. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No waiver of any provision of this Agreement shall be implied from any course of dealing between or among the parties hereto or from any failure by any party hereto to assert its rights hereunder on any occasion or series of occasions. (e) REFORMATION; SEVERABILITY. If any provision of this Agreement is held by a court or arbitrator to be unreasonable in scope or duration or otherwise, the court or arbitrator shall, to the extent permitted by law, reform such provision so that it is enforceable, and enforce the applicable provision as so reformed. Reformation of any provision of this Agreement pursuant to this subsection (e) shall not affect any other provision of this Agreement or render this Agreement unenforceable or void. (f) NOTICES. Any notice or other communication required or permitted to be delivered under this Agreement shall be (i) in writing, (ii) delivered personally, by courier service or by certified or registered mail, first-class postage prepaid and return receipt requested, (iii) deemed to have been received on the date of delivery or on the third business day after the mailing thereof, and (iv) addressed as follows (or to such other address as the party entitled to notice shall hereafter designate in accordance with the terms hereof): 9 (A) if to the Employer, to it at: One Lexmark Centre Drive 740 West New Circle Road Lexington, Kentucky 40550 ATTENTION: General Counsel (B) if to the Employee, to him at the address listed on the signature page hereof. (h) SURVIVAL. Sections 7, 8, 9,10 and 11 and, if the Employee's employment terminates in a manner giving rise to a payment under Section 6(f), Section 6(f) shall survive the termination of the employment of the Employee hereunder. (i) COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. (j) HEADINGS. The section and other headings contained in this Agreement are for the convenience of the parties only and are not intended to be a part hereof or to affect the meaning or interpretation hereof. IN WITNESS WHEREOF, the Employer has duly executed this Agreement by its authorized representatives and the Employee has hereunto set his hand, in each case effective as of the date first above written. LEXMARK INTERNATIONAL, INC. By: /s/ Paul J. Curlander ------------------------------------ Paul J. Curlander Chairman and Chief Executive Officer THE EMPLOYEE: /s/ Gary E. Morin ---------------------------------------- 10 EX-10.29 12 l92467aex10-29.txt EXHIBIT 10.29 Exhibit 10.29 EMPLOYMENT AGREEMENT -------------------- EMPLOYMENT AGREEMENT, dated as of July 1, 2001, between Lexmark International, Inc., a Delaware corporation (the "Employer"), and Paul A. Rooke (the "Employee"). W I T N E S S E T H: ------------------- WHEREAS, Employer and Employee desire to enter into an employment agreement; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, and for other good and valuable consideration, the parties hereto hereby agree as follows: 1. TERM; POSITION AND RESPONSIBILITIES. (a) TERM OF EMPLOYMENT. Unless the Employee's employment shall sooner terminate pursuant to Section 6, the Employer shall employ the Employee for a term commencing on the day hereof and ending on June 30, 2003 (the "Initial Term"); provided, however, that commencing on the date two years after the date hereof, and on each bi-annual anniversary (such date and each bi-annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Initial Term shall be automatically extended so as to terminate two years from such Renewal Date, unless prior to the Renewal Date the Employer or Employee shall give notice to the other that the Initial Term shall not be so extended; and the Employee's employment shall continue thereafter at will. (b) POSITION AND RESPONSIBILITIES. The Employee will serve as Vice President and President - Printing Solutions and Services Division and in such other executive capacity or capacities as may be determined from time to time by or under the authority of the Board of Directors of the Employer ("Employer's Board"), and the Employee will devote all of his skill, knowledge and working time (except for reasonable vacation time and absence for sickness or similar disability) to the conscientious performance of his duties. The Employee represents that he is entering into this Agreement voluntarily and that his employment hereunder and compliance by him with the terms and conditions of this Agreement will not conflict with or result in the breach of any agreement to which he is a party or by which he may be bound. 2. BASE SALARY. As compensation for the services to be performed by the Employee hereunder, the Employer will pay the Employee an annual base salary of $310,000 during the term of his employment hereunder. The Employer will review the Employee's base salary from time to time during the period of his employment hereunder and, in the discretion of the Employer, may increase such base salary from time to time based upon the performance of the Employee, the financial condition of the Employer, prevailing industry salary scales and such other factors as the Employer shall consider relevant. (The annual base salary payable to the Employee under this Section 2, as the same may be increased from time to time, shall hereinafter be referred to as the "Base Salary".) The Base Salary payable under this Section 2 shall be reduced to the extent that the Employee elects to defer such Base Salary under the terms of any deferred compensation or savings plan maintained or established by the Employer, provided that any such reduction of the Base Salary shall not be taken into account for purposes of calculating the Base Amount (as defined in Section 3). The Employer shall pay the Employee the Base Salary in biweekly installments, or in such other installments as may be mutually agreed upon by the Employer and the Employee. 3. SHORT-TERM INCENTIVE COMPENSATION. The Employee shall receive an annual incentive bonus award (the "Annual Bonus") for each calendar year ending during the term of the Employee's employment hereunder equal to: (a) if the Operating Result (as defined below) for such year is equal to or greater than the Maximum Operating Target (as defined below) for such year, 150% of the amount of the Employee's Base Salary paid to the Employee during the calendar year for which such bonus is payable (such amount is hereinafter referred to as the "Base Amount"); (b) if the Operating Result for such year is greater than the Operating Target but less than the Maximum Operating Target for such year, 75% of the Base Amount plus, for each increase of 1/25th of the difference between the Operating Target and the Maximum Operating Target, an additional 3.00% of the Base Amount; (c) if the Operating Result for such year is equal to 100% of the Operating Target for such year, 75% of the Base Amount; (d) if the Operating Result for such year is greater than the Minimum Operating Target (as defined below) but less than the Operating Target for such year, 30% of the Base Amount plus, for each increase of 1/20th of the difference between the Minimum Operating Target and the Operating Target (100%), an additional 2.25% of the Base Amount; and (e) if the Operating Result for such year is equal to the Minimum Operating Target for such year, 30% of the Base Amount. (f) if the Operating Result for such year is greater than the Threshold Operating Target (as defined below) but less than the Minimum Operating Target for such year, 20% of the Base Amount plus, for each increase of 1/10th of the difference between the Threshold Operating Target and the Minimum Operating Target, an additional 1.0% of the Base Amount; and (g) if the Operating Result for such year is equal to the Threshold 2 Operating Target for such year, 20% of the Base Amount. Notwithstanding the foregoing, the Employer may increase or decrease the amount of the Annual Bonus based upon the Employer's judgment of Employee's overall contribution to the Employer's business results. No Annual Bonus shall be paid if the Operating Result is less than the Threshold Operating Target for such year. The "Operating Target", the "Maximum Operating Target", the "Minimum Operating Target" and the "Threshold Operating Target" in any year shall be jointly established by the Chief Executive Officer of the Employer and the Compensation and Pension Committee of Employer's Board (the "Committee"). The "Operating Result" for any year shall be equal to the annual financial results for the components that make up the Operating Target as of December 31 in such year, using United States generally accepted accounting principles consistently applied and taking into account such other factors as may be approved by the Committee. Notwithstanding anything else in this agreement to the contrary, if the Employer does not meet its Threshold Operating Target, there shall be no annual bonus regardless of business unit, personal or other objectives that constitute individual incentive objectives. Funding for the Annual Bonus shall be based on the Employer's annual financial results. In the event that the funds available to pay the Employer's aggregate Annual Bonuses are less than the amount required to pay such Annual Bonuses, the Annual Bonus shall be reduced in a manner deemed appropriate by the Committee, in its sole discretion. The Annual Bonus, if any, shall be paid as soon as practicable after the close of the year for which the Annual Bonus is payable, unless the Employee elects to defer such amounts under the terms of any deferred compensation or savings plan maintained or established by the Employer. 4. EMPLOYEE BENEFITS. During the term of the Employee's employment hereunder, employee benefits, including, but not limited to, life, medical, dental and disability insurance, will be provided to the Employee in accordance with programs at the Employer then available to executive employees. The Employee shall also be entitled to participate in all of Employer's profit sharing, pension, retirement, deferred compensation and savings plans, as the same may be amended and in effect from time to time, at levels and having interests commensurate with the Employee's then current period of service, compensation and position. 5. PERQUISITES AND EXPENSES. (a) GENERAL. During the term of the Employee's employment hereunder, the Employee shall be entitled to participate in any special benefit or perquisite program available from time to time to executive employees of the Employer on the terms and conditions then prevailing under such program. (b) BUSINESS TRAVEL, LODGING, ETC. The Employer shall reimburse the 3 Employee for reasonable travel, lodging and meal expenses incurred by him in connection with his performance of services hereunder upon submission of evidence, satisfactory to the Employer, of the incurrence and purpose of each such expense. 6. TERMINATION OF EMPLOYMENT. (a) TERMINATION DUE TO DEATH OR DISABILITY. In the event that the Employee's employment hereunder terminates due to death or is terminated by the Employer due to the Employee's Disability (as defined below), no termination benefits shall be payable to or in respect of the Employee except as provided in Section 6(f)(ii). For purposes of this Agreement, "Disability" shall mean a physical or mental disability that prevents the performance by the Employee of his duties hereunder lasting (or likely to last, based on competent medical evidence presented to Employer's Board) for a continuous period of six months or longer. The reasoned and good faith judgment of Employer's Board as to the Employee's Disability shall be final and shall be based on such competent medical evidence as shall be presented to it by the Employee or by any physician or group of physicians or other competent medical experts employed by the Employee or the Employer to advise Employer's Board. (b) TERMINATION BY THE EMPLOYER FOR CAUSE. The Employee may be terminated for Cause by the Employer. "Cause" shall mean (i) the willful failure of the Employee substantially to perform his duties hereunder (other than any such failure due to physical or mental illness) after a demand for substantial performance is delivered to the Employee by the executive to which the Employee reports or by Employer's Board, which notice identifies the manner in which such executive or Employer's Board, as the case may be, believes that the Employee has not substantially performed his duties, (ii) the Employee's engaging in willful and serious misconduct that is injurious to Employer or any of its subsidiaries, (iii) the Employee's regularly making a substantial, abusive use of alcohol, drug, or similar substances, and such abuse in the Employer's judgment has affected his ability to conduct the business of the Employer in a proper and prudent manner, (iv) the Employee's conviction of, or entering a plea of nolo contendere to, a crime that constitutes a felony, or (v) the willful and material breach by the Employee of any of his obligations hereunder, or the willful and material breach by the Employee of any written covenant or agreement with the Employer or any of its affiliates not to disclose any information pertaining to the Employer or any of its affiliates or not to compete or interfere with the Employer or any of its affiliates. (c) TERMINATION BY THE EMPLOYER WITHOUT CAUSE. The Employee may be terminated Without Cause by the Employer. A termination "Without Cause" shall mean a termination of employment by the Employer other than due to death or Disability as defined in Section 6(a) or Cause as defined in Section 6(b). (d) TERMINATION BY THE EMPLOYEE. The Employee may terminate his employment for "Good Reason". "Good Reason" shall mean a termination of employment by the Employee within 30 days following (i) any assignment to the 4 Employee of any duties, functions or responsibilities that are significantly different from, and result in a substantial diminution of, the duties, functions or responsibilities that the Employee has on the date hereof or (ii) the failure of the Employer to obtain the assumption of this Agreement by any successor as contemplated by Section 12. (e) NOTICE OF TERMINATION. Any termination by the Employer pursuant to Section 6(a), 6(b) or 6(c), or by the Employee pursuant to Section 6(d), shall be communicated by a written "Notice of Termination" addressed to the other parties to this Agreement. A "Notice of Termination" shall mean a notice stating that the Employee's employment hereunder has been or will be terminated, indicating the specific termination provisions in this Agreement relied upon and setting forth in reasonable detail the facts and circumstances claimed to provide a basis for such termination of employment. (f) PAYMENTS UPON CERTAIN TERMINATIONS. (i) In the event of a termination of the Employee's employment Without Cause or a termination by the Employee of his employment for Good Reason, the Employer shall pay to the Employee (A) (1) the greater of (x) his Base Salary, if any, for the period from the Date of Termination (as defined below) through the last day of the Initial Term and (y) an amount equal to one year's Base Salary; provided that Employer may, at any time, pay to the Employee in a single lump sum an amount equal to the Base Salary remaining to be paid to the Employee as of the date of such lump sum payment, less (2) any amounts paid or to be paid to the Employee under the terms of any severance plan or program of Employer, if any, as in effect on the Date of Termination, (B) the Annual Bonus with respect to a completed fiscal year to the extent not theretofore paid to the Employee and (C) a Pro Rata Share of the Annual Bonus (as defined below) for the fiscal year in which the Date of Termination occurred. (ii) If the Employee's employment shall terminate upon his death or Disability or if Employer shall terminate the Employee's employment for Cause, Employer shall pay the Employee his full Base Salary through the Date of Termination, plus, in the case of termination upon the Employee's death or Disability, a Pro Rata Share of the Annual Bonus. Any benefits payable to or in respect of the Employee under any otherwise applicable plans, policies and practices of the Employer shall not be limited by this provision. (iii) For purposes of this Section 6, the "Pro Rata Share of the Annual Bonus" shall be calculated and paid as follows. If the Employee is terminated prior to July 1 of any year, the Pro Rata Share of the Annual Bonus (A) will be equal to the product of (1) the Annual Bonus, calculated assuming that 100% of the Operating Target is achieved in such year, and (2) a fraction equal to the number of full months in such year prior to the Date of Termination over 12, and (B) will be paid to the Employee within 30 days after the Date of Termination. If the Employee is terminated on or after July 1 of any year, the Pro Rata Share of the Annual Bonus (A) will be equal 5 to the product of (1) the Annual Bonus, calculated based on the actual Operating Result for such year, and (2) a fraction equal to the number of full months in such year prior to the Date of Termination over 12, and (B) will be paid to the Employee within 90 days after the close of the year in respect of which the Pro Rata Share of the Annual Bonus is payable. (g) DATE OF TERMINATION. As used in this Agreement, the term "Date of Termination" shall mean (i) if the Employee's employment is terminated by his death, the date of his death, (ii) if the Employee's employment is terminated for Cause, the date on which Notice of Termination is given as contemplated by Section 6(e), and (iii) if the Employee's employment is terminated Without Cause, due to the Employee's Disability or by the Employee for Good Reason, 30 days after the date on which Notice of Termination is given as contemplated by Section 6(d) or, if no such Notice is given, 30 days after the date of termination of employment. (h) CONDITION TO PAYMENTS. The Employer's obligation to make any payments hereunder shall be conditioned upon the Employer's receipt of an appropriately signed "General Release and Covenant Not to Sue" in form and substance satisfactory to the Employer. 7. UNAUTHORIZED DISCLOSURE. During and after the term of his employment hereunder, the Employee shall not, without the written consent of Employer's Board, the General Counsel of the Employer, or the Chief Executive Officer of the Employer, disclose to any person (other than an employee or director of the Employer or its affiliates, or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Employee of his duties as an executive of the Employer) any confidential or proprietary information, knowledge or data that is not theretofore publicly known and in the public domain obtained by him while in the employ of the Employer with respect to the Employer or any of its subsidiaries or affiliates or with respect to any products, improvements, formulas, recipes, designs, processes, customers, methods of sales, distribution, operation or manufacture, sales, prices, profits, costs, contracts, suppliers, business prospects, business methods, techniques, research, plans, strategies, personnel, organization, trade secrets or know-how of the Employer or any of its subsidiaries or affiliates (collectively, "Proprietary Information"), except as may be required by law or in connection with any judicial or administrative proceedings or inquiry. 8. NON-COMPETITION. During the period of the Employee's employment and thereafter for a period equal to the number of months providing the basis for calculating any termination payments to the Employee under Section 6, if any such payments are required, but in any event for at least 12 months, the Employee shall not engage directly or indirectly in, become employed by, serve as an agent or consultant to, or become a partner, principal or stockholder of, any partnership, corporation or other entity which competes with a business (including any product or service offering of such business) that represents 5% or more of the aggregate gross revenues of the Employer and its subsidiaries, or competes with the Employer's Lexmark Solution Services 6 business, and which is then engaged in such competition in any geographical area in which the Employer or any of its subsidiaries is then engaged in such business without first obtaining written approval from the Employer, PROVIDED that the Employee's ownership of less than 1% of the issued and outstanding stock of any corporation whose stock is traded on an established securities market shall not constitute competition with the Employer. The Employer may grant or deny such approval in its sole discretion. 9. NON-INTERFERENCE. During the period of the Employee's employment and thereafter for a period equal to the number of months providing the basis for calculating any termination payments to the Employee under Section 6, if any such payments are required, but in any event for at least 36 months, the Employee will not, directly or indirectly, for his own account or the account of any other person or entity, (a) employ, solicit or endeavor to entice away from the Employer, or otherwise intentionally interfere with the Employer's relationship with, any person or entity who or which is at the time, OR WITHIN 6 MONTHS OF THAT TIME HAS BEEN, employed by or otherwise engaged to perform services for the Employer or (b) intentionally interfere with the Employer's relationship with any person or entity who or which is, or has been within the previous 36 months, a customer, client or supplier of the Employer. 10. RETURN OF DOCUMENTS. In the event of the termination of the Employee's employment for any reason, the Employee will deliver to the Employer all non-personal documents and data of any nature pertaining to his work with the Employer, and he will not take with him any documents or data of any nature or any reproduction thereof, or any documents containing or pertaining to any Proprietary Information. 11. FORFEITURE OF REALIZED AND UNREALIZED GAINS ON INCENTIVE AWARDS FOR BREACH OF THIS AGREEMENT. If the Employee violates any provision of Sections 7, 8, 9 or 10 of this Agreement, and the Employee is no longer employed by the Employer, whether or not the termination of employment occurs prior to or subsequent to such violation, then (1) all stock incentive awards, including but not limited to stock options, restricted stock awards and any deferred stock units, held by the Employee shall terminate effective the date on which Employee violates this Agreement, unless terminated sooner by operation of another term or condition of the Employee's stock incentive award agreement or the plan pursuant to which such award has been issued, and (2) any gain realized by Employee on the vesting of restricted stock or deferred stock units, and option gains (represented by the closing market price on the date of exercise over the exercise price, multiplied by the number of options exercised without regard to any subsequent market price decrease or increase) realized by Employee from exercising all or a portion of the Employee's options, within 18 months prior to termination of employment with Employer and until such time as the violation of Section 7, 8, 9, or 10 is discovered by Employer, shall be paid by the Employee to the Employer. The Employee agrees that the Employer has the right to withhold the amount owed to it from any amounts that Employer may owe the Employee from time to time (including, but not limited to, wages or other compensation, fringe benefits, or vacation pay). 7 12. ASSUMPTION OF AGREEMENT. The Employer will require any successor (by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Employer, by agreement in form and substance reasonably satisfactory to the Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Employer would be required to perform it if no such succession had taken place. Failure of the Employer to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Employee to the greater of (x) compensation from the Employer in the same amount and on the same terms as the Employee would be entitled hereunder if the Employer terminated his employment Without Cause as contemplated by Section 6 and (y) amounts required to be paid to the Employee pursuant to the Change of Control Agreement by and among Lexmark International Group, Inc. ("Group", which was subsequently merged with and into Employer), Employer and Employee dated as of April 30, 1998 (the "CIC Agreement"). For purposes of implementing the foregoing clause (x), the date on which any such succession becomes effective shall be deemed to be the Date of Termination, and for purposes of implementing clause (y), the timing and amount of any payments required pursuant to the CIC Agreement shall be determined in accordance with the CIC Agreement. 13. ENTIRE AGREEMENT. Except as otherwise expressly provided herein, this Agreement, the CIC Agreement and the Indemnification Agreement made and entered into as of the 30th day of April, 1998 by and among Employer, Group and Employee (the "Indemnification Agreement") constitute the entire agreement among the parties hereto with respect to the subject matter hereof, and all promises, representations, understandings, arrangements and prior agreements relating to such subject matter (including those made to or with the Employee by any other person or entity) are merged herein, in the CIC Agreement and in the Indemnification Agreement and superseded hereby and thereby. To the extent that the amount and timing of payments required to be made under this Agreement are inconsistent with or different from the amount and timing of payments required to be made pursuant to the CIC Agreement and/or the Indemnification Agreement, the Employee shall be entitled to the most favorable benefits provided to the Employee under the provisions of any such agreements. 14. INDEMNIFICATION. The Employer agrees that it shall indemnify and hold harmless the Employee to the fullest extent (a) permitted by Delaware law from and against any and all liabilities, costs, claims and expenses arising out of the employment of the Employee hereunder, except to the extent arising out of or based upon the gross negligence or willful misconduct of the Employee and (b) provided by the Indemnification Agreement. 15. NO MITIGATION. The Employee shall not be required to mitigate the amount of any payment that the Employer becomes obligated to make in connection with this 8 Agreement, the CIC Agreement or the Indemnification Agreement, by seeking other employment or otherwise. 16. MISCELLANEOUS. (a) BINDING EFFECT. This Agreement shall be binding on and inure to the benefit of the Employer and its successors and permitted assigns. This Agreement shall also be binding on and inure to the benefit of the Employee and his heirs, executors, administrators and legal representatives. (b) GOVERNING LAW. This Agreement shall be governed by and constructed in accordance with the laws of the State of Delaware without reference to principles of conflict of laws. (c) TAXES. The Employer may withhold from any payments made under the Agreement all federal, state, city or other applicable taxes or social security governmental regulation or ruling. (d) AMENDMENTS. No provisions of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is approved by Employer's Board or General Counsel of the Employer and is agreed to in writing by the Employee and General Counsel of the Employer. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No waiver of any provision of this Agreement shall be implied from any course of dealing between or among the parties hereto or from any failure by any party hereto to assert its rights hereunder on any occasion or series of occasions. (e) REFORMATION; SEVERABILITY. If any provision of this Agreement is held by a court or arbitrator to be unreasonable in scope or duration or otherwise, the court or arbitrator shall, to the extent permitted by law, reform such provision so that it is enforceable, and enforce the applicable provision as so reformed. Reformation of any provision of this Agreement pursuant to this subsection (e) shall not affect any other provision of this Agreement or render this Agreement unenforceable or void. (f) NOTICES. Any notice or other communication required or permitted to be delivered under this Agreement shall be (i) in writing, (ii) delivered personally, by courier service or by certified or registered mail, first-class postage prepaid and return receipt requested, (iii) deemed to have been received on the date of delivery or on the third business day after the mailing thereof, and (iv) addressed as follows (or to such other address as the party entitled to notice shall hereafter designate in accordance with the terms hereof): 9 (A) if to the Employer, to it at: One Lexmark Centre Drive 740 West New Circle Road Lexington, Kentucky 40550 ATTENTION: General Counsel (B) if to the Employee, to him at the address listed on the signature page hereof. (h) SURVIVAL. Sections 7, 8, 9,10 and 11 and, if the Employee's employment terminates in a manner giving rise to a payment under Section 6(f), Section 6(f) shall survive the termination of the employment of the Employee hereunder. (i) COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. (j) HEADINGS. The section and other headings contained in this Agreement are for the convenience of the parties only and are not intended to be a part hereof or to affect the meaning or interpretation hereof. IN WITNESS WHEREOF, the Employer has duly executed this Agreement by its authorized representatives and the Employee has hereunto set his hand, in each case effective as of the date first above written. LEXMARK INTERNATIONAL, INC. By: /s/ Paul J. Curlander ------------------------------------ Paul J. Curlander Chairman and Chief Executive Officer THE EMPLOYEE: /s/ Paul A. Rooke --------------------------------------- 10 EX-10.30 13 l92467aex10-30.txt EXHIBIT 10.30 Exhibit 10.30 EMPLOYMENT AGREEMENT -------------------- EMPLOYMENT AGREEMENT, dated as of July 1, 2001, between Lexmark International, Inc., a Delaware corporation (the "Employer"), and Vincent J. Cole (the "Employee"). W I T N E S S E T H: ------------------- WHEREAS, Employer and Employee desire to enter into an employment agreement; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, and for other good and valuable consideration, the parties hereto hereby agree as follows: 1. TERM; POSITION AND RESPONSIBILITIES. (a) TERM OF EMPLOYMENT. Unless the Employee's employment shall sooner terminate pursuant to Section 6, the Employer shall employ the Employee for a term commencing on the day hereof and ending on June 30, 2003 (the "Initial Term"); provided, however, that commencing on the date two years after the date hereof, and on each bi-annual anniversary (such date and each bi-annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Initial Term shall be automatically extended so as to terminate two years from such Renewal Date, unless prior to the Renewal Date the Employer or Employee shall give notice to the other that the Initial Term shall not be so extended; and the Employee's employment shall continue thereafter at will. (b) POSITION AND RESPONSIBILITIES. The Employee will serve as Vice President, General Counsel and Secretary and in such other executive capacity or capacities as may be determined from time to time by or under the authority of the Board of Directors of the Employer ("Employer's Board"), and the Employee will devote all of his skill, knowledge and working time (except for reasonable vacation time and absence for sickness or similar disability) to the conscientious performance of his duties. The Employee represents that he is entering into this Agreement voluntarily and that his employment hereunder and compliance by him with the terms and conditions of this Agreement will not conflict with or result in the breach of any agreement to which he is a party or by which he may be bound. 2. BASE SALARY. As compensation for the services to be performed by the Employee hereunder, the Employer will pay the Employee an annual base salary of $285,000 during the term of his employment hereunder. The Employer will review the Employee's base salary from time to time during the period of his employment hereunder and, in the discretion of the Employer, may increase such base salary from time to time based upon the performance of the Employee, the financial condition of the Employer, prevailing industry salary scales and such other factors as the Employer shall consider relevant. (The annual base salary payable to the Employee under this Section 2, as the same may be increased from time to time, shall hereinafter be referred to as the "Base Salary".) The Base Salary payable under this Section 2 shall be reduced to the extent that the Employee elects to defer such Base Salary under the terms of any deferred compensation or savings plan maintained or established by the Employer, provided that any such reduction of the Base Salary shall not be taken into account for purposes of calculating the Base Amount (as defined in Section 3). The Employer shall pay the Employee the Base Salary in biweekly installments, or in such other installments as may be mutually agreed upon by the Employer and the Employee. 3. SHORT-TERM INCENTIVE COMPENSATION. The Employee shall receive an annual incentive bonus award (the "Annual Bonus") for each calendar year ending during the term of the Employee's employment hereunder equal to: (a) if the Operating Result (as defined below) for such year is equal to or greater than the Maximum Operating Target (as defined below) for such year, 140% of the amount of the Employee's Base Salary paid to the Employee during the calendar year for which such bonus is payable (such amount is hereinafter referred to as the "Base Amount"); (b) if the Operating Result for such year is greater than the Operating Target but less than the Maximum Operating Target for such year, 70% of the Base Amount plus, for each increase of 1/25th of the difference between the Operating Target and the Maximum Operating Target, an additional 2.80% of the Base Amount; (c) if the Operating Result for such year is equal to 100% of the Operating Target for such year, 70% of the Base Amount; (d) if the Operating Result for such year is greater than the Minimum Operating Target (as defined below) but less than the Operating Target for such year, 30% of the Base Amount plus, for each increase of 1/20th of the difference between the Minimum Operating Target and the Operating Target (100%), an additional 2.00% of the Base Amount; and (e) if the Operating Result for such year is equal to the Minimum Operating Target for such year, 30% of the Base Amount. (f) if the Operating Result for such year is greater than the Threshold Operating Target (as defined below) but less than the Minimum Operating Target for such year, 20% of the Base Amount plus, for each increase of 1/10th of the difference between the Threshold Operating Target and the Minimum Operating Target, an additional 1.0% of the Base Amount; and (g) if the Operating Result for such year is equal to the Threshold 2 Operating Target for such year, 20% of the Base Amount. Notwithstanding the foregoing, the Employer may increase or decrease the amount of the Annual Bonus based upon the Employer's judgment of Employee's overall contribution to the Employer's business results. No Annual Bonus shall be paid if the Operating Result is less than the Threshold Operating Target for such year. The "Operating Target", the "Maximum Operating Target", the "Minimum Operating Target" and the "Threshold Operating Target" in any year shall be jointly established by the Chief Executive Officer of the Employer and the Compensation and Pension Committee of Employer's Board (the "Committee"). The "Operating Result" for any year shall be equal to the annual financial results for the components that make up the Operating Target as of December 31 in such year, using United States generally accepted accounting principles consistently applied and taking into account such other factors as may be approved by the Committee. Notwithstanding anything else in this agreement to the contrary, if the Employer does not meet its Threshold Operating Target, there shall be no annual bonus regardless of business unit, personal or other objectives that constitute individual incentive objectives. Funding for the Annual Bonus shall be based on the Employer's annual financial results. In the event that the funds available to pay the Employer's aggregate Annual Bonuses are less than the amount required to pay such Annual Bonuses, the Annual Bonus shall be reduced in a manner deemed appropriate by the Committee, in its sole discretion. The Annual Bonus, if any, shall be paid as soon as practicable after the close of the year for which the Annual Bonus is payable, unless the Employee elects to defer such amounts under the terms of any deferred compensation or savings plan maintained or established by the Employer. 4. EMPLOYEE BENEFITS. During the term of the Employee's employment hereunder, employee benefits, including, but not limited to, life, medical, dental and disability insurance, will be provided to the Employee in accordance with programs at the Employer then available to executive employees. The Employee shall also be entitled to participate in all of Employer's profit sharing, pension, retirement, deferred compensation and savings plans, as the same may be amended and in effect from time to time, at levels and having interests commensurate with the Employee's then current period of service, compensation and position. 5. PERQUISITES AND EXPENSES. (a) GENERAL. During the term of the Employee's employment hereunder, the Employee shall be entitled to participate in any special benefit or perquisite program available from time to time to executive employees of the Employer on the terms and conditions then prevailing under such program. (b) BUSINESS TRAVEL, LODGING, ETC. The Employer shall reimburse the 3 Employee for reasonable travel, lodging and meal expenses incurred by him in connection with his performance of services hereunder upon submission of evidence, satisfactory to the Employer, of the incurrence and purpose of each such expense. 6. TERMINATION OF EMPLOYMENT. (a) TERMINATION DUE TO DEATH OR DISABILITY. In the event that the Employee's employment hereunder terminates due to death or is terminated by the Employer due to the Employee's Disability (as defined below), no termination benefits shall be payable to or in respect of the Employee except as provided in Section 6(f)(ii). For purposes of this Agreement, "Disability" shall mean a physical or mental disability that prevents the performance by the Employee of his duties hereunder lasting (or likely to last, based on competent medical evidence presented to Employer's Board) for a continuous period of six months or longer. The reasoned and good faith judgment of Employer's Board as to the Employee's Disability shall be final and shall be based on such competent medical evidence as shall be presented to it by the Employee or by any physician or group of physicians or other competent medical experts employed by the Employee or the Employer to advise Employer's Board. (b) TERMINATION BY THE EMPLOYER FOR CAUSE. The Employee may be terminated for Cause by the Employer. "Cause" shall mean (i) the willful failure of the Employee substantially to perform his duties hereunder (other than any such failure due to physical or mental illness) after a demand for substantial performance is delivered to the Employee by the executive to which the Employee reports or by Employer's Board, which notice identifies the manner in which such executive or Employer's Board, as the case may be, believes that the Employee has not substantially performed his duties, (ii) the Employee's engaging in willful and serious misconduct that is injurious to Employer or any of its subsidiaries, (iii) the Employee's regularly making a substantial, abusive use of alcohol, drug, or similar substances, and such abuse in the Employer's judgment has affected his ability to conduct the business of the Employer in a proper and prudent manner, (iv) the Employee's conviction of, or entering a plea of nolo contendere to, a crime that constitutes a felony, or (v) the willful and material breach by the Employee of any of his obligations hereunder, or the willful and material breach by the Employee of any written covenant or agreement with the Employer or any of its affiliates not to disclose any information pertaining to the Employer or any of its affiliates or not to compete or interfere with the Employer or any of its affiliates. (c) TERMINATION BY THE EMPLOYER WITHOUT CAUSE. The Employee may be terminated Without Cause by the Employer. A termination "Without Cause" shall mean a termination of employment by the Employer other than due to death or Disability as defined in Section 6(a) or Cause as defined in Section 6(b). (d) TERMINATION BY THE EMPLOYEE. The Employee may terminate his employment for "Good Reason". "Good Reason" shall mean a termination of employment by the Employee within 30 days following (i) any assignment to the 4 Employee of any duties, functions or responsibilities that are significantly different from, and result in a substantial diminution of, the duties, functions or responsibilities that the Employee has on the date hereof or (ii) the failure of the Employer to obtain the assumption of this Agreement by any successor as contemplated by Section 12. (e) NOTICE OF TERMINATION. Any termination by the Employer pursuant to Section 6(a), 6(b) or 6(c), or by the Employee pursuant to Section 6(d), shall be communicated by a written "Notice of Termination" addressed to the other parties to this Agreement. A "Notice of Termination" shall mean a notice stating that the Employee's employment hereunder has been or will be terminated, indicating the specific termination provisions in this Agreement relied upon and setting forth in reasonable detail the facts and circumstances claimed to provide a basis for such termination of employment. (f) PAYMENTS UPON CERTAIN TERMINATIONS. (i) In the event of a termination of the Employee's employment Without Cause or a termination by the Employee of his employment for Good Reason, the Employer shall pay to the Employee (A) (1) the greater of (x) his Base Salary, if any, for the period from the Date of Termination (as defined below) through the last day of the Initial Term and (y) an amount equal to one year's Base Salary; provided that Employer may, at any time, pay to the Employee in a single lump sum an amount equal to the Base Salary remaining to be paid to the Employee as of the date of such lump sum payment, less (2) any amounts paid or to be paid to the Employee under the terms of any severance plan or program of Employer, if any, as in effect on the Date of Termination, (B) the Annual Bonus with respect to a completed fiscal year to the extent not theretofore paid to the Employee and (C) a Pro Rata Share of the Annual Bonus (as defined below) for the fiscal year in which the Date of Termination occurred. (ii) If the Employee's employment shall terminate upon his death or Disability or if Employer shall terminate the Employee's employment for Cause, Employer shall pay the Employee his full Base Salary through the Date of Termination, plus, in the case of termination upon the Employee's death or Disability, a Pro Rata Share of the Annual Bonus. Any benefits payable to or in respect of the Employee under any otherwise applicable plans, policies and practices of the Employer shall not be limited by this provision. (iii) For purposes of this Section 6, the "Pro Rata Share of the Annual Bonus" shall be calculated and paid as follows. If the Employee is terminated prior to July 1 of any year, the Pro Rata Share of the Annual Bonus (A) will be equal to the product of (1) the Annual Bonus, calculated assuming that 100% of the Operating Target is achieved in such year, and (2) a fraction equal to the number of full months in such year prior to the Date of Termination over 12, and (B) will be paid to the Employee within 30 days after the Date of Termination. If the Employee is terminated on or after July 1 of any year, the Pro Rata Share of the Annual Bonus (A) will be equal 5 to the product of (1) the Annual Bonus, calculated based on the actual Operating Result for such year, and (2) a fraction equal to the number of full months in such year prior to the Date of Termination over 12, and (B) will be paid to the Employee within 90 days after the close of the year in respect of which the Pro Rata Share of the Annual Bonus is payable. (g) DATE OF TERMINATION. As used in this Agreement, the term "Date of Termination" shall mean (i) if the Employee's employment is terminated by his death, the date of his death, (ii) if the Employee's employment is terminated for Cause, the date on which Notice of Termination is given as contemplated by Section 6(e), and (iii) if the Employee's employment is terminated Without Cause, due to the Employee's Disability or by the Employee for Good Reason, 30 days after the date on which Notice of Termination is given as contemplated by Section 6(d) or, if no such Notice is given, 30 days after the date of termination of employment. (h) CONDITION TO PAYMENTS. The Employer's obligation to make any payments hereunder shall be conditioned upon the Employer's receipt of an appropriately signed "General Release and Covenant Not to Sue" in form and substance satisfactory to the Employer. 7. UNAUTHORIZED DISCLOSURE. During and after the term of his employment hereunder, the Employee shall not, without the written consent of Employer's Board, the General Counsel of the Employer, or the Chief Executive Officer of the Employer, disclose to any person (other than an employee or director of the Employer or its affiliates, or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Employee of his duties as an executive of the Employer) any confidential or proprietary information, knowledge or data that is not theretofore publicly known and in the public domain obtained by him while in the employ of the Employer with respect to the Employer or any of its subsidiaries or affiliates or with respect to any products, improvements, formulas, recipes, designs, processes, customers, methods of sales, distribution, operation or manufacture, sales, prices, profits, costs, contracts, suppliers, business prospects, business methods, techniques, research, plans, strategies, personnel, organization, trade secrets or know-how of the Employer or any of its subsidiaries or affiliates (collectively, "Proprietary Information"), except as may be required by law or in connection with any judicial or administrative proceedings or inquiry. 8. NON-COMPETITION. During the period of the Employee's employment and thereafter for a period equal to the number of months providing the basis for calculating any termination payments to the Employee under Section 6, if any such payments are required, but in any event for at least 12 months, the Employee shall not engage directly or indirectly in, become employed by, serve as an agent or consultant to, or become a partner, principal or stockholder of, any partnership, corporation or other entity which competes with a business (including any product or service offering of such business) that represents 5% or more of the aggregate gross revenues of the Employer and its subsidiaries, or competes with the Employer's Lexmark Solution Services 6 business, and which is then engaged in such competition in any geographical area in which the Employer or any of its subsidiaries is then engaged in such business without first obtaining written approval from the Employer, PROVIDED that the Employee's ownership of less than 1% of the issued and outstanding stock of any corporation whose stock is traded on an established securities market shall not constitute competition with the Employer. The Employer may grant or deny such approval in its sole discretion. 9. NON-INTERFERENCE. During the period of the Employee's employment and thereafter for a period equal to the number of months providing the basis for calculating any termination payments to the Employee under Section 6, if any such payments are required, but in any event for at least 36 months, the Employee will not, directly or indirectly, for his own account or the account of any other person or entity, (a) employ, solicit or endeavor to entice away from the Employer, or otherwise intentionally interfere with the Employer's relationship with, any person or entity who or which is at the time, OR WITHIN 6 MONTHS OF THAT TIME HAS BEEN, employed by or otherwise engaged to perform services for the Employer or (b) intentionally interfere with the Employer's relationship with any person or entity who or which is, or has been within the previous 36 months, a customer, client or supplier of the Employer. 10. RETURN OF DOCUMENTS. In the event of the termination of the Employee's employment for any reason, the Employee will deliver to the Employer all non-personal documents and data of any nature pertaining to his work with the Employer, and he will not take with him any documents or data of any nature or any reproduction thereof, or any documents containing or pertaining to any Proprietary Information. 11. FORFEITURE OF REALIZED AND UNREALIZED GAINS ON INCENTIVE AWARDS FOR BREACH OF THIS AGREEMENT. If the Employee violates any provision of Sections 7, 8, 9 or 10 of this Agreement, and the Employee is no longer employed by the Employer, whether or not the termination of employment occurs prior to or subsequent to such violation, then (1) all stock incentive awards, including but not limited to stock options, restricted stock awards and any deferred stock units, held by the Employee shall terminate effective the date on which Employee violates this Agreement, unless terminated sooner by operation of another term or condition of the Employee's stock incentive award agreement or the plan pursuant to which such award has been issued, and (2) any gain realized by Employee on the vesting of restricted stock or deferred stock units, and option gains (represented by the closing market price on the date of exercise over the exercise price, multiplied by the number of options exercised without regard to any subsequent market price decrease or increase) realized by Employee from exercising all or a portion of the Employee's options, within 18 months prior to termination of employment with Employer and until such time as the violation of Section 7, 8, 9, or 10 is discovered by Employer, shall be paid by the Employee to the Employer. The Employee agrees that the Employer has the right to withhold the amount owed to it from any amounts that Employer may owe the Employee from time to time (including, but not limited to, wages or other compensation, fringe benefits, or vacation pay). 7 12. ASSUMPTION OF AGREEMENT. The Employer will require any successor (by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Employer, by agreement in form and substance reasonably satisfactory to the Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Employer would be required to perform it if no such succession had taken place. Failure of the Employer to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Employee to the greater of (x) compensation from the Employer in the same amount and on the same terms as the Employee would be entitled hereunder if the Employer terminated his employment Without Cause as contemplated by Section 6 and (y) amounts required to be paid to the Employee pursuant to the Change of Control Agreement by and among Lexmark International Group, Inc. ("Group", which was subsequently merged with and into Employer), Employer and Employee dated as of April 30, 1998 (the "CIC Agreement"). For purposes of implementing the foregoing clause (x), the date on which any such succession becomes effective shall be deemed to be the Date of Termination, and for purposes of implementing clause (y), the timing and amount of any payments required pursuant to the CIC Agreement shall be determined in accordance with the CIC Agreement. 13. ENTIRE AGREEMENT. Except as otherwise expressly provided herein, this Agreement, the CIC Agreement and the Indemnification Agreement made and entered into as of the 30th day of April, 1998 by and among Employer, Group and Employee (the "Indemnification Agreement") constitute the entire agreement among the parties hereto with respect to the subject matter hereof, and all promises, representations, understandings, arrangements and prior agreements relating to such subject matter (including those made to or with the Employee by any other person or entity) are merged herein, in the CIC Agreement and in the Indemnification Agreement and superseded hereby and thereby. To the extent that the amount and timing of payments required to be made under this Agreement are inconsistent with or different from the amount and timing of payments required to be made pursuant to the CIC Agreement and/or the Indemnification Agreement, the Employee shall be entitled to the most favorable benefits provided to the Employee under the provisions of any such agreements. 14. INDEMNIFICATION. The Employer agrees that it shall indemnify and hold harmless the Employee to the fullest extent (a) permitted by Delaware law from and against any and all liabilities, costs, claims and expenses arising out of the employment of the Employee hereunder, except to the extent arising out of or based upon the gross negligence or willful misconduct of the Employee and (b) provided by the Indemnification Agreement. 15. NO MITIGATION. The Employee shall not be required to mitigate the amount of any payment that the Employer becomes obligated to make in connection with this 8 Agreement, the CIC Agreement or the Indemnification Agreement, by seeking other employment or otherwise. 16. MISCELLANEOUS. (a) BINDING EFFECT. This Agreement shall be binding on and inure to the benefit of the Employer and its successors and permitted assigns. This Agreement shall also be binding on and inure to the benefit of the Employee and his heirs, executors, administrators and legal representatives. (b) GOVERNING LAW. This Agreement shall be governed by and constructed in accordance with the laws of the State of Delaware without reference to principles of conflict of laws. (c) TAXES. The Employer may withhold from any payments made under the Agreement all federal, state, city or other applicable taxes or social security governmental regulation or ruling. (d) AMENDMENTS. No provisions of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is approved by Employer's Board or General Counsel of the Employer and is agreed to in writing by the Employee and General Counsel of the Employer. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No waiver of any provision of this Agreement shall be implied from any course of dealing between or among the parties hereto or from any failure by any party hereto to assert its rights hereunder on any occasion or series of occasions. (e) REFORMATION; SEVERABILITY. If any provision of this Agreement is held by a court or arbitrator to be unreasonable in scope or duration or otherwise, the court or arbitrator shall, to the extent permitted by law, reform such provision so that it is enforceable, and enforce the applicable provision as so reformed. Reformation of any provision of this Agreement pursuant to this subsection (e) shall not affect any other provision of this Agreement or render this Agreement unenforceable or void. (f) NOTICES. Any notice or other communication required or permitted to be delivered under this Agreement shall be (i) in writing, (ii) delivered personally, by courier service or by certified or registered mail, first-class postage prepaid and return receipt requested, (iii) deemed to have been received on the date of delivery or on the third business day after the mailing thereof, and (iv) addressed as follows (or to such other address as the party entitled to notice shall hereafter designate in accordance with the terms hereof): 9 (A) if to the Employer, to it at: One Lexmark Centre Drive 740 West New Circle Road Lexington, Kentucky 40550 ATTENTION: General Counsel (B) if to the Employee, to him at the address listed on the signature page hereof. (h) SURVIVAL. Sections 7, 8, 9,10 and 11 and, if the Employee's employment terminates in a manner giving rise to a payment under Section 6(f), Section 6(f) shall survive the termination of the employment of the Employee hereunder. (i) COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. (j) HEADINGS. The section and other headings contained in this Agreement are for the convenience of the parties only and are not intended to be a part hereof or to affect the meaning or interpretation hereof. IN WITNESS WHEREOF, the Employer has duly executed this Agreement by its authorized representatives and the Employee has hereunto set his hand, in each case effective as of the date first above written. LEXMARK INTERNATIONAL, INC. By: /s/ Paul J. Curlander ------------------------------------- Paul J. Curlander Chairman and Chief Executive Officer THE EMPLOYEE: /s/ Vincent J. Cole ---------------------------------------- 10 EX-10.31 14 l92467aex10-31.txt EXHIBIT 10.31 Exhibit 10.31 EMPLOYMENT AGREEMENT -------------------- EMPLOYMENT AGREEMENT, dated as of July 1, 2001, between Lexmark International, Inc., a Delaware corporation (the "Employer"), and Timothy P. Craig (the "Employee"). W I T N E S S E T H: ------------------- WHEREAS, Employer and Employee desire to enter into an employment agreement; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, and for other good and valuable consideration, the parties hereto hereby agree as follows: 1. TERM; POSITION AND RESPONSIBILITIES. (a) TERM OF EMPLOYMENT. Unless the Employee's employment shall sooner terminate pursuant to Section 6, the Employer shall employ the Employee for a term commencing on the day hereof and ending on June 30, 2003 (the "Initial Term"); provided, however, that commencing on the date two years after the date hereof, and on each bi-annual anniversary (such date and each bi-annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Initial Term shall be automatically extended so as to terminate two years from such Renewal Date, unless prior to the Renewal Date the Employer or Employee shall give notice to the other that the Initial Term shall not be so extended; and the Employee's employment shall continue thereafter at will. (b) POSITION AND RESPONSIBILITIES. The Employee will serve as Vice President and President - Consumer Printer Division and in such other executive capacity or capacities as may be determined from time to time by or under the authority of the Board of Directors of the Employer ("Employer's Board"), and the Employee will devote all of his skill, knowledge and working time (except for reasonable vacation time and absence for sickness or similar disability) to the conscientious performance of his duties. The Employee represents that he is entering into this Agreement voluntarily and that his employment hereunder and compliance by him with the terms and conditions of this Agreement will not conflict with or result in the breach of any agreement to which he is a party or by which he may be bound. 2. BASE SALARY. As compensation for the services to be performed by the Employee hereunder, the Employer will pay the Employee an annual base salary of $270,000 during the term of his employment hereunder. The Employer will review the Employee's base salary from time to time during the period of his employment hereunder and, in the discretion of the Employer, may increase such base salary from time to time based upon the performance of the Employee, the financial condition of the Employer, prevailing industry salary scales and such other factors as the Employer shall consider relevant. (The annual base salary payable to the Employee under this Section 2, as the same may be increased from time to time, shall hereinafter be referred to as the "Base Salary".) The Base Salary payable under this Section 2 shall be reduced to the extent that the Employee elects to defer such Base Salary under the terms of any deferred compensation or savings plan maintained or established by the Employer, provided that any such reduction of the Base Salary shall not be taken into account for purposes of calculating the Base Amount (as defined in Section 3). The Employer shall pay the Employee the Base Salary in biweekly installments, or in such other installments as may be mutually agreed upon by the Employer and the Employee. 3. SHORT-TERM INCENTIVE COMPENSATION. The Employee shall receive an annual incentive bonus award (the "Annual Bonus") for each calendar year ending during the term of the Employee's employment hereunder equal to: (a) if the Operating Result (as defined below) for such year is equal to or greater than the Maximum Operating Target (as defined below) for such year, 150% of the amount of the Employee's Base Salary paid to the Employee during the calendar year for which such bonus is payable (such amount is hereinafter referred to as the "Base Amount"); (b) if the Operating Result for such year is greater than the Operating Target but less than the Maximum Operating Target for such year, 75% of the Base Amount plus, for each increase of 1/25th of the difference between the Operating Target and the Maximum Operating Target, an additional 3.00% of the Base Amount; (c) if the Operating Result for such year is equal to 100% of the Operating Target for such year, 75% of the Base Amount; (d) if the Operating Result for such year is greater than the Minimum Operating Target (as defined below) but less than the Operating Target for such year, 30% of the Base Amount plus, for each increase of 1/20th of the difference between the Minimum Operating Target and the Operating Target (100%), an additional 2.25% of the Base Amount; and (e) if the Operating Result for such year is equal to the Minimum Operating Target for such year, 30% of the Base Amount. (f) if the Operating Result for such year is greater than the Threshold Operating Target (as defined below) but less than the Minimum Operating Target for such year, 20% of the Base Amount plus, for each increase of 1/10th of the difference between the Threshold Operating Target and the Minimum Operating Target, an additional 1.0% of the Base Amount; and (g) if the Operating Result for such year is equal to the Threshold Operating Target for such year, 20% of the Base Amount. 2 Notwithstanding the foregoing, the Employer may increase or decrease the amount of the Annual Bonus based upon the Employer's judgment of Employee's overall contribution to the Employer's business results. No Annual Bonus shall be paid if the Operating Result is less than the Threshold Operating Target for such year. The "Operating Target", the "Maximum Operating Target", the "Minimum Operating Target" and the "Threshold Operating Target" in any year shall be jointly established by the Chief Executive Officer of the Employer and the Compensation and Pension Committee of Employer's Board (the "Committee"). The "Operating Result" for any year shall be equal to the annual financial results for the components that make up the Operating Target as of December 31 in such year, using United States generally accepted accounting principles consistently applied and taking into account such other factors as may be approved by the Committee. Notwithstanding anything else in this Agreement to the contrary, if the Employer does not meet its Threshold Operating Target, there shall be no annual bonus regardless of business unit, personal or other objectives that constitute individual incentive objectives. Funding for the Annual Bonus shall be based on the Employer's annual financial results. In the event that the funds available to pay the Employer's aggregate Annual Bonuses are less than the amount required to pay such Annual Bonuses, the Annual Bonus shall be reduced in a manner deemed appropriate by the Committee, in its sole discretion. The Annual Bonus, if any, shall be paid as soon as practicable after the close of the year for which the Annual Bonus is payable, unless the Employee elects to defer such amounts under the terms of any deferred compensation or savings plan maintained or established by the Employer. 4. EMPLOYEE BENEFITS. During the term of the Employee's employment hereunder, employee benefits, including, but not limited to, life, medical, dental and disability insurance, will be provided to the Employee in accordance with programs at the Employer then available to executive employees. The Employee shall also be entitled to participate in all of Employer's profit sharing, pension, retirement, deferred compensation and savings plans, as the same may be amended and in effect from time to time, at levels and having interests commensurate with the Employee's then current period of service, compensation and position. 5. PERQUISITES AND EXPENSES. (a) GENERAL. During the term of the Employee's employment hereunder, the Employee shall be entitled to participate in any special benefit or perquisite program available from time to time to executive employees of the Employer on the terms and conditions then prevailing under such program. (b) BUSINESS TRAVEL, LODGING, ETC. The Employer shall reimburse the Employee for reasonable travel, lodging and meal expenses incurred by him in connection with his performance of services hereunder upon submission of evidence, satisfactory to the Employer, of the incurrence and purpose of each such expense. 3 6. TERMINATION OF EMPLOYMENT. (a) TERMINATION DUE TO DEATH OR DISABILITY. In the event that the Employee's employment hereunder terminates due to death or is terminated by the Employer due to the Employee's Disability (as defined below), no termination benefits shall be payable to or in respect of the Employee except as provided in Section 6(f)(ii). For purposes of this Agreement, "Disability" shall mean a physical or mental disability that prevents the performance by the Employee of his duties hereunder lasting (or likely to last, based on competent medical evidence presented to Employer's Board) for a continuous period of six months or longer. The reasoned and good faith judgment of Employer's Board as to the Employee's Disability shall be final and shall be based on such competent medical evidence as shall be presented to it by the Employee or by any physician or group of physicians or other competent medical experts employed by the Employee or the Employer to advise Employer's Board. (b) TERMINATION BY THE EMPLOYER FOR CAUSE. The Employee may be terminated for Cause by the Employer. "Cause" shall mean (i) the willful failure of the Employee substantially to perform his duties hereunder (other than any such failure due to physical or mental illness) after a demand for substantial performance is delivered to the Employee by the executive to which the Employee reports or by Employer's Board, which notice identifies the manner in which such executive or Employer's Board, as the case may be, believes that the Employee has not substantially performed his duties, (ii) the Employee's engaging in willful and serious misconduct that is injurious to Employer or any of its subsidiaries, (iii) the Employee's regularly making a substantial, abusive use of alcohol, drug, or similar substances, and such abuse in the Employer's judgment has affected his ability to conduct the business of the Employer in a proper and prudent manner, (iv) the Employee's conviction of, or entering a plea of nolo contendere to, a crime that constitutes a felony, or (v) the willful and material breach by the Employee of any of his obligations hereunder, or the willful and material breach by the Employee of any written covenant or agreement with the Employer or any of its affiliates not to disclose any information pertaining to the Employer or any of its affiliates or not to compete or interfere with the Employer or any of its affiliates. (c) TERMINATION BY THE EMPLOYER WITHOUT CAUSE. The Employee may be terminated Without Cause by the Employer. A termination "Without Cause" shall mean a termination of employment by the Employer other than due to death or Disability as defined in Section 6(a) or Cause as defined in Section 6(b). (d) TERMINATION BY THE EMPLOYEE. The Employee may terminate his employment for "Good Reason". "Good Reason" shall mean a termination of employment by the Employee within 30 days following (i) any assignment to the Employee of any duties, functions or responsibilities that are significantly different from, and result in a substantial diminution of, the duties, functions or responsibilities that the Employee has on the date hereof or (ii) the failure of the Employer to obtain the assumption of this Agreement by any successor as contemplated by Section 12. 4 (e) NOTICE OF TERMINATION. Any termination by the Employer pursuant to Section 6(a), 6(b) or 6(c), or by the Employee pursuant to Section 6(d), shall be communicated by a written "Notice of Termination" addressed to the other parties to this Agreement. A "Notice of Termination" shall mean a notice stating that the Employee's employment hereunder has been or will be terminated, indicating the specific termination provisions in this Agreement relied upon and setting forth in reasonable detail the facts and circumstances claimed to provide a basis for such termination of employment. (f) PAYMENTS UPON CERTAIN TERMINATIONS. (i) In the event of a termination of the Employee's employment Without Cause or a termination by the Employee of his employment for Good Reason, the Employer shall pay to the Employee (A) (1) the greater of (x) his Base Salary, if any, for the period from the Date of Termination (as defined below) through the last day of the Initial Term and (y) an amount equal to one year's Base Salary; provided that Employer may, at any time, pay to the Employee in a single lump sum an amount equal to the Base Salary remaining to be paid to the Employee as of the date of such lump sum payment, less (2) any amounts paid or to be paid to the Employee under the terms of any severance plan or program of Employer, if any, as in effect on the Date of Termination, (B) the Annual Bonus with respect to a completed fiscal year to the extent not theretofore paid to the Employee and (C) a Pro Rata Share of the Annual Bonus (as defined below) for the fiscal year in which the Date of Termination occurred. In the event of the Employee's termination of employment pursuant to Section 6(c) or 6(d), the Employer shall also provide the Employee with a leave of absence from the date of termination of employment until April 26, 2006 for purposes of determining eligibility (but not the amount of, or time of commencement of, benefits) of the Employee for retiree benefits pursuant to any retiree benefit plan, practice and policy applicable to the Employee at the Date of Termination. Notwithstanding anything to the contrary in any document or statement, including but not limited to this Agreement, the Employer reserves the right to change without notice any benefit plan, practice or policy at its sole discretion. Changes may include reduction or termination of any benefit plan, practice or policy. (ii) If the Employee's employment shall terminate upon his death or Disability or if Employer shall terminate the Employee's employment for Cause, Employer shall pay the Employee his full Base Salary through the Date of Termination, plus, in the case of termination upon the Employee's death or Disability, a Pro Rata Share of the Annual Bonus. Any benefits payable to or in respect of the Employee under any otherwise applicable plans, policies and practices of the Employer shall not be limited by this provision. (iii) For purposes of this Section 6, the "Pro Rata Share of the Annual Bonus" shall be calculated and paid as follows. If the Employee is terminated prior to July 1 of any year, the Pro Rata Share of the Annual Bonus (A) will 5 be equal to the product of (1) the Annual Bonus, calculated assuming that 100% of the Operating Target is achieved in such year, and (2) a fraction equal to the number of full months in such year prior to the Date of Termination over 12, and (B) will be paid to the Employee within 30 days after the Date of Termination. If the Employee is terminated on or after July 1 of any year, the Pro Rata Share of the Annual Bonus (A) will be equal to the product of (1) the Annual Bonus, calculated based on the actual Operating Result for such year, and (2) a fraction equal to the number of full months in such year prior to the Date of Termination over 12, and (B) will be paid to the Employee within 90 days after the close of the year in respect of which the Pro Rata Share of the Annual Bonus is payable. (g) DATE OF TERMINATION. As used in this Agreement, the term "Date of Termination" shall mean (i) if the Employee's employment is terminated by his death, the date of his death, (ii) if the Employee's employment is terminated for Cause, the date on which Notice of Termination is given as contemplated by Section 6(e), and (iii) if the Employee's employment is terminated Without Cause, due to the Employee's Disability or by the Employee for Good Reason, 30 days after the date on which Notice of Termination is given as contemplated by Section 6(d) or, if no such Notice is given, 30 days after the date of termination of employment. (h) CONDITION TO PAYMENTS. The Employer's obligation to make any payments hereunder shall be conditioned upon the Employer's receipt of an appropriately signed "General Release and Covenant Not to Sue" in form and substance satisfactory to the Employer. 7. UNAUTHORIZED DISCLOSURE. During and after the term of his employment hereunder, the Employee shall not, without the written consent of Employer's Board, the General Counsel of the Employer, or the Chief Executive Officer of the Employer, disclose to any person (other than an employee or director of the Employer or its affiliates, or a person to whom disclosure is reasonably necessary or appropriate in connection with the performance by the Employee of his duties as an executive of the Employer) any confidential or proprietary information, knowledge or data that is not theretofore publicly known and in the public domain obtained by him while in the employ of the Employer with respect to the Employer or any of its subsidiaries or affiliates or with respect to any products, improvements, formulas, recipes, designs, processes, customers, methods of sales, distribution, operation or manufacture, sales, prices, profits, costs, contracts, suppliers, business prospects, business methods, techniques, research, plans, strategies, personnel, organization, trade secrets or know-how of the Employer or any of its subsidiaries or affiliates (collectively, "Proprietary Information"), except as may be required by law or in connection with any judicial or administrative proceedings or inquiry. 8. NON-COMPETITION. During the period of the Employee's employment and thereafter for a period equal to the number of months providing the basis for calculating any termination payments to the Employee under Section 6, if any such payments are required, but in any event for at least 12 months, the Employee shall not engage 6 directly or indirectly in, become employed by, serve as an agent or consultant to, or become a partner, principal or stockholder of, any partnership, corporation or other entity which competes with a business (including any product or service offering of such business) that represents 5% or more of the aggregate gross revenues of the Employer and its subsidiaries, or competes with the Employer's Lexmark Solution Services business, and which is then engaged in such competition in any geographical area in which the Employer or any of its subsidiaries is then engaged in such business without first obtaining written approval from the Employer, PROVIDED that the Employee's ownership of less than 1% of the issued and outstanding stock of any corporation whose stock is traded on an established securities market shall not constitute competition with the Employer. The Employer may grant or deny such approval in its sole discretion. 9. NON-INTERFERENCE. During the period of the Employee's employment and thereafter for a period equal to the number of months providing the basis for calculating any termination payments to the Employee under Section 6, if any such payments are required, but in any event for at least 36 months, the Employee will not, directly or indirectly, for his own account or the account of any other person or entity, (a) employ, solicit or endeavor to entice away from the Employer, or otherwise intentionally interfere with the Employer's relationship with, any person or entity who or which is at the time, OR WITHIN 6 MONTHS OF THAT TIME HAS BEEN, employed by or otherwise engaged to perform services for the Employer or (b) intentionally interfere with the Employer's relationship with any person or entity who or which is, or has been within the previous 36 months, a customer, client or supplier of the Employer. 10. RETURN OF DOCUMENTS. In the event of the termination of the Employee's employment for any reason, the Employee will deliver to the Employer all non-personal documents and data of any nature pertaining to his work with the Employer, and he will not take with him any documents or data of any nature or any reproduction thereof, or any documents containing or pertaining to any Proprietary Information. 11. FORFEITURE OF REALIZED AND UNREALIZED GAINS ON INCENTIVE AWARDS FOR BREACH OF THIS AGREEMENT. If the Employee violates any provision of Sections 7, 8, 9 or 10 of this Agreement, and the Employee is no longer employed by the Employer, whether or not the termination of employment occurs prior to or subsequent to such violation, then (1) all stock incentive awards, including but not limited to stock options, restricted stock awards and any deferred stock units, held by the Employee shall terminate effective the date on which Employee violates this Agreement, unless terminated sooner by operation of another term or condition of the Employee's stock incentive award agreement or the plan pursuant to which such award has been issued, and (2) any gain realized by Employee on the vesting of restricted stock or deferred stock units, and option gains (represented by the closing market price on the date of exercise over the exercise price, multiplied by the number of options exercised without regard to any subsequent market price decrease or increase) realized by Employee from exercising all or a portion of the Employee's options, within 18 months prior to termination of employment with Employer and until such time as the violation of Section 7, 8, 9, or 10 is discovered by Employer, shall be paid by the Employee to the Employer. The Employee agrees that the Employer has the right to withhold the 7 amount owed to it from any amounts that Employer may owe the Employee from time to time (including, but not limited to, wages or other compensation, fringe benefits, or vacation pay). 12. ASSUMPTION OF AGREEMENT. The Employer will require any successor (by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Employer, by agreement in form and substance reasonably satisfactory to the Employee, to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Employer would be required to perform it if no such succession had taken place. Failure of the Employer to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Employee to the greater of (x) compensation from the Employer in the same amount and on the same terms as the Employee would be entitled hereunder if the Employer terminated his employment Without Cause as contemplated by Section 6 and (y) amounts required to be paid to the Employee pursuant to the Change of Control Agreement by and among Lexmark International Group, Inc. ("Group", which was subsequently merged with and into Employer), Employer and Employee dated as of April 30, 1998 (the "CIC Agreement"). For purposes of implementing the foregoing clause (x), the date on which any such succession becomes effective shall be deemed to be the Date of Termination, and for purposes of implementing clause (y), the timing and amount of any payments required pursuant to the CIC Agreement shall be determined in accordance with the CIC Agreement. 13. ENTIRE AGREEMENT. Except as otherwise expressly provided herein, this Agreement, the CIC Agreement and the Indemnification Agreement made and entered into as of the 30th day of April, 1998 by and among Employer, Group and Employee (the "Indemnification Agreement") constitute the entire agreement among the parties hereto with respect to the subject matter hereof, and all promises, representations, understandings, arrangements and prior agreements relating to such subject matter (including those made to or with the Employee by any other person or entity) are merged herein, in the CIC Agreement and in the Indemnification Agreement and superseded hereby and thereby. To the extent that the amount and timing of payments required to be made under this Agreement are inconsistent with or different from the amount and timing of payments required to be made pursuant to the CIC Agreement and/or the Indemnification Agreement, the Employee shall be entitled to the most favorable benefits provided to the Employee under the provisions of any such agreements. 14. INDEMNIFICATION. The Employer agrees that it shall indemnify and hold harmless the Employee to the fullest extent (a) permitted by Delaware law from and against any and all liabilities, costs, claims and expenses arising out of the employment of the Employee hereunder, except to the extent arising out of or based upon the gross negligence or willful misconduct of the Employee and (b) provided by the Indemnification Agreement. 15. NO MITIGATION. The Employee shall not be required to mitigate the amount of any payment that the Employer becomes obligated to make in connection with this 8 Agreement, the CIC Agreement or the Indemnification Agreement, by seeking other employment or otherwise. 16. MISCELLANEOUS. (a) BINDING EFFECT. This Agreement shall be binding on and inure to the benefit of the Employer and its successors and permitted assigns. This Agreement shall also be binding on and inure to the benefit of the Employee and his heirs, executors, administrators and legal representatives. (b) GOVERNING LAW. This Agreement shall be governed by and constructed in accordance with the laws of the State of Delaware without reference to principles of conflict of laws. (c) TAXES. The Employer may withhold from any payments made under the Agreement all federal, state, city or other applicable taxes or social security governmental regulation or ruling. (d) AMENDMENTS. No provisions of this Agreement may be modified, waived or discharged unless such modification, waiver or discharge is approved by Employer's Board or General Counsel of the Employer and is agreed to in writing by the Employee and General Counsel of the Employer. No waiver by any party hereto at any time of any breach by any other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No waiver of any provision of this Agreement shall be implied from any course of dealing between or among the parties hereto or from any failure by any party hereto to assert its rights hereunder on any occasion or series of occasions. (e) REFORMATION; SEVERABILITY. If any provision of this Agreement is held by a court or arbitrator to be unreasonable in scope or duration or otherwise, the court or arbitrator shall, to the extent permitted by law, reform such provision so that it is enforceable, and enforce the applicable provision as so reformed. Reformation of any provision of this Agreement pursuant to this subsection (e) shall not affect any other provision of this Agreement or render this Agreement unenforceable or void. (f) NOTICES. Any notice or other communication required or permitted to be delivered under this Agreement shall be (i) in writing, (ii) delivered personally, by courier service or by certified or registered mail, first-class postage prepaid and return receipt requested, (iii) deemed to have been received on the date of delivery or on the third business day after the mailing thereof, and (iv) addressed as follows (or to such other address as the party entitled to notice shall hereafter designate in accordance with the terms hereof): (A) if to the Employer, to it at: One Lexmark Centre Drive 740 West New Circle Road 9 Lexington, Kentucky 40550 ATTENTION: General Counsel (B) if to the Employee, to him at the address listed on the signature page hereof. (h) SURVIVAL. Sections 7, 8, 9,10 and 11 and, if the Employee's employment terminates in a manner giving rise to a payment under Section 6(f), Section 6(f) shall survive the termination of the employment of the Employee hereunder. (i) COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same instrument. (j) HEADINGS. The section and other headings contained in this Agreement are for the convenience of the parties only and are not intended to be a part hereof or to affect the meaning or interpretation hereof. IN WITNESS WHEREOF, the Employer has duly executed this Agreement by its authorized representatives and the Employee has hereunto set his hand, in each case effective as of the date first above written. LEXMARK INTERNATIONAL, INC. By: /s/ Paul J. Curlander ------------------------------------ Paul J. Curlander Chairman and Chief Executive Officer THE EMPLOYEE: /s/ Timothy P. Craig --------------------------------------- 10 EX-12 15 l92467aex12.txt EXHIBIT 12 Exhibit 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN MILLIONS, EXCEPT RATIOS)
YEARS ENDED DECEMBER 31 ----------------------------------------------------------- 2001 2000 1999 1998 1997 ------- ------- ------- ------- ------- EARNINGS: Net earnings $ 273.6 $ 285.4 $ 318.5 $ 243.0 $ 149.0 Extraordinary loss -- -- -- -- 14.0 Provision for income taxes 44.2 111.0 140.4 122.4 91.7 Amortization of capitalized interest 0.6 0.5 0.3 0.2 0.2 Fixed charges excluding interest capitalized 26.3 24.2 21.3 19.3 18.7 ------- ------- ------- ------- ------- Total $ 344.7 $ 421.1 $ 480.5 $ 384.9 $ 273.6 ======= ======= ======= ======= ======= FIXED CHARGES: Interest expense (gross of interest income) $ 16.5 $ 15.0 $ 13.0 $ 12.6 $ 13.0 Amortization of deferred financing expense 0.3 0.3 0.3 0.5 0.6 Interest capitalized 0.3 0.8 1.0 0.6 0.5 Interest component of rental expense 9.5 8.9 8.0 6.2 5.1 ------- ------- ------- ------- ------- Total $ 26.6 $ 25.0 $ 22.3 $ 19.9 $ 19.2 ======= ======= ======= ======= ======= RATIO OF EARNINGS TO FIXED CHARGES 13.0(a) 16.8(b) 21.5 19.3 14.3 ======= ======= ======= ======= =======
(a) Excluding a $87.7 million ($64.5 million, net of tax) restructuring and related inventory charge in 2001, the company's ratio of earnings to fixed charges would have been 16.2 times. (b) Excluding a $41.3 million ($29.7 million, net of tax) restructuring charge in 2000, the company's ratio of earnings to fixed charges would have been 18.5 times. In the computation of the company's ratio of earnings to fixed charges, earnings consist of earnings before income taxes, plus fixed charges, less capitalized interest, plus amortization of capitalized interest. Fixed charges consist of interest expense excluding the benefit of capitalized interest and including a reasonable approximation of the interest component included in rental expense. EX-21 16 l92467aex21.txt EXHIBIT 21 Exhibit 21 Subsidiaries of Lexmark International, Inc.
SUBSIDIARIES STATE OR COUNTRY OF INCORPORATION - ------------ ---------------------------------- Lexmark Asia Pacific Corporation, Inc. Delaware Lexmark Receivables Corporation Delaware Lexington Tooling Company Delaware Lexmark Mexico Holding Company, Inc. Delaware Lexmark International De Argentina, Inc. Delaware Lexmark International De Mexico, Inc. Delaware Lexmark International Trading Corporation Delaware Lexmark Europe Trading Corporation, Inc. Delaware Lexmark Europe Holding Company, I, L.L.C. Delaware Lexmark Europe Holding Company, II, L.L.C. Delaware Lexmark Espana, L.L.C. Delaware Lexmark Nordic, L.L.C. Delaware Lexmark Canada, Inc. Canada Lexmark International, K.K. Japan Lexmark Handelsgesellschaft m.b.H. Austria Lexmark International, S.A. Belgium Lexmark Europe S.A.R.L. France Lexmark International (Australia) PTY Limited Australia Lexmark International S.r.l. Italy Lexmark International Finance B.V. Netherlands Lexmark International (Portugal) Servicos de Assistencia e Marketing, Unipessoal, Limitada Portugal Lexmark (Schweiz) AG Switzerland Lexmark International Limited UK Lexmark International (Ireland) Limited Ireland Lexmark International Technology, S.A. Switzerland Lexmark Deutschland GmbH Germany Lexmark Solution Services (Australia) PTY Limited Australia Solution Services Europe GmbH Germany Lexmark International (Scotland) Limited Scotland Lexmark International (Czech) s.r.o. Czech Lexmark International (Philippines), Inc. Philippines Lexmark International Financial Services Company Limited Ireland Lexmark S.A.R.L. (Gerant) (France) France Lexmark International (Singapore) PTE Limited Singapore Lexmark International (China) Limited China Lexmark International (Korea), Inc. Korea Lexmark Internacional, S.A. De C.V. Mexico Lexmark Electronics (Mexico), S.A. de C.V. Mexico Lexmark International de Uruguay S.A. Uruguay Lexmark International Hungaria Kft Hungary Lexmark International Service & Support Center Limited Ireland Lexmark International (India) Private Limited India Lexmark Printer (Shenzhen) Company Limited China
SUBSIDIARIES STATE OR COUNTRY OF INCORPORATION - ------------ ---------------------------------- Lexmark International South Africa (Pty) Limited South Africa Tech-nique Corporate Services (Pty) Limited South Africa Dealerguard Holding 25 (Pty) Limited South Africa Lexmark International Logistics, BV Netherlands Lexmark Internacional Servicios, S. de R.L. de C. V. Mexico Lexmark Research & Development Corp. Philippines Lexmark International S.N.C. France Lexmark International SCI France Lexmark Espana L.L.C. & Cia S.R.C. Spain Lexmark International Do Brasil Limitada Brazil Lexmark International B.V. Netherlands Lexmark Foreign Sales Corporation Barbados Lexmark de Peru, SRL Peru Lexmark International de Chile Limitada Chile Altmark, s.r.o. Czech Republic International Trade and Computing (ITAC) B.V. Netherlands
EX-23 17 l92467aex23.txt EXHIBIT 23 Exhibit 23 ---------- CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Forms S-3 and S-8 (File Nos. 333-56144, 33-99330, 33-80879, 333-87851, 333-88303 and 333-53228) of Lexmark International, Inc. of our reports dated February 12, 2002 relating to the financial statements and the financial statement schedule, which appear in this Form 10-K. We also hereby consent to the incorporation by reference in the Registration Statement on Forms S-3 and S-8 (File Nos. 333-56144, 33-99330, 33-80879, 333-87851, 333-88303 and 333-53228) of Lexmark International, Inc. of our reports dated March 14, 2002 relating to the financial statements of the Lexmark International Group, Inc. 1999 Employee Stock Purchase Plan, which appears in the 11-K filed as an exhibit to this Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Lexington, Kentucky March 18, 2002 EX-24 18 l92467aex24.txt EXHIBIT 24 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned, a director or an officer, or both, of Lexmark International, Inc., a Delaware corporation ("Lexmark"), does hereby make, constitute and appoint Paul J. Curlander, Gary E. Morin and Vincent J. Cole, the address of each of which is in care of Lexmark, One Lexmark Centre Drive, Lexington, Kentucky 40550, and each of them, the true and lawful attorney for the undersigned, with full power of substitution and revocation to each for the undersigned, and in the name, place and stead of the undersigned, to sign in any and all capacities and to file or cause to be filed, an annual report on Form 10-K with the Securities and Exchange Commission, pursuant to the Securities Exchange Act of 1934, as amended, and any and all amendments to such Form 10-K, hereby giving to each of such attorneys full power to do everything whatsoever required or necessary to be accomplished in and about the premises as fully as the undersigned could do if personally present, hereby ratifying and confirming all that such attorneys or substitutes or any of them shall lawfully do or cause to be done by virtue thereof. IN WITNESS WHEREOF, the undersigned has set his hand this 19th day of February, 2002. /s/ B. C. Ames /s/ Teresa Beck - ------------------------------- ----------------------------------- B. Charles Ames Teresa Beck /s/ Frank T. Cary /s/ William R. Fields - ------------------------------- ----------------------------------- Frank T. Cary William R. Fields /s/ Ralph E. Gomory /s/ Stephen R. Hardis - ------------------------------- ----------------------------------- Ralph E. Gomory Stephen R. Hardis /s/ James F. Hardymon /s/ Robert Holland, Jr. - ------------------------------- ----------------------------------- James F. Hardymon Robert Holland, Jr. /s/ M. L. Mann /s/ Michael J. Maples - ------------------------------- ----------------------------------- Marvin L. Mann Michael J. Maples /s/ Martin D. Walker - ------------------------------- Martin D. Walker EX-99 19 l92467aex99.txt EXHIBIT 99 Exhibit 99 LEXMARK INTERNATIONAL GROUP, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN REPORT ON AUDIT OF FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2001 AND 2000 LEXMARK INTERNATIONAL GROUP, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN DECEMBER 31, 2001 PAGES Report of Independent Accountants 1 Financial Statements: Statements of Assets Available for Plan Benefits, as of December 31, 2001 and 2000 2 Statements of Changes in Assets Available for Plan Benefits for the years ended December 31, 2001 and 2000 3 Notes to Financial Statements 4 - 7 REPORT OF INDEPENDENT ACCOUNTANTS To the Participants and Administrator of the Lexmark International Group, Inc. 1999 Employee Stock Purchase Plan In our opinion, the accompanying statements of assets available for plan benefits and the related statements of changes in assets available for plan benefits present fairly, in all material respects, the assets available for benefits of the Lexmark International Group, Inc. 1999 Employee Stock Purchase Plan (the Plan) at December 31, 2001 and 2000 and the changes in assets available for benefits for the years ended December 31, 2001 and 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Plan's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Lexington, Kentucky March 14, 2002 1 LEXMARK INTERNATIONAL GROUP, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN STATEMENTS OF ASSETS AVAILABLE FOR PLAN BENEFITS December 31, 2001 and 2000 - -------------------------------------------------------------------------------
ASSETS 2001 2000 ------ ---- ---- Lexmark Class A Common Stock, at fair value (cost of $21,167,096 $ 7,444,447 $20,476,328 and $10,974,511 at December 31, 2001 and 2000, respectively) Employer contribution receivable 101,437 117,284 Employee contribution receivable 574,810 664,610 ----------- ----------- ASSETS AVAILABLE FOR PLAN BENEFITS $21,843,343 $ 8,226,341 =========== ===========
2 LEXMARK INTERNATIONAL GROUP, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN STATEMENTS OF CHANGES IN ASSETS AVAILABLE FOR PLAN BENEFITS for the years ended December 31, 2001 and 2000 - -------------------------------------------------------------------------------
2001 2000 ---- ---- Contributions: Employer $ 1,528,896 $ 1,756,103 Participants 8,707,566 10,000,303 ------------ ------------ Total Contributions 10,236,462 11,756,406 ------------ ------------ Withdrawals of Lexmark Class A Common Stock by Participants, at fair value (603,346) -- Investment gain (loss): Net appreciation (depreciation) in fair value of Lexmark Class A Common Stock 3,983,886 (3,530,065) ------------ ------------ Total Withdrawals and Net Appreciation (Depreciation) 3,380,540 (3,530,065) ------------ ------------ Net Increase $ 13,617,002 $ 8,226,341 ASSETS AVAILABLE FOR PLAN BENEFITS Beginning of year 8,226,341 -- ------------ ------------ End of year $ 21,843,343 $ 8,226,341 ============ ============
3 LEXMARK INTERNATIONAL GROUP, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN NOTES TO FINANCIAL STATEMENTS - ------------------------------------------------------------------------------- 1. PLAN DESCRIPTION: The following is a brief description of the Lexmark International Group, Inc. 1999 Employee Stock Purchase Plan (the "Plan") and is provided for general information only. For additional information regarding the Plan's provisions, participants should refer to the Plan prospectus. a. GENERAL: The Plan is designed to provide eligible employees of Lexmark International, Inc. (the "Company") an opportunity to purchase Lexmark Class A Common Stock ("Lexmark Stock") at a discounted price through payroll deductions. Eligible employees may participate in the Plan during two offering periods each calendar year, January 1 through June 30 and July 1 through December 31 (the "Offering Periods"). The Plan is not subject to the provisions of the Employee Retirement Income Security Act of 1974, as amended (ERISA). The Plan was approved by the Company's stockholders on April 29, 1999 and commenced on January 1, 2000. A total of 3,000,000 shares of Lexmark Stock may be acquired by participants under the terms of the Plan. b. ADMINISTRATION: A committee comprised of the Chief Financial Officer, Vice President of Human Resources and Vice President, General Counsel and Secretary of the Company has been designated as the Plan Administrator by the Compensation and Pension Committee of the Company's Board of the Directors. The recordkeeping and administration of the Plan is provided by EquiServe Trust Company, N.A. ("EquiServe") and Plan Gestion. EquiServe and Plan Gestion maintain custody of the Plan's assets and use information regarding participants' payroll deductions to credit an account in each participant's name with the number of full and fractional shares of Lexmark Stock purchased by that participant's contributions to the Plan. Shares acquired by participants under the Plan may be shares issued by the Company from its authorized but unissued stock, treasury stock or shares purchased on the open market. c. ELIGIBILITY: Eligible employees are those individuals who have been employed as regular employees for three consecutive full months prior to the first day of an Offering Period by the Company or one of its designated subsidiaries whose employees have been approved by the Plan Administrator for participation in the Plan. The Plan Administrator also has the authority to prescribe additional rules affecting eligibility of employees to participate in the Plan. There were approximately 2,200 and 2,500 participants in the Plan at December 31, 2001 and 2000, respectively. 4 LEXMARK INTERNATIONAL GROUP, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN NOTES TO FINANCIAL STATEMENTS, CONTINUED - ------------------------------------------------------------------------------- 1. PLAN DESCRIPTION, CONTINUED: d. CONTRIBUTIONS: Eligible employees may elect to contribute from 1% to 10% of their compensation to the Plan via payroll deductions. Participants may elect to increase or decrease their payroll deductions to any whole percentage between 1% and 10%, or to suspend their contributions, up to two times during an Offering Period subject to a maximum of two changes per calendar year. e. PURCHASES: Participants' contributions are used to purchase Lexmark Stock on or about the last business day of each month. For most participants in the Plan, the price for a whole or fractional share of Lexmark Stock is 85% of its closing price on the last business day of the respective month. However, the purchase price may vary somewhat for certain participants in the Plan who are employed outside of the United States, depending on the administration of the Plan in their respective countries. Shares of Lexmark Stock acquired under the Plan must be held for a period of twelve months from the date of purchase except under certain limited circumstances. The value of shares purchased by an eligible employee in any calendar year cannot exceed $25,000 in fair value (based on the closing market price on the first day of each Offering Period). f. EXPENSES: The Company pays all administrative expenses related to the purchase, custody, and recordkeeping of Lexmark Stock held as part of the Plan. These expenses may include broker's commissions, transfer fees, administrative costs and other similar expenses. Expenses related to the disposition or transfer of shares from participants' accounts are borne by the participants. g. WITHDRAWALS AND TERMINATION OF EMPLOYMENT: The Plan provides that an employee may withdraw from the Plan at any time by giving written notice or such other form of notice as required by the Plan Administrator. Separation of employment for any reason, including death, disability, termination or retirement is considered a withdrawal from the Plan. Upon withdrawal from the Plan, the shares of Lexmark Stock held on the participant's behalf by the agent will remain in the participant's account with the agent until the participant requests that the shares be sold or transferred. Lexmark Stock purchased under the Plan may not be sold for a period of 12 months from the date of purchase or transferred for a period of two years from the first day of an Offering Period, except in the event of death, disability, retirement or a change in control of the Company as defined in the Plan document. Rights to participate in or to purchase Lexmark Stock under the Plan are non-transferable. 5 LEXMARK INTERNATIONAL GROUP, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN NOTES TO FINANCIAL STATEMENTS, CONTINUED - ------------------------------------------------------------------------------- 1. PLAN DESCRIPTION, CONTINUED: h. PLAN TERMINATION: The Plan will terminate at the earliest of the following: o December 31, 2009; o The date the Board of Directors of the Company acts to terminate the Plan in accordance with the Plan provisions; or, o The date when all of the shares available under the Plan have been purchased (as of December 31, 2001, 370,305 shares of the 3,000,000 shares authorized have been purchased under the Plan) Upon termination of the Plan, all unapplied cash credits not already used to purchase Lexmark Stock remaining in participants' accounts will be refunded in cash to the participants. The Company's Board of Directors may suspend, discontinue, extend, revise or amend the Plan as deemed necessary or appropriate. i. INCOME TAX STATUS: The Plan is not qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and the restrictions and special tax treatment provided therein are not available to participants. The Plan is intended to qualify as an Employee Stock Purchase Plan under Section 423 of the Code. The Plan does not provide for income taxes, as all taxable income is taxable to the participants. Participants are not taxed on the 15% stock price discount at the time of purchase. Upon the sale of Lexmark Stock purchased under the Plan, participants are subject to tax. The amount of tax depends on how long the shares are held. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: a. BASIS OF ACCOUNTING: The accompanying financial statements of the Plan have been prepared on the accrual basis of accounting. Withdrawals of common stock are recorded at fair value on the date of withdrawal. b. EMPLOYEE ACCOUNTS: EquiServe and Plan Gestion maintain a separate account for each participant. The administrative agent allocates to each participant account the number of full and fractional shares of Lexmark Stock purchased with contributions and other proceeds credited to such account. 6 LEXMARK INTERNATIONAL GROUP, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN NOTES TO FINANCIAL STATEMENTS, CONTINUED - ------------------------------------------------------------------------------- 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: c. LEXMARK STOCK VALUATION: Lexmark Stock is stated at fair value as quoted by the New York Stock Exchange. Unless otherwise requested by the participant, participant shares are sold or withdrawn on a First-In-First-Out (FIFO) basis. d. NET APPRECIATION (DEPRECIATION): The Plan presents in the statements of changes in assets available for Plan benefits the net appreciation (depreciation) in the fair value of Lexmark Stock, which consists of realized gains (losses) and the unrealized appreciation (depreciation) on those investments. e. USE OF ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the changes in assets available for Plan benefits during the reporting period. Actual results could differ from those estimates. 3. CONCENTRATION OF CREDIT RISK: The Plan's assets available for Plan benefits consist entirely of Lexmark Stock. Accordingly, the underlying value of the Plan assets is entirely dependent upon the performance of the Company and the market's evaluation of such performance. Changes in the fair value of Lexmark Stock could materially affect a participant's account balance and the amounts reported in the Statements of Changes in Assets Available for Plan Benefits. 4. INVESTMENTS IN LEXMARK STOCK: During the year ended December 31, 2001 and 2000 respectively, participants purchased 202,297 and 168,008 shares of Lexmark Stock (rounded to nearest share). During the year ended December 31, 2001, participants withdrew 11,541 shares of Lexmark Stock. There were no withdrawals of Lexmark Stock by participants for the year ended December 31, 2000. Net unrealized gains and net realized gains (losses) on Lexmark Stock are $4,220,832 and $(236,946), respectively, for the year ended December 31, 2001. Therefore, the net appreciation in Lexmark Stock is $3,983,886 for the year ended December 31, 2001. Net unrealized losses and net realized gains (losses) on Lexmark Stock are $3,530,065 and $0, respectively, for the year ended December 31, 2000. Therefore, the net depreciation in Lexmark Stock is $3,530,065 for the year ended December 31, 2000. 7 SIGNATURES The Plan. Pursuant to the requirements of the Securities Exchange Act of 1934, the Plan Administrator of the Plan has duly caused this annual report to be signed on its behalf by the undersigned hereunto duly authorized. LEXMARK INTERNATIONAL GROUP, INC. 1999 EMPLOYEE STOCK PURCHASE PLAN Date: March 18, 2002 By: /S/ GARY E. MORIN -------------------------------- Gary E. Morin Executive Vice President and Chief Financial Officer Lexmark International, Inc. -----END PRIVACY-ENHANCED MESSAGE-----