-----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, QYSH++Y0zfMqtA6rbPnHRAWWgNRNPNOR5075IaEByNcPMhUg5whRek6J6lkML22i dexDQaFs5LFGM4VlV8zTKA== 0001001288-97-000006.txt : 19970327 0001001288-97-000006.hdr.sgml : 19970327 ACCESSION NUMBER: 0001001288-97-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970326 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEXMARK INTERNATIONAL GROUP INC CENTRAL INDEX KEY: 0001001288 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER & OFFICE EQUIPMENT [3570] IRS NUMBER: 223074422 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: 97563325 BUSINESS ADDRESS: STREET 1: ONE LEXMARK CENTRE DRIVE CITY: LEXINGTON STATE: KY ZIP: 40511 BUSINESS PHONE: 6062322700 MAIL ADDRESS: STREET 1: 740 NEW CIRCLE ROAD N W CITY: LEXINGTON STATE: KY ZIP: 45011-1876 FORMER COMPANY: FORMER CONFORMED NAME: LEXMARK HOLDING INC \DE\ DATE OF NAME CHANGE: 19950922 10-K 1 1996 10-K FOR LEXMARK INTERNATIONAL, INC. - -------------------------------------------------------------------------------- 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, 1996 OR Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No.1-14050 LEXMARK INTERNATIONAL GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 22-3074422 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) One Lexmark Centre Drive 740 New Circle Road NW Lexington, Kentucky 40550 (Address of principal executive offices) (Zip Code) (606) 232-2000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- --------------------- Class A common stock, $.01 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X As of March 14, 1997, there were outstanding 70,853,802 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 outstanding 2,313,423 shares 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 14, 1997) was approximately $1,499,447,209. Documents Incorporated by Reference Pages 25 through 54 of the Company's 1996 Annual Report to Stockholders have been incorporated by reference in response to certain requirements of Part II of this filing. Pages 1 through 3 and pages 6 through 12 of the Proxy Statement for the Annual Meeting of Stockholders of the Company to be held May 2, 1997, have been incorporated by reference in response to certain requirements of Part III of this filing. - -------------------------------------------------------------------------------- LEXMARK INTERNATIONAL GROUP, INC. FORM 10-K For the Year Ended December 31, 1996 Page of Form 10-K --------- PART I ITEM 1. BUSINESS............................................................3 ITEM 2. PROPERTIES.........................................................17 ITEM 3. LEGAL PROCEEDINGS..................................................17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................18 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..............................................19 ITEM 6. SELECTED FINANCIAL DATA............................................19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................21 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.........................................21 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................22 ITEM 11. EXECUTIVE COMPENSATION.............................................24 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.....24 ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................24 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K....25 Part I Item 1. Business Lexmark International Group, Inc. ("LIG") is a Delaware corporation that has as its only significant asset all the outstanding common stock of Lexmark International, Inc., a Delaware corporation ("Lexmark International"). Hereinafter, "the Company" and "Lexmark" will refer to LIG, or to LIG and Lexmark International, including its subsidiaries, as the context requires. LIG was formed in 1990 by Clayton, Dubilier & Rice, Inc., a private investment firm ("CD&R"), in connection with the acquisition (the "Acquisition") of IBM Information Products Corporation (renamed Lexmark International) from IBM. The Acquisition was completed in March 1991. General Lexmark is a global developer, manufacturer and supplier of laser and inkjet printers and associated consumable supplies for the office and home markets. Lexmark also sells dot matrix printers for printing single and multi-part forms by business users. The Company's core printer business targets the office and home markets through its Business Printer and Consumer Printer Divisions. In 1996, revenues from the sale of printers and associated printer supplies increased 24 percent from 1995 and accounted for 77 percent of total Company revenues of approximately $2.4 billion. The Company's installed base of printers supports a large and profitable printer supplies business. Because consumable supplies must be replaced on average one to three times a year, depending on type of printer and usage, demand for laser and inkjet print cartridges is increasing at a higher rate than printer shipments. This is a relatively high margin, recurring business that management expects to contribute to the stability of Lexmark's earnings over time. In addition to its core printer business, Lexmark develops, manufactures and markets a broad line of other office imaging products, through its Imaging Solutions Division, which include supplies for IBM branded printers, after-market supplies for original equipment manufacturer ("OEM") products, and typewriters and typewriter supplies that are sold under the IBM trademark. In 1996, revenues from the sale of other office imaging products increased 2 percent from 1995 and accounted for 22 percent of total Company revenues. The Company operates in the office products industry segment. Revenues by major product line are found on page 45 of the Company's 1996 Annual Report to Stockholders. Approximately half of the Company's 1996 revenues have been derived from sales outside the United States. Revenues derived from international sales, including exports from the United States, have grown from 45 percent of total revenues in 1994 to 54 percent of total revenues in 1996. Lexmark's products are sold in nearly 150 countries in North and South America, Europe, the Middle East, Africa, Asia, the Pacific Rim and the Caribbean. While currency translation has significantly affected international revenues and cost of revenues, it did not have a material impact on operating income through 1996. Although the Company manages its net exposure to exchange rate fluctuations through operational hedges, such as pricing actions and product sourcing changes, and financial instruments, such as forward exchange contracts and currency options, there can be no assurances that currency fluctuations will not have a material impact on operating income in the future. As the Company's international operations continue to grow, more management effort will be required to focus on the operation and expansion of the Company's global business and to manage the cultural, language and legal differences inherent in international operations. A summary of the Company's revenues, operating income and total assets by geographic area is found on page 41 of the Company's 1996 Annual Report to Stockholders. 3 Printers and Associated Supplies Lexmark competes primarily in the markets for office desktop laser and color inkjet printers--two of the fastest growing printer categories. Sales of office desktop laser and color inkjet printers and their associated supplies together represented approximately 86 percent and 82 percent of Lexmark's total printer and associated supplies revenues in 1996 and 1995, respectively. Laser Printers. Network laser printer growth is being driven by the office migration from large mainframe computers to local area networks that link various types of computers using a variety of protocols and operating systems. This shift has created strong demand for office desktop laser printers with network connectivity attributes. Laser printers that print at speeds of 7-30 pages per minute ("ppm") are referred to herein as "office desktop" or "network" printers, while lower-speed (1-6 ppm) laser printers and inkjet printers are referred to herein as "personal" printers. The Company's laser printers primarily compete in the office desktop segment, which the Company believes is one of the fastest growing segments of the laser printer market. For further discussion of the evolving nature of laser printer classifications, see "Market Overview and Strategy-Printers and Associated Supplies". Lexmark develops and owns most of the technology for its laser printers and consumable supplies, which differentiates the Company from a number of its major competitors, including Hewlett-Packard Company ("HP"), which purchases its laser engines from a third party. Lexmark's integration of research and development, manufacturing and marketing has enabled the Company to design laser printers with features desired by specific customer groups and has resulted in substantial market presence for Lexmark within certain industry segments such as banking, retail/pharmacy and health care. The Company's critical technology and manufacturing capabilities have allowed Lexmark to effectively manage quality and to reduce its typical new product introduction cycle times, for example, in the case of laser printers from 24 months to approximately 12 to 16 months. Management believes its cycle times are among the fastest in the industry and that these capabilities have contributed to the Company's success over the last several years. Inkjet Printers. The color inkjet printer market, the fastest growing segment of the personal printer market, is expanding rapidly due to growth in personal computers and home offices, and the development of easy-to-use color inkjet technology with good quality color print capability at low prices. Based on data from industry analysts, management believes that the inkjet market grew from 4 million units in 1992 to 27 million units in 1996 and will continue to grow substantially as a result of the increase in the number of personal computers and as the inkjet market continues to shift from monochrome to color and as inkjet printers continue to replace low-speed laser printers. Lexmark introduced its first color inkjet printer using its own technology in 1994 and has experienced strong sales growth through retail outlets. The Company has increased its product distribution through retail outlets, with the number of such outlets worldwide rising from approximately 5,000 retail outlets in 1995 to approximately 15,000 in 1996. The Company has made substantial capital investments in its inkjet production capacity in 1995 and 1996 to address the growing demand for its color inkjet printers. Supplies. The Company is currently the exclusive source for new print cartridges for the laser and inkjet printers it manufactures. Management expects that an increasing percentage of future Company earnings will come from its consumable supplies business, due to the consumer's continual usage and replacement of cartridges. In 1996, the Company has substantially expanded its inkjet cartridge manufacturing capacity in both North America and Europe. 4 Other Office Imaging Products The Company's other office imaging products category includes many mature products such as supplies for IBM printers, typewriters and typewriter supplies and other impact supplies that require little investment but provide a significant source of cash flow. The Company introduced its first after-market laser cartridges for the large installed base of laser printers sold by other manufacturers in May 1995. Management believes that the potential for an after-market laser cartridge business is significant. The Company's strategy for other office imaging products is to focus on the after-market OEM laser supplies opportunity while managing its mature businesses for cash flow. Keyboards and Other In the first quarter of 1996, the Company completed the phase-out of its keyboard business. Keyboard sales accounted for 8 percent and 3 percent, respectively, of the Company's revenue and gross profit for 1995. Market Overview and Strategy Printers and Associated Supplies Market Overview In 1996, estimated industry-wide revenue for printer hardware in the 1-30 ppm speed category, including network, personal and dot matrix, was approximately $24 billion. Management believes, based on industry analysts' estimates, that this market will in the aggregate continue to experience modest growth through 1999. However, the Company believes that certain product categories within this market that it has targeted, such as office desktop laser printers and color inkjet printers, will experience double-digit growth in volume. An overview of the printer markets in which the Company competes is summarized below:
U.S. Primary Paper Speed Price Range Print Quality Market Media ----- ----------- ------------- -------- ----- Color Laser 2-5 ppm $5,000-10,000 Better/Best (300-600 dpi) Office Plain Mono Laser: $ 400- 5,000 Best (1200 x 1200 dpi) Office Plain Personal 1-6 ppm Office Desktop/ Network 7-30 ppm Inkjet: Mono 2-7 ppm $ 100- 400 Better (600 x 600 dpi) Home Plain/Coated Color 0.3-2 ppm $ 150- 3,000 Better (600 x 600 dpi) Home Plain/Coated Dot Matrix 2-4 ppm $ 100- 500 Good (less than 240 dpi) Office Plain/Multi Parts
5 Laser Printers. The laser printer market is categorized by print speeds. Office desktop or network monochrome laser printers are those that print 7-30 ppm while low-speed lasers typically print 1-6 ppm*. Management believes that the overall printer market is bifurcating into two principal segments: office desktop printers suitable for an office environment and low-speed, lower cost printers suitable for recreational and home office use by individuals. In recent years, businesses have shifted from relying on large mainframe computers to using local area networks ("LAN") that connect various types of computers using a variety of protocols and operating systems. With this shift has come the need for network printers that can communicate with, and adapt to, the various configurations of the computers they serve. The ability to process jobs quickly is also important. Most printers employed in the network environment are office desktop printers with sophisticated software management tools. Management expects network printers to continue to increase in speed and that special features will proliferate to enhance network connectivity. Low-speed laser printers are generally used as personal printers and are not connected to networks. This segment is characterized by intense price pressure and is vulnerable to replacement by low cost, color inkjet printers. Based on the available market data, management believes that between 1991 and 1995 there was steady growth in overall shipments of network and personal laser printers (1-30 ppm), although different segments of the market experienced different growth rates. The Company's shipments of network and personal laser printers taken as a whole during 1991 to 1996 increased at a compound annual rate, which management believes reflected the overall rate of growth of the market as a whole. Within the office desktop network laser printer category, Lexmark shipments increased at a rate which enabled the Company to gain market share. Lexmark shipments of low-speed laser printers remained essentially flat during the same period despite strong market growth within that category. Management expects the market unit volume for low-speed laser printers to grow moderately but that the market for office desktop laser printers--which includes the Company's Optra+ line of laser printers--will experience double-digit growth through 1999. Laser printer unit growth in recent years has generally exceeded the growth rate of laser printer revenues due to unit price pressure. This is partially offset by the tendency for customers in the network segment of the market to trade up to models with faster speeds, greater network connectivity, and other new features. New models with such enhanced features generally sell at higher price points and carry higher gross profit margins than the models they replace. - ------------------------------------------------------------------------ * Data available from industry analysts as to the size of the laser and inkjet printer market varies widely. The variance in laser printer market data is caused in part by the rapid pace of change in laser printer speeds which makes comparative analyses based on comparable product categories difficult over a recent historical period. The Company bases its analysis of historical market trends on the data available from several different industry analysts. The ranges of printing speed used to define and distinguish between laser printer categories described herein are based on the Company's own internal analysis of the laser printer categories currently used by certain industry analysts to measure the laser printer market. 6 Inkjet Printers. Growth in the market for inkjet printers, which are mainly used as personal printers, reflects increased penetration of personal computers for recreational and home office use. Strong market demand also reflects the availability of low-cost technology capable of providing customers with good quality printing at affordable prices. The recent availability of color inkjet printers at affordable prices has caused explosive industry growth since 1992. Starting from a relatively small base, Lexmark's shipments of inkjet printers increased by 100 percent from 1993 to 1994, 345 percent from 1994 to 1995, and in 1996, Lexmark shipments increased at a rate which the Company believes enabled it to gain market share. Lexmark entered the color inkjet printer market with its own technology in 1994. Growth in inkjet printer revenue has been slower than unit growth due to rapidly declining prices. The greater affordability of color inkjet printers has been an important factor in the explosive growth of this market. Dot Matrix Printers. The market for dot matrix printers has been declining for several years and volumes are expected to continue to decline in the future due in large part to replacement by inkjet printers with higher print quality. Within the dot matrix printer market, however, the demand for dot matrix printers that print single and multi-part forms--which constitute the Company's principal product offering in this category--has declined at a slower rate. Associated Printer Supplies. Printer supplies products are defined by the printing technology. Impact supplies are used in printers and typewriters that put marks on paper through the use of some form of physical force, usually a wire or hammer which applies force to a ribbon. The majority of impact supplies are either fabric or film ribbons. Non-impact supplies are used in printers that do not use force to put marks on paper. For example, the laser printer uses electrophotography to place toner on paper. Non-impact supplies include toner and photoconductor as well as ink cartridges used in inkjet printers. The principal supply product for laser printers is a laser cartridge, which includes toner and photoconductor. The principal supply product for inkjet printers is an inkjet print cartridge, which includes ink and a circuit assembly. The principal supply product for Lexmark's dot matrix printers is an inked fabric ribbon. As the installed base of Lexmark laser and inkjet printers continues to grow, the market for their associated supplies will grow as such supplies are continually purchased throughout the life of the printers. Strategy Lexmark's laser printer strategy is to target fast growing industry segments of the network printer market and to increase market share by providing high quality, technologically advanced products at competitive prices. To promote Lexmark brand awareness and market penetration, Lexmark will continue to identify and focus on customer segments where Lexmark can differentiate itself by supplying laser printers with features that meet specific customer needs and represent the best total cost of printing solution. Management intends to continue to develop and market products with more function and capabilities than comparably priced HP printers. The Company's inkjet printer strategy is to generate demand for the Lexmark color inkjet printer by offering high-quality products at competitive prices to retail and OEM customers. Management expects that the Company's associated printer supplies business will continue to grow as its installed base of laser and inkjet printers increases. For the business customer, Lexmark expects to continue to offer an array of advanced laser printer products with superior features and functions, higher speeds and better print resolution at competitive prices. The Company believes that it is well-positioned to take advantage of the growth potential of LAN printers due to its development and ownership of both the software and hardware features that provide network connectivity and management tools. Lexmark has targeted the office desktop laser printer markets and, as it has with the 1,200 dpi 7 Optra+ family, intends to remain one of the few printer companies that create industry-wide standards for laser printer performance. Lexmark focuses continually on enhancing the network capability of its laser printers by introducing new products, like its MarkVision printer management utility, that enhance the ability of its printers to function efficiently in a LAN environment and provide significant flexibility to the LAN user. Lexmark's large account marketing team focuses on demand generation in Fortune 1000 companies, other large corporations globally and specific industries where Lexmark can differentiate itself by supplying high function products with customized features to meet specific needs. These marketing teams work with Lexmark's development teams to design features requested by large account customers for specific functions. Lexmark has had recent success in its large account marketing team's target markets, such as in the finance sector (whose customers are served by Lexmark's duplex (double-sided printing) and "flash memory" feature which permits instantaneous printing and updating of forms in all locations). Another of the Company's strategies is to offer its advanced network management software in products to enable these financial institutions to more efficiently manage and control their network printing activities. Lexmark expects that its marketing strategy focusing on significant industry segments will promote Lexmark brand awareness and provide a platform for greater penetration of the laser printer market through sales by dealers and distributors. For the office and home user, Lexmark focuses on manufacturing well-priced, reliable, easy-to-use color inkjet printers. The Company expects that hardware improvements in this market will result in faster printing and better print quality. On the software side, the Company expects that enhanced compatibility with standard PC operating systems, such as Microsoft Windows 95, and software features that take advantage of the computing power of the PC for printing functions will permit the Company to reduce manufacturing costs for the printers and to produce a product that is easier to use. Lexmark believes that its core product offerings in this market will also permit it to build brand recognition in the retail channels. On the manufacturing side, the Company is continually focusing on ways to reduce costs and expand capacity while maintaining high quality. The Company will also consider strategic acquisitions in the future to leverage its technological expertise. Other Office Imaging Products Market Overview Other office imaging products include typewriters for office use and associated supplies sold under the IBM name, impact supplies for Lexmark printers that are no longer in production, supplies for IBM branded printers and after-market printer supplies for other OEM printers. The markets for most of the Company's other office imaging products are generally declining, other than the market for after-market laser cartridges for other OEM printers, which the Company believes is a market with significant growth potential. In 1996, non-impact supplies were estimated to be an approximately $28 billion opportunity worldwide, compared to the impact supplies opportunity of approximately $2 billion. Based on available industry data, the Company estimates that worldwide impact supplies revenue will decline steadily in future years, while non-impact supplies revenue will continue to grow. Management expects that office typewriter market revenue will continue to decline. 8 Strategy In view of declining revenues and profit margins from sales of typewriters and typewriter supplies and sales of other office imaging products for IBM printers, the Company's strategy for other office imaging products is to focus on the after-market OEM supplies opportunity while managing its mature businesses for cash flow. The Company will continue to compete with other OEMs to provide supplies for their installed bases of laser printers. The Company may pursue selected acquisitions of other office imaging products companies. Lexmark will make minimal further investment in impact supplies and management expects profit margins on such products to decline as a result of new agreements with IBM that generally became effective on March 27, 1996. As a result of its high quality products, the Company benefits from customer loyalty, which has historically permitted it to continue its premium pricing strategy. Keyboards and Other The Company historically manufactured keyboards primarily for IBM. Following the expiration in March 1996 of the Company's keyboard agreement with IBM and management's expectation that the keyboard industry will continue to experience price declines resulting in low margins and a low return on assets, the Company completed its transition out of the keyboard business by the end of the first quarter of 1996. Keyboard sales accounted for 8 percent and 3 percent, respectively, of the Company's revenue and gross profit for 1995. Products The Company's current product offerings consist primarily of the Lexmark Optra+ laser printer product line and Optra C color laser printer, the Optra E personal laser printer, a wide range of inkjet printers, a family of network print servers, typewriters and dot matrix printers. The Company also designs, manufactures and distributes a variety of print cartridges for use in its laser and inkjet printers as well as approximately 1,200 other office imaging products, including typewriter supplies and supplies for other printers, including IBM printers. Lexmark's main printer products are listed below: Category Products U.S. Price Range -------- -------- ---------------- Office Desktop/Network Mono Laser 4039-10plus $1,150-1,250 Optra+ $1,300-3,000 Optra N $2,400-2,600 Color Laser Optra C $7,000-7,500 Personal Laser Optra E $ 500-750 Color Inkjet Color Jetprinter 1020 & 2030 $ 150-200 Color Jetprinter 2050 & 2070 $ 250-400 Color Jetprinter 4079+ $2,650-3,000 Dot Matrix 23XX $ 300-500 4227 $1,300-1,500 The Company has upgraded and improved its laser printer product offerings significantly since the Acquisition with the introduction of several models adding functionality and performance at lower prices. The Company's 9 current network laser family, the Optra+ line, was enhanced in the second quarter of 1996 and offers four products at various price ranges. All four Optra+ models are 16 ppm and include 1,200 dpi printing and high performance RISC processors. Another standard feature of the Optra+ product line is MarkVision, Lexmark's printer management program, which permits bi-directional communication for status management between the user or LAN administrator and the printer. In addition to offering connectivity solutions and management tools as features on its laser printers, Lexmark also designs and manufactures network print servers. These products provide a means to connect a printer lacking its own network adapter to a local area network. The Company's current product offering is the MarkNet XLe, a multiprotocol server capable of supporting 18 different networking environments. MarkNet XLe offers enhancements to Lexmark's previous product offerings at a lower price. The Company currently markets a number of personal color inkjet printers for individual home and office use. These printers generally retail in a range of $150-$400 and offer sharp color printing, fast performance, compatibility with leading software applications, and ease of installation and use. The Company also markets five dot matrix printers in the $300-$1,500 price range for customers who print large volumes of multi-part forms. The Company designs, manufactures and distributes a variety of cartridges for use in its installed base of laser and inkjet printers. Lexmark is currently the exclusive source for new print cartridges for the printers it manufactures. The Company's other office imaging products include over 1,200 products, including typewriter products and products for IBM and other OEM printers using both impact and non-impact technology. The Company continues to offer a broad line of typewriters with the IBM logo, which remain the industry leaders. The Company also provides a wide range of supplies for the large installed base of IBM printers including toners, ribbons, photoconductors and other printer accessories. Lexmark has also developed and recently introduced after-market laser cartridges for laser printers sold by other manufacturers. Marketing and Distribution Printers and Associated Supplies The Company markets and distributes its laser printers primarily through its well-established dealer network, which includes such dealers as Microage Computers, Ameridata, Vanstar, Intelligent Electronics, Merisel, Ingram Micro and Inacom. The Company's products are also sold through value-added resellers, who offer custom solutions to specific markets. The Company employs large account marketing teams whose mission is to generate demand for Lexmark printers primarily among Fortune 1000 companies and other large corporations globally. In recent years, marketing teams have begun to focus on industry segments such as banking, retail/pharmacy and health care. Those teams, in conjunction with the Company's development and manufacturing teams, are able to design products to meet customer specifications for printing electronic forms, media handling, duplex printing and other custom solutions. The majority of customer orders solicited by these marketing teams are filled through dealers or resellers. The Company distributes its personal inkjet printers primarily through approximately 15,000 retail outlets worldwide including office superstores such as Office Depot and Staples, computer superstores such as Computer 10 City, consumer electronics stores such as Circuit City, Best Buy and Radio Shack, mass merchandisers such as Wal-Mart, other large regional chains and overseas stores such as Dixons, Carrefour and Vobis. The Company's international sales are an important component of its operations. The Company's sales and marketing activities in its global markets are organized to meet the needs of the local jurisdictions and the size of their markets. The Company's European marketing operation is structured similarly to its domestic marketing activity. The Company's products are available from major information technology resellers such as Northamber and in large markets from key retailers such as Media Markt in Germany, Dixons in the United Kingdom and Carrefour in France. Canadian marketing activities, like those in the United States, focus on large account demand generation and vertical markets, with orders filled through distributors and retailers. The Company's Latin American and Asian Pacific markets are served through a combination of Lexmark sales offices, strategic partnerships and distributors. The Company also has sales and marketing efforts for OEM opportunities. The Company's printer supplies and other office imaging products are generally available at the customer's preferred point of purchase through multiple channels of distribution. Although channel mix varies somewhat depending on the geography, substantially all of the Company's supplies products sold commercially in 1996 were sold through the Company's network of Lexmark-authorized supplies distributors and resellers who sell directly to end users or to independent office supply dealers. Lexmark's supplies are also available at office and computer superstores. Supplies for the European market are distributed from the Company's facility near Orleans, France. The Lexington, Kentucky facility is the central distribution point for all U.S. and other global supplies markets. Supplies and other office imaging products are also sold selectively to a few large end users, with the largest customer being IBM, and to OEMs for resale under the OEM's brand name. See "IBM Relationship". Competition Printers and Associated Supplies The markets for printers and associated supplies are highly competitive, especially with respect to pricing and the introduction of new products and features. The laser printer market is dominated by HP, which has a widely recognized brand name and has been estimated to have an approximate 70 percent market share. Several other large manufacturers such as Canon and Apple also compete in the laser printer market. Since June 1996, IBM has been expanding its product offerings in the printer market with products that compete with the Company's products. The Company believes that IBM has the resources to be an aggressive competitor. See "IBM Relationship". The Company's strategy is to target fast growing segments of the network printer market and to increase market share by providing high quality, technologically advanced products at competitive prices. This strategy requires that the Company continue to develop and market new and innovative products at competitive prices. New product announcements by HP and the Company's other principal competitors, however, can have and in the past have had a material adverse effect on the Company's financial results. Such new product announcements can quickly undermine any technological competitive edge that one manufacturer may enjoy over another and set new market standards for quality, speed and function. Furthermore, knowledge in the marketplace about pending new product announcements by the Company's competitors may also have a material adverse effect on the Company inasmuch as purchasers of printers may defer purchasing decisions until the announcement and subsequent testing of such new products. 11 In recent years, the Company and its principal competitors, all of which have significantly greater financial, marketing and technological resources than the Company, have regularly lowered prices on printers and are expected to continue to do so. The Company is vulnerable to these pricing pressures which, if not mitigated by cost and expense reductions, may result in lower profitability and could jeopardize the Company's ability to grow or maintain market share and build an installed base of Lexmark printers. The Company expects that, as it competes more successfully with its larger competitors, the Company's increased market presence may attract more frequent challenges, both legal and commercial, from its competitors, including claims of possible intellectual property infringement. HP is also the market leader in the personal color inkjet printer market and, with Canon and Epson, has been estimated to account for approximately 80 to 90 percent of worldwide personal color inkjet printer sales. As with laser printers, if pricing pressures are not mitigated by cost and expense reduction, the Company's ability to maintain or build market share and its profitability could be adversely affected. In addition, as a relatively new entrant to the retail marketplace with a less widely recognized brand name, the Company must compete with HP, Canon and Epson for retail shelf space for its inkjet printers. There can be no assurance that the Company will be able to continue to penetrate the retail marketplace. The Company has recently entered the market as a supplier of after-market laser cartridges for laser printers using certain models of Canon engines. There is no assurance that the Company will be able to compete effectively for a share of the after-market cartridge business for its competitors' base of laser printers. The Company's decision to enter this market may have an adverse effect on the Company's relations with certain of its suppliers. Although Lexmark is currently the exclusive supplier of new print cartridges for its laser printers, there can be no assurance that other companies will not develop new compatible cartridges for Lexmark laser printers. In addition, refill and remanufactured alternatives for the Company's cartridges are available from independent suppliers and, although generally offering lower print quality, compete with the Company's supplies business. Other Office Imaging Products The market for other office imaging products is extremely competitive and the impact segment of the supplies market is declining. Although the Company has exclusive rights to market certain IBM branded supplies until April 1999, there are more than 100 independent ribbon manufacturers and more than 25 independent toner manufacturers competing to provide compatible supplies for IBM branded printing products. Independent manufacturers compete for the after-market ribbon business under either their own brand, private label, or both, using price, aggressive marketing programs, and flexible terms and conditions to attract customers. Depending on the product, prices for compatible products produced by independent manufacturers generally range from 15 percent to 70 percent below the Company's prices. The Company is less dependent on revenue and profitability from its other office imaging products business than it has been historically and intends to focus on the growing portions of that market such as the after-market laser cartridge supplies category. There is no assurance that the Company will be able to compete in the after-market laser supplies business effectively or that the declining market areas in its other office imaging products business will not adversely affect the Company's operating results. The Company does not expect any major new entrants into the ribbon market. However, in response to the declining impact supplies opportunity, many established competitors are investing in non-impact capacity and joining forces through acquisitions on a worldwide basis. The Company's primary U.S. competitors in the overall supplies market include Nu-kote, Turbon, GRC and NER. Internationally, the Company's primary competitors are Turbon, Armor, TBS, and Pelikan (acquired by Nu-kote) in Europe and Fullmark in the Far East. 12 The Company is increasing its efforts to provide laser supplies for other OEM printers. As an after-market supplier in the all-in-one laser cartridge business, the Company faces competition from both the OEMs and cartridge remanufacturers. In order to become an effective worldwide supplier of after-market cartridges, the Company will need to compete with HP and Canon. The Company believes the current number of competitors in the declining worldwide office typewriter market is fewer than 17, down significantly from over 40 in the mid-1980's. The four primary competitors in the U.S. market are Canon, Brother, Panasonic and Swintec. The Company believes that it is dominant in the U.S. office typewriter market. Remaining office typewriter competitors with multiple product lines continue to shift focus to other products in their portfolios (copier, fax, PC, multifunction, etc.). No significant new office typewriter product announcements have been made by any key competitor since 1993. Manufacturing The Company's manufacturing facilities are located in Lexington, Kentucky, Boulder, Colorado, Orleans, France and Sydney, Australia, all of which are ISO 9000 certified. The Company opened new facilities during 1996 in Rosyth, Scotland and Juarez, Mexico. Most of the Company's laser and inkjet technologies are developed in Lexington. The Company's manufacturing strategy is to keep processes that are technologically complex, proprietary in nature and higher value added, such as the manufacture of inkjet cartridges, at the Company's own facilities. Stable technology, labor intensive and non-strategic operations, such as the manufacture of dot matrix printers, are typically performed by lower-cost vendors. Management believes that the Lexington manufacturing facility employs some of the most modern techniques in the industry. In order to make its facility capable of implementing new products with a shorter cycle time, the Company revamped the Lexington facility from a fully automated plant to a more flexible facility. Accordingly, the Company has the ability to adapt the plant to the requirements of a new product and to adopt more efficient manufacturing techniques as they are developed. The plant's electronic card assembly and test facility with surface mount technologies also enhances the Company's manufacturing capability. The Company's development and manufacturing operations for laser printer supplies which include toners, photoconductor drums, developers, charge rolls and fuser rolls, are located in Boulder. The Company has made significant capital investments in the Boulder facility to expand toner and photoconductor drum processes. Raw Materials The Company procures a wide variety of components used in the manufacturing process, including semiconductors, electro-mechanical components and assemblies, as well as raw materials, such as plastic resins. Although many of these components are standard off-the-shelf parts that are available from multiple sources, the Company often utilizes preferred supplier relationships to better ensure more consistent quality, cost, and delivery. Typically, these preferred suppliers maintain alternate processes and/or facilities to ensure continuity of supply. The Company generally must place commitments for its projected component needs approximately three to six months in advance. The Company occasionally faces capacity constraints when there has been more demand for its printers and associated supplies than initially projected. Some components of the Company's products are only available from one supplier, including certain custom chemicals, microprocessors, application specific integrated circuits and other semiconductors. In addition, the Company sources some printer engines and finished products from OEMs. Although the Company purchases in anticipation of its future requirements, should these components not be available from any one of these suppliers, there can be no assurance that production of certain of the Company's products would not be disrupted. Such a 13 disruption could interfere with the Company's ability to manufacture and sell products and materially adversely affect the Company's business. Research and Development The Company's research and development activity for the past four years has focused on laser and inkjet printers and associated supplies and on network connectivity products. The Company is selective in targeting its research and development efforts. For example, anticipating the industry trend, the Company minimized investing in dot matrix technology in 1991 and has instead devoted its research and development resources to the faster growing markets for laser and inkjet printers. The Company has been able to keep pace with product development and improvement while spending less than its larger competitors on research and development and has even been able to achieve significant productivity and minimize research and development costs. In the case of certain products, the Company may elect to purchase products and key components from third party suppliers. The Company is committed to being a technology leader in its targeted areas and is actively engaged in the design and development of additional products and enhancements to its existing products. Its engineering effort focuses on laser, inkjet, and connectivity technologies as well as design features that will increase efficiency and lower production costs. The process of developing new technology products is complex and requires innovative designs that anticipate customer needs and technological trends. Research and development expenditures were $124 million in 1996, $116 million in 1995 and $101 million in 1994. In addition, the Company must make strategic decisions from time to time as to which new technologies will produce products in market segments that will experience the greatest future growth. There can be no assurance that the Company can continue to develop the more technologically advanced products required to remain competitive. IBM Relationship In connection with the Acquisition, IBM entered into numerous agreements to support the Company's operations for a five-year term. These agreements, which expired on March 27, 1996, included a keyboard supply agreement (which obligated IBM to acquire essentially all of its desktop keyboard requirements from the Company), an internal use agreement (which obligated IBM to acquire substantially all of its requirements for desktop printers, typewriters and associated supplies from the Company), an IBM trademark license agreement (which permitted the Company to use the IBM trademark on certain of its products) and a non-competition agreement (pursuant to which IBM was prohibited from competing with the Company's products). The Company completed its transition out of the keyboard business by the end of the first quarter of 1996 and entered into an agreement with IBM providing for the orderly transition of the Company's keyboard business to IBM or other vendors. Under this agreement with IBM, IBM paid the Company $36.5 million of which $24 million related to amounts recorded by the Company through September 30, 1995, $6 million of profit recorded through March 1996, and $6.5 million for the purchase of certain keyboard assets. The Company's keyboard business, of which IBM represented approximately 95 percent, accounted for revenues of $32, $177 and $201 million for the years 1996, 1995 and 1994, respectively. Under the original agreement with IBM, the Company's keyboard business was guaranteed a minimum gross profit, and in the years ended 1996, 1995 and 1994 the keyboard business contributed $6, $18 and $28 million, respectively, toward the Company's consolidated gross profit. Sales to IBM (excluding sales of keyboards) were $163, $258 and $215 million for the years 1996, 1995 and 1994, respectively. The Company believes IBM will continue to be a significant customer but that future revenue and profitability from IBM sales will continue to decline as the Company's core printer and associated supplies business represents a larger percentage of the Company's total business. 14 In the third quarter of 1995, the Company entered into a profit sharing supplies agreement with IBM and a related agreement for an extension of the IBM trademark agreement that allows the Company to continue to use the IBM logo on certain existing printer supplies in its other office imaging products line through March 31, 1999. Under these agreements, Lexmark has been required since April 1996 to share the profits from the Company's sale of certain products bearing the IBM logo. The Company also entered into a royalty agreement for an extension of the right to use the IBM logo on typewriters, typewriter supplies and certain other IBM branded printer supplies through March 27, 2001. Since these new arrangements became effective, the Company estimates that operating income has been reduced approximately $8 million to $9 million a quarter during 1996. Since March 27, 1996, IBM is no longer required to purchase its desktop printers and typewriters from the Company. However, IBM subsequently entered into an agreement to use its best efforts to buy its printer and typewriter supplies from the Company through March 31, 1999. In addition, since March 27, 1996, IBM is no longer prohibited from competing with the Company's printer business, and in June 1996, IBM introduced laser printer products that compete with the Company's products. Although the Company and IBM have entered into agreements providing for an ongoing relationship, the Company expects that future revenue and profit received from IBM will decline significantly and that such decline could have a material adverse effect on the Company. However, the Company anticipated the expiration of these agreements and has redeployed the resources previously utilized on the declining keyboard and other businesses associated with the majority of the IBM agreements to the Company's strategically important businesses. Large Customers No customer other than IBM has accounted for more than 10 percent of the Company's consolidated revenues since 1994. Backlog The Company generally ships its products within 30 days of receiving orders and therefore has a backlog of generally less than 30 days at any time, which backlog the Company does not consider material to its business. Employees As of December 31, 1996, the Company had approximately 6,600 employees worldwide of which 4,900 are located in the U.S. and the remaining 1,700 in Europe, Canada, Latin America and Asia Pacific. None of the U.S. employees are represented by any union. Employees in France, Germany and the Netherlands are represented by Statutory Works Councils. Substantially all regular employees have stock options. The Company's employees have been organized in employee teams that are able to make rapid decisions and to implement those decisions to achieve faster development and manufacturing cycle times. 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 15 agreement to agreement. Each of the IBM, Canon and HP cross-licenses grants worldwide, royalty-free, non-exclusive rights to the Company to use the covered patents to manufacture certain of its products. Certain of the Company's material license agreements, including those that permit the Company to manufacture its current design of laser and inkjet printers and after-market laser cartridges for certain OEM printers, terminate as to future products upon certain "changes of control" of the Company. 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 1,300 patents worldwide and has approximately 450 pending patent applications worldwide covering a range of subject matter. The Company has filed over 500 worldwide patent applications since its inception in 1991. The Company's patent strategy includes obtaining patents on key features of new products which it develops and patenting a range of inventions contained in new supply products such as toner and ink cartridges for printers. Where appropriate, the Company seeks patents on inventions flowing from its general research and development activities. While no single patent or series of patents is material to the Company, the Company's patent portfolio in the aggregate serves to protect its product lines and offers the possibility of entering into license agreements with others. The Company designs its products to avoid infringing the intellectual property rights of others. The Company's major competitors, such as HP and Canon, have extensive, ongoing worldwide patenting programs. As is typical in technology industries, disputes arise from time to time about whether the Company's products infringe the patents or other intellectual property rights of major competitors and others. As the Company competes more successfully with its larger competitors, more frequent claims of infringement may be asserted. In October 1996, Lexmark International entered into an agreement with HP to cross-license each other's patents filed prior to a specified date (the "HP Agreement"). The HP Agreement generally gives both parties a worldwide non-exclusive license under the licensed patents for the manufacture and sale of printers, as well as accessories and consumable supplies designed for use with each party's own printers. In addition, the HP Agreement resolves issues of patent infringement that had been raised by both companies and does not involve any royalty or other payment by either party. The Agreement generally permits licenses granted thereunder to be terminated in the event of a "change of control," which includes, in very limited circumstances, an acquisition of substantially less than 50 percent of the Company's or Lexmark's voting shares. The Company has trademark registrations or pending trademark applications for the name LEXMARK in approximately 70 countries for various categories of goods. The Company also owns a number of trademark applications and registrations for product names, such as the OPTRA laser printer name. Although the Company believes the LEXMARK trademark is material to its business, it does not believe any other trademarks are material. The Company holds worldwide copyrights in computer code, software and publications of various types. Environmental and Regulatory Matters The Company's operations, both domestically and internationally, are subject to numerous laws and regulations, particularly relating to environmental matters that impose limitations on the discharge of pollutants into the air, water and soil and establish standards for the treatment, storage and disposal of solid and hazardous wastes. The Company is also required to have permits from a number of governmental agencies in order to conduct various aspects of its business. Compliance with these laws and regulations has not had and is not expected to have a material effect on the capital expenditures, earnings or competitive position of the Company. There can be no assurance, however, that future changes in environmental laws or regulations, or in the criteria required to obtain or maintain necessary permits, will not have an adverse effect on the Company's operations. 16 Item 2. Properties The Company's manufacturing and other material operations are conducted at the facilities set forth below: Location Square Feet Activities Status -------- ----------- ---------- ------ Lexington, KY 2,966,000 Headquarters, Manufacturing, Development, Administrative, Distribution, Warehouse, Marketing Owned 266,000 Warehouses, Development Leased(1) Boulder, CO 332,000 Manufacturing, Development, Warehouse Leased(2) Dietzenbach, Germany 49,000 Administrative, Warehouse Leased(3) Juarez, Mexico 95,000 Manufacturing, Administrative Owned Markham, Ontario 47,000 Administrative, Marketing, Warehouse Leased(4) Orleans, France 452,000 Manufacturing, Administrative, Warehouse Owned Ormes, France 192,000 Warehouse Leased(5) Paris, France 30,000 Administrative, Marketing Leased(6) Rosyth, Scotland 92,000 Manufacturing, Administrative Leased(7) Sydney, Australia 64,000 Manufacturing, Administrative, Warehouse, Marketing Leased(8) - -------------------------------------------------- (1) Leases covering 151,000 square feet expire September 1997 and carry two one-year renewal options. Lease covering 115,000 square feet expires August 1998 and carries five three-year renewal options. (2) Lease covering 278,000 square feet expires May 2001 and carries three five-year renewal options. Lease covering 54,000 square feet expires January 1998 and carries three one-year renewal options. (3) Leases covering this property expire September 2004 and there are no renewal options. (4) Lease covering this property expires September 2001 and carries two five-year renewal options. (5) Lease covering this property expires February 1999 and carries one three-year renewal option. (6) Leases covering this property expire December 2003 and there are no renewal options. (7) Lease covering this property expires in 2021 and includes an option to purchase exercisable through March 2001. (8) Lease covering this property expires March 2002 and carries one six-year renewal option. The Company believes its facilities are in good operating condition. Except for the Juarez, Mexico facility, properties owned by the Company serve as collateral for the Company's term loan and revolving credit facility. Item 3. Legal Proceedings The Company is party to routine litigation incidental to the Company's business. The Company does not believe that any legal proceedings to which it is a party or to which any of its property is subject, including any such routine litigation, will have a material adverse effect on the Company's financial position or results of operations. As the Company competes more successfully with its larger competitors, the Company's increased market presence may attract more frequent legal challenges from its competitors, including claims of possible intellectual property infringement. Although the Company does not believe that the outcome of any current claims of intellectual property infringement is likely to have a material adverse effect on the Company's future operating results and financial condition, there can be no assurance that such claims will not result in litigation. In 17 addition, there can be no assurance that any litigation that may result from the current claims or any future claims by these parties or others would not have a material adverse effect on the Company's business. Item 4. Submission of Matters to a Vote of Security Holders None 18 Part II * Item 5. Market For Registrant's Common Equity and Related Stockholder Matters Information regarding the market prices of the Company's Class A common stock, the market for that stock and the number of holders of each class of the Company's common stock as set forth on page 54 of the Company's 1996 Annual Report to Stockholders is incorporated herein by reference. The Company has never declared or paid any dividends on the Class A common stock and has no current plans to pay dividends on the Class A common stock. The payment of any future dividends will be determined by the Company's Board of Directors in light of conditions then existing, including the Company's earnings, financial condition and capital requirements, restrictions in financing agreements, business conditions, certain corporate law requirements and other factors. The Company is a holding company and thus its ability to pay dividends on the Class A common stock depends on the Company's subsidiaries' ability to pay dividends to the Company. In addition, the Company's financing agreements generally restrict the payment of dividends by the Company. Item 6. Selected Financial Data Selected Financial Data for the Company as set forth on page 52 of the Company's 1996 Annual Report to Stockholders is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis of Financial Condition and Results of Operations as set forth on pages 44 through 51 of the Company's 1996 Annual Report to Stockholders is incorporated herein by reference. Factors That May Affect Future Results and Information Concerning Forward-Looking Statements Certain of the statements contained in this Report and in documents incorporated herein by reference may be considered 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, including, without limitation, (i) statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" concerning (a) the Company's belief that its total revenues will continue to grow due to overall market growth and increases in the Company's market share in both the network and color inkjet segments and that this growth will more than offset reduced demand for certain of its products, (b) the Company's belief that the office desktop segment is one of the fastest growing segments of the laser printer market and (c) the Company's expectation that its overall margins will remain relatively stable as its associated printer supplies business becomes an increasingly larger part of its business, offsetting the decline in the Company's other office imaging products supplies business and the phase-out of its lower margin keyboard business, (ii) the statements in "Item 1. Business -- Market Overview and Strategy -- Printers and Associated Supplies -- Market Overview" concerning the Company's belief about growth in the printer hardware market, including double-digit growth in volume of certain product categories such as office desktop laser printers and color inkjet printers, (iii) the statements in "Item 3. Legal Proceedings" concerning the Company's belief with respect to the possible effect of certain legal proceedings, and current or future claims of intellectual property infringement on its financial position or results of operations, (iv) other statements as to management's expectations and belief presented in this "Management's Discussion and Analysis of Financial Condition and Results of Operations", (v) other statements as to management's expectations and belief presented elsewhere in this Report or in any documents incorporated herein by reference and (vi) variations 19 in the foregoing statements whenever they appear in this Report and the documents incorporated herein by reference. Forward-looking statements are made based upon management's current expectations and belief concerning future developments and their potential effects upon the Company. There can be no assurance that future developments affecting the Company will be those anticipated by management. There are certain important factors that could cause actual results to differ materially from estimates or expectations reflected in such forward-looking statements, including, without limitation, the factors set forth below: ~ The Company's future operating results may be adversely affected if it is unable to continue to develop, manufacture and market products that meet customers' needs. The markets for printers and associated supplies are highly competitive, especially with respect to pricing and the introduction of new products and features. The Company and its major competitors, all of which have significantly greater financial, marketing and technological resources than the Company, have regularly lowered prices on their printers and may continue to do so. The inkjet printer market has experienced and could continue to experience significant printer price pressure from the Company's major competitors. Price reductions beyond expectations or the inability to reduce costs, certain expenses or increase sales as currently expected could result in lower profitability and jeopardize the Company's ability to grow or maintain its market share. ~ The life cycles of the Company's products, as well as delays in product development and manufacturing, variations in the cost of component parts and delays in customer purchases of existing products in anticipation of new product introductions by the Company or its competitors, could cause a build up in the Company's inventories, make the transition from current products to new products difficult and could adversely affect the Company's future operating results. Further, some of the Company's newly developed products replace or compete with some of the Company's existing products. ~ Revenues derived from international sales, including exports from the United States, represent an increasing portion of the Company's consolidated revenues and have grown from 45 percent of total revenues in 1994 to 54 percent of total revenues in 1996. Accordingly, the Company's future results could be adversely affected by a variety of factors, including foreign currency exchange rate fluctuations, trade protection measures, changes in a specific country's or region's political or economic conditions and unexpected changes in regulatory requirements. Moreover, margins on international sales tend to be lower than those on domestic sales. ~ The Company's success depends in part on its ability to obtain patents, copyrights and trademarks, maintain trade secret protection and operate without infringing the proprietary rights of others. Current or future claims of intellectual property infringement could prevent the Company from obtaining technology of others and could otherwise adversely affect its operating results, financial position or business. ~ Part of the Company's business strategy is to expand its business through the acquisition of related businesses. There can be no assurance that suitable acquisitions can be accomplished on terms favorable to the Company. Further, there can be no assurance that the Company will be able to operate profitably any businesses or other assets it may acquire, effectively integrate the operations of such acqusitions or otherwise achieve the intended benefits of such acquisitions. ~ Factors unrelated to the Company's operating performance, including economic and business conditions, both national and international; the loss of significant customers or suppliers; changes in business strategy; and the ability to retain and attract key personnel, could also adversly affect the Company's operating results. In addition, trading activity in the Company's common stock, particularly in light of the substantial number of shares owned by the original investor group that are available for resale, may affect the Company's common stock price. 20 While the Company reassesses material trends and uncertainties affecting the Company's financial condition and results of operations, in connection with its preparation of Management's Discussion and Analysis of Financial Condition and Results of Operations contained in its quarterly and annual reports, the Company does not intend to review or revise, in light of future events, any particular forward-looking statement referenced in this Report or the documents incorporated herein by reference. The information referred to above should be considered by investors when reviewing any forward-looking statements contained in this Report, in any documents incorporated herein by reference, in any of the Company's public filings or press releases or in any oral statements made by the Company or any of its officers or other persons acting on its behalf. By means of this cautionary note, the Company intends to avail itself of the safe harbor from liability with respect to forward-looking statements that is provided by Section 27A and Section 21E referred to above. Item 8. Financial Statements and Supplementary Data The Consolidated Financial Statements of the Company together with the report thereon by Coopers & Lybrand L.L.P., independent accountants, as set forth in pages 25 through 43 of the Company's 1996 Annual Report to Stockholders are incorporated herein by reference. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None *Except as specifically incorporated by reference herein, the Company's 1996 Annual Report to Stockholders is not deemed to be filed as part of this Form 10-K. 21 Part III Item 10. Directors and Executive Officers of the Registrant The section entitled "Election of Directors" appearing on pages 1 through 3 of the Proxy Statement for the Annual Meeting of Stockholders of the Company to be held May 2, 1997, sets forth certain information with respect to the directors of the Company and is incorporated herein by reference. The executive officers of the Company and their respective ages, positions and years of service with the Company are set forth below. Years With Name of Individual Age Position The Company - ------------------ --- -------- ----------- Marvin L. Mann 63 Chairman of the Board and Chief Executive Officer 5 Paul J. Curlander 44 Director, President and Chief Operating Officer 5 Kathleen J. Affeldt 48 Vice President, Human Resources 5 Daniel P. Bork 45 Director of Taxes * Terence P. Chin 41 Treasurer * Vincent J. Cole, Esq. 40 Vice President, General Counsel and Secretary 5 David L. Goodnight 44 Corporate Controller 3 Clifford D. Gookin 39 Vice President, Corporate Development 1 Thomas B. Lamb 38 Vice President and General Manager * Bernard V. Masson 49 Vice President and General Manager 1 John C. Mitchell 49 Vice President and General Manager * Gary E. Morin 47 Vice President and Chief Financial Officer 1 Donald C. Shropshire, Jr. 57 Vice President and General Manager 5 John A. Stanley 59 Vice President and President of Lexmark Europe 5 Alfred A. Traversi 44 Vice President, Information Technology and Operations * *Tenure with the Company is less than one year. Mr. Mann has been Chairman of the Board and Chief Executive Officer of the Company since March 1991 and President of the Company from March 1991 to February 1997. Prior to such time, Mr. Mann held numerous positions with IBM, which he joined in 1958. During his IBM career, Mr. Mann held executive positions in marketing, research and development, manufacturing and general management, including President of the Information Products Division and President and Chief Executive Officer of Satellite Business Systems. He was elected an IBM Vice President in 1985. Mr. Mann also serves on the board of directors of M.A. Hanna Company and Imation Corp. and is a member of the board of trustees of Fidelity Investments. Dr. Curlander has been a Director, President and Chief Operating Officer of the Company since February 1997 and Executive Vice President, Operations of Lexmark International, Inc. ("Lexmark International") from January 1995 to February 1997. In 1993, Dr. Curlander became a Vice President of Lexmark International. Prior to such time, commencing in March 1991, Dr. Curlander served as General Manager of Lexmark International's Printing Systems Business. Prior to joining the Company, Dr. Curlander was employed with IBM, which he joined in 22 1974. He received a Ph.D. in Electrical Engineering from MIT in 1979 while on leave of absence from IBM. After returning to IBM, Dr. Curlander held management and executive positions in development, manufacturing and general management, including leading the development of IBM's first LED printer and the Company's first desktop laser printer. Ms. Affeldt has been Vice President of Human Resources since July 1996. Prior to such time and since 1991, Ms. Affeldt served as Director of Human Resources. Prior to 1991, Ms. Affeldt held various human resource management positions with IBM. Mr. Bork has been Director of Taxes of the Company since he joined the Company in October 1996. Prior to joining the Company, Mr. Bork was Director of Taxes with Cray Research, Inc. Prior to his tenure at Cray Research, Inc., Mr. Bork was with the accounting firm of Coopers & Lybrand, most recently serving as Director of International Tax in Coopers & Lybrand's Minneapolis office. Mr. Chin has been Treasurer of the Company since he joined the Company in June 1996. Prior to joining the Company, Mr. Chin was Assistant Treasurer - International with Joseph E. Seagram & Sons. Prior to 1993, Mr. Chin was Assistant Treasurer - Risk Management and Benefits Financing with Merck & Company. Mr. Cole has been Vice President and General Counsel of the Company since July 1996 and Corporate Secretary since February 1996. Prior to such time, commencing in March 1991, Mr. Cole served as Corporate Counsel and then Assistant General Counsel. Prior to joining the Company, Mr. Cole was associated with the law firm of Cahill Gordon & Reindel. Mr. Goodnight has been Controller of the Company since February 1997. Prior to such time and since January 1994, when he joined the Company, Mr. Goodnight served as CFO for the Company's Business Printer Division. Prior to joining the Company, Mr. Goodnight held various Controller positions with Calcomp, Inc. Mr. Gookin has been Vice President of Corporate Development of Lexmark International since November 1995. Prior to joining the Company, Mr. Gookin served as managing director of the Mergers and Acquisition Group at Rauscher Pierce Refsnes, Inc. Prior to 1991, Mr. Gookin held positions in the Investment Banking Department of CS First Boston Corporation. Mr. Lamb has been Vice President and General Manager of the Imaging Solutions Division of Lexmark International since January 1996. Prior to joining the Company, Mr. Lamb held various senior management positions with General Chemical Corporation, including most recently, the position of Vice President and General Manager of the Industrial Chemicals Division. Mr. Masson has been Vice President and General Manager of the Consumer Printer Division of Lexmark International since December 1995. Prior to joining the Company, Mr. Masson was Vice President and General Manager of DH Technology's DHPRINT unit, a publicly-held manufacturer of specialty printers, primarily for the financial, retail and gaming markets worldwide. Prior to 1992, Mr. Masson served as Senior Vice President and General Manager - Plotter Division of Calcomp, Inc. Mr. Mitchell has been Vice President and General Manager of the Business Printer Division of Lexmark International since he joined the Company in January 1997. Prior to joining the Company, Mr. Mitchell held various executive and senior management positions with Nabisco, including most recently, the position of President - Planters and Lifesavers Companies. 23 Mr. Morin has been Vice President and Chief Financial Officer of the Company since January 1996. Prior to joining the Company, Mr. Morin held various executive and senior management positions with Huffy Corporation, including most recently, the position of Executive Vice President and Chief Operating Officer. Mr. Shropshire has been Vice President and General Manager of Lexmark International since October 1994. When he joined the Company in 1991, Mr. Shropshire served as Vice President, Marketing and Sales, U.S. and Americas Far East. In his prior 27 years with IBM, he held various executive positions in marketing, development and general management. Mr. Stanley has been Vice President of Lexmark International and President of Lexmark Europe since March 1991. Prior to such time, Mr. Stanley worked for IBM, which he originally joined in the United Kingdom in 1968. He held several executive positions with IBM in Europe and the U.S. in marketing, human resources and operations. Immediately before joining the Company, he was the director of marketing and services for IBM Europe. Mr. Traversi has been Vice President of Information Technology and Operations of Lexmark International since he joined the Company in October 1996. Prior to joining the Company, Mr. Traversi was Vice President - Operations Services with Taco Bell Corporation. Prior to 1994, Mr. Traversi held various senior management positions with Digital Equipment Corporation. Item 11. Executive Compensation The section entitled "Executive Compensation" appearing on pages 8 through 11 of the Proxy Statement for the Annual Meeting of Stockholders of the Company to be held May 2, 1997, sets forth certain information with respect to executive compensation and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management The section entitled "Security Ownership of Certain Beneficial Owners and Management" appearing on pages 6 and 7 of the Proxy Statement for the Annual Meeting of Stockholders of the Company to be held May 2, 1997, sets forth certain information with respect to security ownership of certain beneficial owners and management and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The section entitled "Certain Relationships and Related Transactions" appearing on pages 11 and 12 of the Proxy Statement for the Annual Meeting of Stockholders of the Company to be held May 2, 1997, sets forth information with respect to certain relationships and related transactions and is incorporated herein by reference. 24 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1 Financial Statements: Pages In Annual Report To Stockholders* ---------------------- Consolidated Statements of Operations 25 Consolidated Statements of Financial Position 26 Consolidated Statements of Cash Flow 27 Consolidated Statements of Stockholders' Equity 28-29 Notes to Consolidated Financial Statements 30-42 Report of Independent Accountants 43 * These pages of the Company's 1996 Annual Report to Stockholders are incorporated herein by reference. (a) 2 Financial Statement Schedules: Pages In Form 10-K ------------------ Report of Independent Accountants 26 For the years ended December 31, 1996, 1995, and 1994: Schedule II - Valuation and Qualifying Accounts 27 All other schedules are omitted as the required information is inapplicable or the information is presented in the Consolidated Financial Statements or related notes. 25 REPORT OF INDEPENDENT ACCOUNTANTS Our report on the consolidated financial statements of Lexmark International Group, Inc. and subsidiaries as of December 31, 1996 and 1995 and for each of the years in the three year period ended December 31, 1996 has been incorporated by reference in this Form 10-K from page 43 of the 1996 Annual Report to Stockholders of Lexmark International Group, Inc. and subsidiaries. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 27 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Lexington, Kentucky February 13, 1997 26 LEXMARK INTERNATIONAL GROUP, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS For the Years Ended December 31, 1994, 1995, and 1996 (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 - ---------------------------------- ----------- ---------- ---------- ---------- ---------- 1994: Allowance for doubtful accounts $ 13.4 $ 7.8 $ - $ (1.8) $ 19.4 Inventory reserves 19.0 49.5 - (32.5) 36.0 Deferred tax assets valuation allowance 101.0 13.7 - (3.9) 110.8 Restructuring reserve 1.4 - - (1.4) - 1995: Allowance for doubtful accounts $ 19.4 $ 13.2 $ - $ (5.5) $ 27.1 Inventory reserves 36.0 36.9 - (27.9) 45.0 Deferred tax assets valuation allowance 110.8 4.5 - (38.1) 77.2 1996: Allowance for doubtful accounts $27.1 $ 3.0 $ - $(12.1) $18.0 Inventory reserves 45.0 30.0 - (41.4) 33.6 Deferred tax assets valuation allowance 77.2 0.8 - (45.7) 32.3
27 Item 14(a)(3). Exhibits Exhibits for the Company are listed in the Index to Exhibits beginning on page E-1. (b) Reports on Form 8-K None 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Lexington, State of Kentucky, on March 24, 1997. LEXMARK INTERNATIONAL GROUP, INC. By /s/ Marvin L. Mann ----------------------------- Name: Marvin L. Mann Title: Chairman of the Board & 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/ Marvin L. Mann Chairman of the March 24, 1997 - -------------------------------- Board/Chief Executive Marvin L. Mann Officer (Principal Executive Officer) /s/ Gary E. Morin Vice President/Chief March 24, 1997 - -------------------------------- Financial Officer Gary E. Morin (Principal Financial Officer) /s/ David L. Goodnight Corporate Controller March 24, 1997 - --------------------------------- (Principal Accounting David L. Goodnight Officer) /s/ B. Charles Ames Director March 24, 1997 - --------------------------------- B. Charles Ames /s/ Roderick H. Carnegie Director March 24, 1997 - --------------------------------- Roderick H. Carnegie /s/ Frank T. Cary Director March 24, 1997 - --------------------------------- Frank T. Cary Signature Title Date --------- ----- ---- /s/ Paul J. Curlander Director March 24, 1997 - ---------------------------------- Paul J. Curlander /s/ William R. Fields Director March 24, 1997 - ---------------------------------- William R. Fields /s/ Donald J. Gogel Director March 24, 1997 - ---------------------------------- Donald J. Gogel /s/ Ralph E. Gomory Director March 24, 1997 - ---------------------------------- Ralph E. Gomory /s/ Stephen R. Hardis Director March 24, 1997 - ---------------------------------- Stephen R. Hardis /s/ Michael J. Maples Director March 24, 1997 - ---------------------------------- Michael J. Maples /s/ Martin D. Walker Director March 24, 1997 - ---------------------------------- Martin D. Walker Index to Exhibits Number Description of Exhibits - ------ ----------------------- 3.1 Third Restated Certificate of Incorporation of Lexmark International Group, Inc. (the "Company"). (1) 3.2 Company By-Laws, as Amended and Restated as of October 26, 1995, and Amended by Amendment No. 1 dated as of February 13, 1997. 4.1 Amended and Restated Secured U.S. Credit Agreement, dated as of April 21, 1995 (the "U.S. Credit Agreement"), among Lexmark International, Inc. ("International"), the Company, the Lenders listed therein ("Lenders") and Morgan Guaranty Trust, as agent (the "Agent"). (2) 4.2 Amendment No. 1 to the U.S. Credit Agreement, dated as of September 26, 1995, among International, the Company, the Lenders and the Agent. (3) 4.3 Amendment No. 2 to the U.S. Credit Agreement, dated as of April 3, 1996, among International, the Company, the Lenders and the Agent. (4) 4.4 Note and Stock Purchase Agreement, dated as of March 27, 1991 (the "Note and Stock Purchase Agreement"), among the Company, International and The Equitable Life Assurance Society of the United States and certain of its affiliates (the "Equitable Investors"). (2) 4.5 Amendment No. 1 to the Note and Stock Purchase Agreement, dated as of December 31, 1991, among the Company, International and the Equitable Investors. (2) 4.6 Amendment No. 2 to the Note and Stock Purchase Agreement, dated as of December 21, 1992, among the Company, International and the Equitable Investors. (2) 4.7 Amendment No. 3 to the Note and Stock Purchase Agreement, dated as of December 31, 1993, among the Company, International and the Equitable Investors. (2) 4.8 Amendment No. 4 to the Note and Stock Purchase Agreement, dated as of April 21, 1995, among the Company, International and the Equitable Investors. (2) 4.9 Amendment No. 5 to the Note and Stock Purchase Agreement, dated as of October 17, 1995, among the Company, International and the Equitable Investors. (3) 4.10 Amendment No. 6 to the Note and Stock Purchase Agreement, dated as of April 3, 1996, among the Company, International and the Equitable Investors. (4) E-1 4.11 Registration and Participation Agreement, dated as of March 27, 1991, among the Company, The Clayton & Dubilier Private Equity Fund IV Limited Partnership ("C&D Fund IV"), and the stockholders of the Company named therein. (2) 4.12 Amendment, Waiver and Consent Under Registration and Participation Agreement, dated as of December 21, 1994, executed by C&D Fund IV, Leeway & Co., Mellon Bank N.A., as Trustee for First Plaza Group Trust ("Mellon Bank", and with Leeway & Co., the "Institutional Investors"), and the Equitable Investors. (2) 4.13 Registration Agreement, dated as of March 27, 1991, among the Company, International, the Equitable Investors and the Institutional Investors. (2) 4.14 Amendment No. 1 to the Registration Agreement, dated as of December 31, 1991, among the Company, International, the Equitable Investors and the Institutional Investors. (2) 4.15 Letter Agreement, dated as of March 27, 1991, among the Company, C&D Fund IV and International Business Machines Corporation ("IBM"). (1) 4.16 Securities Purchase Agreement, dated as of March 27, 1991, among the Company and the Institutional Investors. (2) 4.17 Amendment No. 1 to the Securities Purchase Agreement, dated as of March 27, 1991, among the Company and the Institutional Investors. (2) 4.18 Amendment No. 2 to the Securities Purchase Agreement, dated as of December 21, 1992, among the Company and the Institutional Investors. (2) 4.19 Specimen of Class A common stock certificate. (1) 4.20 Warrant Agreement, dated as of April 1, 1991, among International, Spectrum Sciences B.V., a Netherlands corporation, and the Company. (2) 4.21 Letter Agreement, dated December 31, 1992, from Keys Foundation to the Company. (2) 4.22 Warrant No. 6, dated February 21, 1997, issued to Keys Foundation. 9.1 Voting Trust Agreement, dated as of August 28, 1991, among Clayton & Dubilier Associates IV Limited Partnership ("C&D Associates IV"), as voting trustee, the Company and Larry H. Holswade, Thomas L. Millner, Tadd C. Seitz and Peter C. Valli. (2) 9.2 Voting Trust Agreement, dated as of March 27, 1991, among C&D Associates IV, as voting trustee, the Company and M. Lee Pearce. (2) 10.1 Supplies Agreement, dated August 14, 1995, between IBM and International. (3)* 10.1A Category I Supplies Trademark Agreement, dated as of August 16, 1995 and effective as of March 27, 1996, between IBM and International. (1) E-2 10.2 Agreement, dated as of August 1, 1990, between IBM and International, and Amendment thereto. (3)* ] 10.3 Agreement, dated as of May 31, 1990, between International and Canon Inc., and Amendment thereto. (3)* 10.4 Agreement, dated as of March 26, 1991, between International and Hewlett-Packard Company. (3)* 10.5 Patent Cross-License Agreement, effective October 1, 1996, between Hewlett-Packard Company and International. (5)* 10.6 Amended and Restated Lease Agreement, dated as of January 1, 1991, between IBM and Lexmark, and First Amendment thereto. (2) 10.7 Board Investor Promissory Note and Pledge Agreement, dated as of December 19, 1994, between the Company and Sir Roderick H. Carnegie. (2) 10.8 Receivables Purchase Agreement, dated as of January 31, 1994, among International, Delaware Funding Corporation and J.P. Morgan Delaware, as Administrative Agent. (2) 10.9 Indemnification Agreement, dated as of March 27, 1991, among the Company, International, Clayton & Dubilier, Inc., and C&D Fund IV. (2) 10.10 Form of Stock Subscription Agreement, between the Company and Board investors (including a schedule of Board investors, purchase dates and number of shares purchased). (1) 10.11 Form of Management Stock Subscription Agreement, among the Company, International and Named Executive Officers (including a schedule of Named Executive Officers, purchase dates and number of shares purchased). (1) + 10.12 The Company Stock Option Plan for Executives and Senior Officers. (2) + 10.13 First Amendment to the Stock Option Plan for Executives and Senior Officers, dated as of October 31, 1994. (1) + 10.14 Second Amendment to the Stock Option Plan for Executive and Senior Officers, as of September 13, 1995. (1) + 10.15 Form of Management Stock Option Agreement, among the Company, International and Named Executive Officers (including a schedule of Named Executive Officers, grant dates and number of shares granted pursuant to options). (1) + 10.16 First Amendment to Management Stock Option Agreement, dated as of October 31, 1994, between the Company and Marvin L. Mann. (1) + E-3 10.17 Form of Non-Qualified Stock Option Agreement, pursuant to the Company's Stock Incentive Plan. (1) + 10.18 Lexmark International Group, Inc. Stock Incentive Plan. (1) + 10.19 1995-1997 Long Term Incentive Plan. (2) + 10.20 Form of Management Stock Subscription Agreement, among the Company, International and Named Executive Officers (including a schedule of Named Executive Officers, grant dates and number of shares granted pursuant to options). (1) + 10.21 Employment Agreement, dated as of September 13, 1995, between Marvin L. Mann and International. (1) + 10.22 Employment Agreement, dated as of September 13, 1995, between Paul J. Curlander and International. (1) + 10.23 Employment Agreement, dated as of September 13, 1995, between Donald C. Shropshire and International. (1) + 10.24 Employment Agreement, dated as of September 13, 1995, between John A. Stanley and International U.K. Ltd. (1) + 10.25 Patent Cross-License Agreement, effective October 1, 1996, between Hewlett-Packard Company and International. (5)* 10.26 Lexmark International Group, Inc. Non-Employee Director Stock Plan, Amended and Restated Effective December 12, 1996. (6) + 13 Sections of the Company's 1996 Annual Report to Stockholders incorporated by reference in this report. 21 Subsidiaries of the Company as of December 13, 1996. 23 Consent of Coopers & Lybrand L.L.P. 27 Financial Data Schedule. - ---------- *Confidential treatment previously granted by the Securities and Exchange Commission. + Indicates management contract or compensatory plan, contract or arrangement. (1) Incorporated by reference to Company's Form S-1 Registration Statement, Amendment No. 1 (Registration No. 33-97218) filed with the Commission on October 27, 1995. E-4 (2) Incorporated by reference to Company's Form S-1 Registration Statement, (Registration No. 33-97218) filed with the Commission on September 22, 1995. (3) Incorporated by reference to Company's Form S-1 Registration Statement, Amendment No. 2 (Registration No. 33-97218) filed with the Commission on November 13, 1995. (4) Incorporated by reference to Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996 (Commission File No.1-14050) filed with the Commission on May 3, 1996. (5) Incorporated by reference to Company's Quarterly Report on Form 10-Q/A for the quarter ended September 30, 1996 (Commission File No. 1-14050) filed with the Commission on January 24, 1997. (6) Incorporated by reference to Company's Form S-3 Registration Statement (Registration No.333-19377) filed with the Commission on January 8, 1997. E-5 EX-3.2 2 LEXMARK INTERNATIONAL GROUP, INC. BY-LAWS ========================================================== LEXMARK INTERNATIONAL GROUP, INC. BY-LAWS ------- As Amended and Restated as of October 26, 1995 ========================================================== LEXMARK INTERNATIONAL GROUP, INC. BY-LAWS TABLE OF CONTENTS SECTION PAGE - ------- ---- ARTICLE I STOCKHOLDERS.........................................................1 Section 1.01. Annual Meetings.......................................1 Section 1.02. Special Meetings......................................1 Section 1.03. Notice of Meetings; Waiver............................2 Section 1.04. Quorum................................................2 Section 1.05. Voting................................................2 Section 1.06. Voting by Ballot......................................3 Section 1.07. Adjournment...........................................3 Section 1.08. Proxies...............................................3 Section 1.09. Organization; Procedure...............................4 Section 1.10. Consent of Stockholders in Lieu of Meeting............4 Section 1.11. Stockholder Proposals and Nominations of Directors..................................................5 ARTICLE II BOARD OF DIRECTORS...................................................6 Section 2.01. General Powers........................................6 Section 2.02. Number and Term of Office.............................6 Section 2.03. Election of Directors.................................6 Section 2.04. Annual and Regular Meetings...........................7 Section 2.05. Special Meetings; Notice..............................7 Section 2.06. Quorum; Voting........................................8 Section 2.07. Adjournment...........................................8 Section 2.08. Action Without a Meeting..............................9 Section 2.09. Regulations; Manner of Acting.........................9 Section 2.10. Action by Telephonic Communications...................9 Section 2.11. Resignations..........................................9 Section 2.12. Removal of Directors..................................9 Section 2.13. Vacancies and Newly Created Directorships............10 Section 2.14. Compensation.........................................10 Section 2.15. Reliance on Accounts and Reports, etc................10 i SECTION PAGE - ------- ---- ARTICLE III EXECUTIVE COMMITTEE AND OTHER COMMITTEES............................11 Section 3.01. How Constituted......................................11 Section 3.02. Powers...............................................11 Section 3.03. Proceedings..........................................13 Section 3.04. Quorum and Manner of Acting..........................13 Section 3.05. Action by Telephonic Communications..................14 Section 3.06. Absent or Disqualified Members.......................14 Section 3.07. Resignations.........................................14 Section 3.08. Removal................................... ..........14 Section 3.09. Vacancies............................................14 ARTICLE IV OFFICERS AND AGENTS.................................................15 Section 4.01. Number...............................................15 Section 4.02. Election.............................................15 Section 4.03. Salaries.............................................15 Section 4.04. Removal and Resignation; Vacancies...................15 Section 4.05. Authority and Duties of Officers.....................16 Section 4.06. The Chairman.........................................16 Section 4.07. The President and Chief Executive Officer............16 Section 4.08. Vice Presidents and Corporate Agents.................17 Section 4.09. The Vice President & Chief Financial Officer.........17 Section 4.10. The Treasurer........................................17 Section 4.11. The Secretary........................................18 Section 4.12. Additional Officers and Agents.......................19 Section 4.13. Security.............................................19 ARTICLE V CAPITAL STOCK.......................................................20 Section 5.01. Certificates of Stock, Uncertificated Shares.........20 Section 5.02. Signatures; Facsimile................................20 Section 5.03. Lost, Stolen or Destroyed Certificates...............20 Section 5.04. Transfer of Stock....................................21 Section 5.05. Record Date..........................................21 Section 5.06. Registered Stockholders..............................22 Section 5.07. Transfer Agent and Registrar.........................23 ii SECTION PAGE - ------- ---- ARTICLE VI INDEMNIFICATION.....................................................23 Section 6.01. Nature of Indemnity..................................23 Section 6.02. Successful Defense...................................24 Section 6.03. Determination That Indemnification Is Proper.........24 Section 6.04. Advance Payment of Expenses..........................24 Section 6.05. Procedure for Indemnification of Directors and Officers.....................................25 Section 6.06. Survival; Preservation of Other Rights...............26 Section 6.07. Insurance............................................26 Section 6.08. Severability.........................................27 ARTICLE VII OFFICES.............................................................27 Section 7.01. Registered Office....................................27 Section 7.02. Other Offices........................................27 ARTICLE VIII GENERAL PROVISIONS..................................................27 Section 8.01. Dividends............................................27 Section 8.02. Reserves.............................................28 Section 8.03. Execution of Instruments.............................28 Section 8.04. Corporate Indebtedness...............................28 Section 8.05. Deposits.............................................29 Section 8.06. Checks...............................................29 Section 8.07. Sale, Transfer, etc. of Securities...................29 Section 8.08. Voting as Stockholder................................29 Section 8.09. Fiscal Year..........................................30 Section 8.10. Seal.................................................30 Section 8.11. Books and Records; Inspection........................30 ARTICLE IX AMENDMENT OF BY-LAWS................................................30 Section 9.01. Amendment............................................30 ARTICLE X CONSTRUCTION........................................................31 iii LEXMARK INTERNATIONAL GROUP, INC. BY-LAWS ------- As amended and restated as of October 26, 1995 ARTICLE I --------- STOCKHOLDERS ------------ Section 1.01. Annual Meetings. The annual meeting of the stockholders of ---------------- Lexmark International Group, Inc. (the "Corporation") for the election of Directors and for the transaction of such other business as properly may come before such meeting shall be held at such place, either within or without the State of Delaware, and at 10:00 A.M. local time on the last Thursday in April (or, if such day is a legal holiday, then on the next succeeding business day), or at such other date and hour, as may be fixed from time to time by resolution of the Board of Directors and set forth in the notice or waiver of notice of the meeting. [Sections 211(a), (b).]* Section 1.02. Special Meetings. Special meetings of the stockholders may be ---------------- called at any time by the Chairman or the President and Chief Executive Officer (or, in the event of the absence or disability of the Chairman and the President and Chief Executive Officer, by the Vice President & Chief Financial Officer or, in the event of his absence or disability, any Vice President designated by the President and Chief Executive Officer to act in the event of his absence or disability), or by the Board of Directors. A special meeting shall be called by the Chairman or the President and Chief Executive Officer (or, in the event of the absence or disability of the Chairman and the President and Chief Executive Officer, by the Vice President & Chief Financial Officer or, in the event of his absence or disability, any Vice President designated by the President and Chief Executive Officer to act in the event of his absence or disability), or by the Secretary immediately upon receipt of a written request therefor by stockholders holding in the aggregate not less than a majority of the - -------- * Citations are to the General Corporation Law of the State of Delaware as in effect on September 1, 1995, and are inserted for reference only, and do not constitute a part of the By-Laws. outstanding shares of the Corporation at the time entitled to vote at any meeting of the stockholders. If such officers or the Board of Directors shall fail to call such meeting within 20 days after receipt of such request, any stockholder executing such request may call such meeting. Such special meetings of the stockholders shall be held at such places, within or without the State of Delaware, as shall be specified in the respective notices or waivers of notice thereof. [Section 211(d).] Section 1.03. Notice of Meetings; Waiver. The Secretary or any Assistant --------------------------- Secretary shall cause written notice of the place, date and hour of each meeting of the stockholders, and, in the case of a special meeting, the purpose or purposes for which such meeting is called, to be given personally or by mail, not less than ten nor more than 60 days prior to the meeting, to each stockholder of record entitled to vote at such meeting. If such notice is mailed, it shall be deemed to have been given to a stockholder when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the record of stockholders of the Corporation, or, if he shall have filed with the Secretary of the Corporation a written request that notices to him be mailed to some other address, then directed to him at such other address. Such further notice shall be given as may be required by law. No notice of any meeting of stockholders need be given to any stockholder who submits a signed waiver of notice, whether before or after the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in a written waiver of notice. The attendance of any stockholder at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the ground that the meeting is not lawfully called or convened. [Sections 222, 229.] Section 1.04. Quorum. Except as otherwise required by law or by the ------ Certificate of Incorporation, the presence in person or by proxy of the holders of record of a majority of the shares entitled to vote at a meeting of stockholders shall constitute a quorum for the transaction of business at such meeting. [Section 216.] Section 1.05. Voting. If, pursuant to Section 5.05 of these By-Laws, a ------ record date has been fixed, 2 every holder of record of shares entitled to vote at a meeting of stockholders shall be entitled to one vote for each share outstanding in his name on the books of the Corporation at the close of business on such record date. If no record date has been fixed,then every holder of record of shares entitled to vote at a meeting of stockholders shall be entitled to one vote for each share of stock standing in his name on the books of the Corporation at the close of business on the day next preceding the day on which notice of the meeting is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. Except as otherwise required by law or by the Certificate of Incorporation, the vote of a majority of the shares represented in person or by proxy at any meeting at which a quorum is present shall be sufficient for the transaction of any business at such meeting. [Sections 212(a), 216.] Section 1.06. Voting by Ballot. No vote of the stockholders need be taken ---------------- by written ballot or conducted by inspectors of election, unless otherwise required by law. Any vote which need not be taken by ballot may be conducted in any manner approved by the meeting. Section 1.07. Adjournment. If a quorum is not present at any meeting of the ----------- stockholders, the stockholders present in person or by proxy shall have the power to adjourn any such meeting from time to time until a quorum is present. Notice of any adjourned meeting of the stockholders of the Corporation need not be given if the place, date and hour thereof are announced at the meeting at which the adjournment is taken, provided that if the adjournment is for more -------- than 30 days, or if after the adjournment a new record date for the adjourned meeting is fixed pursuant to Section 5.05 of these By-Laws, a notice of the adjourned meeting, conforming to the requirements of Section 1.03 of these By-Laws, shall be given to each stockholder of record entitled to vote at such meeting. At any adjourned meeting at which a quorum is present, any business may be transacted that might have been transacted on the original date of the meeting. [Section 222(c).] Section 1.08. Proxies. Any stockholder entitled to vote at any meeting of ------- the stockholders or to express consent to or dissent from corporate action without a meeting may, by a written instrument signed by such stockholder or his attorney-in-fact, authorize another person or persons to vote at any such meeting and express such consent or dissent for him by proxy. No such proxy shall be 3 voted or acted upon after the expiration of three years from the date of such proxy, unless such proxy provides for a longer period. Every proxy shall be revocable at the pleasure of the stockholder executing it, except in those cases where applicable law provides that a proxy shall be irrevocable. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or by filing another duly executed proxy bearing a later date with the Secretary. Section 212(b), (c).] Section 1.09. Organization; Procedure. At every meeting of stockholders the ----------------------- presiding officer shall be the Chairman or, in the event of his absence or disability, the President and Chief Executive Officer or, in the event of his absence or disability, a presiding officer chosen by a majority of the stockholders present in person or by proxy. The Secretary, or in the event of his absence or disability, the Assistant Secretary, if any, or if there be no Assistant Secretary, in the absence of the Secretary, an appointee of the presiding officer, shall act as Secretary of the meeting. The order of business and all other matters of procedure at every meeting of stockholders may be determined by such presiding officer. Section 1.10. Consent of Stockholders in Lieu of Meeting. To the fullest ------------------------------------------- extent permitted by law, whenever the vote of stockholders at a meeting thereof is required or permitted to be taken for or in connection with any corporate action, such action may be taken without a meeting, without prior notice and without a vote of stockholders, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. Every written consent shall bear the date of signature of each stockholder or member who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within 60 4 days of the earliest dated consent delivered in the manner required by law to the Corporation, written consents signed by a sufficient number of holders or members to take action are delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. [Section 228.] Section 1.11. Stockholder Proposals and Nominations of Directors. ------------------------------------------------------- Nominations for election to the Board of Directors of the Corporation at a meeting of the stockholders may be made by the Board of Directors, or on behalf of the Board of Directors by a committee appointed by the Board of Directors, or (subject to compliance with the remainder of this section) by any stockholder of the Corporation entitled to vote for the election of Directors at such meeting. Any nominations, other than those made by or on behalf of the Board of Directors or any such committee, and any proposal by any stockholder to transact any corporate business at an annual or special stockholders meeting, shall be made by written notice, mailed by certified mail, to the Secretary of the Corporation and (i) in the case of an annual meeting, received no later than 60 days prior - to the date of the annual meeting; provided, however, that if less than 60 -------- ------- days' advance notice of a meeting of stockholders is given to the stockholders, such advance notice of proposed business or nomination by such stockholder shall have been made or delivered to the Secretary or Acting Secretary of the Corporation not later than the close of business on the seventh day following the day on which the written notice of a meeting was mailed, and (ii) in the -- case of a special meeting of stockholders, received not later than the close of business on the tenth day following the day on which written notice of the date of the meeting was mailed or public disclosure of the date of the meeting was made, whichever occurs first. Notwithstanding the foregoing, the inclusion of stockholder proposals in proxy materials prepared by the Corporation shall be governed by Rule 14a-8 under the Securities Exchange Act of 1934, as amended. The form of written notice of Director nominations by a stockholder or stockholders shall set forth as to each proposed nominee who is not an incumbent Director (i) the name, age, business address, and if known, residence address of - each nominee proposed in such notice, (ii) the principal occupation or -- 5 employment of each such nominee, (iii) the number of shares of stock of the --- Corporation which are beneficially owned by each such nominee and the nominating stockholder, and (iv) any other information concerning the nominee that must be -- disclosed regarding nominees in proxy solicitations pursuant to Section 14(a) of the Securities Exchange Act of 1934, as amended, and the rules under such section. The Chairman of the Board, or in his absence the President, any Vice President or the Secretary or Acting Secretary, may, if the facts warrant, determine and declare to the meeting of stockholders that a nomination or a proposal made by a stockholder was not made in accordance with the foregoing procedure and that the defective nomination or proposal shall be disregarded. ARTICLE II ---------- BOARD OF DIRECTORS ------------------ Section 2.01. General Powers. Except as may otherwise be provided by law, -------------- by the Certificate of Incorporation or by these By-Laws, the property, affairs and business of the Corporation shall be managed by or under the direction of the Board of Directors and the Board of Directors may exercise all the powers of the Corporation. [Section 141(a).] Section 2.02. Number and Term of Office. The number of Directors ----------------------------- constituting the entire Board of Directors shall be eight, which number may be modified from time to time by resolution of the Board of Directors, but in no event shall the number of Directors be less than one. Each Director (whenever elected) shall hold office until his successor has been duly elected and qualified, or until his earlier death, resignation or removal. [Section 141(b).] Section 2.03. Election of Directors. The Board of Directors shall be ----------------------- divided into three classes, designated Classes I, II and III, which shall, from and after the annual meeting of stockholders to be held in 1996, be as nearly equal in number as possible. Directors of Class I shall be elected at any time on and after the date of filing of the Third Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to hold office for an initial term expiring at the annual meeting of stockholders to be held in 1998. Directors of Class II shall be elected at any time on and after the date of filing 6 of the Third Restated Certificate of Incorporation with the Secretary of State of the State of Delaware to hold office for an initial term expiring at the annual meeting of stockholders to be held in 1999. Directors of Class III shall be elected at the annual meeting of stockholders to be held in 1996 for an initial term of office expiring at the annual meeting of stockholders to be held in 1997; provided that, prior to the annual meeting of stockholders to be held in 1996, the Board of Directors may, by resolution duly adopted, create and appoint one or more persons to fill one or more Class III Directorships up to a number not to exceed the number of Directors in Class I for an interim term expiring at the annual meeting of stockholders to be held in 1996. At each annual meeting of stockholders following the annual meeting of stockholders to be held in 1996, the respective successors of the Directors whose terms are expiring shall be elected for terms expiring at the annual meeting of stockholders held in the third succeeding year. The holders of a majority of the shares then entitled to vote at an election of Directors may remove any Director or the entire Board of Directors, but only for cause. Section 2.04. Annual and Regular Meetings. The annual meeting of the Board --------------------------- of Directors for the purpose of electing officers and for the transaction of such other business as may come before the meeting shall be held as soon as possible following adjournment of the annual meeting of the stockholders at the place of such annual meeting of the stockholders. Notice of such annual meeting of the Board of Directors need not be given. The Board of Directors from time to time may by resolution provide for the holding of regular meetings (in addition to such annual meeting) and fix the place (which may be within or without the State of Delaware) and the date and hour of such meetings. Notice of regular meetings need not be given, provided, however, that if the Board of Directors -------- shall fix or change the time or place of any regular meeting, notice of such action shall be mailed promptly, or sent by telecopier, telegram, radio or cable, to each Director who shall not have been present at the meeting at which such action was taken, addressed to him at his usual place of business, or shall be delivered to him personally, provided further, however, that the Chairman -------- ------- shall have the authority to change the time or place of any regular meeting fixed by the Board of Directors by providing notice to each director in the manner specified for calling a special meeting pursuant to Section 2.05 of these By-laws. Notice of such action need not be given to any Director who attends the first regular meeting after such action is taken without 7 protesting the lack of notice to him, prior to or at the commencement of such meeting, or to any Director who submits a signed waiver of notice, whether before or after such meeting. [Section 141(g).] Section 2.05. Special Meetings; Notice. Special meetings of the Board of ------------------------- Directors shall be held whenever called by the Chairman or the President and Chief Executive Officer or, in the event of the absence or disability of the Chairman and the President and Chief Executive Officer, by the Vice President & Chief Financial Officer or, in the event of his absence or disability, any other Vice President who has been designated by the President and Chief Executive Officer to act in the event of his absence or disability, at such place (within or without the State of Delaware), date and hour as may be specified in the respective notices or waivers of notice of such meetings. Special meetings of the Board of Directors shall be called by the Chairman or the President and Chief Executive Officer (or, in the event of the absence or disability of the Chairman and the President and Chief Executive Officer, by the Vice President and Chief Financial Officer or, in the event of his absence or disability, any other Vice President designated by the President and Chief Executive Officer to act in the event of his absence or disability), or by the Secretary, promptly upon receipt of a written request therefor by at least three Directors, and if such officers or the Board of Directors shall fail to call such meeting within five days after receipt of such request, any Director executing such request may call such meeting; and any such special meeting shall be held at such place, within or without the State of Delaware, as shall be specified in the notice thereof. Special meetings of the Board of Directors may be called on 24 hours' notice, if notice is given to each Director personally or by telephone, telecopy or telegram, or on five days' notice, if notice is mailed to each Director, addressed to him at his usual place of business. Notice of any special meeting need not be given to any Director who attends such meeting without protesting the lack of notice to him, prior to or at the commencement of such meeting, or to any Director who submits a signed waiver of notice, whether before or after such meeting, and any business may be transacted thereat. [Sections 141(g), 229.] Section 2.06. Quorum; Voting. At all meetings of the Board of Directors, --------------- the presence of a majority of the total authorized number of Directors shall constitute a quorum for the transaction of business. Except as otherwise required by law, the vote of a majority of the Directors 8 present at any meeting at which a quorum is present shall be the act of the Board of Directors. [Section 141(b).] Section 2.07. Adjournment. A majority of the Directors present, whether or ----------- not a quorum is present, may adjourn any meeting of the Board of Directors to another time or place. No notice need be given of any adjourned meeting unless the time and place of the adjourned meeting are not announced at the time of adjournment, in which case notice conforming to the requirements of Section 2.05 of these By-Laws shall be given to each Director. Section 2.08. Action Without a Meeting. Any action required or permitted to ------------------------ be taken at any meeting of the Board of Directors may be taken without a meeting if all members of the Board of Directors consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the Board of Directors. [Section 141(f).] Section 2.09. Regulations; Manner of Acting. To the extent consistent with ------------------------------ applicable law, the Certificate of Incorporation and these By-Laws, the Board of Directors may adopt such rules and regulations for the conduct of meetings of the Board of Directors and for the management of the property, affairs and business of the Corporation as the Board of Directors may deem appropriate. The Directors shall act only as a Board, and the individual Directors shall have no power as such. Section 2.10. Action by Telephonic Communications. Members of the Board of ----------------------------------- Directors may participate in a meeting of the Board of Directors by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this provision shall constitute presence in person at such meeting. [Section 141(i).] Section 2.11. Resignations. Any Director may resign at any time by ------------ delivering a written notice of resignation, signed by such Director, to the President and Chief Executive Officer or the Secretary. Unless otherwise specified therein, such resignation shall take effect upon delivery. [Section 141(b).] Section 2.12. Removal of Directors. Any Director may be removed at any --------------------- time, for cause, upon the affirmative vote of the holders of a majority of the outstanding shares 9 of stock of the Corporation entitled to vote for the election of such Director, cast at a special meeting of stockholders called for the purpose. Any vacancy in the Board of Directors caused by any such removal may be filled at such meeting by the stockholders entitled to vote for the election of the Director so removed. If such stockholders do not fill such vacancy at such meeting (or in the written instrument effecting such removal, if such removal was effected by consent without a meeting), such vacancy may be filled in the manner provided in Section 2.13 of these By-Laws. [Section 141(b).] Section 2.13. Vacancies and Newly Created Directorships. If any vacancies ------------------------------------------ shall occur in the Board of Directors, by reason of death, resignation, removal or otherwise, or if the authorized number of Directors shall be increased, the Directors then in office shall continue to act, and such vacancies and newly created Directorships may be filled by a majority of the Directors then in office, although less than a quorum. A Director elected to fill a vacancy or a newly created Directorship shall hold office until his successor has been elected and qualified or until his earlier death, resignation or removal. Any such vacancy or newly created Directorship may also be filled at any time by vote of the stockholders. [Section 223.] Section 2.14. Compensation. The amount, if any, which each Director shall ------------ be entitled to receive as compensation for his services as a Director shall be fixed from time to time by resolution of the Board of Directors, provided that -------- no Director (a) who is an officer or employee of the Corporation or (b) who is - - an officer or employee of, or an affiliate (as such term is defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended) of, The Clayton & Dubilier Private Equity Fund IV Limited Partnership or any other stockholder of the Company holding 5% or more of the Company's equity securities shall be entitled to receive any compensation for his services as a Director (although he shall be entitled to be reimbursed for any reasonable out-of-pocket expenses incurred in connection with his service as a Director). [Section 141(h).] Section 2.15. Reliance on Accounts and Reports, etc. A Director, or a ---------------------------------------- member of any Committee designated by the Board of Directors shall, in the performance of his duties, be fully protected in relying in good faith upon the records of the Corporation and upon information, opinions, reports or statements presented to the Corporation by any of the Corporation's officers or employees, or Committees 10 designated by the Board of Directors, or by any other person as to the matters the member reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation. [Section 141(e).] ARTICLE III ----------- EXECUTIVE COMMITTEE AND OTHER COMMITTEES ---------------------------------------- Section 3.01. How Constituted. The Board of Directors may, by resolution ---------------- adopted by a majority of the whole Board, designate one or more committees, including an Executive Committee, each such committee to consist of such number of Directors as from time to time may be fixed by the Board of Directors, provided that the Executive Committee shall initially consist of three or more - -------- Directors, one of whom shall be the Chairman. The Board of Directors may designate one or more Directors as alternate members of any such committee, who may replace any absent or disqualified member or members at any meeting of such committee. Thereafter, members (and alternate members, if any) of each such committee may be designated at the annual meeting of the Board of Directors. Any such committee may be abolished or re-designated from time to time by the Board of Directors. Each member (and each alternate member) of any such committee (whether designated at an annual meeting of the Board of Directors or to fill a vacancy or otherwise) shall hold office until his successor shall have been designated or until he shall cease to be a Director, or until his earlier death, resignation or removal. [Section 141(c).] Section 3.02. Powers. During the intervals between the meetings of the ------ Board of Directors, the Executive Committee, except as otherwise provided in this Section 3.02, shall have and may exercise all the powers and authority of the Board of Directors in the management of the property, affairs and business of the Corporation. Each other committee of the Board of Directors, except as otherwise provided in this Section 3.02, shall have and may exercise such powers of the Board of Directors as may be provided by resolution or resolutions of the Board of Directors. None of the Executive Committee or any other committee of the Board of Directors shall have the power or authority: 11 (a) to amend the Certificate of Incorporation (except that such a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board of Directors as provided in Section 151(a) of the General Corporation Law of the State of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the Corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the Corporation or fix the number of shares of any series of stock or authorize the increase or decrease of the shares of any series) or By-laws of the Corporation; (b) to adopt an agreement of merger or consolidation or a certificate of ownership and merger; (c) to recommend to the stockholders the sale, lease or exchange of all or substantially all of the Corporation's property and assets; (d) to recommend to the stockholders the dissolution of the Corporation or a revocation of a dissolution; (e) to declare a dividend; (f) to authorize the issuance of stock; (g) to remove the Chairman, or the President and Chief Executive Officer, or a Director, or any other officer of the Corporation; (h) to authorize any borrowing of funds, other than under existing facilities, that is material to the capital structure of the Corporation; (i) to authorize any new compensation or benefit program; (j) to appoint or discharge the Corporation's independent public accountants; (k) to authorize the annual operating plan, annual capital expenditure plan and strategic plan; 12 (l) to authorize the acquisition of any business or any segment thereof from any person or entity, whether by way of asset purchase, stock purchase, merger or other business combination, if such transaction would require a waiver under or modification of any material financing agreement or loan document to which the Corporation is a party, including the Amended and Restated Secured United States Credit Agreement, dated as of April 21, 1995; or (m) to abolish or usurp the authority of another committee of the Board of Directors. The Executive Committee shall have, and any other committee may be granted by the Board of Directors, power to authorize the seal of the Corporation to be affixed to any or all papers which may require it. [Section 141(c).] Section 3.03. Proceedings. Each committee of the Board of Directors may fix ----------- its own rules of procedure and may meet at such place (within or without the State of Delaware), at such time and upon such notice, if any, as it shall determine from time to time, provided that, unless the Executive Committee or -------- the Board of Directors otherwise determines, the Executive Committee shall meet at least once during each month other than months in which meetings of the Board of Directors are held, and promptly following the giving of notice of a meeting of such Committee by the Chairman or any two members of such Committee. Each such committee of the Board of Directors shall keep minutes of its proceedings and shall report such proceedings to the Board of Directors at the meeting of the Board of Directors next following any such proceedings. Section 3.04. Quorum and Manner of Acting. Except as may be otherwise ----------------------------- provided in the resolution creating any committee of the Board of Directors, at all meetings of such committee the presence of members (or alternate members) constituting a majority of the total authorized membership of such committee shall constitute a quorum for the transaction of business. The act of the majority of the members present at any meeting at which a quorum is present shall be the act of such committee. Any action required or permitted to be taken at any meeting of any such committee may be taken without a meeting, if all members of such committee shall consent to such action in writing and such writing or writings are filed with the minutes of the proceedings of such committee. The members of any such committee shall act only as a committee, and the 13 individual members of such committee shall have no power as such. [Section 141(c).] Section 3.05. Action by Telephonic Communications. Members of any committee ----------------------------------- of the Board of Directors may participate in a meeting of such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this provision shall constitute presence in person at such meeting. [Section 141(I).] Section 3.06. Absent or Disqualified Members. In the absence or ---------------------------------- disqualification of a member of any committee of the Board of Directors, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. [Section 141(c).] Section 3.07. Resignations. Any member (and any alternate member) of any ------------ committee of the Board of Directors may resign at any time by delivering a written notice of resignation, signed by such member, to the Chairman or the President and Chief Executive Officer. Unless otherwise specified therein, such resignation shall take effect upon delivery. Section 3.08. Removal. Any member (and any alternate member) of any ------- committee of the Board of Directors may be removed at any time, either for or without cause, by resolution adopted by a majority of the whole Board of Directors. Section 3.09. Vacancies. If any vacancy shall occur in any committee of the --------- Board of Directors, by reason of disqualification, death, resignation, removal or otherwise, the remaining members (and any alternate members) shall continue to act, and any such vacancy may be filled by the Board of Directors. 14 ARTICLE IV ---------- OFFICERS AND AGENTS ------------------- Section 4.01. Number. The officers of the Corporation shall be elected by ------ the Board of Directors and shall consist of a Chairman, a President and Chief Executive Officer, one or more Vice Presidents, a Secretary, a Treasurer and such other officers as the Board of Directors shall designate. The Board of Directors also may elect one or more Assistant Secretaries and Assistant Treasurers in such numbers as the Board of Directors may determine. In addition, the Board of Directors or the President and Chief Executive Officer may choose one or more corporate agents to hold the positions of Vice President and General Counsel, Vice President of Human Resources and Director of Taxes. Any number of offices may be held by the same person. No officer need be a Director of the Corporation. [Section 142(a), (b).] Section 4.02. Election. Unless otherwise determined by the Board of -------- Directors, the officers of the Corporation shall be elected by the Board of Directors at the annual meeting of the Board of Directors, and shall be elected to hold office until the next succeeding annual meeting of the Board of Directors. In the event of the failure to elect officers at such annual meeting, officers may be elected at any regular or special meeting of the Board of Directors. Each officer shall hold office until his successor has been elected and qualified, or until his earlier death, resignation or removal. [Section 142(b).] Section 4.03. Salaries. The salaries of all officers of the Corporation -------- shall be fixed by the Board of Directors and the salaries of all corporate agents shall be fixed by the President and Chief Executive Officer. Section 4.04. Removal and Resignation; Vacancies. Any officer may be ------------------------------------- removed for or without cause at any time by the Board of Directors. Any corporate agent may be removed for or without cause at any time by the President and Chief Executive Officer or the Board of Directors. Any officer or corporate agent may resign at any time by delivering a written notice of resignation, signed by such officer, to the Board of Directors or the President and Chief Executive Officer. Unless otherwise specified therein, such resignation shall take effect upon delivery. Any vacancy occurring in any office of the Corporation by 15 death, resignation, removal or otherwise, shall be filled by the Board of Directors. [Section 142(b), (e).] Section 4.05. Authority and Duties of Officers. The officers of the ----------------------------------- Corporation shall have such authority and shall exercise such powers and perform such duties as may be specified in these By-Laws, except that in any event each officer shall exercise such powers and perform such duties as may be required by law. [Section 142(a). Section 4.06. The Chairman. The Chairman shall have general supervision and ------------ control of the policies, business and affairs of the Corporation, subject to the control and authority of the Board of Directors. The Chairman shall preside at all meetings of the stockholders, the Board of Directors and the Executive Committee at which he is present. Section 4.07. The President and Chief Executive Officer. The President and ----------------------------------------- Chief Executive Officer shall preside, in the event of the absence or disability of the Chairman, at all meetings of the stockholders and Directors at which he is present, shall be the chief executive officer and the chief operating officer of the Corporation, shall have general control and supervision of the policies and operations of the Corporation (subject to the authority of the Board of Directors and the Chairman), and shall see that all orders and resolutions of the Board of Directors and the Chairman are carried into effect. He shall manage and administer the Corporation's business and affairs and shall also perform all duties and exercise all powers usually pertaining to the office of a chief executive officer and a chief operating officer of a corporation. He shall have the authority to sign, in the name and on behalf of the Corporation, checks, orders, contracts, leases, notes, drafts and other documents and instruments in connection with the business of the Corporation, and together with the Secretary or an Assistant Secretary, conveyances of real estate and other documents and instruments to which the seal of the Corporation is affixed. He shall have the authority to cause the employment or appointment of such employees and agents of the Corporation as the conduct of the business of the Corporation may require, to fix their compensation, and to remove or suspend any employee or agent elected or appointed by the President and Chief Executive Officer or the Board of Directors. The President and Chief Executive Officer shall perform such other duties and have such other powers as the Board of Directors or the Chairman may from time to time prescribe. 16 Section 4.08. Vice Presidents and Corporate Agents. Each Vice President and ------------------------------------ each corporate agent shall perform such duties and exercise such powers as may be assigned to him from time to time by the President and Chief Executive Officer and these By-Laws. In the absence of the President and Chief Executive Officer, the duties of the President and Chief Executive Officer shall be performed and his powers may be exercised by such Vice President as shall be designated by the President and Chief Executive Officer, or failing such designation, such duties shall be performed and such powers may be exercised by each Vice President in the order of their earliest election to that office, subject in any case to review and superseding action by the President and Chief Executive Officer. Section 4.09 The Vice President & Chief Financial Officer. The Vice ------------------------------------------------- President & Chief Financial Officer shall be the chief financial officer of the Corporation. He shall report to the President and Chief Executive Officer and shall be responsible for reviewing and recommending financial policy to the Board of Directors, and for analysis and reporting of the financial results of the Corporation to the Board of Directors. He shall supervise all tax and internal audit functions of the Corporation. He will also be responsible for review, coordination and general supervision of all of the foregoing functions for subsidiaries of the Corporation. He shall perform such other duties and exercise such other powers as may be assigned or delegated to him by the President and Chief Executive Officer or the Board of Directors. Section 4.10. The Treasurer. The Treasurer shall report to the Vice -------------- President & Chief Financial Officer, and shall have the following powers and duties: (a) He shall have charge and supervision over and be responsible for the moneys, securities, receipts and disbursements of the Corporation, and shall keep or cause to be kept full and accurate records of all receipts of the Corporation. (b) He shall cause the moneys and other valuable effects of the Corporation to be deposited in the name and to the credit of the Corporation in such banks or trust companies or with such bankers or other depositaries as shall be selected in accordance with Section 8.05 of these By-Laws. 17 (c) He shall cause the moneys of the Corporation to be disbursed by checks or drafts (signed as provided in Section 8.06 of these By-Laws) upon the authorized depositaries of the Corporation and cause to be taken and preserved proper vouchers for all moneys disbursed. (d) He may sign (unless an Assistant Treasurer or the Secretary or an Assistant Secretary shall have signed) certificates representing stock of the Corporation the issuance of which shall have been authorized by the Board of Directors. (e) He shall be responsible for and supervise the Corporation's insurance program. (f) He shall perform such other duties as may be assigned to him by the Vice President & Chief Financial Officer. Section 4.11. The Secretary. The Secretary shall have the following powers ------------- and duties: (g) He shall keep or cause to be kept a record of all the proceedings of the meetings of the stockholders and of the Board of Directors in books provided for that purpose. (h) He shall cause all notices to be duly given in accordance with the provisions of these By-Laws and as required by law. (i) Whenever any committee of the Board of Directors shall be appointed pursuant to a resolution of the Board of Directors, he shall furnish a copy of such resolution to the members of such committee. (j) He shall be the custodian of the records and of the seal of the Corporation and cause such seal (or a facsimile thereof) to be affixed to all certificates representing shares of the Corporation prior to the issuance thereof and to all instruments the execution of which on behalf of the Corporation under its seal shall have been duly authorized in accordance with these By-Laws, and when so affixed he may attest the same. (k) He shall properly maintain and file all books, reports, statements, certificates and all other 18 documents and records required by law, the Certificate of Incorporation or these By-Laws. (l) He shall have charge of the stock books and ledgers of the Corporation and shall cause the stock and transfer books to be kept in such manner as to show at any time the number of shares of stock of the Corporation of each class issued and outstanding, the names (alphabetically arranged) and the addresses of the holders of record of such shares, the number of shares held by each holder and the date as of which each became such holder of record. (m) He shall sign (unless the Treasurer, an Assistant Treasurer or Assistant Secretary shall have signed) certificates representing shares of the Corporation the issuance of which shall have been authorized by the Board of Directors. (n) He shall perform, in general, all duties incident to the office of secretary and such other duties as may be specified in these By-Laws or as may be assigned to him from time to time by the Board of Directors or the President and Chief Executive Officer. Section 4.12. Additional Officers and Agents. The Board of Directors may ------------------------------- appoint such other officers and agents as it may deem appropriate, and such other officers and agents shall hold their offices for such terms and shall exercise such powers and perform such duties as may be determined from time to time by the Board of Directors. The Board of Directors from time to time may delegate to any officer or agent the power to appoint subordinate officers or agents and to prescribe their respective rights, terms of office, authorities and duties. Any such officer or agent may remove any such subordinate officer or agent appointed by him, for or without cause. [Section 142(a), (b).] Section 4.13. Security. The Board of Directors may require any officer, -------- agent or employee of the Corporation to provide security for the faithful performance of his duties, in such amount and of such character as may be determined from time to time by the Board of Directors. [Section 142(c).] 19 ARTICLE V --------- CAPITAL STOCK ------------- Section 5.01. Certificates of Stock, Uncertificated Shares. The shares of -------------------------------------------- the Corporation shall be represented by certificates, provided that the Board -------- of Directors may provide by resolution or resolutions that some or all of any or all classes or series of the stock of the Corporation shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until each certificate is surrendered to the Corporation. Notwithstanding the adoption of such a resolution by the Board of Directors, every holder of stock in the Corporation represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the Corporation, by the President and Chief Executive Officer or a Vice President, and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary, representing the number of shares registered in certificate form. Such certificate shall be in such form as the Board of Directors may determine, to the extent consistent with applicable law, the Certificate of Incorporation and these By-Laws. [Section 158.] Section 5.02. Signatures; Facsimile. Any or all of the signatures on the ---------------------- certificate referred to in Section 5.01 of these By-Laws may be a facsimile, engraved or printed, to the extent permitted by law. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature has been placed upon, a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. [Section 158.] Section 5.03. Lost, Stolen or Destroyed Certificates. The Board of ------------------------------------------ Directors may direct that a new certificate be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon delivery to the Board of Directors of an affidavit of the owner or owners of such certificate, setting forth such allegation. The Board of Directors may require the owner of such lost, stolen or destroyed certificate, or his legal representative, to give the Corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged 20 loss, theft or destruction of any such certificate or the issuance of any such new certificate. [Section 167.] Section 5.04. Transfer of Stock. Upon surrender to the Corporation or the ----------------- transfer agent of the Corporation of a certificate for shares, duly endorsed or accompanied by appropriate evidence of succession, assignment or authority to transfer, the Corporation shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Within a reasonable time after the transfer of uncertificated stock, the Corporation shall send to the registered owner thereof a written notice containing the information required to be set forth or stated on certificates pursuant to Sections 151, 156, 202(a) or 218(a) of the General Corporation Law of the State of Delaware. Subject to the provisions of the Certificate of Incorporation and these By-Laws, the Board of Directors may prescribe such additional rules and regulations as it may deem appropriate relating to the issue, transfer and registration of shares of the Corporation. [Section 151.] Section 5.05. Record Date. In order to determine the stockholders entitled ----------- to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix, in advance, a record date, which record date shall not precede the date on which the resolution fixing the record date is adopted by the Board of Directors, and which shall not be more than 60 nor less than ten days before the date of such meeting. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting, provided, however, ------- that the Board of Directors may fix a new record date for the adjourned meeting. In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by law, shall be the first date on which a signed written 21 consent setting forth the action taken or proposed to be taken is delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights of the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. [Section 213.] Section 5.06. Registered Stockholders. Prior to due surrender of a ------------------------ certificate for registration of transfer, the Corporation may treat the registered owner as the person exclusively entitled to receive dividends and other distributions, to vote, to receive notice and otherwise to exercise all the rights and powers of the owner of the shares represented by such certificate, and the Corporation shall not be bound to recognize any equitable or legal claim to or interest in such shares on the part of any other person, whether or not the Corporation shall have notice of such claim or interests. Whenever any transfer of shares shall be made for collateral security, and not absolutely, it shall be so expressed in the entry of the transfer if, when the certificates are presented to the Corporation for transfer or uncertificated shares are requested to be transferred, both the transferror and transferee request the Corporation to do so. [Section 159.] 22 Section 5.07. Transfer Agent and Registrar. The Board of Directors may ------------------------------ appoint one or more transfer agents and one or more registrars, and may require all certificates representing shares to bear the signature of any such transfer agents or registrars. ARTICLE VI ---------- INDEMNIFICATION --------------- Section 6.01. Nature of Indemnity. The Corporation shall indemnify any ------------------- person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was or has agreed to become a Director, officer or corporate agent of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a Director, officer or corporate agent, of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, and may indemnify any person who was or is a party or is threatened to be made a party to such an action, suit or proceeding by reason of the fact that he is or was or has agreed to become an employee or agent of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or on his behalf in connection with such action, suit or proceeding and any appeal therefrom, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding had no reasonable cause to believe his conduct was unlawful; except that in the case of an action or suit by or in the right of the Corporation to procure a judgment in its favor (a) such indemnification shall be limited to expenses (including attorneys' fees) actually and reasonably incurred by such person in the defense or settlement of such action or suit, and (b) no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication 23 of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper. The termination of any action, suit or proceeding by judgment, order settlement, conviction, or upon a plea of nolo contendere or its equivalent, ---- ---------- shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. [Sections 145(a), (b).] Section 6.02. Successful Defense. To the extent that a director, officer, ------------------ employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 6.01 of these By-Laws or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. [Section 145(c).] Section 6.03. Determination That Indemnification Is Proper. Any --------------------------------------------------- indemnification of a Director or officer of the Corporation under Section 6.01 of these By-Laws (unless ordered by a court) shall be made by the Corporation unless a determination is made that indemnification of the Director or officer is not proper in the circumstances because he has not met the applicable standard of conduct set forth in Section 6.01 of these By-Laws. Any indemnification of an employee or agent of the Corporation under Section 6.01 of these By-Laws (unless ordered by a court) may be made by the Corporation upon a determination that indemnification of the employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 6.01 of these By-Laws. Any such determination shall be made (a) by the - Board of Directors by a majority vote of a quorum consisting of Directors who were not parties to such action, suit or proceeding, or (b) if such a quorum is - not obtainable, or, even if obtainable a quorum of disinterested Directors so directs, by independent legal counsel in a written opinion, or (c) by the - stockholders. [Section 145(d).] Section 6.04. Advance Payment of Expenses. Expenses (including attorneys' --------------------------- fees) incurred by a Director or officer in defending any civil, criminal, administrative 24 or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the Director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation as authorized in this Article VI. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board of Directors deems appropriate. The Board of Directors may authorize the Corporation's counsel to represent such director, officer, employee or agent in any action, suit or proceeding, whether or not the Corporation is a party to such action, suit or proceeding. [Section 145(e).] Section 6.05. Procedure for Indemnification of Directors and Officers. Any ------------------------------------------------------- indemnification of a Director or officer of the Corporation under Sections 6.01 and 6.02 of these By-Laws, or advance of costs, charges and expenses to a Director or officer under Section 6.04 of these ByLaws, shall be made promptly, and in any event within 30 days, upon the written request of the Director or officer. If a determination by the Corporation that the Director or officer is entitled to indemnification pursuant to this Article VI is required, and the Corporation fails to respond within 60 days to a written request for indemnity, the Corporation shall be deemed to have approved such request. If the Corporation denies a written request for indemnity or advancement of expenses, in whole or in part, or if payment in full pursuant to such request is not made within 30 days, the right to indemnification or advances as granted by this Article VI shall be enforceable by the Director or officer in any court of competent jurisdiction. Such person's costs and expenses incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such action shall also be indemnified by the Corporation. It shall be a defense to any such action (other than an action brought to enforce a claim for the advance of costs, charges and expenses under Section 6.04 of these By-Laws where the required undertaking, if any, has been received by the Corporation) that the claimant has not met the standard of conduct set forth in Section 6.01 of these By-Laws, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, its independent legal counsel, and its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because he has met the applicable standard of 25 conduct set forth in Section 6.01 of these By-Laws, nor the fact that there has been an actual determination by the Corporation (including its Board of Directors, its independent legal counsel, and its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 6.06. Survival; Preservation of Other Rights. The foregoing ------------------------------------------ indemnification provisions shall be deemed to be a contract between the Corporation and each director, officer, employee and agent who serves in any such capacity at any time while these provisions as well as the relevant provisions of the Delaware Corporation Law are in effect and any repeal or modification thereof shall not affect any right or obligation then existing with respect to any state of facts then or previously existing or any action, suit or proceeding previously or thereafter brought or threatened based in whole or in part upon any such state of facts. Such a "contract right" may not be modified retroactively without the consent of such director, officer, employee or agent. The indemnification provided by this Article VI shall not be deemed -------- exclusive of any other rights to which those indemnified may be entitled under any by-law, agreement, vote of stockholders or disinterested Directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. [Section 145(f), (j).] Section 6.07. Insurance. The Corporation shall purchase and maintain --------- insurance on behalf of any person who is or was or has agreed to become a Director or officer of the Corporation, or is or was serving at the request of the Corporation as a Director or officer of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him or on his behalf in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article VI, provided that such insurance is available on acceptable terms, which - -------- determination shall be made by a vote of a majority of the entire Board of Directors. 26 Section 6.08. Severability. If this Article VI or any portion hereof shall ------------ be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each Director or officer and may indemnify each employee or agent of the Corporation as to costs, charges and expenses (including attorneys' fees), judgments, fines and amounts paid in settlement with respect to any action, suit or proceeding, whether civil, criminal, administrative or investigative, including an action by or in the right of the Corporation, to the fullest extent permitted by any applicable portion of this Article VI that shall not have been invalidated and to the fullest extent permitted by applicable law. ARTICLE VII ----------- OFFICES ------- Section 7.01. Registered Office. The registered office of the Corporation ------------------ in the State of Delaware shall be located at Corporation Trust Center, 1209 Orange Street in the City of Wilmington, County of New Castle. Section 7.02. Other Offices. The Corporation may maintain offices or places ------------- of business at such other locations within or without the State of Delaware as the Board of Directors may from time to time determine or as the business of the Corporation may require. ARTICLE VIII ------------ GENERAL PROVISIONS ------------------ Section 8.01. Dividends. Subject to any applicable provisions of law and --------- the Certificate of Incorporation, dividends upon the shares of the Corporation may be declared by the Board of Directors at any regular or special meeting of the Board of Directors and any such dividend may be paid in cash, property, or shares of the Corporation's Capital Stock. A member of the Board of Directors, or a member of any Committee designated by the Board of Directors shall be fully protected in relying in good faith upon the records of the Corporation and upon such information, opinions, reports or statements presented to the Corporation by any of its officers or employees, or Committees of the Board of 27 Directors, or by any other person as to matters the Director reasonably believes are within such other person's professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation, as to the value and amount of the assets, liabilities and/or net profits of the Corporation, or any other facts pertinent to the existence and amount of surplus or other funds from which dividends might properly be declared and paid. [Sections 172, 173.] Section 8.02. Reserves. There may be set aside out of any funds of the -------- Corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, thinks proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation or for such other purpose as the Board of Directors shall think conducive to the interest of the Corporation, and the Board of Directors may similarly modify or abolish any such reserve. [Section 171.] Section 8.03. Execution of Instruments. The Chairman, the President and ------------------------- Chief Executive Officer, any Vice President, the Secretary or the Treasurer may enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation. The Board of Directors or the Chairman, the President and Chief Executive Officer or the Vice President & Chief Financial Officer may authorize any other officer or agent to enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation. Any such authorization may be general or limited to specific contracts or instruments. Section 8.04. Corporate Indebtedness. No loan shall be contracted on behalf ---------------------- of the Corporation, and no evidence of indebtedness shall be issued in its name, unless authorized by the Board of Directors or the Chairman, the President and Chief Executive Officer or the Vice President & Chief Financial Officer. Such authorization may be general or confined to specific instances. Loans so authorized may be effected at any time for the Corporation from any bank, trust company or other institution, or from any firm, corporation or individual. All bonds, debentures, notes and other obligations or evidences of indebtedness of the Corporation issued for such loans shall be made, executed and delivered as the Board of Directors or the Chairman, the President and Chief Executive Officer or the Vice President & Chief Financial Officer shall authorize. 28 When so authorized by the Board of Directors or the Chairman, the President and Chief Executive Officer or the Vice President & Chief Financial Officer, any part of or all the properties, including contract rights, assets, business or good will of the Corporation, whether then owned or thereafter acquired, may be mortgaged, pledged, hypothecated or conveyed or assigned in trust as security for the payment of such bonds, debentures, notes and other obligations or evidences of indebtedness of the Corporation, and of the interest thereon, by instruments executed and delivered in the name of the Corporation. Section 8.05. Deposits. Any funds of the Corporation may be deposited from -------- time to time in such banks, trust companies or other depositaries as may be determined by the Board of Directors or the Chairman, the President and Chief Executive Officer or the Vice President & Chief Financial Officer, or by such officers or agents as may be authorized by the Board of Directors or the Chairman, the President and Chief Executive Officer or the Vice President & Chief Financial Officer to make such determination. Section 8.06. Checks. All checks or demands for money and notes of the ------ Corporation shall be signed by such officer or officers or such agent or agents of the Corporation, and in such manner, as the Board of Directors or the Chairman or the President and Chief Executive Officer from time to time may determine. Section 8.07. Sale, Transfer, etc. of Securities. To the extent authorized ---------------------------------- by the Board of Directors or by the Chairman, the President and Chief Executive Officer, the Vice President & Chief Financial Officer, any other Vice President, the Secretary or the Treasurer or any other officers designated by the Board of Directors or the Chairman or the President and Chief Executive Officer may sell, transfer, endorse and assign any shares of stock, bonds or other securities owned by or held in the name of the Corporation, and may make, execute and deliver in the name of the Corporation, under its corporate seal, any instruments that may be appropriate to effect any such sale, transfer, endorsement or assignment. Section 8.08. Voting as Stockholder. Unless otherwise determined by ----------------------- resolution of the Board of Directors, each of the Chairman, the President and Chief Executive Officer and the Vice President & Chief Financial Officer shall have full power and authority on behalf of the Corporation to attend any meeting of stockholders of any 29 corporation in which the Corporation may hold stock, and to act, vote (or execute proxies to vote) and exercise in person or by proxy all other rights, powers and privileges incident to the ownership of such stock. Such officers acting on behalf of the Corporation shall have full power and authority to execute any instrument expressing consent to or dissent from any action of any such corporation without a meeting. The Board of Directors may by resolution from time to time confer such power and authority upon any other person or persons. Section 8.09. Fiscal Year. The fiscal year of the Corporation shall ------------ commence on the first day of January of each year (except for the Corporation's first fiscal year which shall commence on the date of incorporation) and shall terminate in each case on December 31. Section 8.10. Seal. The seal of the Corporation shall be circular in form ---- and shall contain the name of the Corporation, the year of its incorporation and the words "Corporate Seal" and "Delaware". The form of such seal shall be subject to alteration by the Board of Directors. The seal may be used by causing it or a facsimile thereof to be impressed, affixed or reproduced, or may be used in any other lawful manner. Section 8.11. Books and Records; Inspection. Except to the extent otherwise ----------------------------- required by law, the books and records of the Corporation shall be kept at such place or places within or without the State of Delaware as may be determined from time to time by the Board of Directors. ARTICLE IX ---------- AMENDMENT OF BY-LAWS -------------------- Section 9.01. Amendment. These By-Laws may be amended, altered or repealed --------- (a) by resolution adopted by a majority of the Board of Directors at any special or regular meeting of the Board if, in the case of such special meeting only, notice of such amendment, alteration or repeal is contained in the notice or waiver of notice of such meeting; or (b) at any regular or special meeting of the stockholders if, in the case of such special meeting 30 only, notice of such amendment, alteration or repeal is contained in the notice or waiver of notice of such meeting. [Section 109(a).] ARTICLE X --------- CONSTRUCTION ------------ Section 10.01. Construction. In the event of any conflict between the ------------ provisions of these By-Laws as in effect from time to time and the provisions of the Certificate of Incorporation of the Corporation as in effect from time to time, the provisions of such Certificate of Incorporation shall be controlling. 31 AMENDMENT NO. 1 DATED AS OF FEBRUARY 13, 1997 TO LEXMARK INTERNATIONAL GROUP, INC. BY-LAWS AS AMENDED AND RESTATED AS OF OCTOBER 26, 1995 Section 1. Amendment to ARTICLE IV of By-Laws. ARTICLE IV of the -------------------------------------- By-Laws is hereby amended by (i) deleting in their entirety Sections 4.07 and 4.08, (ii) renumbering Sections 4.09 through 4.13 as Sections 4.11 through 4.15, respectively, and, then, (iii) inserting the following text as Sections 4.07 through 4.10: Section 4.07 The Chief Executive Officer. The Chief Executive ----------------------------- Officer shall preside, in the event of the absence or disability of the Chairman, at all meetings of the stockholders and Directors at which he is present, shall be the chief executive officer of the Corporation, shall have general control and supervision of the policies of the Corporation (subject to the authority of the Board of Directors), and shall see that all orders and resolutions of the Board of Directors are carried into effect. He shall manage and administer the Corporation's business and affairs and shall also perform all duties and exercise all powers usually pertaining to the office of a chief executive officer of a corporation. The Chief Executive Officer shall have the authority to sign, in the name and on behalf of the Corporation, checks, orders, contracts, leases, notes, drafts and other documents and instruments in connection with the business of the Corporation, and together with the Secretary or an Assistant Secretary, conveyances of real estate and other documents and instruments to which the seal of the Corporation is affixed. The Chief Executive Officer shall have the authority to cause the employment or appointment of such employees and agents of the Corporation as the conduct of the business of the Corporation may require, to fix their compensation, and to remove or suspend any employee or agent elected or appointed by the Chief Executive Officer or the Board of Directors. The Chief Executive Officer shall perform such other duties and have such other powers as the Board of Directors may from time to time prescribe. Section 4.08 The President and Chief Operating Officer. The --------------------------------------------- President and Chief Operating Officer shall, in the event of the absence or disability of the Chief Executive Officer, perform the duties of the Chief Executive Officer (subject to the authority of the Board of Directors to designate some other person as temporary Chairman), shall be the chief operating officer of the Corporation, shall have general control and supervision of the operations of the Corporation and shall have general supervision of the divisions of the Corporation (subject to the authority of the Board of Directors and the Chief Executive Officer). The President and Chief Operating Officer shall manage and administer the Corporation's business and affairs, and shall also perform all duties and exercise all powers usually pertaining to the office of a chief operating officer of a corporation. The President and Chief Operating Officer shall have the authority to sign, in the name and on behalf of the Corporation, checks, orders, contracts, leases, notes, drafts, and other documents and instruments in connection with the business of the Corporation, and together with the Secretary or an Assistant Secretary, conveyances of real estate and other documents and instruments to which the seal of the Corporation is affixed. The President and Chief Operating Officer shall perform such other duties and have such other powers as the Board of Directors or the Chairman or Chief Executive Officer may from time to time prescribe. Section 4.09 Vice Presidents and Corporate Agents. Each Vice ---------------------------------------- President and each corporate agent shall perform such duties and exercise such powers as may be assigned to him from time to time by the Chief Executive Officer and these By-Laws. In the absence of the Chief Executive Officer and the President and Chief Operating Officer, the 2 duties of such officers shall be performed and their powers may be exercised by the Vice President and Chief Financial Officer, and in the absence of the Vice President and Chief Financial Officer, such Vice President as shall be designated by the Chief Executive Officer, or failing such designation, such duties shall be performed and such powers may be exercised by each Vice President in the order of their earliest election to that office, subject in any case to review and superseding action by the Chief Executive Officer. Section 4.10 Changes to References to Certain Officers in these ---------------------------------------------------- By-Laws. Except as set forth in the last sentence of this Section ------- 4.10, all references in these By-Laws to "the President and Chief Executive Officer" shall be replaced with "the Chief Executive Officer". All references in these By-Laws to "in the event of the absence or disability of the Chairman and the President and Chief Executive Officer, by the Vice President and Chief Financial Officer" shall be replaced with "in the event of the absence or disability of the Chairman and Chief Executive Officer, by the President and Chief Operating Officer or, in the event of his absence or disability, by the Vice President and Chief Financial Officer". All references in Article VIII of these By-Laws to "the President and Chief Executive Officer" shall be replaced with "the Chief Executive Officer, the President". 3 EX-4.22 3 WARRANT NO. 6 THIS WARRANT IS NON-TRANSFERABLE WITHOUT THE WRITTEN CONSENT OF THE COMPANY. THIS WARRANT AND THE SHARES OF COMMON STOCK PURCHASABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFERABILITY AS SET FORTH HEREIN AND IN SUCH WARRANT SUBSCRIPTION AGREEMENT. SUCH SHARES MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR THE PROVISIONS OF THIS WARRANT OR OF SUCH WARRANT SUBSCRIPTION AGREEMENT. THE WARRANT REPRESENTED BY THIS CERTIFICATE IS ENTITLED TO THE BENEFITS OF AND IS BOUND BY THE OBLIGATIONS SET FORTH IN THE REGISTRATION AND PARTICIPATION AGREEMENT, DATED AS OF MARCH 27, 1991, AMONG THE COMPANY AND CERTAIN STOCKHOLDERS OF THE COMPANY, A COPY OF WHICH IS LOCATED AT THE PRINCIPAL OFFICE OF THE COMPANY. - ------------------------------ ---------------------------- No. of Shares of Common Stock: Warrant No. 6 462,088 - ------------------------------ ---------------------------- WARRANT To Purchase Common Stock of Lexmark International Group, Inc. (formerly named Lexmark Holding, Inc.) THIS IS TO CERTIFY THAT Keys Foundation, a Netherlands Antilles foundation ("Holder"), or registered assigns, is entitled to purchase from Lexmark International Group, Inc. (formerly named Lexmark Holding, Inc.), a Delaware corporation (the "Company"), 462,088 shares (the "Shares") of Class A Common ------- ------ Stock (as hereinafter defined and subject to adjustment as provided herein), in whole or in part, at any time or times prior to the Expiration Date (as hereinafter defined), at a purchase price of $6.67 per share, all on the terms and conditions and pursuant to the provisions hereinafter set forth. 1. Definitions. As used in this Warrant, the following terms have the ----------- respective meanings set forth below: "Additional Shares of Common Stock" shall mean all shares of Common Stock ----------------------------------- issued by the Company after the Initial Date, other than (a) Warrant Stock, (b) shares of Common Stock issued to members of the management, employees or directors of or consultants to (or former employees of or consultants to) the Company or any Affiliate of the Company (or trusts for the benefit of any relatives of any such employees), (c) shares of Common Stock issued to senior executives of other corporations in which entities managed or sponsored by C&D have made equity investments, (d) shares of Common Stock issued in exchange for shares of the Company's junior participating preferred stock, (e) shares of Class A Common Stock issued upon conversion of shares of Class B Common Stock and (f) shares of Class B Common Stock issued in exchange for shares of Class A Common Stock. "Affiliate" shall mean any person controlling, controlled by or under --------- common control with another person. "Applicable Law" shall have the meaning set forth in Section 3(b). -------------- "Business Day" shall mean any day that is not a Saturday or Sunday or a day ------------ on which banks are required or permitted to be closed in the State of New York. "C&D" shall mean Clayton, Dubilier & Rice, Inc., a Delaware corporation. --- "Class A Common Stock" shall mean the Class A Common Stock, par value $.01 -------------------- per share, of the Company. 2 "Class B Common Stock" shall mean the Class B Common Stock, par value $.01 -------------------- per share, of the Company. "Close of Business" shall have the meaning set forth in Section 2(a). ----------------- "Code" shall have the meaning set forth in Section 3(c). ---- "Commission" shall mean the Securities and Exchange Commission. ---------- "Common Stock" shall mean (except where the con text otherwise indicates) ------------ the Class A Common Stock, as constituted on the date hereof, and any capital stock into which such Common Stock may thereafter be changed (includ ing, without limitation, Class B Common Stock), and shall also mean capital stock of the Company of any other class (regardless of how denominated) issued to the holders of shares of Common Stock upon any reclassification thereof which is also not preferred as to dividends or assets over any other class of stock of the Company and which is not subject to redemption. "Company" shall have the meaning set forth in the preamble to this Warrant. ------- "Convertible Securities" shall mean evidences of indebtedness, shares of ----------------------- stock (other than Class A Common Stock, Class B Common Stock and the Company's junior par ticipating preferred stock) or other securities which are convertible into or exchangeable, with or without payment of additional consideration in cash or property, for Additional Shares of Common Stock, either immediately or upon the occurrence of a specified date or event. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, ------------ or any successor federal statute, and the rules and regulations of the Commission thereunder, as in effect from time to time. 3 "Exercise Period" shall mean the period during which this Warrant is ---------------- exercisable pursuant to Section 2(a). "Exercise Price" shall have the meaning set forth in Section 2(b). -------------- "Expiration Date" shall have the meaning set forth in Section 2(a). --------------- "Holder" shall have the meaning set forth in the preamble to this Warrant. ------ "Initial Date" shall mean March 27, 1991. ------------ "Lexmark" shall mean Lexmark International, Inc. (which was formerly named ------- IBM Information Products Corp oration and, before that, New York Libra Corporation), a Delaware corporation. "License Agreement" shall mean the License Agreement, dated as of November ----------------- 9, 1990, between Lexmark and SSBV. "Outstanding" shall mean, when used with reference to Common Stock, at any ----------- date as of which the number of shares thereof is to be determined, all issued shares of Common Stock, except shares then owned or held by or for the account of the Company or any subsidiary thereof. "Public Offering" shall mean a public offering of shares of common Stock ---------------- underwritten by an investment banking firm of recognized national standing pursuant to an effective registration statement under the Securities Act. "Registration and Participation Agreement" shall mean the Registration and ----------------------------------------- Participation Agreement, dated as of March 27, 1991, among the Company and the other parties thereto. 4 "Restricted Warrant Stock" shall mean shares of Warrant Stock that are -------------------------- evidenced by a certificate bearing the restrictive legend set forth in Section 9(c). "Securities Act" shall mean the Securities Act of 1933, as amended, or any -------------- successor federal statute, and the rules and regulations of the Commission thereunder, as in effect from time to time. "Shares" shall mean the shares of Common Stock purchasable upon exercise of ------ this Warrant, subject to adjustment as provided herein. "SSBV" shall mean Spectrum Sciences B.V., a Netherlands corporation. ---- "Tax Loss" shall have the meaning set forth in Section 3(b). -------- "Transfer Notice" shall have the meaning set forth in Section 9(d). --------------- "Warrant" shall mean this Warrant and all Warrants issued in substitution ------- therefor. "Warrant Stock" shall mean the shares of Common Stock purchased upon -------------- exercise of this Warrant. 2. Duration, Conditions and Exercise of Warrant. (a) Duration and -------------------------------------------------- ------------- Conditions. This Warrant shall expire at 5:00 p.m., New York City time (the - ---------- "Close of Business"), on the seventh anniversary of the Initial Date (such date ----------------- being referred to herein as the "Expiration Date").This Warrant may be exercised --------------- with respect to the Shares, on any Business Day or Business Days prior to the Close of Business on the Expiration Date After the Close of Business on the Expiration Date, this Warrant will become wholly void and of no value. 5 (b) Exercise. Subject to the provisions of this Warrant, Holder shall have -------- the right to purchase from the Company (and the Company shall issue and sell to Holder) the aggregate number of fully paid and nonassessable shares of Common Stock of the Company in respect of which this Warrant is being exercised at a purchase price of $6.67 per share, as adjusted from time to time as provided in this Warrant (such price, as so adjusted, being referred to herein as the "Exercise Price"), in whole or in part. The Exercise Price shall be payable in --------------- cash or by bank cashier's check in New York Clearing House funds payable to the order of the Company or by wire transfer in immediately available funds to an account designated by the Company. This Warrant shall be exercisable only by (i) delivering to the company the form of notice of exercise attached hereto as Attachment A duly completed and signed by Holder or by its duly appointed legal representative or duly authorized attorney, and (ii) within five Business Days thereafter depositing with the Company the certificate evidencing this Warrant and paying the aggregate Exercise Price for the number of shares of Common Stock in respect of which this Warrant is being exercised, provided that the Exercise Price must in any event be paid and the certificate representing this Warrant deposited with the Company prior to the close of Business on the Expiration Date. 3. Tax Matters. (a) Payment and Expenses. The Company shall not be required ----------- -------------------- to pay any stamp, registration or transfer tax or other similar tax or governmental charge imposed in connection with any transfer involved in the issuance of any certificate for shares of Common Stock, unless such tax or charge is imposed by law upon the Company. (b) Withholding Tax. If any deduction or withholding or other required ---------------- payment of United States federal tax in respect of the Warrant or the Warrant Stock is required under applicable law, rules or regulations or any interpretation thereof by the Internal Revenue Service in published or private rulings, notices or publications 6 (collectively "Applicable Law") or if a liability for failure to deduct or --------------- withhold has been assessed against the Company or a statutory notice of deficiency has been sent to the Company, in either case in respect of the Warrant or the Warrant Stock, and the basis of such assessment or statutory notice of deficiency has not been reversed, the Company shall promptly notify Holder prior to first making any such withholding or deduction (unless such notice is not possible, e.g., due to a change in law or notification of change in status of Holder, in which case notification shall be made as soon as reasonably possible under the circumstances then prevailing). The Company shall make reasonable efforts to confer with Holder prior to first making any such withholding or deduction or other arrangement for the payment of such tax in order to determine whether such deduction or withholding is in accord with Applicable Law. Should the Company determine after consultation that withholding is required by Applicable Law or because of such a prior assessment or assessment or statutory notice of deficiency, the Company shall be entitled at its option (i) to require payment in cash of the amount of any such tax prior to issuing any shares of common stock or (ii) to hold in escrow for Holder 30% of the number of shares of Common Stock with respect to which the Warrant is being exercised pending the Company's receipt of payment by Holder of the amount of such tax. At the request of the Company, Holder shall furnish whatever forms and certifications are necessary in order to establish that no withholding or deduction is required in respect of the Warrant and the exercise thereof and, if requested, an opinion of United States tax counsel to Holder reasonably satisfactory to the Company that no withholding or deduction is required in respect of the Warrant or the exercise thereof. If a liability is assessed against the Company for failure to withhold or deduct or require payment of tax in respect of the Warrant or the exercise thereof, the Company shall promptly notify Holder of such assessment. Holder, after consultation with the Company, may promptly take such actions as it deems fit under the circumstances in response to such assessment so long as such action shall not, in the 7 judgment of the Company, have an adverse impact on the Company or is not otherwise prohibited by the terms of this Warrant. Notwithstanding the foregoing, the Company may promptly pay such assessment, and (without limiting the Company's remedies otherwise available at law or in equity, by contract or otherwise), Holder shall indemnify and hold the Company harmless against the amount of any such assessment, together with interest, penalties or additions to tax and any reasonable attorneys fees incurred and taking into account the assumed income tax consequences to the Company of the receipt of any amounts payable under this indemnity (collectively, a "Tax Loss"). Holder shall pay all -------- such amounts to the Company within five business days of actually receiving notice from the Company with respect thereto together with a certificate showing the calculation of the Tax Loss in reasonable detail. If Holder is required by law to deduct or withhold any tax in respect of such payment, the amount of such payment shall be increased by Holder as may be necessary so that after making all required deductions and withholdings the Company shall receive the same amount it would have received had no deductions or withholdings been required. Notwithstanding the foregoing, Holder shall not be required to increase the amount of such payment to the extent such withholding or deduction would have been reduced or eliminated if the Company had furnished any required forms and certifications timely requested by Holder. The Company shall furnish Holder with an annual statement certifying the amount of the actual increase in income tax liability of the Company attributable to receipt of indemnity payments in the prior year under this Section 3 promptly after filing its United States income tax return for the year in which any indemnity payment is reflected on its return and explaining how the amount of such increase was calculated. Such amount shall, except for manifest error, be final, conclusive and binding for all purposes. The Company shall respond promptly to any reasonable inquiry so that Holder can satisfy itself that no manifest error exists. The Company shall pay to Holder, if the assumed 8 increase is greater, or Holder shall pay to the Company, if the actual increase is greater, the difference between the assumed increase and the actual increase in income tax liability of the Company. The Company shall make any such payment at the time of furnishing the certification, and Holder shall make any such payment within five business days of actually receiving the notice and certification. (c) Withholding Tax Covenant. In the absence of Applicable Law or a prior ------------------------- assessment or statutory notice of deficiency in respect of the Warrant or Warrant Stock, the basis of which has not been reversed, the Company will not withhold any amount under Section 1442 of the Internal Revenue Code of 1986, as amended (the "Code"), in respect of the Warrant or Warrant Stock or agree in writing to any adjustment to its tax liability under Section 1461 of the Code in respect of the Warrant or Warrant Stock, so long as Holder has furnished the Company with the forms, certifications and opinions requested pursuant to the fourth sentence of Section 3(b). 4. Fractional Shares. The Company shall not be required to issue a ------------------ fractional share of Common Stock upon exercise of this Warrant. As to any fraction of a share of Common Stock which Holder would otherwise be entitled to purchase upon any exercise of this Warrant, the Company shall pay a cash adjustment in respect of such fraction in an amount equal to the same fraction of the current market value of a share of Common Stock on the date of exercise (which shall, in the absence of any trading market, be deemed to be the fair value of such share of Common Stock as determined in good faith by the board of directors of the Company), less the portion of the Exercise Price attributable to such fraction. 5. Adjustments. (a) Adjustment. The number of shares of Common Stock for ----------- ---------- which this Warrant is exercisable and the price at which such shares may be purchased upon exercise of this Warrant shall be subject to adjustment from time to time as set forth in this Section 5. 9 (b) Stock Dividends, Subdivisions and Combinations. If at any time the -------------------------------------------------- Company shall: (i) take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, Additional Shares of Common Stock, (ii) subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock, or (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, then (A) the number of shares of Common Stock for which this Warrant is exercisable immediately after the happening of such event shall be adjusted to equal the number of shares of Common Stock which a record holder of the same number of shares of Common Stock for which this Warrant is exercisable immediately prior to the happening of such event would own or be entitled to receive after the happening of such event, and (B) the Exercise Price shall be adjusted to equal (1) the Exercise Price in effect immediately prior to such event multiplied by the number of shares of Common Stock for which this Warrant is exercisable immediately prior to the adjustment divided by (2) the number of shares for which this Warrant is exercisable immediately after such adjustment. (c) Issuance of Additional Shares of Common Stock. --------------------------------------------- (i) If at any time after the date hereof the Company shall (except as hereinafter provided) issue or sell any Additional Shares of Common Stock in exchange for consideration in an amount per Additional Share of Common Stock less than the Exercise Price at the time the Additional Shares of Common Stock are issued, then (A) the Exercise Price as to the number of shares for 10 which this Warrant is exercisable prior to such adjustment shall be reduced to a price determined by dividing (1) an amount equal to the sum of (x) the number of shares of Common Stock Outstanding immediately prior to such issue or sale multiplied by the then existing Exercise Price, plus (y) the aggregate consideration, if any, received by the Company upon such issue or sale, by (2) the total number of shares of Common Stock Outstanding immediately after such issue or sale, and (B) the number of shares of Common Stock for which this Warrant is exercisable shall be adjusted to equal the quotient obtained by dividing (1) the product obtained by multiplying (x) the Exercise Price in effect immediately prior to such issue or sale by (y) the number of shares for which this Warrant is exercisable immediately prior to such issue or sale, by (2) the Exercise Price resulting from the adjustment made pursuant to clause (A) above. (ii) The provisions of paragraph (i) of this section 5(c) shall not apply to any issuance of Additional Shares of Common Stock for which an adjustment is provided under Section 5(b). No adjustment of the number of shares of Common Stock for which this Warrant shall be exercisable shall be made under paragraph (i) of this Section 5(c) upon the issuance of any Additional Shares of Common Stock pursuant to the exercise of any warrants or other subscription or purchase rights or pursuant to the exercise of any conversion or exchange rights in any Convertible Securities, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights or upon the issuance of such Convertible Securities (or upon the issuance of any warrant or other rights therefor) pursuant to Section 5 (d) or 5(e). (d) Issuance of Warrants or Other Rights. If at any time after the date -------------------------------------- hereof the Company shall take a record of holders of its Common Stock for the purpose of 11 entitling then to receive a distribution of, or shall in any manner (whether directly or by assumption in a merger in which the Company is the surviving corporation) issue or sell, any warrants or other rights to subscribe for or purchase any Additional Shares of Common Stock or any Convertible Securities, whether or not such rights thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon the exercise of such warrants or other rights or upon conversion or exchange of such Convertible Securities shall be less than the Exercise Price in effect immediately prior to the time of such issue or sale, then the Exercise Price shall be adjusted as provided in Section 5(c) on the basis that the maximum number of shares of Common Stock issuable pursuant to all such warrants or other rights or necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued and outstanding and the Company shall have received all of the consideration payable therefor, if any, as of the date of the actual issuance of such warrants or other rights, provided that Section 6 of the Registration and Participation Agreement shall not be deemed to give rise to any rights pursuant to this Section 5(d). No further adjustments of the Exercise Price shall be made upon the actual issuance of such Common Stock or of such Convertible Securities upon exercise of such warrants or other Common Stock upon such conversion or exchange of such Convertible Securities. (e) Issuance of Convertible Securities. If at any time the Company shall ------------------------------------ take a record of the holders of its Common Stock for the purpose of entitling them to receive a distribution of, or shall in any manner (whether directly or by assumption in a merger in which the Company is the surviving corporation) issue or sell, any Convertible Securities, whether or not the rights to exchange or convert thereunder are immediately exercisable, and the price per share for which Common Stock is issuable upon such conversion or exchange shall be less than the Exercise Price in effect immediately prior to the time of such issue or 12 sale, then the Exercise Price shall be adjusted as provided in Section 5(c) on the basis that the maximum number of shares of Common Stock necessary to effect the conversion or exchange of all such Convertible Securities shall be deemed to have been issued and outstanding and the Company shall have received all of the consideration payable therefor, if any, as of the date of actual issuance of such Convertible Securities. No adjustment of the Exercise Price shall be made under this Section 5(e) upon the issuance of any Convertible Securities which are issued pursuant to the exercise of any warrants or other subscription or purchase rights therefor, if any such adjustment shall previously have been made upon the issuance of such warrants or other rights pursuant to Section 5(d). No further adjustments of the Exercise Price shall be made upon the actual issuance of such Common Stock upon conversion or exchange of such Convertible Securities, and, if any issuance or sale of such Convertible Securities is made upon exercise of any warrant or other right to subscribe for or to purchase or any warrant or other right to purchase any such Convertible Securities for which adjustments of the Exercise Price have been or are to be made pursuant to other provisions of this Section 5, no further adjustments of the Exercise Price shall be made by reason of such issuance or sale. (f) Superseding Adjustment. If, at any time after any adjustment of the ----------------------- number of shares of Common Stock for which this warrant is exercisable shall have been made pursuant to Section 5(d) or 5(e) as the result of any issuance of warrants, rights or convertible Securities, (i) such warrants or rights, or the right of conversion or exchange in such other Convertible Securities, shall expire, and all or a portion of such warrants or rights, or the right of conversion or exchange with respect to all or a portion of such other Convertible Securities, as the case may be, shall not have been exercised, or 13 (ii) the consideration per share for which shares of Common Stock are issuable pursuant to such warrants or rights, or the terms of such other Convertible Securities, shall be increased solely by virtue of provisions therein contained for an automatic increase in such consideration per share upon the occurrence of a specified date or event, then such previous adjustment shall be rescinded and annulled and the Additional Shares of Common Stock which were deemed to have been issued by virtue of the computation made in connection with the adjustment so rescinded and annulled shall no longer be deemed to have been issued by virtue of such computation. Thereupon, a recomputation shall be made of the effect of such rights or options or other Convertible Securities on the basis of (A) treating the number of Additional Shares of Common Stock or other property, if any, theretofore actually issued or issuable pursuant to the previous exercise of any such warrants or rights or any such right of conversion or exchange, as having been issued on the date or dates of any such exercise and for the consideration actually received and receivable therefor, and (B) treating any such warrants or rights or any such other Convertible Securities which then remain outstanding as having been granted or issued immediately after the time of such increase of the consideration per share for which shares of Common Stock or other property are issuable under such warrants or rights or other Convertible Securities, whereupon a new adjustment of the number of shares of Common Stock for which this Warrant is exercisable shall be made, which new adjustment shall supersede the previous adjustment so rescinded and annulled. 14 (g) Reorganization, Reclassification, Consolidation or Merger. If the ----------------------------------------------------------- Company shall (i) effect any reorganization or reclassification of its capital stock or (ii) consolidate or merge with or into any other person, in either case in a transaction in connection with which Holder has not exercised this Warrant, then, upon any exercise of this Warrant subsequent to the consummation thereof, Holder shall be entitled to receive, in lieu of the Common Stock issuable upon exercise immediately prior to such consummation, the stock or other securities or property (including cash) to which Holder would have been entitled upon such consummation if Holder had exercised this Warrant immediately prior thereto, all subject to further adjustments thereafter as provided in this Section 5. (h) Other Provisions Applicable to Adjustments under this Section 5. The ------------------------------------------------------------------ following provisions shall be applicable to the making of adjustments of the number of shares of Common Stock for which this Warrant is exercisable provided for in this Section 5: (i) Computation of Consideration. To the extent that any Additional Shares ---------------------------- of Common Stock or any Convertible Securities or any warrants or other rights to subscribe for or purchase any Additional Shares of Common Stock or any Convertible Securities shall be issued for cash consideration, the cash consideration received by the Company therefor shall be the amount of the cash received by the Company therefor, or, if such Additional Shares of Common Stock or Convertible Securities are offered by the Company for subscription, the subscription price, or, if such Additional Shares of Common Stock or Convertible securities are sold to underwriters or dealers for public offering without a subscription offering, the initial public offering price (in any such case subtracting (A) any amounts paid or receivable for accrued interest or accrued dividends and without taking into account (B) any compensation, discounts or expenses paid or incurred by the Company for and in the underwriting of, or 15 otherwise in connection with, the issuance thereof). To the extent that such issuance shall be for a consideration other than cash, then, except as herein otherwise expressly provided, the amount of such consideration shall be deemed to be fair value of such consideration at the time of such issuance as determined in good faith by the Board of Directors of the Company. In case any Additional Shares of Common Stock or any Convertible Securities or any warrants or other rights to subscribe for or purchase such Additional Shares of Common Stock or Convertible Securities shall be issued in connection with any merger in which the Company issues any securities, the amount of consideration therefor shall be deemed to be the fair value, as determined in good faith by the Board of Directors of the Company, of such portion of the assets and business of the nonsurviving corporation as the Board in good faith shall determine to be attributable to such Additional Shares of Common Stock Convertible Securities, warrants or other rights, as the case may be. The consideration for any Additional Shares of Common Stock issuable pursuant to any warrants or other rights to subscribe for or purchase the same shall be the consideration received by the Company for issuing such warrants or other rights plus the additional consideration payable to the Company upon exercise of such warrants or other rights. The consideration for any Additional Shares of Common Stock issuable pursuant to the terms of any Convertible Securities shall be the consideration received by the Company for issuing warrants or other rights to subscribe for or purchase such Convertible Securities, plus the consideration paid or payable to the Company in respect of the subscription for or purchase of such Convertible Securities, plus the additional consideration, if any, payable to the Company upon the exercise of the right of conversion or exchange in such Convertible Securities. In case of the issuance at any time of any Additional Shares of Common Stock or Convertible Securities in payment or satisfaction of any dividends 16 upon any class of stock other than Common Stock, the Company shall be deemed to have received for such Additional Shares of Common Stock or Convertible Securities a consideration equal to the amount of such dividend so paid or satisfied. (ii) When Adjustment to be Made. The adjustments required by this Section 5 -------------------------- shall be made whenever and as often as any specified event requiring an adjustment shall occur, except that any adjustment of the number of shares of Common Stock for which this Warrant is exercisable that would otherwise be required may be postponed (except in the case of a subdivision or combination of shares of the Common Stock, as provided for in Section 5(b)) up to but not beyond the date of exercise if such adjustment either by itself or with other adjustments not previously made adds or subtracts less than 2% of the shares of Common Stock for which this Warrant is exercisable immediately prior to the making of such adjustment. Any adjustment representing a change of less than such minimum amount (except as aforesaid) which is postponed shall be carried forward and made as soon as such adjustment, together with other adjustments required by this Section 5 and not previously made, would result in a minimum adjustment or on the date of exercise. For the purpose of any adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. (iii) Fractional Interest; Rounding. In computing adjustments under this ------------------------------ Section 5, fractional interests in Common Stock shall be taken into account to the nearest 1/10th of a share, adjustments in the Exercise Price shall be made to the nearest $.01. (iv) When Adjustment Not Required. If the Company shall take a record of ------------------------------ the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution or subscription or purchase rights and 17 shall, thereafter and before the distribution to stockholders thereof, legally abandon its plan to pay or deliver such dividend, distribution, subscription or purchase rights, then no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. (v) Escrow of Warrant Stock. If Holder exercises this Warrant after any ------------------------ property becomes distributable pursuant to this Section 5 by reason of the taking of any record of the holders of Common Stock, but prior to the occurrence of the event for which such record is taken, any Additional Shares of Common Stock issuable upon exercise by reason of such adjustment shall be deemed the last shares of Common Stock for which this Warrant is exercised (notwithstanding any other provision to the contrary herein). Such shares or other property shall be held in escrow for Holder by the Company to be issued to Holder upon and to the extent that the event actually takes place, upon payment of the Exercise Price. Notwithstanding any other provision to the contrary herein, if the event for which such record was taken fails to occur or is rescinded, then such escrowed shares shall be cancelled by the Company and escrowed property returned. 6. Notices. (a) Notice of Adjustment. Whenever the number of shares of ------- --------------------- Common Stock for which this Warrant is exercisable or the Exercise Price shall be adjusted pursuant to Section 5, the Company shall forthwith prepare a certificate to be executed by the chief financial officer of the Company setting forth, in reasonable detail, the event requiring the adjustment, the method by which the adjustment was calculated and describing the number of shares of Common Stock for which this Warrant is exercisable and the Exercise Price after giving effect to such adjustment or change. The Company shall promptly cause a signed copy of such certificate to be delivered to Holder. The Company shall keep at the Office of the Company copies of all such 18 certificates and cause the same to be available for in spection during normal business hours by Holder. (b) Notice of Extraordinary Distributions. In the event that the Company --------------------------------------- proposes to take a record of the holders of its Common Stock for the purpose of entitling them to receive any dividend or other distribution of: (i) cash (A) in an amount in excess of the previous regular cash dividend or (B) constituting a liquidating distribution; (ii) to the extent not separately required by any provision of Section 5, any evidences of its indebtedness, any shares of its stock or any other securities or property of any nature whatsoever, including any warrants or other rights to subscribe for or purchase any evidences of its indebtedness, any shares of its stock or any other securities or property, then the Company shall deliver to Holder written notice of such proposed dividend or distribution at least 30 days prior to such proposed record date. A reclassification of the Common Stock (other than a change in par value, or from par value to no par value or from no par value to par value) into shares of Common Stock and shares of any other class of stock shall be deemed distribution by the Company to the holders of its Common Stock of such shares of such other class of stock within the meaning of this Section 6(b) and, if the outstanding shares of Common Stock shall be changed into a larger or smaller number of shares of Common Stock as a part of such reclassification, shall be deemed a subdivision or combination, as the case may be, of the outstanding shares of Common Stock within the meaning of Section 5(b). (c) Notice of Certain Mergers and Asset Dispositions. In the event that the ------------------------------------------------ Company proposes to consolidate with or merge into another corporation in a 19 transaction in which the Common Stock will be changed or converted into other securities, cash or property, or to sell, transfer or otherwise dispose of all or substantially all of its property, assets or business to another corporation or another entity, the Company shall deliver to Holder written notice of such proposed transaction at least 30 days prior to the earlier of its consummation or the taking of any record of the holders of its Common Stock for the purpose of determining their rights pursuant to such transactions. (d) Registration Rights and Participation. This Warrant and the Shares --------------------------------------- issued pursuant to this Warrant and, in each case, the holder thereof shall be entitled to the rights and subject to the obligations created under the Registration and Participation Agreement, and this Warrant and the Shares shall be defined as Registrable Securities thereunder. 7. Reservation and Authorization of Common Stock. (a) Reservation of ------------------------------------------------ --------------- Shares. The Company shall at all times reserve and keep available for issuance - ------ upon the exercise of this Warrant such number of its authorized but unissued shares of Common Stock as will be sufficient to permit the exercise in full of this Warrant. All shares of Common Stock issuable upon exercise of this Warrant and payment therefor in accordance with the terms of this Warrant shall be duly and validly issued and fully paid and nonassessable, and not subject to preemptive rights. (b) Certain Corporate Actions. Before taking any action which would cause -------------------------- an adjustment reducing the Exercise Price below the then par value, if any, of the shares of Common Stock issuable upon exercise of this Warrant, the Company shall take any corporate actions which may be necessary in order that the Company may validly and legally issue fully paid and nonassessable shares of such Common Stock at such adjusted Exercise Price. 20 8. Taking of Record. In the case of all dividends or other distributions by ---------------- the Company to the holders of its Common Stock with respect to which any provision of Section 5 refers to the taking of a record of such holders, the Company will in each such case take such a record and will take such record as of the close of business on a Business Day. 9. Restrictions on Transferability. (a) Re strictions. This Warrant is --------------------------------- non-transferable except that Lexmark as a Holder may transfer the Warrant to SSBV and that SSBV as a Holder may transfer this Warrant with the written consent of the Company. The Warrant Stock shall not be transferred, hypothecated or assigned before satisfaction of the conditions specified in this Section 9. Holder, by acceptance of this Warrant, agrees to be bound by the provisions of this Section 9. (b) Warrant Restrictive Legend. This Warrant shall be stamped or otherwise --------------------------- imprinted with a legend in substantially the following form: "THIS WARRANT IS NON-TRANSFERABLE WITHOUT THE WRITTEN CONSENT OF THE COMPANY. THIS WARRANT AND THE SHARES OF COMMON STOCK PURCHASABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ARE SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFERABILITY AS SET FORTH HEREIN AND IN SUCH WARRANT SUBSCRIPTION AGREEMENT. SUCH SHARES MAY NOT BE TRANSFERRED IN VIOLATION OF SUCH ACT, THE RULES AND REGULATIONS THEREUNDER OR THE PROVISIONS OF THIS WARRANT OR OF SUCH WARRANT SUBSCRIPTION AGREEMENT." "THE WARRANT REPRESENTED BY THIS CERTIFICATE IS ENTITLED TO THE BENEFITS OF AND IS BOUND BY THE OBLIGATIONS SET FORTH IN THE REGISTRATION AND PARTICIPATION AGREEMENT, DATED AS OF MARCH 27, 1991, AMONG THE COMPANY AND CERTAIN STOCKHOLDERS OF THE COMPANY, A COPY OF WHICH IS LOCATED AT THE PRINCIPAL OFFICE OF THE COMPANY." 21 (c) Warrant Stock Restrictive Legend. Except as otherwise provided in this -------------------------------- Section 9, each certificate for Warrant Stock initially issued upon the exercise of this Warrant, and each certificate for Warrant Stock issued to any subsequent transferee of any such certificate, shall be stamped or otherwise imprinted with a legend in substantially the following form: "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 OR (B) THE HOLDER HEREOF SHALL HAVE DELIVERED TO THE COMPANY AN OPINION OF COUNSEL EXPERIENCED IN SECURITIES LAW MATTERS, 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 AND (ii) SUCH DISPOSITION IS PURSUANT TO REGISTRATION UNDER ANY APPLICABLE STATE SECURITIES LAWS OR AN EXEMPTION THEREFROM." "THE SHARES REPRESENTED BY THIS CERTIFICATE ARE ENTITLED TO THE BENEFITS OF AND ARE BOUND BY THE OBLIGATIONS SET FORTH IN THE REGISTRATION AND PARTICIPATION AGREEMENT, DATED AS OF MARCH 27, 1991, AMONG THE COMPANY AND CERTAIN STOCKHOLDERS OF THE COMPANY, A COPY OF WHICH IS LOCATED AT THE PRINCIPAL OFFICE OF THE COMPANY." (d) Notice of Proposed Transfer; Opinion of Counsel. Prior to any transfer ------------------------------------------------ of shares of Restricted Warrant Stock that are not registered under an effective registration statement under the Securities Act (other than a transfer pursuant to Rule 144 or any comparable rule under the Securities Act) the holder thereof shall give written notice (a "Transfer Notice") to the Company of such holder's ---------------- intention to effect such transfer and shall comply in all 22 other respects with this Section 9(d). Each Transfer Notice shall describe the manner and circumstances of the proposed transfer in reasonable detail and be accompanied by an opinion of counsel experienced in securities law matters, who shall be independent of the holder proposing such transfer but who may be the holder's regular outside counsel, which opinion and counsel shall be reasonably satisfactory to the Company, to the effect that the proposed transfer may be effected without registration. The holder shall thereupon be entitled to transfer the securities in question in accordance with the terms of the Transfer Notice. Each share certificate, if any, issued upon or in connection with such transfer shall bear the restrictive legend set forth in Section 9(c) unless, in the opinion of such counsel and of counsel to the Company, such legend is no longer required to ensure compliance with the Securities Act. (e) Termination of Restriction. The legend requirement of Section 9(c) ---------------------------- shall terminate insofar as it relates to Securities Act matters (i) when and so long as the security in question shall have been effectively registered under the Securities Act and disposed of pursuant thereto or (ii) when the Company shall have received an opinion of counsel experienced in securities law matters reasonably satisfactory to it that such legend is not required in order to insure compliance with the Securities Act. Legend requirements shall continue in effect, however, with respect to other transfer restrictions set forth herein and in the Registration and Participation Agreement for so long as such restrictions remain applicable. 10. Covenants of the Company. (a) Rule 144. The Company agrees that at all ------------------------ -------- times after it has filed a registration statement pursuant to the requirements of the Securities Act or the Securities Exchange Act of 1934, as amended, relating to any class of equity securities of the Company (other than (i) the registration of equity securities of the Company and options in respect thereof to be offered primarily to directors, members of the management 23 and employees of and consultants to the Company and its subsidiaries and senior executives of other corporations in which entities managed or sponsored by C&D have made equity investments or (ii) the registration of equity securities and options in respect thereof solely on Form S-8 or any successor form), it will use its best efforts to file in a timely manner all reports required to be filed by it pursuant to the Securities Exchange Act of 1934, as amended, and, upon request of Holder, will furnish to Holder with such information as may be necessary to enable the Holder to effect routine sales pursuant to Rule 144 under the Securities Act. (b) State Securities Laws. The Company hereby agrees to use its best ----------------------- efforts to comply with all state securities or "blue sky" laws that might be applicable to the sale of the Shares to Holder. (c) Certain Information and Access. The Company will furnish to the Holder, ------------------------------ promptly upon their becoming available, copies of all financial statements, reports, notices and proxy statements sent or made available generally by the Company to its stockholders. The Company will cause its officers to discuss with the Holder the subject matters of such materials upon such Holder's reasonable requests, provided that the Company shall not be obligated to furnish to the -------- Holder any information concerning the Company which is not generally available to the Company's stockholders. 11. Loss or Mutilation. Upon receipt by the Company from Holder of evidence ------------------ reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant and an indemnity reasonably satisfactory to it (and in case of mutilation upon surrender and cancellation hereof), the Company will execute and deliver in lieu hereof a new Warrant of like tenor to Holder, provided that, in -------- the case of mutilation, no indemnity shall be required if this Warrant in identifiable form is surrendered to the Company for cancellation. 24 12. Office of the Company. As long as this Warrant remains outstanding, the --------------------- Company shall maintain an office or agency (which may be the principal executive offices of the Company) where this Warrant may be presented for exercise as provided in this Warrant. 13. No Rights or Liabilities as Stockholder. Nothing contained in this ------------------------------------------ Warrant shall be construed as conferring upon Holder any rights as a stockholder of the company or as imposing any liabilities on Holder to purchase any securities or as a stockholder of the Company, whether such liabilities are asserted by the Company or by creditors or stockholders of the Company or otherwise and nothing herein shall derogate from the rights and obligations of the Holder as a holder of Registrable Securities as defined under the Registration and Participation Agreement. 14. Notice. All notices, requests, demands or other communications provided ------ for hereunder shall be in writing and shall be deemed to have been duly given to any party (a) when delivered personally (by courier service or otherwise), (b) when delivered by telex and confirmed by receipt of the proper telex answerback, (c) seven days after being mailed by first class airmail, postage prepaid (registered mail, return receipt requested), (d) when receipt acknowledged, if telecopied, or (e) the next day after timely delivery to the courier, if sent by overnight air courier guaranteeing next day delivery in each case to the applicable address set forth below, or to such other address as such party may have designated to the other in writing. Initial addresses for delivery shall be: 25 (i) If to Holder to: Keys Foundation De Ruyterkade 58A P.0. Box 837 Curacao Netherlands Antilles Attention: Gregory E. Elias Managing Director Telecopier: (599-9) 611-061 with a copy to: Goldfarb, Levy, Giniger, Eran & Co. Eliahu House 2 Ibn Gvirol Tel-Aviv 64077 Israel Attention: William B. Goldfarb, Esq. Telecopier: (972-3) 695-4344 and Prager Dreifuss & Partner Zollikerstrasse 183 8008 Zurich Switzerland Attention: Dr. Tis Prager Telecopier: (41-1) 422-7714 (ii) If to the Company to: Lexmark International Group, Inc. One Lexmark Centre Drive Lexington, Kentucky 40550 Attention: Chief Executive Officer Telecopier: (606) 232-3120 26 with copies to: Clayton, Dubilier & Rice, Inc. 375 Park Avenue, 18th Floor New York, New York 10152 Attention: Joseph L. Rice III Telecopier: (212) 407-5252 and Debevoise & Plimpton 875 Third Avenue New York, New York 10022 Attention: Franci J. Blassberg, Esq. Telecopier: (212) 909-6836 The giving of any notice required hereunder may be waived in writing by the party entitled to receive such notice. 15. Successors and Assigns. Subject to the provisions of Section 9 and ----------------------- except as expressly limited herein, this Warrant and the rights evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and assigns of Holder. 16. Amendment. This Warrant may be modified or amended or the provisions --------- hereof waived with the written consent of the Company and Holder. 17. Headings. The headings used in this Warrant are for the convenience of -------- reference only and shall not, for any purpose, be deemed a part of this Warrant. 27 18. Governing Law. This Warrant shall be governed by and construed in -------------- accordance with the laws of the State of New York. IN WITNESS WHEREOF, the Company has caused this Warrant to be duly executed by its authorized representative and its corporate seal to be impressed hereon and attested by its Secretary or an Assistant Secretary. Dated: February 21, 1997 LEXMARK INTERNATIONAL GROUP, INC. [SEAL] By: /s/ Marvin L. Mann ----------------------------- Marvin L. Mann Chief Executive Officer Attest: By: /s/ Vincent J. Cole ----------------------- Vincent J. Cole Vice President, General Counsel and Secretary 28 Attachment A to Warrant ----------------------- NOTICE OF EXERCISE ------------------ The signed registered owner of Warrant No. 6, dated, February 21, 1997, to purchase Class A Common Stock of Lexmark International Group, Inc. (the "Company"), hereby irrevocably exercises such Warrant for the purchase of shares of Class A Common Stock of the Company, and hereby - ------------- undertakes to make payment therefor and to deposit with the Company the certificate representing such Warrant, in each case as set forth in Section 2(b) thereof and at the price and on the other terms and conditions specified therein. Holder agrees that, at the request of the Company, it shall deliver to the Company such forms and certificates as are necessary in order to establish that no withholding or deduction is required in respect of the issuance of shares upon exercise of the Warrant and, if requested, an opinion of United States tax counsel to Holder reasonably satisfactory to the Company that no withholding or deduction is required in respect of the issuance of shares upon exercise of the Warrant. The undersigned requests that certificates for the shares of Class A Common Stock to be purchased pursuant hereto be issued in the name of the undersigned at the address indicated below and, if such shares of Class A Common Stock shall not include all of the shares of Class A Common Stock issuable as provided in such Warrant, that a new Warrant of like tenor and date for the balance of the Attachment A to Warrant ----------------------- 29 shares of Class A Common Stock issuable thereunder be delivered to the undersigned. ---------------------------- (Name of Registered Owner) ---------------------------- (Signature on behalf of Registered Owner with Bank Signature Guarantee Attached) ---------------------------- (Street Address) ---------------------------- (City) (State) (Zip Code) Dated: ------------------------ NOTICE: The name on this notice of exercise must correspond with the name as written upon the face of the Warrant in every particular, without alteration or enlargement or any change whatsoever. Attachment A to Warrant ----------------------- 30 EX-13 4 SECTIONS OF THE 1996 ANNUAL REPORT CONSOLIDATED STATEMENTS OF OPERATIONS Lexmark International Group, Inc. and Subsidiaries (Dollars in Millions, Except Per Share Amounts) Year Ended -------------------------------- 1996 1995 1994 ---- ---- ---- Revenues (including revenues from IBM of $192, $421, and $404, respectively) $2,377.6 $2,157.8 $1,852.3 Cost of revenues 1,630.2 1,487.9 1,298.8 -------- --------- -------- Gross profit 747.4 669.9 553.5 Research and development 123.9 116.1 101.0 Selling, general and administrative 388.0 359.1 292.9 Option compensation related to IPO - 60.6 - Amortization of intangibles 5.1 25.6 44.7 -------- -------- -------- Operating expenses 517.0 561.4 438.6 -------- -------- -------- Operating income 230.4 108.5 114.9 Interest expense 20.9 35.1 50.6 Amortization of deferred financing costs and other 7.9 10.1 13.6 -------- -------- -------- Earnings before income taxes and extraordinary item 201.6 63.3 50.7 Provision for income taxes 73.8 15.2 6.1 -------- -------- -------- Earnings before extraordinary item 127.8 48.1 44.6 Extraordinary loss on extinguishment of debt (net of related tax benefit of $6.4) - (15.7) - -------- -------- -------- Net earnings 127.8 32.4 44.6 Preferred dividends - - 11.8 Preferred stock redemption premium - - 61.3 -------- -------- -------- Net earnings (loss) attributable to common stock $ 127.8 $ 32.4 $ (28.5) -------- -------- -------- Earnings (loss) per common and common equivalent share, primary and fully diluted: Before extraordinary item $ 1.68 $ 0.64 $ (0.46) Extraordinary loss - (0.21) - -------- --------- -------- Net earnings (loss) $ 1.68 $ 0.43 $ (0.46) Shares used in per share calculation 76,221,843 74,932,103 61,430,896 ========== ========== ========== See notes to consolidated financial statements. 25 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION Lexmark International Group, Inc. and Subsidiaries (Dollars in Millions, Except Share Amounts) December 31, ------------------- 1996 1995 ---- ---- ASSETS Current assets: Cash and cash equivalents $ 119.3 $ 150.5 Trade receivables, net of allowance of $18 and $27, respectively 304.7 213.6 Inventories 271.0 296.3 Prepaid expenses and other current assets 70.1 55.3 -------- -------- Total current assets 765.1 715.7 Property, plant and equipment, net 434.1 361.2 Other assets 22.3 66.0 -------- -------- Total assets $1,221.5 $1,142.9 -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt $ 2.1 $ - Current portion of long-term debt - 20.0 Accounts payable 197.2 209.6 Accrued liabilities 222.0 258.4 -------- -------- Total current liabilities 421.3 488.0 Long-term debt 163.2 175.0 Other liabilities 96.7 89.7 -------- -------- Total liabilities 681.2 752.7 -------- -------- Stockholders' equity: Preferred stock, $.01 par value, 1,600,000 shares authorized, no shares issued and outstanding - - Common stock, $.01 par value: Class A, 160,000,000 shares authorized; 70,213,603 and 64,303,619 outstanding 0.7 0.6 Class B, 10,000,000 shares authorized; 2,446,523 and 5,888,623 outstanding - 0.1 Capital in excess of par 519.3 494.6 Retained earnings (deficit) 19.8 (108.0) Accumulated translation adjustment 0.5 2.9 -------- -------- Total stockholders' equity 540.3 390.2 -------- -------- Total liabilities and stockholders' equity $1,221.5 $1,142.9 ======== ======== See notes to consolidated financial statements. 26 CONSOLIDATED STATEMENTS OF CASH FLOWS Lexmark International Group, Inc. and Subsidiaries (Dollars In Millions) Year Ended -------------------------- 1996 1995 1994 ---- ---- ---- Cash flows from operating activities: Net earnings $127.8 $ 32.4 $ 44.6 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 69.2 99.1 127.3 Option compensation related to IPO - 60.6 - Extraordinary loss - 15.7 - Deferred taxes 12.3 (30.8) - Other non-cash charges to operations 22.6 45.5 54.2 ------ ------ ------ 231.9 222.5 226.1 Change in assets and liabilities: Trade receivables (70.1) (52.5) (39.7) Trade receivables programs (21.0) 30.0 70.0 Inventoriees 25.3 (17.3) 28.5 Accounts payable (12.4) 71.3 17.0 Accured liabilities (36.4) 76.5 29.2 Other assets and libilities 0.7 (23.0) 30.8 ------ ------ ------ Net cash provided by operating activities 118.0 307.5 361.9 Cash flows from investing activities: Purchases of property, plant and equipment (145.0) (106.8) (58.1) Proceeds from sale of property, plant and equipment 3.6 6.6 2.2 ------ ------ ------ Net cash used for investing activities (141.4) (100.2) (55.9) Cash flows from financing activities: Increase in short-term debt 2.1 - - Proceeds from issuance of long-term debt, net of issue costs of $2.8 in 1995 5.7 147.2 - Principal payments on long-term debt (38.0) (245.0) (360.7) Exercise of stock options and warrants 23.0 - (0.1) Preferred dividends paid - (2.2) (9.5) ------ ------ ------ Net cash used for financing activities (7.2) (100.0) (370.3) Effect of exchange rate changes on cash (0.6) 1.2 1.3 ------ ------ ------ Net increase (decrease) in cash and cash equivalents (31.2) 108.5 (63.0) Cash and cash equivalents - beginning of period 150.5 42.0 105.0 ------ ------ ------ Cash and cash equivalents - end of period $119.3 $150.5 $ 42.0 ====== ====== ====== See notes to consolidated financial statements. 27 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Lexmark International Group, Inc. and Subsidiaries (Dollars in Millions, Except Share Amounts)
Junior Class A Preferred Stock Common Stock ------------------- ------------------- Shares Amount Shares Amount ------ ------ ------ ------ Balance at December 31, 1993 50,000 $5.0 50,616,795 $0.5 Issuance of 9,750,000 shares of Class A common stock in exchange for 850,000 shares of redeemable senior preferred stock (net of $0.1 stock issuance costs) 9,750,000 0.1 Issuance of common stock less notes receivable of $0.4 39,060 Dividends on redeemable senior preferred stock ($13.88 per share) Purchase of treasury stock (18,750) Cash received for payments on notes receivable for common stock issued to management and certain other individuals Translation adjustment Net earnings ------ ---- ---------- ---- Balance at December 31, 1994 50,000 5.0 60,387,105 0.6 Issuance of common stock less notes receivable of $0.1 3,600 Conversion of Class B to Class A common stock 2,361,377 Conversion of junior preferred stock to Class A common stock (50,000) (5.0) 750,000 Warrant exercise at $6.67 per warrant 254,385 Option compensation related to IPO Long-term incentive plan compensation Shares issued upon exercise of options 692,588 Treasury shares received from option exercises (439,956) Treasury shares issued upon exercise of options 294,520 Cash received for payments on notes receivable for common stock issued to management and certain other individuals Translation adjustment Net earnings ------ ---- ---------- ---- Balance at December 31, 1995 -- -- 64,303,619 0.6 Conversion of Class B to Class A common stock 3,442,100 0.1 Option compensation expense Long-term incentive plan compensation Shares issued upon exercise of options 2,239,948 Tax benefit related to stock options and warrants Treasury shares received from option exercises (199,881) Treasury shares issued upon exercise of options 427,817 Cash received for payments on notes receivable for common stock issued to management and certain other individuals Translation adjustment Net earnings ------ ---- ---------- ---- Balance at December 31, 1996 -- $-- 70,213,603 $0.7 ====== ==== ========== ====
See notes to consolidated statements. 28
Class B Common Stock Retained Accumulated ----------------- Capital in Earnings Translation Shares Amount Excess of Par (Deficit) Adjustment Total ------ ------ ------------- --------- ----------- ----- 8,250,000 $0.1 $357.2 $(185.0) $(4.1) $173.7 84.8 84.9 -- (11.8) (11.8) (0.2) (0.2) 0.2 0.2 4.1 4.1 44.6 44.6 --------- ---- ------ ------- ------ ------ 8,250,000 0.1 430.2 (140.4) -- 295.5 -- (2,361,377) -- 5.0 -- 1.7 1.7 58.7 58.7 0.6 0.6 -- (2.7) (2.7) 0.9 0.9 0.2 0.2 2.9 2.9 32.4 32.4 --------- ---- ------ ------- ------ ------ 5,888,623 0.1 494.6 (108.0) 2.9 390.2 (3,442,100) (0.1) -- 1.2 1.2 0.8 0.8 15.1 15.1 7.4 7.4 -- -- 0.2 0.2 (2.4) (2.4) 127.8 127.8 --------- ---- ------ -------- ----- ------ 2,446,523 $-- $519.3 $19.8 $0.5 $540.3 ========= ==== ====== ======== ===== ======
29 Lexmark International Group, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in Millions, Except Share Amounts) 1. ORGANIZATION AND BUSINESS Lexmark International Group, Inc. (formerly Lexmark Holding, Inc.) (together with its subsidiaries, the "Company") is a global developer, manufacturer and supplier of laser and inkjet printers and associated consumable supplies. The Company also sells dot matrix printers for printing single and multi-part forms by business users. The Company's core printer business targets the office and home markets through its Business Printer and Consumer Printer Divisions. In addition to its core printer business, the Company develops, manufactures and markets a broad line of other office imaging products, through its Imaging Solutions Division, which include supplies for International Business Machines Corporation ("IBM") branded printers, after-market supplies for other original equipment manufacturer ("OEM") products, and typewriters and typewriter supplies that are sold under the IBM trademark. The Company's "keyboards and other" product category was phased out by March 1996 (see Note 16). The principal customers for the Company's products are dealers, retailers and distributors worldwide. The Company employs marketing teams which target large accounts to generate demand in selected industries worldwide. The Company's products are sold in nearly 150 countries in North and South America, Europe, the Middle East, Africa, Asia, the Pacific Rim and the Caribbean. 2. SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation: The accompanying consolidated financial statements include the accounts of Lexmark International Group, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Foreign Exchange: The functional currency for the Company's significant foreign subsidiaries is the applicable local currency. For those subsidiaries, assets and liabilities are translated into U.S. dollars at period-end exchange rates. Income and expense accounts are translated at average exchange rates prevailing during the period. Adjustments arising from the translation of assets and liabilities are accumulated as a separate component of stockholders' equity. The effects of translation of intercompany loans to international subsidiaries which have been designated as long-term investments are also included in this separate component of stockholders' equity. The Company enters into foreign currency swaps, options, and forward exchange contracts in its management of foreign currency exposures. Realized and unrealized gains and losses on contracts that are designated as hedges are recognized in earnings in the same period as the underlying hedged transaction. Contracts that do not qualify as hedges for accounting purposes, including the currency portion of interest rate/currency swaps, are marked to market and the resulting gains and losses are recognized in current earnings. The cash flows resulting from hedge contracts are classified as cash flows from operating activities. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates are used when accounting for 30 such items as the allowance for doubtful accounts, inventory reserves, product warranty, depreciation, employee benefit plans and taxes. Cash Equivalents: All highly liquid investments with an original maturity of three months or less at the Company's date of purchase are considered to be cash equivalents. Inventories: Inventories are stated at the lower of weighted average cost or market. The Company considers all raw materials to be in production upon their receipt. Property, Plant and Equipment: Property, plant and equipment are stated at cost and depreciated over their estimated useful lives using the straight-line method. Property, plant and equipment accounts are relieved of the cost and related accumulated depreciation when assets are disposed of or otherwise retired. Intangible Assets: Intangible assets (including trademark, patent and license, software license and non-competition agreements) are stated at cost and are amortized on an accelerated basis over the estimated period of economic benefit but not more than five years. Intangible assets were fully amortized by March 1996. Revenue Recognition: Sales are recognized when products are shipped to customers. Advertising Costs: The Company expenses advertising costs when incurred. Advertising expense was approximately $49.3 and $43.0 in 1996 and 1995, respectively. Earnings (Loss) Per Common Share: Earnings (loss) per common share is determined by dividing earnings (loss) attributable to common stock by the weighted average number of common shares, and when dilutive, common equivalent shares, outstanding. Net earnings (loss) attributable to common stock is determined by deducting preferred stock dividends and the preferred stock redemption premium from net earnings. The weighted average number of common and common equivalent shares outstanding have been increased by 2,577,480 shares in 1994 to give effect to the assumption that all stock and stock options, including the effect of the exchange of redeemable senior preferred stock for Class A common stock, issued within one year of the filing of the Company's initial public offering were outstanding for all periods presented, even where their impact is antidilutive. The number of such shares assumed to be outstanding was calculated using the treasury stock method based on the initial public offering price. Common equivalent shares and other potentially dilutive securities include stock options, warrants and junior preferred stock. Primary and fully diluted earnings per share do not differ by a material amount. 3. INVENTORIES Inventories consisted of the following at December 31: 1996 1995 ---- ---- Work in process $144.6 $167.7 Finished goods 126.4 128.6 ------ ------ $271.0 $296.3 ====== ====== 4. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following at December 31: 1996 1995 ---- ---- Land and improvements $ 15.9 $ 14.1 Buildings and improvements 184.9 154.4 Machinery and equipment 392.2 353.6 Information systems and furniture 118.7 100.0 ------ ------ 711.7 622.1 Less accumulated depreciation 277.6 260.9 ------ ------ $434.1 $361.2 ====== ====== Depreciation expense was $62.3, $71.2 and $71.8 for 1996, 1995 and 1994, respectively. 31 5. ACCRUED LIABILITIES Accrued liabilities consisted of the following at December 31: 1996 1995 ---- ---- Compensation $ 57.6 $ 69.2 Income taxes payable 7.0 22.2 Fixed assets 26.8 29.6 Warranty 31.0 21.8 Value added tax 15.5 16.8 Deferred revenue 17.4 9.8 Other 66.7 89.0 ------ ------ $222.0 $258.4 ====== ====== 6. LONG-TERM DEBT Long-term debt consisted of the following at December 31: 1996 1995 ---- ---- Term loan $ 37.0 $ 55.0 Senior notes, Series B, 12.125% interest rate, due in 1998 - 20.0 Senior subordinated notes, 14.25% interest rate, due in 2001 120.0 120.0 Other 6.2 - ------ ------ 163.2 195.0 Less current portion - (20.0) ------ ------ $163.2 $175.0 ====== ====== In April 1995, the Company refinanced its $150.0 non-revolving term loan and its $150.0 revolving credit facility prior to their maturity with a new $150.0 non-revolving term loan and a $250.0 revolving credit facility held by a group of banks. This early extinguishment of debt resulted in an extraordinary charge of $22.1 ($15.7 net of tax benefit) caused by the write-off of deferred financing costs of $4.9 and the mark to market of hedging instruments related to the extinguished debt of $17.2. During 1995, $95.0 of the term loan was prepaid, and in 1996 an additional $18.0 was prepaid on the term loan. Under the amended and restated credit agreement (as amended), interest on the term loan and any amount outstanding under the revolving credit facility is calculated using either of two methods at the option of the Company. The first method provides for a rate, based on the Company's performance, ranging from 0.0% to 0.75% above the base rate, with the base rate equal to the higher of the bank's prime rate or the federal funds rate plus 0.5% per annum. The second method provides for a rate, based on the Company's performance, ranging from 0.75% to 2.0% above adjusted LIBOR (London Inter Bank Offered Rate). Principal payments on the term loan are due quarterly, with the next scheduled payment due on June 30, 1998 and the final payment due on December 31, 1998. Any amounts outstanding under the revolving credit facility are due upon the maturity of the facility in January 1999. In certain situations, a portion of the proceeds from the sale of assets, casualty events or debt financings must be used to repay the term loan. Although not required under the amended and restated credit agreement, the Company was required under the terms of the original credit agreement to cap the interest rate paid on a portion of the term loan at a rate of 13% or below, and entered into interest rate/currency swaps to meet this requirement. Because portions of the original U.S. dollar loan proceeds were recorded on the books of foreign subsidiaries, or used by the U.S. parent company to fund intercompany loans to foreign subsidiaries, currency swaps were used to neutralize the effect of currency fluctuations. An interest rate/currency swap with a notional amount of $36.7 continues and was marked to market at the time the term loan was refinanced and redesignated as a hedge of the new facility. The interest rate/currency swap matures on March 27, 1998. The effective rate of interest on the term loan (after giving effect to the interest rate/currency swap) was 7.0% at December 31, 1996. In March 1996, the senior notes in the amount of $20.0 were redeemed. 32 The senior subordinated notes are held by financial institutions. Interest is payable at the end of each calendar quarter through March 31, 2001. Mandatory principal payments are due annually from March 31, 1999 through March 31, 2001. In the event of a change in control, holders have the option to require prepayment of the senior subordinated notes plus accrued interest and a prepayment charge. The Company must offer to repurchase the senior subordinated notes if cash proceeds from sales of assets exceed a specific amount, as defined in the Note and Stock Purchase Agreement (as amended); however, payment is subject to the full payment of all term loans and senior notes. The Company executed an interest rate swap agreement related to these notes on a notional amount of $40.0 through September 30, 1998 whereby the Company receives a fixed rate of 5.4% and pays a variable rate equal to LIBOR. The variable rate the Company pays on this swap is capped at 7.7%. At December 31, 1996, the Company had unused lines of credit of approximately $250.0. The amended and restated credit agreement provides for the quarterly payment of a commitment fee on all unused commitments ranging from 0.2% to 0.5% per annum, based on the Company's performance. Interest expense of $1.2, $7.7 and $10.3 in 1996, 1995 and 1994, respectively, related to the swaps discussed above, previously outstanding interest rate/currency swaps and interest rate caps and options is included in interest expense in the statement of operations. Substantially all tangible and intangible assets of the Company serve as collateral for the term loan and revolving credit facility. The senior subordinated notes are unsecured but are guaranteed by the Company and by the domestic subsidiaries of Lexmark International, Inc., a wholly owned subsidiary of the Company. The credit agreements contain customary default provisions, including a default upon a "change of control" which includes the acquisition by one person or a related group of persons other than Clayton & Dubilier Private Equity Fund IV Limited Partnership (C&D Fund IV) and IBM of 25% or more of the Company's voting securities, unless C&D Fund IV owns a greater percentage of the Company's voting securities than such person or related group. The senior subordinated note agreement allows the holder to put the notes to Lexmark International, Inc. upon the acquisition, by a person or a related group of persons, of 20% of the Company's voting securities and the cessation of control of the Company by C&D Fund IV and certain other stockholders. The credit agreements also contain certain net worth, leverage and fixed charge coverage restrictions and other covenants which, among other things, restrict the payment of dividends on common stock, incurrence of additional debt, investments and joint ventures, repurchases of common stock, mergers or consolidations and sales of assets. The aggregate annual long-term debt payment requirements are as follows for the five years ending December 31: 1997-$0; 1998-$37.0; 1999-$40.0; 2000-$40.0; 2001-$40.0, and thereafter-$6.2. Total cash paid for interest amounted to $24.2, $41.4 and $50.2 in 1996, 1995 and 1994, respectively. 7. STOCKHOLDERS' EQUITY The Company authorized and issued 850,000 shares of redeemable senior preferred stock and 50,000 shares of junior preferred stock in connection with the acquisition of IBM Information Products Corporation in 1991. The redeemable senior preferred stock was canceled and exchanged for 9,750,000 shares of Class A common stock on December 30, 1994. This was a non-cash exchange, and thus does not appear in the statement of cash flows. The excess of the fair value of the common stock issued to the holders of the redeemable senior preferred stock over the carrying amount of the redeemable senior preferred stock has been subtracted from net earnings in arriving at net loss attributable to common stock in the calculation of net loss per common share in 1994. The junior preferred stock, which was contributed to the Company's savings plan on March 27, 1991, was exchanged for 750,000 shares of Class A common stock on October 25, 1995. The junior preferred stock was then retired. This was a non-cash exchange, and thus does not appear in the statement of cash flows. 33 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. In 1996 and 1995, 3,442,100 and 2,361,377 shares, respectively, of Class B common stock were converted to Class A common stock. At December 31, 1996, approximately 74,000,000 and 1,750,000 shares of Class A and Class B common stock were unissued and unreserved. These shares are available for a variety of general corporate purposes, including future public offerings to raise additional capital and for facilitating acquisitions. In connection with a technology agreement with an unrelated party, the Company has outstanding an exercisable warrant to purchase 634,365 shares of Class A common stock at $6.67 per share. The warrant expires on March 27, 1998. 8. STOCK INCENTIVE PLANS The Company has established various stock incentive plans to encourage employees and non-employee directors to remain with the Company and to more closely align their interests with those of the Company's stockholders. Under the employee plans, approximately 13,140,000 shares of Class A common stock have been reserved for grant in the form of stock options, stock appreciation rights, restricted stock, performance shares or deferred stock units. Under the director plan, approximately 150,000 shares of Class A common stock have been reserved for grant in the form of stock options and deferred stock units. As of December 31, 1996, awards under the programs have been limited to stock options, restricted stock and deferred stock units. Additionally, performance shares will be earned by certain members of executive management if specific performance objectives are attained by the Company over a three year period ending December 31, 1997. The exercise price of options awarded under these plans is equal to the fair market value of the underlying common stock on the date of grant. All options expire ten years from the date of grant and become fully vested at the end of five years based upon continued employment or three years of service on the Board of Directors. The Company recognized a non-cash compensation charge in 1995 of $60.6 ($38.5 net of tax benefit) for certain stock options outstanding prior to the initial public offering in November 1995. 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 the non-cash compensation charge mentioned in the preceding paragraph. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant date for awards under these plans consistent with the methodology prescribed under Statement of Financial Accounting Standards ("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: 1996 1995 ---- ---- Net earnings - as reported $127.8 $ 32.4 Net earnings - pro forma 125.0 29.9 Net earnings per share - as reported $ 1.68 $ 0.43 Net earnings per share - pro forma 1.64 0.40 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: 1996 1995 ---- ---- Expected dividend yield - - Expected stock price volatility 45% 45% Weighted average risk-free interest rate 5.8% 5.9% Weighted average expected life of options (years) 3.9 4.4 The weighted average fair value of options granted during 1996 and 1995 was $7.67 and $8.16 per share, respectively. 34 The pro forma effects on net income for 1996 and 1995 are not representative of the pro forma effect on net income in future years because they do not take into consideration pro forma compensation expense related to grants made prior to 1995. A summary of the status of all of the Company's stock incentive plans as of December 31, 1996, 1995 and 1994 and changes during the years then ended is presented below: Weighted Average Exercise Number Price ------ -------- Outstanding at January 1, 1994 8,157,420 $ 7.07 Granted 372,750 11.33 Exercised - - Forfeited or canceled ( 482,160) 7.19 --------- ------- Outstanding at December 31, 1994 8,048,010 7.26 Granted 2,609,007 19.14 Exercised ( 987,108) 7.09 Forfeited or canceled ( 241,128) 8.20 --------- ------- Outstanding at December 31, 1995 9,428,781 10.54 Granted 508,532 19.39 Exercised (2,664,363) 7.11 Forfeited or canceled ( 321,088) 14.81 --------- ------- Outstanding at December 31, 1996 6,951,862 12.31 ========= ======= As of December 31, 1996, 1995, and 1994 there were 4,574,734, 6,787,426 and 1,145,850 options exercisable, respectively. The following tables summarize information about stock options outstanding at December 31, 1996: Options Outstanding --------------------------------------------------- Number Weighted-Average Range of Outstanding Remaining Weighted-Average Exercise Prices at 12/31/96 Contractual Life Exercise Price --------------- ----------- ---------------- ---------------- $ 6.67 to $14.75 4,059,682 4.9 years $ 7.38 15.00 to 19.75 671,402 8.3 16.21 20.00 to 26.75 2,220,778 8.8 20.14 ---------------- --------- --- ------ $ 6.67 to $26.75 6,951,862 6.5 $12.31 ================ ========= === ====== Options Exercisable ----------------------------- Number Range of Exercisable Weighted-Average Exercised Prices at 12/31/96 Exercise Price ---------------- ----------- ---------------- $ 6.67 to $14.75 3,829,665 $ 7.19 15.00 to 19.75 240,689 16.10 20.00 to 26.75 504,380 20.12 ---------------- --------- ------ $ 6.67 to $26.75 4,574,734 $ 9.08 ================ ========= ====== Approximately 2,370,000 shares were available for future awards under the stock incentive plans at December 31, 1996. 9. INCOME TAXES The Company utilizes the liability method of accounting for income taxes, as set forth in SFAS No. 109, Accounting for Income Taxes. SFAS 109 requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The provision for income taxes consisted of the following: 1996 1995 1994 ---- ---- ---- Currently payable: Federal $50.0 $32.3 $ 2.1 Non-U.S. 5.3 5.1 3.1 State and local 6.2 8.6 0.9 ----- ----- ----- 61.5 46.0 6.1 Deferred payable (benefit): Federal 12.0 (23.9) - Non-U.S. 0.1 (0.4) - State and local 0.2 (6.5) - ----- ----- ----- 12.3 (30.8) - ----- ----- ----- Provision for income taxes $73.8 $15.2 $ 6.1 ===== ===== ===== 35 Earnings before income taxes were as follows: 1996 1995 1994 ---- ---- ---- U.S. $129.6 $27.3 $36.7 Non-U.S. 72.0 36.0 14.0 ------ ----- ----- Earnings before income taxes $201.6 $63.3 $50.7 ====== ===== ===== The U.S. and non-U.S. earnings before income taxes reflect write-offs of certain intercompany obligations owed to the U.S. totaling $10.6 and $13.0 in 1995 and 1994, respectively. The Company realized an income tax benefit from the exercise of certain stock options and warrants in 1996. This benefit resulted in a decrease in current income taxes payable and an increase in capital in excess of par of $7.4 in 1996. Significant components of deferred income taxes were as follows: 1996 1995 ---- ---- Deferred tax assets: Tax loss carryforwards $ 24.2 $ 61.6 Intangible assets 10.3 29.2 Research and development tax credits - 13.2 Alternative minimum tax credits 6.3 4.0 Unexercised stock options 12.4 22.1 Inventory 20.2 16.3 Valuation allowance (32.3) (77.2) ------ ------ Total deferred tax assets 41.1 69.2 ------ ------ Deferred tax liabilities: Prepaid expenses 4.6 6.8 Property, plant and equipment 17.2 19.0 Other 0.7 12.5 ------ ------ Total deferred tax liabilities 22.5 38.3 ------ ------ Net deferred tax asset $ 18.6 $ 30.9 ====== ====== The net decrease in the total valuation allowance for the years ended December 31, 1996 and 1995 was $44.9 and $33.6, respectively. As of December 31, 1996, the Company has $6.3 of alternative minimum tax credits available to offset future U.S. federal income taxes on an indefinite carryforward basis. The Company has non-U.S. tax loss carryforwards of $68.4 which expire between the years 1997 and 2014. Of these non-U.S. tax loss carryforwards, $38.1 are not expected to provide a future benefit because they are attributable to certain non-U.S. entities that are also taxable in the U.S. A reconciliation of the provision for income taxes using the U.S. statutory rate and the Company's effective tax rate was as follows: 1996 1995 1994 ---- ---- ---- Provision for income taxes at statutory rate $ 70.5 $ 22.2 $ 17.7 State and local income taxes,net of 6.4 1.4 0.6 federal tax benefit 45.1 31.2 3.7 Losses providing no tax benefit - - (11.2) U.S. tax loss carryforward Change in the beginning-of-the-year balance of the valuation allowance for deferred tax assets affecting provision (44.9) (33.6) - Research and development credit (2.9) (3.8) - Foreign sales corporation (5.0) (2.3) - Non-U.S. income exempt from tax - (3.7) (5.0) Other 4.6 3.8 0.3 ------ ------ ------ Provision for income taxes $ 73.8 $ 15.2 $ 6.1 ====== ====== ====== Cash paid for income taxes was $60.7, $24.1 and $4.9 in 1996, 1995 and 1994, respectively. 10. EMPLOYEE PENSION PLANS The Company and its subsidiaries have retirement plans covering substantially all regular employees. The total pension expense of all defined benefit plans is determined using the projected unit credit actuarial method. Certain of the Company's non-U.S. subsidiaries recognized $0.9 and $0.1 for settlement and curtailment losses during 1996 and 1994, respectively. Plan assets are invested in government securities, corporate debt, annuity contracts and equity securities. It is the Company's policy to fund amounts for pensions sufficient to meet the minimum requirements prescribed by various government regulations and such additional amounts as the Company may determine to be appropriate. U.S. Plans: Regular full-time employees in the U.S. are covered by a noncontributory defined benefit plan, which is funded by Company contributions to an irrevocable trust fund held for the sole benefit 36 of employees. Monthly retirement benefits are based on service and compensation. Benefits become vested upon completion of five years of service. The Company has a supplemental retirement plan for employees whose benefits under the defined benefit plan are limited because of restrictions imposed by federal tax laws. Non-U.S. Plans: Most subsidiaries have retirement plans covering substantially all employees funded through various fiduciary-type arrangements. Retirement benefits are generally based on years of service and compensation during a fixed number of years immediately prior to retirement. Net periodic pension expense included the following components:
U.S. Plans Non-U.S. Plans -------------------------- ---------------------- 1996 1995 1994 1996 1995 1994 ---- ---- ---- ---- ---- ---- Service cost $ 15.5 $ 12.3 $ 15.4 $ 2.0 $ 1.9 $ 1.8 Interest cost 23.0 20.3 17.9 4.5 4.5 3.3 Actual (gain) loss return on plan assets (27.2) (82.4) 16.9 (4.3) (4.9) (0.4) Net amortization and deferral (5.8) 56.3 (44.9) 0.6 1.3 (2.7) Settlement/curtailment losses - - - 0.9 - 0.1 ------- ------ ------ ------ ------ ------ Net periodic pension expense $ 5.5 $ 6.5 $ 5.3 $ 3.7 $ 2.8 $ 2.1 ======= ====== ====== ====== ====== ======
The funded status at December 31 was as follows:
U.S. Plans Non-U.S. Plans ----------------- ---------------- 1996 1995 1996 1995 ---- ---- ---- ---- Actuarial present value of benefit obligations: Vested benefit obligation $218.5 $234.0 $ 53.7 $ 45.9 ------ ------ ------ ------ Accumulated benefit obligation $256.0 $280.8 $ 57.3 $ 54.8 ------ ------ ------ ------ Plan assets at fair value $322.8 $337.1 $ 54.9 $ 53.9 Projected benefit obligation 303.2 327.8 66.7 66.9 ------ ------ ------ ------ Plan assets in excess of (or less than) projected benefit obligation 19.6 9.3 (11.8) (13.0) Unrecognized net (gain) loss (11.8) 3.8 3.9 5.1 Additional minimum liability - - (2.5) - ------ ------ ------ ------ Prepaid pension cost (pension liability) $ 7.8 $ 13.1 $(10.4) $ (7.9) ====== ====== ====== ======
Significant actuarial assumptions used to determine the projected benefit obligation and to compute the expected long-term return on assets were as follows:
U.S. Plans Non-U.S.Plans 1996 1995 1994 1996 1995 1994 ---- ---- ---- ---- ---- ---- Discount rate 7.5% 7.0% 9.0% 6.8% 7.5% 7.4% Long-term rate of compensation increase 5.0% 4.5% 6.5% 4.3% 4.8% 4.5% Expected long-term rate of return on plan assets 10.0% 10.0% 10.0% 7.4% 8.1% 8.0%
The actuarial assumptions for non-U.S. plans represent weighted averages reflecting the combined assumptions for all non-U.S. plans. The Company also sponsors various defined contribution plans for employees in certain countries. Company contributions are based upon a percentage of employees' contributions. The Company's expense under these plans amounted to $4.4, $2.9 and $2.4 in 1996, 1995 and 1994, respectively. 37 11. OTHER POSTRETIREMENT BENEFIT PLANS The Company and certain of its non-U.S. subsidiaries have medical, dental and life insurance plans for retirees. Most retirees outside the U.S. are covered by government-sponsored programs. The Company provides U.S. retirees with medical benefits similar to those provided to full-time employees, subject to certain maximums. The Company does not fund its postretirement benefit plans. All U.S. full-time employees who meet certain years of service requirements are eligible for postretirement benefits. The U.S. plan was amended in 1994 to add a cost sharing provision as the Company continues its efforts to control costs. Net periodic U.S. postretirement benefit expense included the following components: 1996 1995 1994 ---- ---- ---- Service cost $3.1 $1.7 $1.9 Interest cost 1.8 1.4 1.1 Amortization of net loss from earlier periods 0.2 - - ---- ---- ---- Net periodic U.S. postretirement benefit expense $5.1 $3.1 $3.0 ==== ==== ==== The U.S. postretirement benefit liability at December 31 was as follows: 1996 1995 ---- ---- Active employees, not fully eligible for benefits $22.3 $19.6 Fully eligible active plan participants 4.8 4.2 ----- ----- Accumulated postretirement benefit obligation 27.1 23.8 Unrecognized net loss (3.0) (4.7) ----- ----- Postretirement benefit liability $24.1 $19.1 ===== ===== Assumed medical cost inflation for 1997 is projected to be 9.5%. For the years 1997 thru 1999, the medical inflation rate is assumed to trend downward slightly by 0.8% each year and by 1.6% in year 2000, for an average annual medical cost increase over the next four years of 8.1%. No medical inflation is assumed after 2000, by which time medical costs are assumed to have doubled from 1991 levels. Since the plan caps medical costs at twice the 1991 levels, the effect of a 1% increase in the assumed medical inflation rate is not material. The assumed discount rate for postretirement medical benefits is 7.7%, 7.2% and 9.2% for 1996, 1995 and 1994, respectively. IBM agreed to pay for its pro rata share (currently estimated at $77.1) of future postretirement benefits for all Company employees based on relative years of service with IBM and the Company. As of March 31, 1996, certain of the Company's U.S. employees who met established eligibility requirements elected to return to IBM and retire as IBM employees. Accordingly, IBM will pay all pension and postretirement benefits for these employees. 12. COMMITMENTS The Company is committed under operating leases (containing various renewal options) for rental of office and manufacturing space and equipment. Rent expense (net of rental income of $5.8, $5.6 and $5.1) was $13.0, $9.9 and $12.0 in 1996, 1995 and 1994, respectively. Future minimum rentals under terms of non-cancelable operating leases at December 31 are: 1997-$17.7; 1998-$15.0; 1999-$11.0; 2000-$8.5; 2001-$6.9 and thereafter-$12.2. 38 13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT The Company operates internationally, giving rise to market risks from changes in foreign exchange rates. The Company is also exposed to interest rate risk on its borrowings. The Company utilizes derivative financial instruments to reduce these risks, and does not hold or issue financial instruments for trading purposes. The Company is exposed to credit-related losses in the event of non-performance by counterparties to financial instruments, but it does not expect any counterparties to fail to meet their obligations given their high credit ratings. Where appropriate, the Company arranges master netting agreements. Interest Rate Risk Management: The Company utilizes interest rate swaps, caps and options to maintain an appropriate balance between fixed and floating rate debt in order to minimize the effect of changing interest rates on earnings. Interest rate swaps and interest rate/currency swaps are included in the statement of financial position as accrued liabilities and other liabilities, respectively. Premiums paid for interest rate cap and option agreements are included in the statement of financial position as current assets and non-current assets and are charged to interest expense over the terms of the agreements or when written off, if the option expires unexercised. Amounts receivable under cap agreements and gains realized on options are recognized as reductions of interest expense over the terms of the agreements. For additional information related to derivative financial instruments used to manage interest rate risk, see Note 6. Foreign Exchange Risk Management: The Company enters into various types of foreign exchange contracts in managing its foreign exchange risk. Notional amounts at December 31 were as follows: 1996 1995 ---- ---- Forward contracts $102.4 $208.3 Options purchased 241.3 152.4 Options written (97.3) (76.2) Forward contracts and purchased options are used to hedge firm and anticipated purchases of inventory and are included in the statement of financial position as current assets and accrued liabilities. These instruments have remaining terms of one year or less. Gains and losses receiving hedge accounting treatment are recognized in earnings in the same period as the underlying hedged transactions. A hedging loss of $0.3 was deferred at December 31, 1995. The Company also purchased and wrote offsetting foreign currency options, which do not qualify for hedge accounting treatment, for the purpose of reducing the net cost of its hedging strategies. These instruments are included in the statement of financial position as current assets and accrued liabilities, respectively. Instruments which do not qualify for hedge accounting treatment are marked to market, with the resulting gains and losses included in earnings. Concentrations of Credit Risk: The Company's main concentrations of credit risk consist primarily of temporary cash investments and trade receivables. Temporary cash investments are placed with various financial institutions. Company guidelines have been established relating to the amount of deposits or investments that may be held by each financial institution. IBM is the most significant trade customer of the Company (see Note 16); otherwise, credit risk related to trade receivables is dispersed across a large number of customers located in various geographic areas. The Company also has off-balance sheet credit risk for the reimbursement from IBM of its pro rata share of postretirement benefits to be paid by the Company (see Note 11). 39 14. FAIR VALUE OF FINANCIAL INSTRUMENTS The following table summarizes the carrying amounts and fair values of financial instruments with fair values different than their carrying amounts at December 31: 1996 1995 Asset (Liability) Asset (Liability) ----------------- ----------------- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Non-derivatives: Long-term debt (senior and senior subordinated notes) $(120.0) $(129.0) $(140.0) $(159.8) Derivatives: Prepaid expenses and other current assets 1.5 2.2 0.9 0.6 Other assets - 0.1 - 0.1 Accrued liabilities - (0.6) - (0.1) Other liabilities (6.0) (7.8) (10.8) (12.7) The carrying amounts in the table are included in the statement of financial position under the indicated captions. The amounts in the table are presented net of amounts offset in accordance with FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts. Cash and cash equivalents and trade receivables are valued at their carrying amounts as recorded in the statement of financial position, and are reasonable estimates of fair value given the relatively short period to maturity for these instruments. The carrying value of the term loan approximates its fair value given its variable rate interest provisions. Derivative financial instruments which do not qualify for hedge accounting are recorded in the statement of financial position at their fair value. The fair value of the senior subordinated notes is estimated based on current rates available to the Company for debt with similar characteristics. Fair values for the Company's derivative financial instruments are based on quoted market prices of comparable instruments or, if none are available, on pricing models or formulas using current assumptions. 15. SALES OF RECEIVABLES The Company entered into an agreement in 1994 (which was subsequently amended), to sell up to $100.0 of U.S. trade receivables on a limited recourse basis. As collections reduce previously sold receivables, the Company may replenish these with new receivables. At December 31, 1996, U.S. trade receivables of $65.0 had been sold and, due to the revolving nature of the agreement, $65.0 also remain outstanding. At December 31, 1995, trade receivables of $100.0 were sold and outstanding. The agreement, which contains net worth and fixed charge coverage restrictions similar to, but less restrictive than, those in the credit agreements, must be renewed annually, and is expected to be renewed upon its expiration in June 1997. The risk the Company bears from bad debt losses on U.S. trade receivables sold is limited to approximately 10% of the outstanding balance of receivables sold. The Company addresses this risk of loss in its allowance for doubtful accounts. Receivables sold may not include amounts over 60 days past due or concentrations over certain limits with any one customer. In January 1996, the Company entered into an agreement to sell up to 22 million deutsche marks of Germany trade receivables on a limited recourse basis. At December 31, 1996, Germany trade receivables of 21.8 million deutsche marks ($14.0 at December 31, 1996 exchange rates) were outstanding under this program and, as collections reduce previously sold receivables, the Company may replenish these with new receivables. The Company sells a portion of its non-U.S. trade receivables on a recourse basis. Proceeds from these sales totaled $48.9, $86.9 and $136.3 in 1996, 1995 and 1994, respectively. Approximately $5.3 and $5.5 remained uncollected at December 31, 1996 and 1995, respectively. In addition, the 40 Company sold receivables to affiliates of IBM (a related party in 1994) on a non-recourse basis totaling $181.7 in 1994. Expenses incurred under these programs totaling $5.4, $3.5 and $3.0 for 1996, 1995 and 1994 respectively, are included in other non-operating expense. 16. MAJOR CUSTOMER The Company transacts business with IBM, which prior to 1995 was considered a related party due to its ownership interest in the Company. In 1994, while IBM was a related party, the Company purchased inventory, products and various services from IBM totaling $167.2. IBM was also considered a major customer prior to 1996, accounting for approximately 8%, 20% and 22% of total revenues in 1996, 1995 and 1994, respectively. At December 31, 1995, the total amount due from IBM was $46.3. In August 1995, the Company concluded negotiations with IBM regarding IBM's purchase of keyboards from the Company. As a result of these negotiations and the Company's analysis of the long-term profitability of the keyboard industry, the Company decided to phase out its keyboard product line and recorded a $15.0 reserve in the third quarter of 1995. The reduction of IBM revenue related to keyboard sales was a factor in IBM no longer being considered a major customer in 1996. In August 1995, the Company entered into a profit sharing agreement for an extension of the IBM trademark agreement that allows the Company to continue to use the IBM logo on certain existing printer supplies in its other office imaging products line through March 31, 1999. The Company also entered into a royalty agreement for an extension of the right to use the IBM logo on typewriters and typewriter supplies through March 27, 2001. 17. INTERNATIONAL OPERATIONS The Company operates in the office products industry segment and manufactures its products in the U.S., France, Australia, Mexico and Scotland and markets them throughout the world. Intercompany sales are made at transfer prices determined using an arm's length methodology which is in compliance with the tax laws of the United States and the tax laws of the various jurisdictions in which Company affiliates operate. Revenues from international operations, including exports from the U.S., represent approximately half of consolidated revenues. Summarized financial data by region follows: 1996 1995 1994 ---- ---- ---- Revenues: U.S. Trade (1) $1,256.5 $1,272.4 $1,146.6 Intercompany 572.6 449.7 342.3 -------- -------- -------- Total U.S. 1,829.1 1,722.1 1,488.9 Europe 881.8 734.9 576.5 Other international 239.3 150.5 129.2 Eliminations (572.6) (449.7) (342.3) -------- -------- -------- Total $2,377.6 $2,157.8 $1,852.3 ======== ======== ======== Operating income: (2) U.S. $ 154.3 $ 65.8 $ 86.5 Europe 77.5 46.2 22.5 Other international 3.5 2.3 3.4 Eliminations (4.9) (5.8) 2.5 -------- -------- -------- Total $ 230.4 $ 108.5 $ 114.9 ======== ======== ======== Total Assets: U.S. $1,034.3 $1,016.1 $ 935.9 Europe 385.9 319.8 272.8 Other international 92.7 53.8 45.8 Eliminations (291.4) (246.8) (293.6) -------- -------- -------- Total $1,221.5 $1,142.9 $ 960.9 ======== ======== ======== (1) U.S. trade revenues include exports to international locations. (2) Includes non-cash compensation charge in 1995 of $45.7, $13.6 and $1.3 for the U.S., Europe, and other international, respectively. 41 18. QUARTERLY FINANCIAL DATA (UNAUDITED) First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- 1996: Revenues $587.8 $555.3 $547.6 $686.9 Gross profit 182.4 172.2 173.9 218.9 Operating income 44.0 52.9 55.1 78.4 Net earnings 21.6 30.8 30.2 45.2 Net earnings per share $ 0.29 $ 0.40 $ 0.40 $ 0.59 1995: Revenues $471.4 $541.4 $514.7 $630.3 Gross profit 151.8 161.7 153.3 203.1 Operating income 30.7 39.8 30.2 7.8 Earnings before extraordinary item 11.4 19.9 16.1 0.7 Net earnings 11.4 4.2 16.1 0.7 Earnings per share before extraordinary item 0.15 0.27 0.21 0.01 Net earnings per share $ 0.15 $ 0.06 $ 0.21 $ 0.01 Fourth quarter 1995 operating income and net earnings were reduced by a non-cash compensation charge of $60.6 ($38.5 net of tax benefit) recognized for certain of the Company's outstanding employee stock options upon consummation of the initial public offering. Second quarter 1995 net earnings were reduced by an extraordinary charge of $22.1 ($15.7 net of tax benefit) caused by an early extinguishment of debt related to the refinancing of the Company's term loan. 19. NEW ACCOUNTING STANDARD In June 1996, the Financial Accounting Standards Board issued SFAS No. 125, Accounting for Transfers of Servicing of Financial Assets and Extinguishment of Liabilities. This statement is effective for the Company's 1997 financial statements. The Company's analysis of this new statement indicates that it will not have a material effect on the Company's financial position or results of operations. 20. SUBSEQUENT EVENT In January 1997, the Company announced that certain stockholders who invested to purchase the Company from IBM in 1991 registered with the U.S. Securities and Exchange Commission to sell up to 11.5 million shares, including 1.5 million shares for over allotment. At settlement, 10,148,100 shares were sold at a public offering price of $24.875 per share. The Company and current members of management chose not to sell any shares in the offering and, therefore, did not receive any of the proceeds from the sale of the shares. 42 MANAGEMENT'S REPORT ON FINANCIAL STATEMENTS The consolidated financial statements and related information included in this Financial Report are the responsibility of management and have been reported in conformity with generally accepted accounting principles. All other financial data in this Annual Report have been presented on a basis consistent with the information included in the consolidated financial statements. Lexmark International Group, Inc. maintains a system of financial controls and procedures, which includes the work of corporate auditors, which we believe provides reasonable assurance that the financial records are reliable in all material respects for preparing the consolidated financial statements and maintaining accountability for assets. The concept of reasonable assurance is based on the recognition that the cost of a system of financial controls must be related to the benefits derived and that the balancing of those factors requires estimates and judgment. This system of financial controls is reviewed, modified and improved as changes occur in business conditions and operations, and as a result of suggestions from the corporate auditors and Coopers & Lybrand L.L.P. The Finance & 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 & Audit Committee, independent accountants, and corporate auditors have free access to one another to discuss their findings. /s/ Marvin L. Mann Marvin L. Mann Chairman and chief executive officer /s/ Gary E. Morin Gary E. Morin Vice president and chief financial officer REPORT OF INDEPENDENT ACCOUNTANTS To the board of directors of Lexmark International Group, Inc. We have audited the accompanying consolidated statements of financial position of Lexmark International Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, cash flows and stockholders' equity for each of the three years in the period ended December 31, 1996 appearing on pages 25 through 42 of this annual report. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Lexmark International Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Lexington, Kentucky February 13, 1997 43 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Lexmark International Group, Inc. (together with its subsidiaries, the "Company" or "Lexmark") is a global developer, manufacturer and supplier of laser and inkjet printers and associated consumable supplies. The Company also sells dot matrix printers for printing single and multi-part forms by business users. The Company's core printer business targets the office and home markets through its Business Printer and Consumer Printer Divisions. In addition to its core printer business, Lexmark develops, manufactures and markets a broad line of other office imaging products, through its Imaging Solutions Division, which include supplies for International Business Machines Corporation ("IBM") branded printers, after-market supplies for other original equipment manufacturers ("OEM") products, and typewriters and typewriter supplies that are sold under the IBM trademark. The Company's "keyboards and other" product category was phased out by March 1996. In the past few years, the worldwide printer industry has seen substantial growth in demand for laser and inkjet printers as a result of increasing penetration of personal computers into the office and home markets. During this period, the Company's own product mix has evolved, with its laser and inkjet printers and associated supplies representing an increasingly larger percentage of its sales volume and revenues, particularly as the increasing base of installed Lexmark printers generates additional revenues from recurring sales of supplies for those printers (primarily laser and inkjet cartridges). In 1996, revenues from the sale of printers and associated printer supplies increased 24 percent from 1995 and accounted for 77 percent of total Company revenues of approximately $2.4 billion. Most of this growth was derived from increasing sales of laser and inkjet printers and printer cartridge supplies, offset in part by slowing demand for dot matrix printers which depend on older impact-printing technology. Lexmark believes that total revenues will continue to grow due to overall market growth and increases in the Company's market share in both the network and color inkjet segments. Management believes this growth will more than offset reduced demand for dot matrix impact printers and the discontinuance of the Company's keyboard product line. In recent years, the Company's growth rate in sales of printer units generally exceeded the growth rate of its printer revenues due to price pressures and the introduction of new lower priced products in both the laser and inkjet printer markets. In the laser printer market, unit price pressure is partially offset by the tendency of customers to move up to higher priced printer models with faster speeds, greater network connectivity and other new features. In the inkjet printer market, advances in color inkjet technology have resulted in lower prices for printers with sharper resolution and improved performance. The greater affordability of color inkjet printers has been an important factor in the recent growth of this market. The Company's other office imaging products category includes many mature products such as supplies for IBM printers, typewriters and typewriter supplies and other impact supplies that require little investment but provide a significant source of cash flow. Lexmark introduced its first after-market laser cartridges for the large installed base of laser printers sold by other manufacturers in May 1995. The Company's strategy for other office imaging products is to focus on the after-market OEM laser supplies opportunity while managing its mature businesses for cash flow. 44 The Company expects that its overall margins will remain relatively stable as its associated printer supplies business becomes an increasingly larger part of its business, offsetting the decline in the Company's other office imaging products supplies business and the phase-out of its lower margin keyboard business. The Company's operations have been significantly impacted by a number of key agreements with IBM which were negotiated as part of the acquisition of Information Products Corporation from IBM in March 1991 (the "Acquisition"). In general, these agreements expired on March 27, 1996. Although the Company and IBM have entered into a number of new agreements, which extend some of the original agreements (although on less favorable terms) and provide for an ongoing relationship in other areas, management expects that future revenue and profit attributable to sales to IBM will continue to decline as the Company's core printer and associated supplies business represents a larger percentage of the Company's business. In January 1997, the Company announced that certain stockholders who invested to purchase the Company from IBM in 1991 registered with the U.S. Securities and Exchange Commission to sell up to 11.5 million shares, including 1.5 million shares for over allotment. At settlement, 10,148,100 shares were sold at a public offering price of $24.875 per share. The Company and current members of management chose not to sell any shares in the offering and, therefore, did not receive any of the proceeds from the sale of the shares. In February 1997, the Company announced its intention to prepay in March 1997 its 14.25% senior subordinated notes due in 2001. The early payment will result in an extraordinary loss in the first quarter of 1997 of approximately $24 million ($15 million net of tax benefit). RESULTS OF OPERATIONS 1996 compared to 1995 Consolidated revenues in 1996 were $2,378 million, an increase of 10 percent over 1995. Printers and associated supplies revenues were $1,832 million, an increase of 24 percent, and revenues from other office imaging products were $513 million, an increase of 2 percent. The transition out of the keyboard business was completed in March 1996 and, excluding this business, revenues were up $365 million or 18 percent. Total U.S. revenues increased $10 million or 1 percent, and excluding the keyboard business, were up 14 percent. International revenues were up $210 million or 24 percent. [GRAPH APPEARS HERE] . REVENUES ... printers and associated supplies represent an increasingly larger proportion of Company's operations in percent 1994 1995 1996 ---- ---- ---- Printers 58.5% 68.5% 77.0% Other 41.5 31.5 23.0 The increase in consolidated revenues was principally due to growth in the core printer and associated supplies business. Hardware volumes have shown significant growth in the sales of inkjet printers while printer supplies revenues increased due to the continued growth of the Company's installed printer base. These revenue increases more than offset price reductions on certain printers. Foreign currency translation effects were slightly unfavorable for 1996 compared to 1995. Revenues from other office imaging products increased primarily due to the growth of the after-market laser cartridge business which more than offset the declines in the traditional IBM branded supplies business. The color inkjet market, the fastest growing segment of the personal printer market (printers in the 1-6 pages per minute ("ppm") category), is expanding rapidly due to growth in personal computers and home offices, and the development of easy-to-use color inkjet technology with good quality color print capability at low prices. Lexmark introduced its first color inkjet printer using its own technology in 1994 and has experienced strong sales growth through retail outlets. The Company has increased its product distribution through retail outlets, with the number of such 45 outlets worldwide rising from approximately 5,000 retail outlets in 1995 to approximately 15,000 in 1996. The Company has made substantial capital investments in its inkjet production capacity in 1995 and 1996 to address the growing demand for its color inkjet printers. The Company's laser printers primarily compete in the office desktop segment (laser printers that print at speeds of 7-30 ppm), which the Company believes is one of the fastest growing segments of the laser printer market. Office desktop laser printer growth is being driven by the office migration from large mainframe computers to local area networks that link various types of computers using a variety of protocols and operating systems. The Company's installed base of printers supports a large and profitable printer supplies business. Because consumable supplies must be replaced on average one to three times a year, depending on type of printer and usage, demand for laser and inkjet print cartridges is increasing at a higher rate than printer shipments. The Company expects this recurring and relatively high margin business to contribute to the stability of the Company's earnings over time. Consolidated gross profit was $747 million for 1996, an increase of 12 percent from 1995, principally due to increased printer and associated supplies volumes, lower costs through better cost management, the absence of the lower-margin keyboard business in 1996 and more favorable product sales mix. Gross profit as a percentage of revenues was 31.4 percent in 1996, slightly better than 31.0 percent in 1995. Gross profit attributable to printers and associated supplies increased 25 percent, principally due to higher revenues and the mix of these revenues. Gross profit margin held steady as competitive price pressures on printers were offset by lower costs and growth in the higher margin associated consumable supplies. Total operating expenses decreased 8 percent for 1996 compared to 1995. In 1995, operating expenses included a non-cash option compensation charge of $61 million ($39 million net of tax benefit) recognized for certain of the Company's outstanding employee stock options upon the consummation of the initial public offering in November 1995. Operating expense comparisons were also affected by amortization of intangible assets, which were fully amortized by March 1996. Excluding the 1995 non-cash option compensation charge and the amortization of intangibles, operating expenses as a percentage of revenues were 21.5 percent in 1996 versus 22.0 percent in 1995. Consolidated operating income was $230 million for 1996, an increase of 112 percent over 1995. Excluding the non-cash option compensation charge and the amortization of intangibles, consolidated operating income was up 21 percent. This increase was due to stronger 1996 sales volumes and cost and expense controls. [GRAPH APPEARS HERE] . OPERATING INCOME BEFORE AMORTIZATION dollars in millions 1994 1995 1996 ---- ---- ---- Before unusual item $159.6 $134.1 $235.5 After unusual item 159.6 194.7 235.5 The following table sets forth the percentage of total revenues represented by certain items reflected in the Company's statement of operations. 1996 1995 1994 ==== ==== ==== Revenues 100% 100% 100% Cost of revenues 69 69 70 --- --- --- Gross profit 31 31 30 Research and development 5 5 6 Selling, general & administrative 16 17 16 Option compensation related to IPO - 3 - Amortization of intangibles - 1 2 --- --- --- Operating income 10% 5% 6% ==== ==== ==== Earnings before income taxes and extraordinary item were $202 million, up 218 percent over 1995 and up 63 percent before the non-cash option compensation charge, principally due to the stronger operating performance and lower interest expense as a result of lower debt levels and lower interest rates. 46 The income tax provision was approximately 37 percent of earnings before tax for 1996 as compared to 24 percent in 1995. The effective tax rate for 1995 was favorably impacted by research and development tax credits and the benefit of a foreign sales corporation. Net earnings were $128 million, up 294 percent, and up 166 percent over earnings before extraordinary item in 1995. Excluding the non-cash option compensation charge, earnings before extraordinary item were up 48 percent to $128 million, up from $87 million in 1995. Net earnings per share were $1.68 for 1996, compared to $0.43, or $0.64 before extraordinary item in 1995, an increase of 287 percent and 161 percent, respectively. [GRAPH APPEARS HERE] . IMPACT OF UNUSUAL ITEMS in dollars 1994 1995 1996 ---- ---- ---- Earnings per share after unusual items -$0.46 $0.43 $1.68 Earnings per share before unusual items 0.49 1.16 1.68 1995 compared to 1994 Consolidated revenues in 1995 were $2,158 million, an increase of 16 percent over 1994. Printers and associated supplies revenues were $1,478 million, an increase of 36 percent and revenues from other office imaging products were $501 million, a decrease of 2 percent. Total U.S. revenues increased $126 million or 11 percent, and international revenues were up $180 million or 25 percent, primarily due to more competitive products, improved marketing, more effective sales efforts, and improved economic conditions in Europe. The strengthening of European currencies in relation to the U.S. dollar contributed approximately $61 million to the increase. The increase in printer and associated supplies revenues was principally due to higher volumes, with associated supplies revenues growing at a faster rate than printer hardware revenues. The increase in hardware volumes was primarily driven by increased inkjet sales, as a result of the Company's entry into the low-end color inkjet market with the ExecJet IIc in the third quarter of 1994, and increased laser printer sales which experienced volume and market share growth in the 7-30 ppm category. Revenues from other office imaging products decreased due to lower typewriter and impact printing supplies volumes, reflecting the continued decline of these markets, and lower sales to IBM. Sales of non-impact printing supplies to customers for printers other than Lexmark's, which includes the after-market laser cartridges, increased $24 million over 1994. "Keyboards and other" revenues were $178 million, a decrease of 30 percent, principally due to the Company's decision in the second half of 1994 to phase out its notebook computer product line. In the third quarter of 1995, the Company recorded a $15 million reserve for keyboard asset write-offs as a result of the Company's decision to phase out its keyboard product line following the expiration in March 1996 of the Company's keyboard agreement with IBM and management's expectations that the keyboard industry will continue to experience price declines resulting in low margins and a low return on assets. Sales to IBM have accounted for substantially all the Company's keyboard sales, which totaled $177 and $201 in 1995 and 1994, respectively. Consolidated gross profit was $670 million, an increase of 21 percent, primarily due to increased printer and associated supplies volumes. Gross profit as a percentage of revenues increased slightly to 31 percent reflecting the improved profitability in 1995 of the keyboards and other business as a result of phasing out the notebook computer product line during 1994. Gross profit attributable to printers and associated supplies was $449 million, an increase of 36 percent, reflecting increased volumes of both printers and associated supplies. Gross profit as a percentage of revenues remained constant at 31 percent. Operating expenses increased as a result of higher ongoing marketing and selling expenses resulting from the expansion of retail and other channels in the latter part of 1994 and higher 47 research and development spending. These increases were partially offset by lower amortization of intangibles acquired in connection with the purchase of the Company. From its inception, the Company's pre-tax earnings have been significantly impacted by the amortization of intangibles. Unamortized intangibles were approximately $5 million at December 31, 1995 and were fully amortized by March 31, 1996. Consolidated operating income was $109 million, a decrease of 6 percent. The $116 million increase in gross profit was more than offset by a non-cash option compensation charge of $61 million ($39 million net of tax benefit) recognized for certain of the Company's outstanding employee stock options upon the consummation of the initial public offering in November 1995, and an additional $61 million increase in other on-going operating expenses. Earnings before extraordinary item were $48 million, up 8 percent over 1994, principally due to lower interest expense primarily as a result of lower average debt balances. The decrease in interest expense was partially offset by an increase in the provision for income taxes to approximately 24 percent of earnings before tax in 1995 as compared to 12 percent in 1994, which benefited from the utilization of loss carryforwards. Had the Company not incurred the non-cash option compensation charge in 1995, earnings before extraordinary item would have been $87 million. Net earnings were $32 million, a decrease of 27 percent, due to an extraordinary charge of $22 million ($16 million net of tax benefit) caused by an early extinguishment of debt related to the Company's refinancing of its term loan. This charge reflects the write-off of deferred financing costs of $5 million and the mark to market of hedging instruments of $17 million related to the extinguished debt. The refinancing resulted in more flexible credit terms and lower interest rates. Earnings per common and common equivalent share were $0.43 in 1995, compared to a net loss of $0.46 per share in 1994. Earnings per common and common equivalent share were significantly impacted by unusual charges in 1995 and 1994. In 1995, net earnings were reduced by both the non-cash option compensation charge incurred in connection with the initial public offering and the extraordinary loss on extinguishment of debt. In 1994, a preferred stock redemption premium reduced net earnings attributable to common stock by $61 million. This premium was recognized as a result of the exchange of the Company's senior redeemable preferred stock for Class A common stock in December 1994. LIQUIDITY AND CAPITAL RESOURCES Lexmark's primary source of liquidity has been cash generated by operations, which totaled $118, $307 and $362 million in 1996, 1995 and 1994, respectively. Cash from operations has been sufficient to allow the Company to repay significant amounts of debt, fund the Company's working capital needs and finance its capital expenditures during these periods. The decrease in cash provided by operating activities for 1996 primarily reflects higher working capital requirements in support of sales growth. Trade receivables were up principally due to higher revenues while accounts payable and accrued liabilities were down primarily due to timing of payments. The 1996 cash from operations was reduced by $21 million due to fewer trade receivables being outstanding under the trade receivables financing programs than in 1995. Cash from operations was favorably impacted by $25 million due to effective management of inventory levels. Cash from operations in 1995 and 1994 was unusually high. Cash from operations for 1995 was favorably impacted by $30 million due to increased sales of trade receivables in an accounts receivable financing program and increases in accounts payable and accrued liabilities of $148 million, primarily due to the timing of payments. Cash generated by operations in 1994 was unusually high primarily due to $70 million in proceeds from the initialization of a receivable financing program, $42 million in higher 48 earnings before depreciation and amortization, lower working capital levels, $27 million attributable to termination proceeds from certain IBM contracts, and an $18 million tax refund from the carryback of 1993 losses. Looking forward to 1997, cash flow from operations is expected to be increased over 1996 due to earnings growth and management of working capital. In April 1995, the Company refinanced its $150 million term loan and $150 million revolving credit facility with a new $150 million term loan, which had a balance of $37 million at December 31, 1996, and a $250 million revolving credit facility, for which no amounts were outstanding at December 31, 1996. The new term loan is to be repaid in equal quarterly installments of $12.5 million. Due to an $18 million prepayment in the fourth quarter of 1996 and to $95 million of prepayments during the third and fourth quarters of 1995, the next scheduled payment will be due on June 30, 1998 with the final payment due on December 31, 1998. Any unpaid borrowings under the revolving credit facility are due at the maturity of the facility in January 1999. The revolving credit facility is available for general corporate purposes, including acquisitions and share repurchases, and is expected to be sufficient to meet the Company's working capital and capital expenditure requirements. See "Capital Expenditures". [GRAPH APPEARS HERE] . CAPITAL STRUCTURE in percent 1994 1995 1996 ---- ---- ---- Equity 50.5% 66.7% 76.6% Debt 49.5 33.3 23.4 As of December 31, 1996, the Company had short-term debt outstanding of $2.1 million. The Company has outstanding $120 million of senior subordinated notes which are payable in three annual installments of $40 million beginning in March 1999. Senior notes in the principal amount of $20 million were redeemed in March 1996. Through its hedging programs, the Company attempts to insulate a portion of its foreign denominated cash flows from the impact of exchange rate fluctuations. The Company utilizes interest rate/currency swaps and has utilized interest rate caps to reduce its interest rate risks. Interest expense incurred in connection with these instruments amounted to $1, $8 and $10 million in 1996, 1995 and 1994, respectively. Substantially all tangible and intangible assets of the Company (including shares of capital stock of the Company's subsidiaries) serve as collateral for the term loan and revolving credit facility. The senior subordinated notes are unsecured but are guaranteed by the Company and by the domestic subsidiaries of Lexmark International, Inc., a wholly owned subsidiary of the Company. The credit agreements contain customary default provisions, including a default upon a "change of control" which includes the acquisition by one person or a related group of persons other than Clayton & Dubilier Private Equity Fund IV ("C&D Fund IV") and IBM of 25 percent or more of the Company's voting securities, unless C&D Fund IV owns a greater percentage of the Company's voting securities than such person or related group. The senior subordinated note agreement allows the holder to put the notes to Lexmark International, Inc. at a make-whole premium upon the acquisition, by a person or a related group of persons, of 20 percent of the Company's voting securities, and the cessation of control of the Company by C&D Fund IV and certain other stockholders. The credit agreements also contain certain net worth, leverage and fixed charge coverage restrictions and other 49 covenants which, among other things, restrict the payment of dividends on common stock, incurrence of additional debt, investments and joint ventures, repurchases of common stock, mergers or consolidations and sales of assets. The senior subordinated note agreement contains customary default provisions and similar covenants. The Company was in compliance with these requirements as of December 31, 1996. In October 1995, 50,000 shares of junior preferred stock owned by the Company's savings plan were exchanged for 750,000 shares of Class A common stock. The junior preferred stock was then retired. In December 1994, 850,000 shares of redeemable preferred stock with a liquidation value of $85 million were exchanged for 9,750,000 shares of Class A common stock with an estimated fair market value of $146 million at the date of exchange. The resulting premium of $61 million is reflected in the 1994 loss per share calculation. As a result of the exchange, the Company avoided dividend payments totaling $101 million through 2003. The Company is party to an agreement to sell, on a limited recourse basis, up to $100 million of its U.S. trade receivables under a revolving arrangement. Proceeds from any such sales are available for general corporate purposes. The initial proceeds in 1994 of $70 million from this program were used to prepay term debt. At December 31, 1996, trade receivables of $65 million were outstanding under this program and, as collections reduce previously sold receivables, the Company may replenish these with new receivables. The agreement, which contain net worth and fixed charge coverage restrictions similar to, but less restrictive than, those in the credit agreements, must be renewed annually, and is expected to be renewed upon its expiration in June 1997. This arrangement provides the Company with lower cost funding than is currently available under its revolving credit facility. In January 1996 the Company entered into an agreement to sell up to 22 million deutsche marks of Germany trade receivables on a limited recourse basis. At December 31, 1996, 22 million deutsche marks of receivables (approximately $14 million at current exchange rates) were outstanding under this program and, as collections reduce previously sold receivables, the Company may replenish these with new receivables. In April 1996, the Company's board of directors authorized the repurchase of up to $50 million of its Class A common stock. The repurchase authority allows the Company to selectively repurchase its stock from time to time in the open market or in privately negotiated transactions depending upon market price and other factors. The amended and restated credit agreements and the note and stock purchase agreement were amended to permit, among other things, the Company's repurchase of up to $50 million of Class A common stock. As of December 31, 1996, the Company has not repurchased any of the stock. CAPITAL EXPENDITURES Capital expenditures totaled $145, $107 and $58 million in 1996, 1995 and 1994, respectively. The increase in capital expenditures in 1996 is primarily due to the Company's expansion of its inkjet printer products manufacturing capacity, including the conversion of a Lexington facility and the establishment of facilities in Mexico and Scotland to manufacture inkjet cartridges. The 1996 capital expenditures have been funded primarily through cash from operations. Looking forward to 1997, the Company expects capital expenditures to be less than $100 million and to be funded primarily through cash from operations. Both 1996 and 1995 expenditures were higher due to expansion of the inkjet printer products manufacturing capacity discussed above. EFFECT OF CURRENCY EXCHANGE RATES AND EXCHANGE RATE RISK MANAGEMENT Revenues from international operations, including exports from the United States, represent an increasing portion of the Company's consolidated revenues and have grown from 45 percent of total revenues in 1994 to 54 percent of total revenues in 1996, with European revenues accounting for about 50 70 percent of international revenues. Substantially all foreign subsidiaries maintain their accounting records in their local currencies. Consequently, period-to-period comparability of results of operations is affected by fluctuations in exchange rates. While currency translation has significantly affected international revenues and cost of revenues, it did not have a material impact on operating income for the years 1994 - 1996. The Company attempts to reduce its exposure to exchange rate fluctuations through the use of operational hedges, such as pricing actions and product sourcing decisions. [GRAPH APPEARS HERE] . REVENUES BY GEORGAPHIC AREA* dollars in millions 1994 1995 1996 ---- ---- ---- U.S. $1,023 $1,112 $1,100 Europe 615 791 896 Other Intl. 214 255 382 *International revenues include exports from the U.S. The Company's exposure to exchange rate fluctuations generally cannot be minimized solely through the use of operational hedges. Therefore, the Company utilizes financial instruments such as forward exchange contracts and currency options to reduce the impact of exchange rate fluctuations on firm and anticipated cash flow exposures and certain assets and liabilities 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. Operating income from international revenues has improved during the last three years primarily due to the restructuring plan initiated in 1992 related to the manufacturing operations in France and the European distribution, selling and administrative operations. While the profitability of international operations has improved, the Company believes that international operations are, and will continue to be, less profitable than the domestic operations reflecting the higher costs of doing business internationally due to such items as importation costs, distribution, and selling and administrative expenses as a percent of revenue. TAX MATTERS The Company's effective tax rate for 1996 was approximately 37 percent, and for 1995 was 24 percent. The effective tax rate in 1995 was favorably impacted by research and development tax credits and the benefit of a foreign sales corporation. In 1994, the Company's effective tax rate was 12 percent, primarily due to the utilization of U.S. tax loss carryforwards for which no benefit had previously been recognized. As of December 31, 1996, the Company had $6 million of alternative minimum tax credits available to offset future U.S. federal income taxes on an indefinite carryforward basis. The Company had non-U.S. tax loss carryforwards of $68 million, which expire between the years 1997 and 2014 for which no benefit had been recorded. A portion of these non-U.S. tax loss carryforwards (approximately $38 million) are not expected to provide a future benefit because they are attributable to income of certain non-U.S. entities that are also taxable in the U.S. INFLATION The Company is subject to the effects of changing prices. The Company operates in an industry where product prices are very competitive and subject to downward price pressures. As a result, future increases in production costs or raw material prices could have an adverse effect on the Company's business. However, the Company actively manages its product costs and manufacturing processes in an effort to minimize the impact on earnings of any such increases. NEW ACCOUNTING STANDARD In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 125, Accounting for the Transfers of Servicing of Financial Assets and Extinguishment of Liabilities. This statement is effective for the Company's 1997 financial statements. The Company's analysis of this new statement indicates that it will not have a material effect on the Company's financial position or results of operations. 51 SELECTED FINANCIAL DATA Lexmark International Group, Inc. and Subsidiaries (Dollars in Millions, Except Share Data)
1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- Statement of Operations Data: - ----------------------------- Revenues $2,377.6 $2,157.8 $1,852.3 $1,675.7 $1,763.9 Cost of revenues 1,630.2 1,487.9 1,298.8 1,107.4 1,130.5 -------- -------- -------- -------- -------- Gross profit 747.4 669.9 553.5 568.3 633.4 Research and development 123.9 116.1 101.0 111.7 135.7 Selling, general and administrative 388.0 359.1 292.9 322.0 367.9 Option compensation related to IPO (1) - 60.6 - - - Amortization of intangibles (2) 5.1 25.6 44.7 64.0 89.2 -------- -------- -------- -------- -------- Operating income (3) 230.4 108.5 114.9 70.6 40.6 Interest expense 20.9 35.1 50.6 63.9 70.7 Amortization of deferred financing costs and other 7.9 10.1 13.6 13.1 16.5 -------- -------- -------- -------- -------- Earnings (loss) before income taxes 201.6 63.3 50.7 (6.4) (46.6) Provision for income taxes 73.8 15.2 6.1 3.0 10.7 -------- -------- -------- -------- -------- Earnings (loss) before extraordinary item 127.8 48.1 44.6 (9.4) (57.3) Extraordinary loss (4) - (15.7) - - - -------- -------- -------- -------- -------- Net earnings (loss) $ 127.8 $ 32.4 $ 44.6 $ (9.4) $ (57.3) Earnings (loss) per common share before extraordinary item (5) $ 1.68 $ 0.64 $ (0.46) $ (0.34) $ (1.12) Net earnings (loss) per common share (5) $ 1.68 $ 0.43 $ (0.46) $ (0.34) $ (1.12) Shares used in per share calculation 76,221,843 74,932,103 61,430,896 61,458,241 61,419,631 Statement of Financial Position Data: - ------------------------------------- Working capital $ 343.8 $ 227.7 $ 237.5 $ 293.6 $ 347.5 Total assets 1,221.5 1,142.9 960.9 1,215.0 1,440.2 Total long-term debt (including current portion) 165.3 195.0 290.0 650.7 759.2 Redeemable senior preferred stock (6) - - - 85.0 85.0 Stockholders' equity (6) 540.3 390.2 295.5 173.7 197.4 Other Key Data: - --------------- Operating income before amortization and unusual item (7) $ 235.5 $ 194.7 $ 159.6 $ 134.6 $ 129.8 Earnings (loss) per share before unusual items (8) $ 1.68 $ 1.16 $ 0.49 $ (0.34) $ (1.12) Cash from operations (9) 118.0 307.5 361.9 176.4 102.1 Capital expenditures 145.0 106.8 58.1 62.4 57.8 Debt to total capital ratio 23% 33% 50% 72% 73% Return on average equity before unusual items (10) 27% 25% 21% (6%) (23%) Number of employees (11) 6,573 7,477 5,934 5,885 5,738
(1) The Company recognized a non-cash compensation charge of $60.6 ($38.5 net of tax benefit) in the fourth quarter of 1995 for certain of the Company's outstanding employee stock options upon the consummation of the initial public offerings. (2) Acquisition-related intangibles were fully amortized by March 31, 1996. (3) Operating income in 1992 is net of a $40.0 provision related to the Company's restructuring of its operations. (4) Represents extraordinary after-tax loss caused by an early extinguishment of debt related to the refinancing of the Company's term loan in April 1995. (5) Earnings (loss) per common share are net of dividends of $11.8, $11.5 and 1993, and 1992. Earnings attributable to common stock in 1994 are also net of a $61.3 preferred stock redemption premium related to the exchange of redeemable senior preferred stock for Class A common stock on December 30, 1994. (6) Redeemable senior preferred stock with a liquidation preference of $85.0 was exchanged for 9,750,000 shares of Class A common stock on December 30, 1994. (7) Unusual item in 1995 reflects the non-cash compensation charge discussed in (1) above. (8) Unusual items in 1995 includes the non-cash compensation charge discussed in (1) above and the extraordinary after-tax loss discussed in (4) above. The unusual item in 1994 represents the preferred stock redemption premium discussed in (5) above. (9) Cash flows from investing and financing activities, which are not presented, are integral components of total cash flow activity. (10) Unusual items in 1995 includes the non-cash compensation charge discussed in (1) above and the extraordinary after-tax loss discussed in (4) above. (11) Represents the number of full-time equivalent employees at December 31st of each year. 52 BOARD OF DIRECTORS, OFFICERS AND COMMITTEES BOARD OF DIRECTORS B. Charles Ames (1),(3) Principal Clayton, Dubilier & Rice, Inc. New York, New York Chairman and chief executive officer Riverwood International Corporation Atlanta, Georgia Age 71 Director of Riverwood International Corp.; WESCO Distribution, Inc.; M.A. Hanna Co. and The Progressive Corp. Former chairman and chief executive officer of Reliance Electric Co., Uniroyal Goodrich Tire Co. and Acme Cleveland Corp. Sir Roderick H. Carnegie (2) Chairman Hudson Conway Limited and Newcrest Mining Limited Melbourne, Australia Age 64 Former chief executive officer of CRA Ltd. and president of the Business Council of Australia. Frank T. Cary (1),(2) Former chairman and chief executive officer International Business Machines Corporation Armonk, New York Age 76 Director of Celgene Corp.; Cygnus Therapeutic Systems; ICOS Corp.; Lincare Inc.; SPS Transaction Services, Inc.; Teltrend Inc.; Vion Pharmaceuticals and SEER Technologies, Inc. Dr. Paul J. Curlander President and chief operating officer Lexmark International Lexington, Kentucky Age 44 Former executive vice president, operations; vice president and general manager of Lexmark International, Inc. William R. Fields (2) Chairman and chief executive officer Blockbuster Entertainment Group Ft. Lauderdale, Florida Age 47 Member of the executive committee of Viacom, Inc.; former executive vice president of Wal-Mart Inc. and president and chief executive officer of the Wal-Mart Stores Division. Donald J. Gogel (4) President Clayton, Dubilier & Rice, Inc. New York, New York Age 48 Director of A.P.S., Inc.; Alliant Foodservice, Inc.; Kinko's Inc. and TurboChef, Inc. Ralph E. Gomory (3), (4) President Alfred P. Sloan Foundation New York, New York Age 67 Director of Ashland Inc.; The Bank of New York; The Washington Post Co. and Polaroid Corp. Former senior vice president for science and technology of International Business Machines Corp. Stephen R. Hardis (3) Chairman and chief executive officer Eaton Corporation Cleveland, Ohio Age 61 Director of KeyCorp; Nordson Corp. and The Progressive Corp. Former executive vice president of finance and planning of Sybron Corp. Marvin L. Mann (1), (4) Chairman and chief executive officer Lexmark International Lexington, Kentucky Age 63 Director of M.A. Hanna Co. and Imation Corp.; Trustee of Fidelity Investments. Former president and chief executive officer of Satellite Business Systems, former vice president of International Business Machines Corp. and president of the IBM Information Products Division. Michael J. Maples (2) Former executive vice president and member of the Office of the President Microsoft Corporation Redmond, Washington Age 54 Member of the University of Oklahoma Engineering School Board of Visitors and the University of Texas College of Engineering Foundation Advisory Council. Former director of software strategy for International Business Machines Corp. Martin D. Walker (1),(3) Chairman M.A. Hanna Company Cleveland,Ohio Age 64 Director of Comerica, Inc., The Goodyear Tire & Rubber Co., Reynolds & Reynolds Co., Textron, Inc. and The Timken Co. Member of the board of Cleveland Tomorrow, the Greater Cleveland Growth Association and the Fairview Health System. Former chief executive officer of M.A. Hanna Co. (1) Executive committee (2) Finance and audit committee (3) Compensation and pension committee (4) Corporate governance and public policy committee EXECUTIVE OFFICERS Marvin L. Mann Chairman and chief executive officer Dr. Paul J. Curlander President and chief operating officer Kathleen J. Affeldt Vice president, human resources Daniel P. Bork Director of taxes Terence P. Chin Treasurer Vincent J. Cole, Esq Vice president, general counsel and secretary David L. Goodnight Corporate controller Clifford D. Gookin Vice president, corporate development Thomas B. Lamb Vice president and general manager, Imaging Solutions Division Bernard V. Masson Vice president and general manager, Consumer Printers Division John C. Mitchell Vice president and general manager, Business Printers Division Gary E. Morin Vice president and chief financial officer Donald C. Shropshire Jr. Vice president and general manager, Asia/Pacific, Canada & Latin America John A. Stanley Vice president and president of Lexmark Europe Alfred A. Traversi Vice president, information technology/operations 53 STOCKHOLDER INFORMATION CORPORATE HEADQUARTERS One Lexmark Centre Drive 740 New Circle Road NW Lexington, Kentucky 40550 (606) 232-2000 INDEPENDENT ACCOUNTANTS Coopers & Lybrand L.L.P. 201 East Main Street Suite 1400 Lexington, Kentucky 40507 TRANSFER AGENT/STOCKHOLDER INQUIRIES For general inquiries, changes of address, and transfer instructions: ChaseMellon Shareholder Services L.L.C., Shareholder Relations Department PO Box 3315 S. Hackensack, New Jersey 07606 (800) 526-0801 For transfer of certificates: ChaseMellon Shareholder Services L.L.C., Securities Transfer Services PO Box 3312 S. Hackensack, New Jersey 07606 (800) 526-0801 ANNUAL MEETING Lexmark International Group, Inc., will hold its Annual Stockholders' Meeting at 10 a.m., Friday, May 2, 1997 at the Opera House, 401 West Short Street, Lexington, Kentucky. FORM 10-K A copy of the company's Form 10-K annual report filed with the U.S. Securities and Exchange Commission for the fiscal year ended December 31, 1996 may be obtained by stockholders without charge by writing to Investor Relations at the address below. STOCK INFORMATION Lexmark International Group's Class A common stock is traded on the New York Stock Exchange under the symbol LXK. The company has not declared or paid any dividends on common stock. The following table sets forth the high and low reported sales prices for the Class A common stock as quoted by the New York Stock Exchange for the periods indicated. High Low 1996 First Quarter $23.25 $16.00 Second Quarter $23.13 $17.88 Third Quarter $20.88 $13.38 Fourth Quarter $27.75 $18.88 High Low 1995 Fourth Quarter (from November 15, 1995) $22.38 $15.50 As of February 14, 1997, there were approximately 1,213 holders of record of the Class A common stock and five holders of record of the Class B common stock. INVESTOR RELATIONS Kurt M. Braun Lexmark International One Lexmark Centre Drive 740 New Circle Road NW Lexington, Kentucky 40550 (606)232-5108 braun@lexmark.com MEDIA INQUIRIES James M. Joseph Lexmark International One Lexmark Centre Drive 740 New Circle Road NW Lexington, Kentucky 40550 (606) 232-2249 jmjoseph@lexmark.com Additional information is available at Lexmark's home page at www.lexmark.com on the Internet. 54 EX-21 5 SUBSIDIARIES OF LEXMARK INTERNATIONAL GROUP, INC. Exhibit 21 ---------- Subsidiaries of Lexmark International Group, Inc. 1. Lexmark International, Inc. State of Incorporation - Delaware 2. Lexmark International, S.N.C. Country of Incorporation - France 3. Lexmark Foreign Sales Corporation Jurisdiction of Incorporation - Barbados EX-23 6 CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Lexmark International Group, Inc. on Form S-8 (File Nos. 33-99330 and 33-80879) of our report dated February 13, 1997, on our audits of the consolidated financial statements and financial statement schedule of Lexmark International Group, Inc. as of December 31, 1996 and 1995, and for the years ended December 31, 1996, 1995, and 1994 which is incorporated by reference in this Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. Coopers & Lybrand L.L.P. Lexington, Kentucky March 24, 1997 EX-27 7 FDS -- FOR THE YEAR ENDED DECEMBER 31, 1996
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF LEXMARK INTERNATIONAL GROUP, INC. FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR DEC-31-1996 DEC-31-1996 119 0 323 18 271 765 434 0 1,222 421 163 0 0 1 539 1,222 2,378 2,378 1,630 1,630 0 0 21 202 74 128 0 0 0 128 1.68 1.68
-----END PRIVACY-ENHANCED MESSAGE-----