SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10/A
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
IMATION CORP.
(Formerly known as 3M Information Processing, Inc.)
(Exact name of registrant as specified in its charter)
DELAWARE 41-1838504
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1 IMATION PLACE
OAKDALE, MINNESOTA 55128
(Address of principal executive offices) (Zip Code)
(612) 704-4000
(Registrant's telephone number, including area code)
Securities to be registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON
TO BE SO REGISTERED WHICH EACH CLASS IS TO BE REGISTERED
Common Stock, par value $.01 per share New York Stock Exchange, Inc.
Preferred Stock Purchase Rights New York Stock Exchange, Inc.
Securities to be registered pursuant to Section 12(g) of the Act:
None
================================================================================
IMATION CORP.
INFORMATION REQUIRED IN REGISTRATION STATEMENT
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
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ITEM NO. CAPTION LOCATION IN INFORMATION STATEMENT
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Item 1. Business ......................... SUMMARY; INTRODUCTION; THE DISTRIBUTION; SPECIAL
FACTORS; MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS;
BUSINESS AND PROPERTIES OF THE COMPANY; HISTORICAL
FINANCIAL STATEMENTS
Item 2. Financial Information ............ SUMMARY; SPECIAL FACTORS; PRO FORMA CAPITALIZATION;
PRO FORMA FINANCIAL STATEMENTS; SELECTED HISTORICAL
FINANCIAL DATA; MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS;
HISTORICAL FINANCIAL STATEMENTS
Item 3. Properties ....................... BUSINESS AND PROPERTIES OF THE COMPANY
Item 4. Security Ownership of
Certain Beneficial Owners
and Management ................... SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS;
BENEFICIAL OWNERSHIP OF MANAGEMENT
Item 5. Directors and Executive
Officers ......................... MANAGEMENT OF THE COMPANY; LIABILITY AND
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Item 6. Executive Compensation ........... MANAGEMENT OF THE COMPANY; SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS
Item 7. Certain Relationships and
Related Transactions ............. SUMMARY; THE DISTRIBUTION; RELATIONSHIP BETWEEN 3M
AND THE COMPANY AFTER THE DISTRIBUTION; MANAGEMENT
OF THE COMPANY; CERTAIN RELATIONSHIPS AND
TRANSACTIONS
Item 8. Legal Proceedings ................ BUSINESS AND PROPERTIES OF THE COMPANY
Item 9. Market Price of and
Dividends on the
Registrant's Common Equity
and Related Stockholder
Matters .......................... SUMMARY; THE DISTRIBUTION; SPECIAL FACTORS;
MANAGEMENT OF THE COMPANY; SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS; BENEFICIAL OWNERSHIP OF
MANAGEMENT; DESCRIPTION OF COMPANY CAPITAL STOCK
Item 10. Recent Sales of Unregistered
Securities ....................... Not Applicable
Item 11. Description of Registrant's
Securities to be Registered ...... DESCRIPTION OF COMPANY CAPITAL STOCK; PURPOSES AND
EFFECTS OF CERTAIN PROVISIONS OF THE CERTIFICATE OF
INCORPORATION AND BYLAWS
Item 12. Indemnification of Directors
and Officers ..................... LIABILITY AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS
Item 13. Financial Statements and
Supplementary Data ............... SUMMARY; PRO FORMA FINANCIAL STATEMENTS; SELECTED
HISTORICAL FINANCIAL DATA; MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS; HISTORICAL FINANCIAL STATEMENTS
Item 14. Changes in and Disagreements
with Accountants on Accounting
and Financial Disclosure ......... Not Applicable
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INFORMATION STATEMENT
IMATION CORP.
COMMON STOCK
PAR VALUE $.01 PER SHARE
This Information Statement is being furnished in connection with the
distribution (the "Distribution") by Minnesota Mining and Manufacturing Company
("3M") to holders of record of 3M common stock at the close of business on June
___, 1996 (the "Record Date"), of one share of Common Stock, par value $.01 per
share (the "Common Stock"), of Imation Corp. (the "Company") for every ten
shares of 3M common stock owned on the Record Date. The Distribution will result
in 100% of the outstanding shares of Common Stock of the Company being
distributed to holders of 3M common stock on a pro rata basis. The Distribution
will be effective on July 1, 1996 (the "Distribution Date"). It is expected that
certificates representing shares of Common Stock will be mailed to 3M
stockholders on or about July 1, 1996.
The Company is a newly formed company which, as a result of transactions entered
into in connection with the Distribution, will own substantially all of the
businesses and assets of, and will be responsible for substantially all of the
liabilities associated with, 3M's global data storage and imaging systems
businesses, as more fully described herein (the "Transferred Businesses").
No consideration will be paid by 3M's stockholders for the shares of Common
Stock. There is no current public trading market for the shares of Common Stock,
although it is expected that a "when-issued" trading market will develop on or
about the Record Date. The shares of Common Stock have been approved for listing
on the New York Stock Exchange, subject to official notice of issuance, under
the symbol "IMN".
The Distribution is conditioned on receipt by 3M of a private letter ruling from
the Internal Revenue Service, or receipt of an opinion from 3M's counsel,
regarding the federal income tax consequences of the Distribution. See "THE
DISTRIBUTION -- Certain Federal Income Tax Consequences."
IN REVIEWING THIS INFORMATION STATEMENT, YOU SHOULD CAREFULLY CONSIDER THE
MATTERS DESCRIBED UNDER THE CAPTION "SPECIAL FACTORS."
NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THIS DISTRIBUTION. WE
ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED
NOT TO SEND US A PROXY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS INFORMATION STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Information Statement is , 1996.
TABLE OF CONTENTS
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PAGE
SUMMARY 1
THE COMPANY 3
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA 5
INTRODUCTION 7
THE DISTRIBUTION 8
Reasons for the Distribution 8
Opinion of Financial Advisor 8
Manner of Effecting the Distribution 10
Certain Federal Income Tax Consequences 11
Listing and Trading of the Common Stock 11
SPECIAL FACTORS 12
Absence of History as an Independent Company 12
Changing Industry Environment 12
Transition to Independent Public Company 12
Absence of 3M Financial Support 13
Competition 13
International Operations 13
Absence of Prior Trading Market for the Common Stock 13
Common Stock Dividend Policy 14
Certain Anti-Takeover Effects 14
RELATIONSHIP BETWEEN 3M AND THE COMPANY AFTER THE DISTRIBUTION 15
Distribution Agreement 15
Tax Sharing Agreement 16
Corporate Services Transition Agreement 16
Environmental Matters Agreement 16
Intellectual Property Agreement 17
Supply, Service, Contract Manufacturing and Sales Agency Agreements 17
Shared Facility and Lease Agreements 18
FINANCING 18
PRO FORMA CAPITALIZATION 19
PRO FORMA FINANCIAL STATEMENTS 20
NOTES TO PRO FORMA STATEMENT OF OPERATIONS 22
SELECTED HISTORICAL FINANCIAL DATA 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 26
General Overview 26
Strategic Reorganization 26
Operating Results 27
Performance by Geographic Area 30
Financial Position 31
Liquidity 31
Future Outlook 32
Forward Looking Statements 33
BUSINESS AND PROPERTIES OF THE COMPANY 34
Overview 34
Industry Background 35
Business Strategy 36
Customer Applications 38
Competition 40
Distributor Channels 40
Raw Materials 40
Research and Patents 40
Manufacturing 40
Properties 41
Employees 41
Legal Proceedings 41
Environmental Matters 41
MANAGEMENT OF THE COMPANY 43
Directors 43
Committees of the Board of Directors 43
Compensation of Directors 44
Director's Stock Compensation Program 44
Executive Officers 46
Compensation of Executive Officers 48
Stock Options Table 49
Option Exercises and Year-End Value Table 50
Long-Term Incentive Plan Awards 50
Transactions With Management 51
Employment Agreement 51
Compensation Under Retirement Plans 51
Company Pension Plan 52
Plans Encouraging Employee Stock Ownership 52
Company 401(k) Plan and ESOP 52
1996 EMPLOYEE STOCK INCENTIVE PROGRAM 53
Federal Tax Consequences 55
New Plan Benefits 55
TREATMENT OF EMPLOYEE OPTIONS AND RESTRICTED STOCK IN
THE DISTRIBUTION 56
CERTAIN RELATIONSHIPS AND TRANSACTIONS 57
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS 57
BENEFICIAL OWNERSHIP OF MANAGEMENT 57
DESCRIPTION OF COMPANY CAPITAL STOCK 58
Authorized Capital Stock 58
Common Stock 58
Preferred Stock 58
No Preemptive Rights 58
Transfer Agent and Registrar 58
PURPOSES AND EFFECTS OF CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND
BY-LAWS 58
General 58
Classified Board of Directors 58
Special Meetings of Stockholders; Action by Written Consent; Advance Notice
Provisions 59
Stockholder Nominations 59
Stockholder Proposals 59
Preferred Stock 60
Supermajority Provision 60
Rights Agreement 61
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS 62
General 62
Elimination of Liability in Certain Circumstances 62
Indemnification and Insurance 62
INDEPENDENT PUBLIC ACCOUNTANTS 63
ADDITIONAL INFORMATION 63
INDEX TO HISTORICAL FINANCIAL STATEMENTS F-1
ANNEX A
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SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED ELSEWHERE IN THIS
INFORMATION STATEMENT. REFERENCE IS MADE TO, AND THIS SUMMARY IS QUALIFIED BY,
THE MORE DETAILED INFORMATION SET FORTH IN THIS INFORMATION STATEMENT, WHICH
SHOULD BE READ IN ITS ENTIRETY. UNLESS THE CONTEXT OTHERWISE REQUIRES, (I)
REFERENCES IN THIS INFORMATION STATEMENT TO 3M AND THE COMPANY SHALL INCLUDE
3M'S AND THE COMPANY'S RESPECTIVE SUBSIDIARIES AND (II) REFERENCES IN THIS
INFORMATION STATEMENT TO THE COMPANY PRIOR TO THE DISTRIBUTION DATE SHALL REFER
TO THE TRANSFERRED BUSINESSES AS OPERATED BY 3M.
DISTRIBUTING CORPORATION Minnesota Mining and Manufacturing Company, a
Delaware corporation ("3M").
DISTRIBUTED CORPORATION Imation Corp., a newly formed Delaware
corporation (the "Company") which, as of the
Distribution Date, will have transferred to it
substantially all of the businesses and assets
of, and will be responsible for substantially
all of the liabilities associated with, 3M's
global data storage and imaging systems
businesses, as more fully described herein (the
"Transferred Businesses").
PRINCIPAL BUSINESSES TO BE
RETAINED BY 3M 3M will retain its core businesses, consisting
of all of its current businesses other than the
Transferred Businesses (the "Core Businesses").
3M has announced that its consumer audio and
video tape business, which is not part of the
Transferred Businesses, will be discontinued.
PRIMARY PURPOSE OF THE
DISTRIBUTION To separate the Transferred Businesses from the
Core Businesses so that each can (i) adopt
strategies and pursue objectives appropriate to
its specific businesses and industries and
thereby achieve, among other things, potential
cost savings, (ii) implement more focused
incentive compensation arrangements that are
tied more directly to results of its operations
and (iii) be recognized by the financial
community as separate and distinct businesses.
SHARES TO BE DISTRIBUTED ___ shares of Common Stock, based on ___ shares
of 3M common stock outstanding on the Record
Date. The shares to be distributed will
constitute 100% of the outstanding shares of
Common Stock of the Company on the Distribution
Date.
DISTRIBUTION RATIO Each 3M stockholder will receive one share of
Common Stock of the Company for every ten
shares of 3M common stock held on the Record
Date.
FRACTIONAL SHARE INTERESTS Fractional share interests will be sold by the
Distribution Agent and the cash proceeds
distributed to those stockholders entitled to a
fractional interest. See "THE DISTRIBUTION --
Manner of Effecting the Distribution."
1
LISTING AND TRADING
MARKET The shares of Common Stock have been approved
for listing on the New York Stock Exchange,
subject to official notice of issuance, under
the symbol "IMN."
RECORD DATE Close of business on June __, 1996.
DISTRIBUTION DATE July 1, 1996. As of the Distribution Date,
the transfer of substantially all of the assets
and liabilities of the Transferred Businesses
from 3M to the Company will become effective
and the shares of Common Stock to be
distributed will be delivered to the
Distribution Agent for distribution to holders
of 3M common stock.
MAILING DATE Certificates representing the shares of Common
Stock will be mailed to 3M stockholders on or
about the Distribution Date.
DISTRIBUTION AGENT Norwest Bank Minnesota, N.A. (the "Distribution
Agent").
TAX CONSEQUENCES The Distribution is expected to qualify as a
tax-free distribution under Section 355 of the
Internal Revenue Code of 1986, as amended (the
"Code"). See "THE DISTRIBUTION -- Certain
Federal Income Tax Consequences."
DIVIDEND POLICY The payment and amount of cash dividends on the
Common Stock after the Distribution will be at
the discretion of the Company's Board of
Directors. The Company's dividend policy will
be reviewed by the Company's Board of Directors
at such future times as may be appropriate, and
payment of dividends will depend upon the
Company's financial position, capital
requirements and such other factors as the
Company's Board of Directors deems relevant.
RELATIONSHIP WITH 3M AFTER
THE DISTRIBUTION Following the Distribution, 3M and the Company
will be operated as independent public
companies. 3M and the Company will, however,
continue to have a relationship as a result of
the agreements being entered into between 3M
and the Company in connection with the
Distribution, including the Distribution
Agreement, the Tax Sharing Agreement, the
Corporate Services Agreement, the Environmental
Matters Agreement, the Intellectual Property
Agreement, the Supply Agreements and other
miscellaneous agreements. In addition, a
director and/or officer of 3M is a director of
the Company. Except as referred to above or as
otherwise described herein, 3M and the Company
will cease to have any material contractual or
other material relationships with each other.
See "RELATIONSHIP BETWEEN 3M AND THE COMPANY
AFTER THE DISTRIBUTION," "FINANCING," "PRO
FORMA CAPITALIZATION" and "MANAGEMENT OF THE
COMPANY -- Directors."
SPECIAL FACTORS Stockholders should carefully consider the
matters discussed under the section entitled
"SPECIAL FACTORS" in this Information
Statement.
2
THE COMPANY
The Company is a leader in developing, manufacturing and marketing a wide
variety of products and services worldwide for data storage and imaging
applications within the information processing industry. The Company's products,
which number in excess of 10,000, are used to capture, process, store, reproduce
and distribute information and images in a wide range of information-intensive
markets, including enterprise computing, network servers, personal computing,
graphic arts, photographic imaging, medical imaging, and commercial and consumer
markets. See "BUSINESS AND PROPERTIES OF THE COMPANY."
The breadth of the Company's product lines, the Company's worldwide leadership
position in a number of product classes and its global distribution network
serve to differentiate the Company from its competitors. In 1995, the Company
had revenues of $2.2 billion, with approximately half of its revenues derived
internationally. The Company's major products, classified by customer
application, are shown below and are described in more detail under "BUSINESS
AND PROPERTIES OF THE COMPANY -- Customer Applications.".
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INFORMATION PROCESSING,
MANAGEMENT AND INFORMATION PRINTING MEDICAL AND PHOTO IMAGING
STORAGE APPLICATIONS APPLICATIONS APPLICATIONS
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* Computer diskettes * Conventional color proofing * Laser imaging products
* Data cartridges and Travan(tm) * Digital color proofing * Laser imagers
cartridges
* Computer tapes * Printing plates * X-ray film
* Rewritable optical media * Image setting and graphic arts * "Dry" imaging products
products
* CD ROM replication services * Carbonless paper products * Film processors
* Photographic film products
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INFORMATION PROCESSOR SERVICE APPLICATIONS
------------------------------------------
* Technical field service support for equipment
* Customer service, documentation and training for equipment
* Engineering and office document systems
As part of 3M, the Transferred Businesses have developed leadership positions in
a number of markets serving the information processing industry, which the
Company believes can serve as platforms for future growth. For example, the
Company:
* is the world's largest supplier of branded removable magnetic and
optical media (see "BUSINESS AND PROPERTIES OF THE COMPANY -- Customer
Applications -- Information Processing, Management and Storage
Applications");
* is one of the world's largest suppliers of color proofing systems to
the graphic arts industry, with a number of its Matchprint(tm) and
Rainbow products serving as industry standards (see "BUSINESS AND
PROPERTIES OF THE COMPANY -- Customer Applications -- Information and
Printing Applications");
* was the first to develop the new, widely-used laser imager for medical
imaging applications, with an installed base of over 7000 imagers (see
"BUSINESS AND PROPERTIES OF THE COMPANY -- Customer Applications
-Medical and Photo Imaging Applications");
* is one of the world's largest suppliers of private label film for the
amateur photography market (see "BUSINESS AND PROPERTIES OF THE
COMPANY -Customer Applications"); and
* has introduced in 1995 and expects to introduce in 1996 several
innovative products with significant market potential, including the
Travan(tm) high capacity data storage tape cartridges, the new family
of Rainbow proofing systems, a new line of DryView(tm) imagers,
medical imaging delivery systems developed under an alliance with
Cemax/Icon and Hewlett-Packard, and a 120 MB 3.5 inch diskette, the
LS-120 diskette, which has been developed with Compaq Computer
Corporation and Matsushita-Kotobuki Electronics Industries, Ltd.
("MKE") (See "BUSINESS AND PROPERTIES OF THE COMPANY -- Customer
Applications").
3
STRATEGY
Following the Distribution, the Company intends to utilize its research and
development capabilities, its solid technology platforms, its well established
product lines, and its strong customer relationships to enhance its position as
a leader in the information processing industry, providing innovative,
cost-effective system solutions to its customers' information processing needs.
To achieve its objectives, the Company intends to focus on the following
elements:
* REFINING PRODUCT PORTFOLIO -- The Company will make adjustments to its
product portfolio when appropriate to ensure that all of its resources
are focused on the Company's objective of consistent, profitable
growth.
* STREAMLINING OPERATIONS AND REDUCING COSTS -- The Company is in the
process of reducing employment levels and consolidating manufacturing
operations. In addition, the Company intends to continue its efforts
to streamline its management structure, consolidate administrative
functions and facilitate communications among various parts of the
organization so as to enable the Company to respond quickly to the
rapidly changing needs of its customers.
* EXPANDING CUSTOMER FOCUS -- The Company will strive to provide more
timely solutions tailored to each of its potential and existing
customers' needs.
* IMPROVING CASH FLOWS -- The Company continues to take steps to improve
cash flows, including instilling in its employees a strong focus on
cash management and re-engineering business processes.
* EXPANDING INTERNATIONAL OPERATIONS -- The Company intends over the
next several years to take advantage of opportunities for growth by
expanding its international penetration in higher growth regions of
the world.
* CAPITALIZING ON PROPRIETARY TECHNOLOGIES TO PROVIDE CUSTOMER SOLUTIONS
-The Company will continue to focus significant efforts on the
development of new products utilizing its core technologies so as to
improve profit margins and enhance the Company's position as a leading
supplier of products, services and systems to the information
processing industry.
* ENCOURAGING EMPLOYEE STOCK OWNERSHIP -- The Company intends to
encourage and increase employee stock ownership as an additional
incentive toward consistent, profitable growth.
In late 1995, in connection with its plan to distribute the Company to its
stockholders, 3M recognized a loss on disposal which included pre-tax charges of
$340 million related to the adoption of a reorganization plan to rationalize the
Company's manufacturing operations, streamline its organizational structure and
write off impaired assets.
The Company believes its continued leadership in developing new data storage
technologies, strong position in high quality color proofing for the printing
industry and strong history of leadership in medical imaging for the health care
industry, together with the benefits of its reorganization plan and business
strategy, should help position the Company to realize future growth and
profitability. See "BUSINESS AND PROPERTIES OF THE COMPANY -- Business
Strategy."
The Company's headquarters are located at 1 Imation Place, Oakdale, Minnesota
55128.
4
SUMMARY HISTORICAL AND PRO FORMA
FINANCIAL DATA
The following summary historical and pro forma financial data of the Company
should be read in conjunction with the Company's historical and pro forma
financial statements and the notes thereto included elsewhere in this
Information Statement. The following summary historical financial information
relates to the Transferred Businesses as they were operated as part of 3M and is
derived from the historical financial statements of the Company. They also
include an allocation of certain general corporate expenses of 3M which were not
directly related to these businesses.
The summary pro forma financial data make adjustments to the historical balance
sheet at March 31, 1996 and the historical statements of operations for the
three months ended March 31, 1996 and the year ended December 31, 1995 as if the
Distribution had occurred on March 31, 1996 for purposes of the pro forma
balance sheet and January 1, 1995 for purposes of the pro forma statements of
operations. The selected historical financial data that relate to the three
years in the period ended December 31, 1995 have been derived from the financial
statements audited by Coopers & Lybrand L.L.P., independent accountants. The
historical and pro forma financial statements of the Company may not reflect the
results of operations or financial position that would have been obtained had
the Company been a separate, independent company during such periods.
5
IMATION CORP.
SUMMARY HISTORICAL FINANCIAL DATA
(Dollars in millions)
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THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
1996* 1995 1995** 1994 1993
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STATEMENT OF OPERATIONS DATA
Net revenues $ 576.1 $576.7 $2,245.6 $2,280.5 $2,307.8
Gross profit 202.3 212.5 724.7 838.5 886.2
Selling, general and administrative
expense 130.7 137.9 539.4 531.5 529.0
Research and development 47.9 56.4 222.4 211.2 216.7
Operating income (loss) 13.3 18.2 (148.9) 95.8 140.5
Income (loss) before taxes and minority
interest 10.1 13.0 (166.8) 81.3 127.4
Net income (loss) 6.1 7.5 (85.0) 54.3 75.3
BALANCE SHEET DATA (AS OF END OF PERIOD)
Total working capital 633.4 658.4 714.0
Property, plant and equipment -- net 503.9 513.2 654.9
Total assets 1,520.0 1,541.5 1,671.7
Total liabilities 398.3 392.8 371.1
Total equity 1,121.7 1,148.7 1,300.0
STATEMENT OF CASH FLOWS DATA
Net cash provided by operating activities 69.7 29.5 256.8 170.1 229.2
Net cash (used) in investing activities (40.1) (46.9) (187.5) (179.7) (210.2)
Net cash (paid to) received from 3M (27.0) 13.4 (72.9) 18.5 (13.1)
Depreciation 48.5 49.1 189.5 185.9 184.4
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SUMMARY PRO FORMA FINANCIAL DATA
(Dollars in millions except per share data)
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THREE MONTHS YEAR ENDED
ENDED DECEMBER 31,
MARCH 31, 1996* 1995**
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STATEMENT OF OPERATIONS DATA
Net revenues $ 576.1 $2,245.6
Gross profit 202.3 724.7
Selling, general and administrative expense 130.7 539.4
Research and development 47.9 222.4
Operating income (loss) 13.3 (148.9)
Income (loss) before taxes and minority
interest 9.7 (168.3)
Net income (loss) 5.6 (97.4)
Net income (loss) per share 0.13 (2.32)
BALANCE SHEET DATA (AS OF END OF PERIOD)
Total working capital 738.0
Property, plant and equipment -- net 503.9
Total assets 1,587.3
Total debt 280.0
Total liabilities 648.7
Total equity 938.6
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* Restructuring charges reduced results for the three months ended March 31,
1996 by $10.4 million on a pre-tax basis and $6.1 million after-taxes and
minority interest. Net income for the three months ended March 31, 1996
excluding these charges would have been $12.2 million on a historical basis
and $11.7 million on a pro forma basis. These charges related to costs for
certain employee separation programs.
** Restructuring charges and asset write-offs reduced 1995 results by $166.3
million on a pre-tax basis and $88.3 million ($97.8 million on a pro forma
basis) after-taxes and minority interest. 1995 net income excluding these
charges would have been $3.3 million on a historical basis and $0.4 million
on a pro forma basis. The majority of these charges related to the write
down of property, plant and equipment.
6
INTRODUCTION
On June ___, 1996, the Board of Directors of 3M declared a dividend payable to
holders of record of 3M's common stock at the close of business on the Record
Date of one share of Common Stock of the Company for every ten shares of 3M
common stock held on the Record Date. The Distribution will be effective on July
1, 1996. Certificates representing shares of Common Stock of the Company will be
mailed to 3M stockholders on or about July 1, 1996. As a result of the
Distribution, 100% of the outstanding shares of Common Stock of the Company will
be distributed to 3M stockholders.
The Company was formed for the purpose of effecting the Distribution. On or
before the Distribution Date, 3M will transfer to the Company substantially all
of the assets and liabilities of the Transferred Businesses. Prior to the
Distribution, 3M operated the Transferred Businesses as part of its
Information, Imaging and Electronics Sector.
Stockholders of 3M with inquiries relating to the Distribution prior to the
Distribution Date should contact Investor Relations at Minnesota Mining and
Manufacturing Company, 3M Center, St. Paul, Minnesota 55144. 3M's telephone
number is (612) 733-8704. After the Distribution Date, stockholders of the
Company with inquiries relating to the Distribution or their investment in the
Company should contact Investor Relations at the Company, 1 Imation Place,
Oakdale, Minnesota 55128. The Company's telephone number is (612) 704-5818.
7
THE DISTRIBUTION
REASONS FOR THE DISTRIBUTION
3M's Board of Directors has determined that it is in the best interests of 3M
and the Company to undertake the Distribution, thereby separating the
Transferred Businesses from 3M, for the reasons described herein.
The Distribution is designed to establish the Transferred Businesses as a stand
alone independent company which can adopt strategies and pursue objectives
appropriate to its specific businesses. The industry in which the Transferred
Businesses operate is extremely competitive and is generally characterized by
rapid technological change and declining prices.
In this highly competitive industry, the Company must operate with a reduced
cost structure, broad distribution channels, streamlined supply chain and fast
paced decision-making. As an independent company, the Company's management
should be better able to organize the Company in a manner more appropriate to
the markets in which it competes. As a result, the Distribution should enhance
the Company's position as an effective competitor, and the Company should be
better able to capitalize quickly on changes in the rapidly expanding
information processing industry.
The Distribution is also designed to allow the Company to establish its own
employee stock ownership plan and other equity-based compensation plans so that
there will be a more direct alignment between the performance of the Transferred
Businesses and the compensation of employees of the Transferred Businesses,
which, among other things, is intended to strengthen and support the Company's
ability to achieve cost savings, greater efficiencies and sales growth. Prior to
1996, management of the Transferred Businesses received 3M stock options and
until the Distribution Date, employees may participate in a company-wide
employee stock ownership plan holding 3M common stock. Following the
Distribution, employees of the Company will participate in an employee stock
ownership plan holding Common Stock of the Company and receive equity-based
incentives which will be more closely aligned with the financial results of the
Company, thereby linking each employee's financial success more directly to the
financial success of the Company. See "MANAGEMENT OF THE COMPANY -- Company
401(k) Plan and ESOP," and "1996 EMPLOYEE STOCK INCENTIVE PROGRAM."
3M believes that the separation of the information and imaging businesses from
its life sciences, industrial and consumer businesses will cause the two
entities to be recognized by the financial community as distinct businesses with
different investment risk and return profiles. As a result of the Distribution,
3M should develop its following in the financial community primarily as a global
manufacturer and marketer of products for the life sciences and industrial and
consumer markets while the Company should develop its following primarily as a
company serving the global information processing industry. In this regard,
investors will be better able to evaluate the merits and future prospects of the
businesses of 3M and the Company, enhancing the likelihood that each will
achieve appropriate market recognition for its performance and potential. In
addition, current stockholders and potential investors will be able to direct
their investments to their specific areas of interest. Also, the Distribution
will enable the Company, as and when appropriate, to engage in strategic
acquisitions using its own capital stock.
For the reasons stated above, the 3M Board of Directors believes that the
Distribution is in the best interest of 3M. In reaching its conclusions, the 3M
Board of Directors also considered the opinion of 3M's financial advisor, Morgan
Stanley & Co., Incorporated ("Morgan Stanley"), which is described below, to the
effect that the Distribution is fair, from a financial point of
view, to the holders of shares of 3M common stock.
OPINION OF FINANCIAL ADVISOR
3M retained Morgan Stanley to act as 3M's financial advisor in connection with
the Distribution and related matters based upon Morgan Stanley's experience and
expertise. Morgan Stanley rendered a written opinion to the Board of Directors
of 3M that, as of the date of this Information Statement and subject to the
considerations set forth in such opinion, the proposed Distribution is fair from
a financial point of view to the holders of shares of 3M common stock.
8
THE FULL TEXT OF MORGAN STANLEY'S WRITTEN OPINION DATED _________, 1996, WHICH
SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX A TO THIS INFORMATION STATEMENT AND IS
INCORPORATED HEREIN BY REFERENCE. STOCKHOLDERS ARE URGED TO, AND SHOULD, READ
THE MORGAN STANLEY OPINION CAREFULLY AND IN ITS ENTIRETY. THE MORGAN STANLEY
OPINION IS DIRECTED TO THE BOARD OF DIRECTORS OF 3M AND CONCERNS THE FAIRNESS OF
THE PROPOSED DISTRIBUTION FROM A FINANCIAL POINT OF VIEW TO THE HOLDERS OF
SHARES OF 3M COMMON STOCK, AND IT DOES NOT ADDRESS ANY OTHER ASPECT OF THE
DISTRIBUTION. THE SUMMARY OF THE MORGAN STANLEY OPINION SET FORTH IN THIS
INFORMATION STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT
OF SUCH OPINION.
In arriving at its opinion, Morgan Stanley (i) analyzed certain publicly
available financial statements and other information relating to 3M and the
Company, including this Information Statement; (ii) analyzed certain internal
historical financial statements and other historical financial operating data
concerning 3M and the Company prepared by their respective managements; (iii)
analyzed certain financial projections prepared by the respective managements of
3M and the Company; (iv) compared the financial performance of the Company with
that of certain other companies with publicly traded securities which were
deemed to be comparable to the Company and its respective business units; (v)
compared the financial performance of 3M (both with and without the Transferred
Businesses) with that of certain other companies with publicly traded securities
which were deemed to be comparable to 3M (both with and without the Transferred
Businesses), respectively; (vi) discussed past and current operations and
financial condition and the prospects of 3M with senior executives of 3M and the
Company with senior executives of the Company; (vii) participated in discussions
among representatives of 3M and the Company and their legal advisors; and (viii)
performed such other analyses as were deemed appropriate.
In rendering its opinion, Morgan Stanley assumed and relied upon, without
independent verification, the accuracy and completeness of the information
reviewed by Morgan Stanley for the purposes of its opinion. With respect to the
financial budgets and forecasts, Morgan Stanley assumed that they have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the future financial performance of 3M and the Company. Morgan
Stanley did not make any independent valuation or appraisal of the assets or
liabilities, contingent or otherwise, of 3M or the Company, nor has Morgan
Stanley been furnished with any such appraisals.
Morgan Stanley further assumed that, prior to the Distribution, 3M will receive
a ruling from the Internal Revenue Service or an opinion of nationally
recognized counsel to the effect that the Distribution will not be a taxable
transaction to the shareholders of 3M under federal income tax laws (except to
the extent of any cash distributed in lieu of fractional shares of the Company).
Morgan Stanley further assumed the correctness of the conclusions set forth in
such opinion or ruling, as applicable. Morgan Stanley also assumed that the
Distribution will comply with all federal, state, local and foreign laws and
applicable regulations, except for any noncompliance with such applicable laws
and regulations that would not have a material adverse effect on 3M or the
Company. In rendering its opinion, Morgan Stanley, with 3M's consent, did not
consider the effect of any terms or arrangements relating to the Distribution,
including the terms of any distribution, tax or other agreement or arrangement,
or any amendment or modification to any existing such agreement or arrangement.
Morgan Stanley's opinion was rendered on the basis of securities markets,
economic and general business and financial conditions prevailing as of the date
of its opinion and the conditions and prospects, financial and otherwise, of 3M
and the Company as they were represented to Morgan Stanley as of the date of its
opinion or as they were reflected in the information and documents reviewed by
Morgan Stanley. Morgan Stanley's opinion assumes that the Distribution will be
completed substantially on the basis set out in the Information Statement and
that the shares of 3M and the Company will be fully and widely distributed among
investors and are subject only to normal trading activity. The estimation of
market trading prices of newly distributed securities is subject to
uncertainties and contingencies, all of which are difficult to predict and
beyond the control of the firm making such estimates.
In addition, Morgan Stanley noted that the market price of such securities will
fluctuate with changes in market conditions, the conditions and prospects,
financial and otherwise, of 3M and the
9
Company, and other factors which generally influence the prices of securities.
In rendering its opinion, Morgan Stanley did not opine as to the price at which
the common stock of 3M or the Company will trade after the Distribution is
effected.
As financial advisor to 3M in connection with the Distribution, Morgan Stanley
has been paid an advisory fee of approximately $300,000 which compensated Morgan
Stanley for the time and efforts expended in rendering advice in connection with
the Distribution and, upon consummation of the Distribution, Morgan Stanley will
be paid a transaction fee, against which all or a portion of any advisory fee
will be credited. The transaction fee,
which shall not exceed $5,500,000, will be determined based on a percentage of
the market value of the equity of the Company on the Distribution Date plus any
debt assumed or incurred by the Company (the "Aggregate Value"). For example,
for an Aggregate Value of $500 million, Morgan Stanley's fee would be 0.7% or
$3.5 million; for an Aggregate Value of $1 billion, Morgan Stanley's fee would
be 0.45% or $4.5 million; and for an Aggregate Value in excess of approximately
$1.25 billion, Morgan Stanley's fee would be capped at $5.5 million. 3M has
agreed to reimburse Morgan Stanley for its out-of-pocket expenses incurred in
connection with its services as financial advisor. 3M has also agreed, in a
separate letter agreement, to indemnify Morgan Stanley and its affiliates, their
respective directors, officers, agents and employees and each person, if any,
controlling Morgan Stanley or any of its affiliates against certain liabilities,
including liabilities under the federal securities laws, and expenses related to
Morgan Stanley's engagement.
Morgan Stanley was selected by the 3M Board to act as 3M's financial advisor
based upon Morgan Stanley's qualifications, expertise and reputation. Morgan
Stanley is a nationally recognized investment banking firm and is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings and private placements.
Morgan Stanley and its affiliates may in the future act as underwriters for, or
participate as members of underwriting syndicates with respect to, offerings of
3M securities, and Morgan Stanley may effect securities transactions for 3M or
perform financial advisory services in connection with certain acquisitions and
dispositions by 3M. In the past, Morgan Stanley and its affiliates have provided
investment banking and financing services for 3M and have received fees for the
rendering of such services. In addition, in the ordinary course of its business,
Morgan Stanley actively trades the equity securities of 3M and may actively
trade the securities of the Company following the consummation of the
Distribution, for its own account and for the accounts of others. Accordingly,
Morgan Stanley may at any time hold a long or short position in the securities
of 3M or the Company.
MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions relating to the Distribution are set forth in a
Transfer and Distribution Agreement, dated as of June ___, 1996 (the
"Distribution Agreement"), between 3M and the Company.
3M will effect the Distribution on the Distribution Date by delivering all of
the outstanding shares of Common Stock of the Company to the Distribution Agent
for distribution to the holders of record of 3M common stock on the Record Date
(other than the holders of a limited number of shares of restricted common stock
of 3M, who, pursuant to the terms of the 3M Management Stock Ownership Program
as implemented by 3M's Compensation Committee, will receive additional shares of
restricted 3M Common Stock with a value equal to the value of the Common Stock
which would have been received by such holders in the Distribution). The
Distribution will be made on the basis of one share of Common Stock for every
ten shares of 3M common stock held on the Record Date. The actual total number
of shares of Common Stock to be distributed will depend on the number of shares
of 3M common stock outstanding on the Record Date (other than shares of
restricted stock). Based upon the shares of 3M common stock outstanding on May
1, 1996, approximately 41,863,000 shares of Common Stock would be distributed to
3M stockholders. The shares of Common Stock will be fully paid and nonassessable
and the holders thereof will not be entitled to preemptive rights. See
"DESCRIPTION OF COMPANY CAPITAL STOCK." Certificates representing shares of
Common Stock will be mailed to 3M stockholders on or about July [ ], 1996.
No holder of 3M common stock will be required to pay any cash or other
consideration for the shares of Common Stock received in the Distribution or to
surrender or exchange shares of 3M common stock in order to receive shares of
Common Stock.
10
No certificates or scrip representing fractional shares of Common Stock will be
issued to 3M stockholders as part of the Distribution. The Distribution Agent
will aggregate fractional shares into whole shares and sell them in the open
market at then prevailing prices on behalf of holders who otherwise would be
entitled to receive fractional share interests, and such persons will receive
instead a cash payment in the amount of their pro rata share of the total sale
proceeds (net of any commissions incurred in connection with such sales). Such
sales are expected to be made on, or as soon as practicable after, the
Distribution Date.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
3M has requested a private letter ruling (the "Private Letter Ruling") from the
Internal Revenue Service (the "Service") substantially to the effect that, among
other things, the Distribution will qualify as a tax-free spin-off to 3M and its
stockholders under Section 355 of the Code. 3M will not complete the
Distribution unless it receives the Private Letter Ruling or an opinion from its
counsel, Skadden, Arps, Slate, Meagher & Flom, based on certain representations
and assumptions, to the same effect. The following is a summary of the material
federal income tax consequences to 3M stockholders expected to result from the
Distribution:
1. A 3M stockholder will not recognize any income, gain or loss as a
result of the Distribution, except, as described below, in connection with
cash received in lieu of fractional shares of Common Stock.
2. A 3M stockholder will apportion his tax basis for his 3M common stock
on which Common Stock is distributed between his 3M common stock and the
Common Stock received in the Distribution (including any fractional shares
of Common Stock deemed received) in proportion to the relative fair market
values of such 3M common stock and Common Stock on the Distribution Date.
3. A 3M stockholder's holding period for the Common Stock received in the
Distribution will include the period during which such stockholder held the
3M common stock on which the Common Stock is distributed, provided that such
3M common stock is held as a capital asset by such stockholder as of the
Distribution Date.
4. A 3M stockholder who receives cash in lieu of a fractional share of
Common Stock as a result of the sale of such shares by the Distribution
Agent will be treated as if such fractional share had been received by the
stockholder as part of the Distribution and then sold by such stockholder.
Accordingly, such stockholder will recognize gain or loss equal to the
difference between the cash so received and the portion of the tax basis in
the Common Stock that is allocable to such fractional shares. Such gain or
loss will be capital gain or loss, provided that such fractional share was
held by such stockholder as a capital asset at the time of the Distribution.
Current Treasury regulations require each 3M stockholder who receives Common
Stock pursuant to the Distribution to attach to his federal income tax return
for the year in which the Distribution occurs a detailed statement setting forth
such data as may be appropriate in order to show the applicability of Section
355 of the Code to the Distribution. 3M will convey the appropriate information
to each stockholder of record as of the Record Date.
The summary of federal income tax consequences set forth above is for general
information only and may not be applicable to stockholders who received their
shares of 3M common stock through the exercise of an employee stock option or
otherwise as compensation or who are not citizens or residents of the United
States or who are otherwise subject to special treatment under the Code. All
stockholders should consult their own tax advisors as to the particular tax
consequences of the Distribution to them, including the applicability and effect
of state, local and foreign tax laws.
LISTING AND TRADING OF THE COMMON STOCK
The shares of Common Stock have been approved for listing on the New York Stock
Exchange, Inc. ("NYSE"), subject to official notice of issuance, and will trade
under the symbol "IMN." Initially the Company is expected to have approximately
106,000 holders of record, based on the number of stockholders of record of 3M
on May 1, 1996.
11
A "when-issued" trading market is expected to develop on or about the Record
Date. The term "when-issued" means that shares can be traded prior to the time
certificates are actually available or issued. Prices at which the shares of
Common Stock may trade, on a "when-issued" basis or after the Distribution,
cannot be predicted. See "SPECIAL FACTORS -- Absence of Prior Trading Market for
the Common Stock."
The shares of Common Stock distributed to 3M stockholders will be freely
transferable, except for shares of Common Stock received by persons who may be
deemed to be "affiliates" of the Company under the Securities Act of 1933, as
amended (the "Securities Act"). Persons who may be deemed to be affiliates of
the Company after the Distribution generally include individuals or entities
that control, are controlled by, or are under common control with the Company
and may include the directors and principal executive officers of the Company as
well as any principal stockholder of the Company. Persons who are affiliates of
the Company will be permitted to sell their shares of Common Stock only pursuant
to an effective registration statement under the Securities Act or an exemption
from the registration requirements of the Securities Act, such as the exemptions
afforded by Section 4(2) of the Securities Act and Rule 144 thereunder.
SPECIAL FACTORS
ABSENCE OF HISTORY AS AN INDEPENDENT COMPANY
The Company was formed for the purpose of effecting the Distribution and does
not have an operating history as an independent company. Accordingly, the
financial statements included herein may not necessarily reflect the results of
operations, financial position and cash flows of the Transferred Businesses had
the Company been operated independently during the periods presented. In
addition, the financial information does not reflect many changes that will
occur in the operations of the Company as a result of the Company's strategic
reorganization (See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Strategic Reorganization") and future business
strategies (See "BUSINESS AND PROPERTIES OF THE COMPANY -- Business Strategy").
The Company believes that these changes, when implemented, will have a
meaningful positive impact on the results of operations of the Company. However,
there can be no assurance as to the timing or amount of any positive impact
which may be realized.
CHANGING INDUSTRY ENVIRONMENT
The information processing industry involves the creation, capture,
manipulation, storage, production and distribution of information. As there is a
greatly expanding need to manage and store more complex information in less
time, with less resources and with greater accuracy, there is an increasing
emphasis in the marketplace on products using digital technology (See "BUSINESS
AND PROPERTIES OF THE COMPANY -- Industry Background").
While the Company has a number of successful digital products, the long-term
profitability of the Company will depend, in part, on the Company's ability to
anticipate the growing uses of digital technologies. The Company believes that
its leadership positions in a number of markets, its proprietary technologies
and its commitment to the development of innovative solution-based products are
factors which will contribute to the Company's ability to be successful. The
Company recognizes, however, that there are many factors beyond its control and
that no assurances can be given as to the Company's ability to anticipate and
satisfy the needs of this evolving marketplace.
TRANSITION TO INDEPENDENT PUBLIC COMPANY
Prior to the Distribution, the Transferred Businesses had the benefit of certain
3M trademarks and 3M's reputation in marketing their products. Pursuant to
agreements being entered into with 3M, the Company will continue to have the use
of certain 3M trademarks for an agreed upon period of time following the
Distribution. One of the challenges facing the Company will be to develop a name
and identity for itself independent of 3M. There can be no assurance that the
Company will be successful in this regard or that the loss of use of 3M
trademarks might not have an adverse effect on the business of the Company.
12
Prior to the Distribution, a number of services have been provided to the
Company by 3M. For a transition period following the Distribution, 3M will
continue to provide such services to the Company. See "RELATIONSHIP BETWEEN 3M
AND THE COMPANY AFTER THE DISTRIBUTION." However, during and after this
transitional period the Company will need to develop its own services and
support systems independent of 3M.
ABSENCE OF 3M FINANCIAL SUPPORT
Prior to the Distribution, the Transferred Businesses participated in 3M's
centralized funding and cash and foreign currency management. The capital
requirements of the Transferred Businesses in excess of their internally
generated funds were provided by 3M. 3M, and not the Transferred Businesses, was
responsible for obtaining any external financing required by the Transferred
Businesses. Although in the years 1993 and 1995, the Company provided cash to 3M
in excess of amounts required for capital expenditures and operating
requirements in the amounts of $13.1 million and $72.9 million respectively, in
1994, 3M provided financial support in the amount of $18.5 million to the
Company. See "HISTORICAL FINANCIAL STATEMENTS -- Historical Statements of Cash
Flows." This financial support will not be available to the Company following
the Distribution and the Company will be responsible for obtaining its own
financing and may experience a higher cost of capital. See "RELATIONSHIP BETWEEN
3M AND THE COMPANY AFTER THE DISTRIBUTION," "FINANCING" and "SPECIAL FACTORS --
Transition To Independent Public Company."
COMPETITION
The Company operates in a highly competitive environment. The Company's
competitors are both larger and smaller than the Company in terms of resources
and market shares. The marketplaces in which the Company operates are generally
characterized by strong unit growth, rapid technological change, evolution to
digital business solutions, and declining prices. In these highly competitive
markets, the Company must compete on the basis of understanding customer needs,
lower costs, introduction of new products and strong digital technology.
Although the Company believes that it can take the necessary steps to meet the
competitive challenges of these marketplaces, no assurance can be given with
regard to the Company's ability to take these steps, the actions of competitors,
some of which will have greater resources than the Company, or the pace of
technological changes. See "BUSINESS AND PROPERTIES OF THE COMPANY --
Competition."
INTERNATIONAL OPERATIONS
The Company does business in approximately 60 countries outside of the United
States, most significantly Italy, United Kingdom, France and Germany.
International operations, which comprised approximately 50% of the Company's
revenues in 1995, may be subject to various risks which are not present in
domestic operations, including political instability, the possibility of
expropriation, restrictions on royalties, dividends and currency remittances,
volatility of exchange rates of foreign currencies, local government involvement
required for operational changes within the Company, requirements for
governmental approvals for new ventures and local participation in operations
such as local equity ownership and workers' councils.
ABSENCE OF PRIOR TRADING MARKET FOR THE COMMON STOCK
There has not been any established public market for the trading of the
Company's Common Stock, although it is expected that a "when-issued" trading
market will develop on or about the Record Date. The shares of Common Stock
have been approved for listing on the NYSE, subject to official notice of
issuance. However, there can be no assurance as to the prices at which the
Common Stock will trade before or after the Distribution Date. Until the Common
Stock is fully distributed and an orderly market develops, the prices at which
shares trade may fluctuate significantly. Prices for shares of Common Stock will
be determined in the marketplace and may be influenced by many factors,
including the depth and liquidity of the market for the shares, investor
perception of the Company and the industry in which the Company participates and
general economic and market conditions.
13
COMMON STOCK DIVIDEND POLICY
The payment and amount of cash dividends on the Common Stock after the
Distribution will be subject to the discretion of the Company's Board of
Directors. The Company's dividend policy will be reviewed by the Company's Board
of Directors at such future times as may be appropriate, and payment of
dividends on the Company's Common Stock will depend upon the Company's financial
position, capital requirements, profitability and such other factors as the
Company's Board of Directors deems relevant.
CERTAIN ANTI-TAKEOVER EFFECTS
Certain provisions of the Company's Restated Certificate of Incorporation (the
"Certificate of Incorporation") and By-Laws (the "By-Laws"), including
provisions classifying the board of directors, prohibiting stockholder action by
written consent, governing business transactions with certain stockholders and
requiring advance notice for nomination of directors and stockholder proposals,
may inhibit changes in control of the Company not approved by the Company's
Board of Directors. In addition, preferred stock purchase rights which will
attach to the Common Stock would have similar effects. See "PURPOSES AND EFFECTS
OF CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS
- -- Rights Agreement." Such Certificate of Incorporation and By-law provisions
and preferred stock purchase rights could diminish the opportunities for a
stockholder to participate in certain tender offers, including tender offers at
prices above the then-current market value of the Common Stock, and may also
inhibit fluctuations in the market price of the Common Stock that could result
from takeover attempts. See "PURPOSES AND EFFECTS OF CERTAIN PROVISIONS OF THE
COMPANY'S CERTIFICATE OF INCORPORATION AND BY-LAWS." In addition, the Company's
Board of Directors, without further stockholder approval, may issue preferred
stock that could have the effect of delaying, deterring or preventing a change
in control of the Company. The issuance of preferred stock could also adversely
affect the voting power of the holders of the Common Stock, including the loss
of voting control to others. The Company has no present plans to issue any
preferred stock. See "DESCRIPTION OF COMPANY CAPITAL STOCK -- Preferred Stock."
Certain agreements pursuant to which 3M is transferring to the Company rights
with respect to certain patents, trademarks, know-how and other intellectual
property provide that 3M may terminate some or all of such rights in the event
that control of the Company is acquired by an entity which may result in
substantially enhanced competition to a significant business of 3M. As a result,
these provisions may inhibit such a change in control of the Company. In
addition, there can be no assurance that the loss of such intellectual property
rights following a change of control would not have a material adverse effect on
the Company's business. Such agreements, the provisions of the Certificate of
Incorporation and By-laws and the preferred stock rights may have the effect of
discouraging or preventing an acquisition of the Company or a disposition of
certain of the Company's businesses.
14
RELATIONSHIP BETWEEN 3M AND THE COMPANY
AFTER THE DISTRIBUTION
For purposes of an orderly transfer on the Distribution Date of the Transferred
Businesses to the Company and an orderly transition to the status of two
separate independent companies, 3M and the Company have entered or will enter
into various agreements and relationships, including those described in this
section. These agreements are generally intended to be on an arms-length basis.
The forms of agreements summarized in this section are included as exhibits to
the Registration Statement of which this Information Statement forms a part, and
the following summaries are qualified in their entirety by reference to the
agreements as filed.
DISTRIBUTION AGREEMENT
3M and the Company have entered into the Distribution Agreement, which provides
for, among other things, the principal corporate transactions required to effect
the Distribution, the transfer to the Company of the Transferred Businesses, the
division between 3M and the Company of certain liabilities and certain other
agreements governing the relationship between 3M and the Company following the
Distribution.
The Distribution Agreement generally provides for the transfer by 3M to the
Company or Imation Enterprises Corp. ("Enterprises"), which will be a wholly
owned subsidiary of the Company immediately following the Distribution, of the
assets used in the Transferred Businesses on an "as is and where is" basis, and
for the assumption by the Company or Enterprises of substantially all of the
liabilities relating to the Transferred Businesses. The Distribution Agreement
also provides for the transfer of the capital stock of Enterprises and of
certain foreign subsidiaries of 3M to Imation. Substantially all the assets of
the Transferred Businesses will be transferred to the Company as a contribution
to capital, except for certain assets related to non-U.S. operations which will
be purchased by the Company. The assets relating to non-U.S. operations will
generally be transferred to subsidiaries of Imation around the world, either as
a contribution to capital or through a sale of assets at book value. In
addition, in most countries outside the U.S. trade accounts receivable and
accounts payable will be retained by 3M and 3M will pay to the Company following
the Distribution an amount corresponding to the amount by which such receivables
exceed such payables. See "PRO FORMA FINANCIAL STATEMENTS."
The Distribution Agreement provides that in the event that it is not feasible to
effect the transfers of non-U.S. operations on or prior to the Distribution Date
in any particular country, 3M and the Company will continue, following the
Distribution Date, their respective efforts to have such transfers and payments
effected as promptly as practicable following the Distribution Date or, if the
Company and 3M determine that such transfers are not capable of being effected
on a timely basis, enter into such other arrangements as are mutually agreed
upon which are intended to enable the Company to operate in such country on a
basis similar to that being conducted by 3M with respect to the Transferred
Businesses. Pending consummation of any such transfers, the Company and 3M shall
enter into such arrangements as may be necessary to enable 3M to continue to
conduct the Transferred Businesses. Following completion of each such transfer,
either 3M shall pay to the Company an amount equal to the net profits realized
after the Distribution Date with respect to these operations or the Company
shall pay to 3M an amount equal to any net losses incurred by 3M after the
Distribution Date with respect to these operations, as the case may be.
The Distribution Agreement also contains certain provisions relating to employee
compensation, benefits and labor matters and the treatment of options to
purchase and awards with respect to 3M common stock held by employees of 3M who
are becoming employees of the Company. Among other things, these provisions
apply to the discharge by the Company of liabilities and obligations relating to
employees of the Transferred Businesses.
The Distribution Agreement further provides that 3M and the Company shall each
be granted access to certain records and information in the possession of the
other, and requires the retention by each of 3M and the Company following the
Distribution Date of all such information in its possession in accordance with
existing document retention policies.
15
The Distribution Agreement provides that, except as otherwise set forth therein
or in any related agreement, 3M and the Company will pay their own costs and
expenses in connection with the Distribution.
TAX SHARING AGREEMENT
3M and the Company have entered into a Tax Sharing and Indemnification Agreement
(the "Tax Sharing Agreement"), providing for their respective obligations
concerning various tax liabilities. The Tax Sharing Agreement provides that 3M
shall pay, and indemnify the Company if necessary, with respect to all federal,
state, local and foreign income taxes relating to the Transferred Businesses for
any taxable period ending on or before the Distribution Date except those
incurred by any foreign subsidiary of the Company. 3M has also agreed to pay all
other taxes (other than those which are imposed solely on the Company) the
liability for which arises on or prior to the Distribution Date or are
attributable to periods up to the Distribution Date, except any tax liability
arising out of the failure of the Distribution or any of the transactions
related to it to qualify as tax-free as a result of any action taken by the
Company or any of its subsidiaries. The Tax Sharing Agreement further provides
for cooperation with respect to certain tax matters, the exchange of information
and the retention of records which may affect the income tax liability of either
party.
CORPORATE SERVICES TRANSITION AGREEMENT
3M and the Company have entered into a Corporate Services Transition Agreement
(the "Corporate Services Agreement") pursuant to which 3M has agreed to provide
to the Company certain services, including engineering and manufacturing
services, logistics and information technology services, financial services and
human resources administration services and tax, insurance, treasury, and
employee benefits administration, which 3M historically has provided to the
Transferred Businesses. The length of time that 3M will provide such services
and the amount that the Company will pay for such services varies based on the
type of service. Generally, no services are expected to be provided beyond two
years following the Distribution Date, and after such time the Company expects
to provide such services on its own behalf. The Corporate Services Agreement is
terminable by each party upon 90 days notice, provided that, 3M is not permitted
to terminate certain specified services, which the parties have determined will
require a longer period to replace, prior to two years following the
Distribution. The cost associated with the services to be provided by 3M will be
either a fixed dollar amount based on the estimated cost of the services to be
provided, or an amount to be determined pursuant to a formula based on the
services actually provided. Any services required by the Transferred Businesses
beyond the first year will be based on costs incurred plus an 8% mark-up.
Certain foreign subsidiaries of the Company and 3M have entered or will enter
into corporate services agreements pursuant to which 3M will provide to such
subsidiaries services similar to those to be provided to the Company pursuant to
the Corporate Services Agreement.
ENVIRONMENTAL MATTERS AGREEMENT
3M and the Company have entered into an Environmental Matters Agreement (the
"Environmental Matters Agreement") providing for their respective obligations
concerning environmental liabilities arising out of the operation of the
premises of the Transferred Businesses and other environmental matters.
Under the Environmental Matters Agreement, the Company will assume and indemnify
3M for all liabilities relating to, arising out of or resulting from (i)
operations at the Company's facilities as conducted before the Closing Date;
(ii) the disposal of hazardous materials, from the Company's facilities, before
the Distribution Date, at disposal sites operated by third parties ("Superfund
Sites"), where such liabilities are discovered after the Distribution Date; or
(iii) operations of the Transferred Businesses on and after the Distribution
Date. 3M has agreed to retain responsibility for environmental liabilities
relating to former premises which may have been associated with the Transferred
Businesses, and known Superfund sites associated with the current properties of
the Transferred Businesses. See "BUSINESS AND PROPERTIES OF THE COMPANY --
Environmental Matters."
16
INTELLECTUAL PROPERTY AGREEMENT
3M and the Company have entered into an Intellectual Property Agreement (the
"Intellectual Property Agreement") pursuant to which 3M will grant to the
Company rights to use certain intellectual property (such as patent rights,
copyrights, mask work rights and proprietary information) exclusively in the
fields of use in which the Transferred Businesses presently operate and
non-exclusively in certain other fields. In addition, 3M is transferring to the
Company title to certain intellectual property rights used by the Transferred
Businesses, subject to certain rights which 3M will have to continue to use such
intellectual property rights. The Intellectual Property Agreement further
provides for cross licensing of certain future intellectual property developed
during a transition period. In addition, for various transition periods
specified in the Intellectual Property Agreement, the Company will be granted
the right to use certain 3M trademarks under a royalty-bearing license.
Trademarks used only by the Transferred Businesses will be assigned to the
Company.
The Intellectual Property Agreement provides that the costs associated with the
procurement and maintenance of patents and trademarks licensed to either party
by the other under the Intellectual Property Agreement will be the
responsibility of the party owning the particular patent or trademark. However,
with respect to patents, either party may designate a patent or patent
application under which it is licensed by the other party to be of "common
interest." The licensed party is granted certain rights to participate in
decisions involving such common interest patents and patent applications, and
the costs thereof are shared by the parties. The costs of enforcing licensed
patents against an infringer will be borne by the party instituting the lawsuit
unless the parties agree otherwise. For jointly-owned patents, enforcement costs
are shared if both parties desire to participate. The Company's enforcement of
patents owned by 3M and licensed to the Company requires prior approval by 3M.
With the exception of licensed trademark rights, no royalties or fees are
payable by the Company to 3M for the assignment and license of intellectual
property to the Company under the Intellectual Property Agreement. With respect
to licensed trademarks, the Company will pay a reasonable royalty through cash
payments, commitments to purchase product from 3M and/or engaging in certain
other activities benefiting 3M.
The parties will cross-license each other under certain patents and proprietary
information developed by each party during the two year period following the
Distribution Date. The cross-licenses are royalty-free and generally of the same
scope (i.e., exclusive or non-exclusive in defined fields) as the licenses
granted to and retained by the Company and 3M, respectively, under the patents
and proprietary information existing at the time of the Distribution.
The Company and 3M will enter into a joint development agreement pursuant to
which the parties will assist each other in the development of new products
after the Distribution Date. The relationship between the parties under the
agreement will vary from simple purchased research to shared product
development.
3M and the Company have agreed not to compete with each other in their
respective businesses for a period of five years following the Distribution
Date. 3M agrees that, except for ancillary activity involving an insubstantial
business, it will not compete directly or indirectly in the Company's Exclusive
Fields (which, as defined in the Intellectual Property Agreement are generally
the fields of business in which the Company is presently engaged). The Company
agrees that, except for ancillary activity involving an insubstantial business,
it will not compete, directly or indirectly in the 3M Business Fields (which, as
defined in the Intellectual Property Agreement, are generally the fields of
business in which 3M is presently engaged). However, this provision does not
preclude the Company from indirect activity, outside of the 3M Reserved Fields
(which, as defined in the Intellectual Property Agreement, are generally fields
closely related to the Company's Exclusive Fields where 3M has retained
exclusive rights), involving working with a third party on that party's imaging
and electronic information processing needs, internal or external, as long as
the activity does not benefit, in more than an ancillary way, a product or
service of the third party which competes with a product or service in the 3M
Business Fields.
SUPPLY, SERVICE, CONTRACT MANUFACTURING AND SALES AGENCY AGREEMENTS
3M and the Company have entered into various product and service supply
agreements (the "Supply Agreements") providing for the supply by 3M to the
Company, or by the Company to 3M, of
17
certain products and services at the prices set forth in such agreements which
generally reflect costs plus an appropriate mark-up. Under the Supply
Agreements, 3M will supply to the Company certain raw material and intermediate
products including film, specialty chemicals and abrasives and will provide to
the Company certain contract manufacturing services, primarily equipment
assembly services. The cost of all such products and services supplied by 3M to
the Company during 1995 totaled approximately $103 million. Under the Supply
Agreements, the Company will supply to 3M certain semi-finished products and
components and will provide to 3M certain contract manufacturing and other
services, including converting, slitting and coating services and technical
field service. The cost of all such products and services supplied by the
Company to 3M during 1995 totaled approximately $41 million. 3M and the Company
have also entered into a sales agency agreement providing for the appointment of
3M as a sales agent for certain finished products supplied by the Company in
return for the payment of a commission for orders taken for the Company's
products. The Company expects to pay commissions to 3M of approximately $1.3
million during the last six months of 1996.
SHARED FACILITY AND LEASE AGREEMENTS
3M and the Company have entered into various lease agreements with respect to
certain facilities (the "Shared Facility Agreements") at which 3M and the
Company will continue to share space. With respect to each of these facilities,
the party that will be the owner (or primary tenant) of the facility will lease
to the other party a portion of the facility so as to enable the other party to
conduct operations at such facility.
The form of lease to be entered into by 3M and the Company provides for the
payment of rent in an amount approximating the standard recharge rate used by
the lessor with respect to internal uses of such facilities. The leases
generally provide for a two year term, in some cases with an option to extend
for an additional two years. It is expected that 3M will pay to the Company
approximately $455,000 and that the Company will pay approximately $11.4 million
to 3M in the first year following the Distribution with respect to Shared
Facility Agreements.
Each of 3M and the Company believe that the properties it will own or have a
leasehold interest in following the Distribution will be adequate for its
business following the Distribution. Over the next two years, the Company
anticipates building new facilities at the site of its corporate headquarters so
as to consolidate its headquarters operations.
FINANCING
The Company intends to obtain a commitment from a lender or group of lenders to
provide a $ ___ million credit facility (the "Credit Facility") which will be
used primarily to finance the Company's purchase of certain assets from 3M
related to the Company's non-U.S. operations and to help satisfy the working
capital needs of the Company following the Distribution. A definitive credit
agreement containing the terms described below will be executed prior to the
Distribution Date.
Loans obtained under the Credit Facility are expected to bear interest, at the
election of the Company, at (i) the adjusted London Interbank Offered Rate plus
___%, (ii) the adjusted certificate of deposit rate plus ___% or (iii) the
higher of the federal funds rate plus ___% and ___'s prime rate, plus ___%. All
of such rates are calculated on a per annum basis and are subject to a default
rate of an additional ___% per annum. The Credit Facility is also expected to
contain covenants customary for facilities of this type which may relate to
limitations on the payment of dividends or other distributions on the Common
Stock, incurrence of indebtedness, mergers and consolidations involving the
Company, certain sales of assets, the creation of liens and maintenance of
financial ratios. The Company expects to pay customary fees in connection with
the Credit Facility.
18
PRO FORMA CAPITALIZATION
The following table sets forth the unaudited pro forma capitalization of the
Company at March 31, 1996. This data should be read in conjunction with the pro
forma balance sheet and the introduction to the pro forma financial statements
appearing elsewhere in this Information Statement. The pro forma information may
not reflect the capitalization of the Company in the future or as it would have
been had the Company been a separate, independent company on March 31, 1996.
Assumptions regarding the number of shares of the Company's Common Stock may not
reflect the actual numbers at the Effective Date. See "PRO FORMA FINANCIAL
STATEMENTS."
IMATION CORP.
PRO FORMA CAPITALIZATION TABLE
as of March 31, 1996
(Dollars in millions)
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
(UNAUDITED) (UNAUDITED) (UNAUDITED)
Long-term debt $ 250.0 (a) $ 280.0
30.0 (b)
Equity
Net investment by 3M $1,121.7 (173.1)(c) --
40.0 (d)
(20.3)(e)
0.3 (f)
(968.6)(g)
Common stock 0.4 (g) 0.4
Additional paid in
capital 968.2 (g) 968.2
Unearned ESOP shares (30.0)(b) (30.0)
Total equity 1,121.7 (183.1) 938.6
Total capitalization $1,121.7 $ 96.9 $1,218.6
NOTES TO PRO FORMA CAPITALIZATION TABLE
(ALL AMOUNTS ARE IN MILLIONS OF DOLLARS UNLESS OTHERWISE NOTED)
(a) Reflects an estimated $250 million of debt the Company expects to incur for
general corporate purposes on or shortly after the Distribution Date.
Approximately $173.1 million of the $250 million to be borrowed will be used at
the time of the Distribution to purchase from 3M certain assets located outside
the United States where spin-off transactions will not be consummated and to
repay intercompany indebtedness being assumed by the Company in connection with
the Distribution, and approximately $26.9 million will be used to pay certain
accrued employee benefits.
(b) Reflects funds borrowed by the Company and on-lent to the ESOP and the
adjustment to the Company's equity resulting from the purchase of outstanding
shares of Common Stock by the ESOP which have not been earned by ESOP
participants and allocated to their respective accounts.
(c) Reflects the net payment to 3M of an estimated $173.1 million to purchase
certain assets located outside the United States where spinoff transactions will
not be consummated and to repay intercompany indebtedness being assumed by the
Company in connection with the Distribution.
(d) Represents contribution by 3M in an amount equal to certain deferred
income obligations being assumed by the Company.
(e) Represents a valuation allowance necessary to reflect deferred tax assets
at their estimated realizable value on a purely separate return basis.
(f) Reflects the net deferred tax assets to be realized by 3M upon the
Company's purchase of certain assets outside the United States (see footnote
(c)).
19
(g) Reflects the issuance of an estimated 42 million shares of common stock, par
value $.01 per share, as of July 1, 1996. This is based on 3M's common stock
outstanding at March 31, 1996 of 418.6 million shares and an assumed
distribution of one share of the Company's common stock for every ten shares of
3M common stock outstanding. Additional paid in capital represents the excess of
the historical carrying values of the Company's net assets at the Distribution
Date over the amount reflected as Common Stock.
PRO FORMA FINANCIAL STATEMENTS
The Company was formed by 3M for the purpose of effecting the Distribution and
has no operating history as a separate, independent company. The historical
financial statements of the Company reflect periods during which the Company did
not operate as a separate, independent company, and certain assumptions were
made in preparing such financial statements. Therefore, such historical
financial statements may not reflect the results of operations or financial
position that would have existed had the Company been a separate, independent
company.
The following pro forma financial statements of the Company make adjustments to
the historical (unaudited) balance sheet at March 31, 1996 and the historical
statements of operations for the year ended December 31, 1995, and the three
months ended March 31, 1996 (unaudited) as if the Distribution had occurred on
March 31, 1996 for purposes of the pro forma balance sheet and January 1, 1995
for purposes of the pro forma statements of operations.
THE PRO FORMA FINANCIAL STATEMENTS OF THE COMPANY SHOULD BE READ IN CONJUNCTION
WITH THE HISTORICAL FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO
CONTAINED ELSEWHERE IN THIS INFORMATION STATEMENT. THE PRO FORMA FINANCIAL
INFORMATION IS PRESENTED FOR INFORMATIONAL PURPOSES ONLY AND MAY NOT REFLECT THE
FUTURE RESULTS OF OPERATIONS OR FINANCIAL POSITION OF THE COMPANY OR WHAT THE
RESULTS OF OPERATIONS OR FINANCIAL POSITION WOULD HAVE BEEN HAD THE COMPANY'S
BUSINESSES BEEN OPERATED AS A SEPARATE, INDEPENDENT COMPANY.
The pro forma financial statements assume the completion of the transactions
contemplated by the Distribution Agreement and the agreements to be entered into
pursuant to the Distribution Agreement, including the completion of all the
asset transfers and contract assignments contemplated thereby. Although it is
possible that certain asset transfers relating to the Company's operations
outside the United States may not be completed prior to the Distribution Date,
the Distribution Agreement provides that the economic benefits or costs relating
to such assets following the Distribution will be for the Company's account. See
"RELATIONSHIP BETWEEN 3M AND THE COMPANY AFTER THE DISTRIBUTION -- Distribution
Agreement." Assumptions regarding the number of shares of the Company's Common
Stock may not reflect the actual numbers at the Distribution Date.
20
IMATION CORP.
PRO FORMA STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1996 and Year Ended December 31, 1995
(In Millions Except for Per Share Data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996 YEAR ENDED DECEMBER 31, 1995
PRO FORMA PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO FORMA
(UNAUDITED) (UNAUDITED) (UNAUDITED) HISTORICAL (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net revenues $576.1 $576.1 $2,245.6 $2,245.6
Cost of goods sold 373.8 373.8 1,520.9 1,520.9
Gross profit 202.3 -- 202.3 724.7 -- 724.7
Operating expenses:
Selling, general and
administrative 130.7 130.7 539.4 539.4
Research and development 47.9 47.9 222.4 222.4
Restructuring charge 10.4 10.4 111.8 111.8
Total 189.0 -- 189.0 873.6 -- 873.6
Operating income (loss) 13.3 -- 13.3 (148.9) -- (148.9)
Interest expense and other 3.2 0.4 (a) 3.6 17.9 1.5 (a) 19.4
Income (loss) before taxes and
minority interest 10.1 (0.4) 9.7 (166.8) (1.5) (168.3)
Income tax expense (benefit) 4.1 (0.2)(b) 4.5 (70.5) (0.6)(b) (48.1)
0.6 (c) 23.0 (c)
Minority interest (0.1) (0.3)(c)(f) (0.4) (11.3) (11.5)(c)(f) (22.8)
Net income (loss) $ 6.1 $(0.5) $ 5.6 (d) $ (85.0) $(12.4) $ (97.4) (d)
Net income (loss) per share $ 0.13(e) $ (2.32)(e)
</TABLE>
21
NOTES TO PRO FORMA STATEMENT OF OPERATIONS
(ALL AMOUNTS ARE IN MILLIONS OF DOLLARS UNLESS OTHERWISE NOTED)
(a) Represents an adjustment of the allocation of 3M's interest expense to
reflect an estimate of the weighted average interest rate the Company would have
experienced during the periods presented. The interest rates used were 8.1% in
1995 and 7.3% in first quarter, 1996. These rates represent 3M's historical
weighted average rates during these periods as adjusted to reflect the higher
cost of borrowing the Company expects to incur on a stand-alone basis. The
interest calculation is based on the Company's estimated non-ESOP debt level
expected on or shortly after the Distribution of $250 million.
(b) Reflects the adjustment to income tax benefit associated with the change
in interest expense described in Note (a).
(c) Represents an adjustment to the income tax benefit to reflect a valuation
allowance for deferred tax assets on a purely separate return basis and the
resulting impact on minority interest.
(d) Restructuring charges reduced pro forma results for the three months ended
March 31, 1996 by $10.4 million on a pre-tax basis and $6.1 million after-taxes
and minority interest. Pro forma net income for the three months ended March 31,
1996 would have been $11.7 million, or $.28 per share excluding these charges.
Restructuring charges and asset write-offs reduced 1995 pro forma results by
$166.3 million on a pre-tax basis and $97.8 million after-taxes and minority
interest. 1995 pro forma net income excluding these charges would have been $0.4
million, or $.01 per share.
(e) Represents the net income (loss) per share on an assumed approximately 42
million shares of the Company's common stock outstanding. This is based on 3M's
weighted average number of shares outstanding during first quarter, 1996 of
418.5 million shares and full year 1995 of 419.8 million shares and an assumed
distribution of one share of the Company's stock for every ten shares of 3M
common stock outstanding.
(f) The historical and pro forma statements of operations reflect minority
interests since the Company's operations in certain countries were conducted by
3M prior to the Distribution Date through joint ventures in which third parties
had owned minority interests. The Company, however, does not know, subject to
further discussion with such joint venture partners, to what extent, if any,
such joint venture partners will be maintaining an interest in the companies
established by the Company to do business in those countries and as to whether
the Company's future statements would reflect minority interests. See Note (j)
of Pro Forma Balance Sheet.
22
IMATION CORP.
PRO FORMA BALANCE SHEET
As of March 31, 1996
(In Millions)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and equivalents $ 250.0 (a) $ 90.0
(26.9)(b)
(173.1)(c)
40.0 (d)
Accounts receivable -- net $ 472.2 -- (e) 472.2
Inventories 420.1 420.1
Other current assets 48.1 (1.5)(f) 44.2
(2.4)(g)
Total current assets 940.4 86.1 1,026.5
Property, Plant and Equipment -- Net 503.9 503.9
Other Assets 75.7 (18.8)(f) 56.9
Total assets $1,520.0 $ 67.3 $1,587.3
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable $ 117.0 -- (e) $ 117.0
Accrued payroll 52.8 52.8
Other current liabilities 137.2 (17.2)(b) 118.7
(1.3)(g)
Total current liabilities 307.0 (18.5) 288.5
Other Liabilities 91.3 (9.7)(b) 80.2
(1.4)(g)
Long-Term Debt 250.0 (a) 280.0
30.0 (h)
Equity
Net investment by 3M 1,121.7 (173.1)(c) --
40.0 (d)
(20.3)(f)
0.3 (g)
(968.6)(i)
Common stock 0.4 (i) 0.4
Additional paid in capital 968.2 (i) 968.2
Unearned ESOP shares (30.0)(h) (30.0)
Total equity 1,121.7 (183.1) 938.6
Total liabilities and equity $1,520.0 $ 67.3 $1,587.3
</TABLE>
The accompanying notes are an integral part of this statement.
23
NOTES TO PRO FORMA BALANCE SHEET
(ALL AMOUNTS ARE IN MILLIONS OF DOLLARS UNLESS OTHERWISE NOTED)
(a) Reflects an estimated $250 million of debt the Company expects to incur for
general corporate purposes on or shortly after the Distribution Date.
Approximately $173.1 million of the $250 million to be borrowed will be used at
the time of the Distribution to purchase from 3M certain assets located outside
the United States where spin-off transactions will not be consummated and to
repay intercompany indebtedness being assumed by the Company in connection with
the Distribution, and approximately $26.9 million will be used to pay certain
accrued employee benefits,
(b) Reflects the payment shortly after the Distribution Date of an estimated
$26.9 million to pay certain accrued employee benefits, including approximately
$17.2 million of current liabilities and approxiamtely $9.7 million of other
liabilities.
(c) Reflects the net payment to 3M of an estimated $173.1 million to purchase
certain assets located outside the United States where spin-off transactions
will not be consummated and to repay intercompany indebtedness being assumed by
the Company in connection with the Distribution.
(d) Represents contribution by 3M in an amount equal to certain deferred
income obligations being assumed by the Company.
(e) To provide a more accurate reflection of future financial statements, the
pro forma financial statements do not give effect to the retention by 3M of
certain trade receivables and payables outside the United States and the
agreement by 3M to pay to the Company following the Distribution an amount
corresponding to the amount by which such receivables exceed such payables. See
"RELATIONSHIP BETWEEN 3M AND THE COMPANY AFTER THE DISTRIBUTION -Distribution
Agreement.")
(f) Represents a valuation allowance necessary to reflect deferred tax assets at
their estimated realizable value on a purely separate return basis.
(g) Reflects the net deferred tax assets to be realized by 3M upon the
Company's purchase of certain assets outside the United States (see footnote
(c)).
(h) Reflects funds borrowed by the Company and on-lent to the ESOP and the
adjustment to the Company's equity resulting from the purchase of outstanding
shares of Common Stock by the ESOP which have not been earned by ESOP
participants and allocated to their respective accounts.
(i) Reflects the issuance of an estimated 42 million shares of common stock, par
value $.01 per share, as of July 1, 1996. This is based on 3M's common stock
outstanding at March 31, 1996 of 418.6 million shares and an assumed
distribution of one share of the Company's common stock for every ten shares of
3M common stock outstanding. Additional paid in capital represents the excess of
the historical carrying values of the Company's net assets at the Distribution
Date over the amount reflected as Common Stock.
(j) The pro forma balance sheet assumes that the Company will own 100% of its
operations in Japan and Korea on the Distribution Date. These operations are
presently conducted by 3M in those countries through joint ventures in which
third parties own minority interests. The Company is presently in discussions
with the joint venture partners to determine what interest, if any, such
partners will have in the companies to be established by the Company in those
countries. If the joint venture partners had maintained an interest in the
companies established by the Company equal to their interest in the companies
presently operated by 3M, the impact on the pro forma balance sheet would have
been to decrease total equity by, and establish minority interests in the amount
of, approximately $15 million.
24
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data of the Company should be read
in conjunction with the historical financial statements and notes thereto
included elsewhere in this Information Statement. This selected historical
financial data relates to the Transferred Businesses as they were operated as
part of 3M. They also include an allocation of certain general corporate
expenses of 3M which were not directly related to these businesses. The
following selected historical financial data are derived from the historical
financial statements of the Company. The selected historical financial data that
relate to the three year period ended December 31, 1995 have been derived from
the financial statements audited by Coopers & Lybrand L.L.P., independent public
accountants. The selected historical financial data for the two year period
ended December 31, 1992 have been derived from unaudited historical financial
statements. In the opinion of management, the unaudited historical financial
statements reflect all adjustments, consisting of normal adjustments, necessary
to present fairly the financial position of the Company at December 31, 1992 and
1991 and the results of operations and cash flows for the years then ended. The
historical financial data of the Company may not reflect the results of
operations or financial position that would have been obtained had the Company
been a separate, independent company.
SELECTED HISTORICAL FINANCIAL DATA
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1995* 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
For the Year Ended December 31:
Net revenues $2,245.6 $2,280.5 $2,307.8 $2,350.0 $2,319.0
Gross profit 724.7 838.5 886.2 885.0 911.0
Selling, general and administrative expense 539.4 531.5 529.0 542.0 525.0
Research and development 222.4 211.2 216.7 181.0 174.0
Operating income (loss) (148.9) 95.8 140.5 162.0 212.0
Income (loss) before tax and minority
interest (166.8) 81.3 127.4 142.0 187.0
Net income (loss) (85.0) 54.3 75.3 94.0 119.0
At December 31:
Total working capital 658.4 714.0 618.4 608.1 606.7
Property, plant and equipment -- net 513.2 654.9 642.2 618.5 607.6
Total assets 1,541.5 1,671.7 1,545.6 1,533.9 1,514.7
Total liabilities 392.8 371.7 345.8 361.7 341.4
Total equity 1,148.7 1,300.0 1,199.8 1,172.2 1,173.3
</TABLE>
* Restructuring charges and asset write-offs reduced 1995 results by $166.3
million on a pre-tax basis and $88.3 million after-tax and minority
interest. 1995 net income excluding these charges would have been $3.3
million. The majority of these charges related to the write-down of
property, plant and equipment.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL OVERVIEW
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations is based upon the separate historical financial statements
of the Company, which present the Company's results of operations, financial
position and cash flows. These historical financial statements include the
assets, liabilities, income and expenses that were directly related to the
Transferred Businesses as they were operated within 3M. In the case of assets
and liabilities not specifically identifiable to any particular business of 3M,
only those assets and liabilities expected to be owned by the Company after the
Distribution were included in the Company's separate balance sheets. Regardless
of the allocation of these assets and liabilities, however, the Company's
statement of operations includes all of the related costs of doing business,
including charges for the use of facilities and for employee benefits, and
include an allocation of certain general corporate expenses of 3M which were not
directly related to these businesses including costs for corporate logistics,
corporate research and development, information technologies, finance, legal and
corporate executives. These allocations were based on a number of factors
including, for example, personnel, space, time and effort, and sales volume.
Management believes these allocations as well as the assumptions underlying the
development of the Company's separate financial statements to be reasonable.
The financial information included herein, however, may not necessarily reflect
the results of operations, financial position and cash flows of the Company as
it will operate in the future or what the results of operations, financial
position and cash flows would have been had the Company been a separate,
stand-alone entity during the periods presented. This is due, in part, to the
historical operation of the Company as an integral part of the larger 3M. The
historical financial information included herein also does not reflect the
changes that will occur in the operations of the Company following the
Distribution.
STRATEGIC REORGANIZATION
The Company historically has operated as part of 3M. Following the Distribution,
the Company will be a stand-alone entity with objectives and strategies separate
from those of 3M. The Company will focus on providing solution-based products
and systems to customers in the information processing industry. In late 1995,
the Company initiated a review of all of its operations, including its
organizational structure, manufacturing operations, products and markets, with
the goal of maximizing its cash flows and improving net income. In connection
with this review, the Company has adopted a reorganization plan to rationalize
its manufacturing operations, streamline its organizational structure and write
off impaired assets.
To reflect the direct and indirect costs associated with this reorganization
plan, 3M recognized a loss on disposal which included pre-tax charges of
approximately $340 million in the fourth quarter of 1995 as a part of its
discontinued operations charges. The Company will reflect the direct portion of
these charges, approximately $250 million, in its separate financial statements
partially in 1995 and partially in 1996 based upon the timing of recognition
criteria required for restructuring charges. The Company recorded $166 million
of these charges in its 1995 statement of operations primarily for the
write-down of assets associated with its manufacturing rationalization programs.
The Company expects to record the remainder in its 1996 financial statements.
These costs relate primarily to employee separations for direct employees of the
Company.
As a part of the reorganization, 3M announced an expected reduction of
approximately 5,000 positions. The Company's direct employee reductions are
expected to total more than 1,600 positions and will occur through already
announced voluntary and involuntary separation programs and through the
completion of the Company's manufacturing consolidation activities. As of May 1,
1996, approximately 850 United States employees have accepted voluntary
separation offers. The Company has also announced the closure of one
manufacturing facility in the United States, which will result in the reduction
of approximately 325 additional employees over the next 12 months. Outside the
United States, the Company expects employment reductions of approximately 290
positions through already
26
announced voluntary and involuntary separation programs. Additional future
employment reductions will result primarily from the completion of the Company's
manufacturing rationalization programs.
The separation costs related to these programs are recognizable in the Company's
financial statements when employees accept voluntary separation offers and upon
announcement for involuntary separation programs. The first quarter 1996
statement of operations includes $10.4 million of these restructuring charges.
The Company expects to record approximately $74 million of additional employee
separation costs, the majority of which will be recorded in the second quarter
of 1996. 3M will fund the cash requirements of these separation programs. See
further discussion of these charges in "-- Operating Results."
As of March 31, 1996 the Company had approximately 12,000 direct and indirect
employees. This number included positions in factory locations to be transferred
to the Company, and in laboratory, engineering, selling, marketing and
administrative positions held by direct Company employees. It also included
indirect equivalent positions in staff services functions at 3M which have
historically provided services to the businesses of the Company. After the
Distribution, approximately 1,100 staff services equivalent positions will
remain with 3M. In the near term, the costs related to the staff services
support provided by these employees will continue to be incurred by the Company
through the Corporate Services Agreement. After the Distribution, it is expected
that the Company will have less than 10,000 direct employees as a result of the
above actions. The Company believes that this is an appropriate staffing level
for the near term.
The Company anticipates that cost savings (net of start-up expenses) from the
reorganization plan will be in the range of $30 million to $50 million in 1996
and in excess of $75 million in 1997. The Company, however, does not expect the
reorganization plan to have any meaningful effect on cash flows until 1997, as
start-up expenses are likely to offset any cash generated from reduced costs in
1996.
OPERATING RESULTS
COMPONENTS OF NET REVENUE CHANGES
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS END DECEMBER 31,
MARCH 31, 1996 1995 1994
U.S. INTL. WORLDWIDE U.S. INTL. WORLDWIDE U.S. INTL. WORLDWIDE
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volume 3% 9% 6% (1)% 6% 2% 5% 9% 7%
Price (4) (7) (5) (5) (7) (6) (9) (8) (9)
Translation -- (2) (1) -- 4 2 -- 1 1
Total (1)% --% --% (6)% 3% (2)% (4)% 2% (1)%
</TABLE>
27
The following table displays the components of the Company's historical
statements of operations as a percentage of total net revenues.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31 YEAR ENDED DECEMBER 31,
1996 1995 1995 1994 1993
<S> <C> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 64.9 63.2 67.7 63.2 61.6
Gross profit 35.1 36.8 32.3 36.8 38.4
Operating expenses:
Selling, general and administrative 22.7 23.8 24.0 23.3 22.9
Research and development 8.3 9.8 9.9 9.3 9.4
Restructuring charges 1.8 -- 5.0 -- --
Total operating expenses 32.8 33.6 38.9 32.6 32.3
Operating income (loss) 2.3 3.2 (6.6) 4.2 6.1
Interest expense and other 0.5 0.9 0.8 0.6 0.6
Income (loss) before tax and minority
interest 1.8 2.3 (7.4) 3.6 5.5
Effective income tax rate (% of pre-tax) 41.0 42.3 (42.3) 36.0 40.7
Net income (loss) 1.1% 1.3% (3.8)% 2.4% 3.3%
</TABLE>
COMPARISON OF THREE MONTHS ENDED MARCH 31, 1996 AND 1995
Net revenues in the first three months of 1996 were essentially equal to the
level during the same period in 1995. Volume increases of 6 percent were
substantially offset by price declines of 5 percent. Net revenues in the United
States declined 1 percent with a volume increase of 3 percent being more than
offset by pricing declines. Outside the United States, volume increased 9
percent. Price declines of 7 percent and a 2 percent negative effect of changes
in currency exchange rates offset these volume increases.
Gross profit in the first quarter of 1996 was 35.1 percent of revenues, down 1.7
percentage points from first quarter 1995. This decline was primarily due to the
effect of lower selling prices, only partially offset by volume increases,
productivity benefits and other factors.
Selling, general and administrative expenses were 22.7 percent of revenues in
the first three months of 1996, down 1.1 percentage points from the same period
in 1995. The majority of this decline was in sales related costs which were down
approximately $5.0 million.
Research and development costs totaled $47.9 million or 8.3 percent of revenues
in the first three months of 1996, down $8.5 million and 1.5 percentage points
from the same period in 1995. The higher level of spending in 1995 reflects
investments made in a number of the Company's new products which came to market
during 1995 and early 1996.
The Company recorded restructuring charges of $10.4 million in the first quarter
of 1996 reflecting costs for certain voluntary separation programs which were
recognized based on the number of employee acceptances of separation offers
during the quarter ended March 31, 1996 in accordance with the applicable
accounting rules.
Operating income for the first three months of 1996 was $13.3 million but would
have totaled $23.7 million or 4.1 percent of revenues excluding restructuring
charges. This represents a $5.5 million increase from operating income in the
same period in 1995 which totaled $18.2 million or 3.2 percent of revenues.
Excluding restructuring charges, income before taxes and minority interest was
$20.5 million in 1996, improved by $7.5 million from the three month period
ended March 31, 1995. This benefited from a lower effective interest rate in
1996.
The Company's effective tax rate was 41.0 percent, down from 42.3 percent in the
first quarter of 1995. This decrease was due primarily to a shift in profits to
lower tax jurisdictions.
Net income in the first quarter of 1996 was $6.1 million, and would have totaled
$12.2 million or 2.1 percent of revenues excluding restructuring charges. This
represents an increase of $4.7 million and 0.8 percentage points from the same
period in 1995.
28
COMPARISON OF YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Net revenues in 1995 and 1994 declined 1.5 percent and 1.2 percent,
respectively. These declines resulted primarily from the effects of downward
pricing pressures which exceeded the Company's volume growth in both 1995 and
1994, especially in the United States. See Note 8 to NOTES TO HISTORICAL
FINANCIAL STATEMENTS for the Company's revenues by classes of similar products
or services.
Approximately 50 percent of the Company's net revenues in 1995 were from sales
outside the United States, which is up from just over 47 percent in 1994 and 46
percent in 1993. This trend is expected to continue in future years. In the
Company's international operations, volume rose 6 percent in 1995 and 9 percent
in 1994. In both 1995 and 1994, these volume gains were substantially offset by
price declines. Changes in currency exchange rates positively impacted
international net revenues by 4 percent in 1995 and 1 percent in 1994.
United States net revenues declined 6 percent in 1995 and 4 percent in 1994,
driven by price declines in both years. Volume declined slightly in 1995, after
having grown 5 percent in 1994.
Gross profit in 1995 was 32.3 percent of revenues, representing a 4.5 percentage
point decrease from 1994. This decrease was primarily due to the effect of lower
selling prices and the portion of special charges included in cost of goods sold
noted below. In 1994, gross profit was 36.8 percent of revenues, representing a
1.6 percentage point decrease from 1993. In this period, the negative effects of
price declines were only partially offset by volume increases and other factors.
Selling, general and administrative expenses were 24.0 percent of revenues in
1995, as compared to 23.3 percent in 1994, and 22.9 percent in 1993. These
increases were primarily due to the decline in the revenue base. Spending in
dollars has been relatively flat during the past three years, reflecting cost
control and productivity improvements, and is expected to decline as a
percentage of revenues in the future.
Research and development expenses in 1995 were 9.9 percent of revenues, up from
9.3 percent and 9.4 percent in 1994 and 1993, respectively. In 1995, this
represented an $11.2 million increase over 1994 spending and reflects
investments in a number of the Company's promising new products including
Travan(tm) high-capacity data cartridges, LS-120 diskettes, the new family of
Rainbow proofing systems and DryView(tm) imagers. Management intends to continue
its strong focus on research and development, while controlling the related
costs through prioritized spending. Management expects expenditures for research
and development to decline as a percentage of revenues in the future.
The Company recorded special charges of $166.3 million ($88.3 million after tax
and minority interest) in its 1995 financial statements. Of these charges,
$111.8 million relate to world-wide manufacturing rationalization programs to
exit less profitable manufacturing locations and to centralize manufacturing in
the United States and in Italy. The $111.8 million charge is included as a
separate restructuring charge in the statement of operations. The remaining
special charge of $54.5 million primarily relates to asset write-offs included
in cost of goods sold.
The operating loss for 1995 totaled $148.9 million. This loss was driven by the
special charges discussed above. Excluding these charges, operating income would
have been $17.4 million, representing a decline of $78.4 million from 1994
operating income which totaled $95.8 million. This decline primarily reflects
the factors affecting the lower gross profit as discussed above, and to a lesser
extent the increase in research and development spending. In 1994, operating
income declined $44.7 million as a result of the factors affecting gross profit
as discussed earlier and to a lesser extent by the lower overall revenue level.
Non-operating expense (primarily interest expense allocation from 3M) totaled
$17.9 million, $14.5 million and $13.1 million in 1995, 1994 and 1993,
respectively. The increases are due to 3M's rising effective interest rates over
the three year period. The allocation methodology for interest expense is more
fully discussed in Note 6 of the NOTES TO HISTORICAL FINANCIAL STATEMENTS.
The Company's effective tax rate was 42.3, 36.0 and 40.7 percent of pre-tax
income for 1995, 1994 and 1993, respectively. The lower effective rate in 1994
was primarily the result of tax benefits recognized in the Company's Italian
operations. See Notes 2 and 5 of the NOTES TO HISTORICAL FINANCIAL STATEMENTS.
29
In 1995, minority interest (primarily in Japan) increased to $11.3 million
compared to $2.3 million in 1994. This change is primarily the result of the
portion of restructuring charges which related to the Company's operations in
Japan.
The 1995 net loss totaled $85.0 million or 3.8 percent of revenues. 1995 net
income excluding special charges would have totaled $3.3 million or 0.1 percent
of revenues, down from $54.3 million or 2.4 percent of revenues in 1994.
In order to reverse the historical decline in revenues and gross profits
described above, the Company intends to implement its business strategies (See
"BUSINESS AND PROPERTIES OF THE COMPANY"). Key factors in reversing this trend
are expected to be (i) anticipated increased sales for key new products
(including Travan(tm), DryView(tm) imagers, LS-120 Diskette and new models of
Rainbow color proofing systems) which were introduced commercially in late 1995
or early 1996, (ii) the Company's ability to sell a broader range of the
Company's products to existing customers, (iii) the Company's success in market
penetration in areas of the world where the Company has a limited market
position, (iv) the Company's ability to consolidate factories to increase
efficiencies and (v) the Company's success in refining product portfolios to
focus on more profitable business opportunities.
Generally, outside the United States, the Company will be relocating employees,
systems and inventory out of 3M facilities. By country, this will occur at
various times over the next year. Sales, marketing and administrative personnel
will be moving to leased facilities in all countries except the United Kingdom,
Italy and Canada, where most personnel will be located in Company owned
facilities transferred from 3M. Initially 3M will provide systems support
services in all countries. It is anticipated that independent Imation supported
systems will gradually replace these 3M systems support services over the next
18 months. Inventory will generally be moved to third-party warehouse providers
by July 1, 1997.
It is the Company's intention to continue expanding market penetration globally.
Recently, sales of DryView(tm) and Travan(tm) products have commenced in Europe
and many other countries. These new products as well as existing products will
be supported by the Company personnel residing in these local markets. In some
countries, 3M will continue to provide selling assistance for Company products
through local sales agency agreements.
PERFORMANCE BY GEOGRAPHIC AREA
UNITED STATES
In 1995, United States net revenues totaled $1,128.8 million down 6 percent from
$1,199.9 million in 1994. Volume declined approximately 1 percent and selling
prices decreased approximately 5 percent, for a total revenue decline of
approximately 6 percent. Operating income in 1995 decreased by $170.5 million
from 1994. Adjusted for the special charges discussed above, operating income
decreased $70.7 million in 1995. United States results were adversely affected
by price declines, higher raw material costs, lack of volume growth and
adjustments in production to reduce inventory levels. Employment levels were
reduced by approximately 500 people at December 31, 1995 as compared with the
levels at December 31, 1994. Inventories were reduced by approximately $34
million in 1995 as compared to December 31, 1994.
EUROPE, MIDDLE EAST AND AFRICA
Net revenues totaled $803.8 million in 1995, up 5 percent from $764.1 million in
1994. Volume increased almost 5 percent, selling prices declined approximately 7
percent, and changes in currency exchange rates positively impacted revenues by
approximately 7 percent. Excluding special charges, which reduced 1995 operating
results by $20.4 million, profits would have increased 4.5 percent to $76.2
million. The Company's manufacturing structure in Europe is expected to be
further reduced in 1996.
LATIN AMERICA, ASIA AND CANADA
Net revenues declined by approximately 1 percent in 1995 to $313 million,
entirely driven by changes in currency exchange rates. The devaluing rates of
exchange in Latin America more than offset the gains recognized in Asia Pacific.
Changes in volume and selling prices offset each other with local currency
revenues flat. Operating income declined by approximately $11 million, after
excluding $46.1
30
million in special charges. The majority of this income decline
occurred in Asia Pacific, where the results were adversely impacted by the
underutilization of a magnetic tape coater in Japan and the high costs of
producing products in that country. Sales and marketing programs were scaled
back to reduce volume growth given the high production costs. The Company
discontinued the use of this equipment in the first quarter of 1996 and changed
the source of supply to a facility in the United States with lower costs.
FINANCIAL POSITION
The Company had 3.4 months of inventory on hand at March 31, 1996 and at
December 31, 1995, a decline from 4.0 months at the end of 1994. The accounts
receivable days sales outstanding was 75 days at March 31, 1996, down from 78
days at December 31, 1995, which was up from 76 days at the end of 1994.
The book value of property, plant and equipment at March 31, 1996 was $503.9
million, a slight decrease from $513.2 million at December 31, 1995. The balance
at December 31, 1995 reflected a decline of $141.7 million from year-end 1994.
The majority of this decline, $128 million, is attributable to the special
charges discussed above. The increase in other assets of $54.5 million was
driven by the increase in deferred income taxes of $57.4 million. This increase
in deferred tax assets resulted from the special charges, which for the most
part, were not yet deductible at December 31, 1995 for income tax purposes.
Management believes the Company, or in certain cases 3M prior to the
Distribution, will generate sufficient taxable income in future periods to fully
recover these deferred tax assets based on the Company's implementation of the
actions discussed under " -- Strategic Reorganization" and "BUSINESS AND
PROPERTIES OF THE COMPANY -- Business Strategy." Also see NOTES TO PRO FORMA
BALANCE SHEET, item (f) regarding establishing deferred tax valuation allowance
on a purely separate return basis.
LIQUIDITY
3M uses a centralized approach to cash management and the financing of its
operations. As a result, cash and equivalents and debt were not allocated to the
Company in the historical financial statements. The Company's historical
financing requirements are represented by cash transactions with 3M and are
reflected in "Net Amount (Paid to) Received From 3M," as described in Note 7 of
the NOTES TO HISTORICAL FINANCIAL STATEMENTS. This financial support will be
discontinued following the Distribution. See "SPECIAL FACTORS -- Absence of 3M
Financial Support."
Cash provided from operating activities was $256.8 million in 1995, $170.1
million in 1994, and $229.2 million in 1993. The major non-cash item is
depreciation, which ranged between $184.4 million and $189.5 million per year
during this period. Working capital and related cash requirements increased
$85.6 million in 1994 and $25.6 million in 1993, while in 1995 working capital
and related cash requirements decreased by $52.0 million.
The Company is developing, and expects to have in place by July 1, relationships
and systems and staffing for a corporate currency management program to monitor
and centrally manage currency exposures. In connection with this currency
management program a variety of financial instruments will be employed,
including but not limited to foreign exchange forward contacts, currency options
and futures.
Investing activities, mainly capital expenditures, utilized cash provided by
operations in the amounts of $187.5 million in 1995, $179.7 million in 1994 and
$210.2 million in 1993. These investments were made to help meet growing global
demand for the Company's products, to improve manufacturing efficiencies and to
establish manufacturing operations for key new products. Over the past two
years, $74.6 million of these expenditures related to new products which were
commercialized in late 1995 and early 1996, including DryView(tm) medical
imagers, Travan(tm) high-capacity data cartridges and LS-120 diskettes.
Excluding one-time start up costs, management intends to maintain annual capital
expenditures in the range of $140 to $170 million per year for the next several
years.
The Company generated cash flows before financing activities with 3M of $72.9
million in 1995, and $13.1 million in 1993, while using $18.5 million in 1994, a
year in which the growth in inventory and accounts receivable more than offset
reductions in capital expenditures. In 1995, improvements in
31
working capital (primarily accounts receivable, inventories and accounts
payable) generated approximately $52.0 million in increased cash.
During the three months ended March 31, 1996 the Company generated cash flows
before financing activities with 3M of $27.0 million while using $13.4 million
for the same period in 1995. The improvement in the first quarter of 1996
reflects reduced levels of inventory coupled with somewhat lower capital
spending in 1996.
Following the Distribution, the Company expects its operations, exclusive of
contemplated borrowings, to generate sufficient funds to meet the Company's
operating needs for the 12 month period following the Distribution, including
capital expenditures. It is expected that additional progress in reducing
working capital needs will be achieved by re-engineering the Company's worldwide
supply chain and information technology systems. The components of the supply
chain include all operations of the Company from procurement of raw materials
through manufacturing and delivery of products to the Company's customers, and
the collection of accounts receivable.
Prior to the Distribution, the Company did not have any cash flows from
financing activities outside of 3M. Following the Distribution, the Company will
rely on internally generated funds and, to the extent necessary, the borrowing
of funds from third party sources. The Company anticipates that on or prior to
the Distribution Date, it will borrow approximately $280 million under the
Credit Facility to be negotiated with a syndicate of banks, which also will
allow the Company to borrow additional amounts for working capital purposes.
Approximately $173.1 million of the $280 million to be borrowed will be used at
the time of the Distribution to purchase from 3M certain assets located outside
the United States and to repay intercompany indebtedness being assured by the
Company in connection with the Distribution, approximately $26.9 million will be
used to pay certain accrued employee benefits, approximately $30 million will be
on-lent to the ESOP as described in the next paragraph, and the remainder will
be retained for working capital purposes. The Company believes that the cash
available under the Credit Facility, together with cash generated from
operations, are sufficient to meet the Company's anticipated funding
requirements.
The Company will establish an employee stock ownership plan (the "ESOP") which
will be leveraged by a loan from the Company and is expected to lead over time
to employee stock ownership (directly or beneficially) of approximately 5
percent of the Company's outstanding shares following the Distribution. At the
time of the Distribution or shortly thereafter, the Company will lend
approximately $30 million to the ESOP with which the ESOP will purchase shares
of Common Stock. The Company intends annually to contribute funds to the ESOP in
order to repay the loans, and to satisfy the Company's obligation to make
matching contributions in respect of employee salary deferrals and other
performance based contributions.
On the Distribution Date, the Company is expected to begin independent
operations with a ratio of total debt to total capital of approximately 20
percent excluding the effects of the ESOP. The Company also expects to begin
operations with approximately $90 million in cash, $50 million of which will be
borrowed under the Company's Credit Facility, to satisfy the Company's initial
working capital requirements.
In connection with the Distribution, the Company and 3M will enter into a
transition agreement relating to the collection of accounts receivable and
payment of accounts payable. See "RELATIONSHIP BETWEEN 3M AND THE COMPANY AFTER
THE DISTRIBUTION -- Corporate Services Agreement." The objective of this
approach is to minimize the impact of the transition on customers and suppliers
and it is not expected to have any material impact on the financial position or
cash flows of the Company.
FUTURE OUTLOOK
1996 will be a year of transition for the Company, both in business operations
and financial returns. The Company believes its continued worldwide leadership
in developing data storage technologies, strong position in high quality color
proofing for the printing industry and strong history of leadership in medical
imaging for the health care industry along with strong worldwide distribution
coverage will offer significant opportunities to help achieve its goals. The
Company will be implementing a compre-
32
hensive re-engineering of its operations. Some components of this re-engineering
will be completed in 1996 and others in 1997 and beyond.
Examples of the actions contemplated include (i) the consolidation and
rationalization of manufacturing organization by reducing the number of
facilities operated by the Company, by consolidating similar operations in one
facility, by consolidating purchasing to take advantage of volume purchasing, by
utilizing just-in-time purchasing and by managing the manufacturing process to
reduce inventories of finished goods by attempting to anticipate demand for
various products, (ii) encouraging cooperation between research and development
teams and the manufacturing units, thereby encouraging the development of
technologies and products which provide solutions to customers' problems, (iii)
aggressively cross-marketing the Company's existing products to customers of one
of the Company's products and (iv) motivating employees through the linkage of
compensation to the financial results of the Company (See "BUSINESS AND
PROPERTIES OF THE COMPANY -- Business Strategy"). The Company expects that these
actions will improve productivity and market share, reduce costs and facilitate
sustainable revenue growth, thereby improving the Company's financial
performance and results of operations.
At the same time, the Company will be faced with the challenges of establishing
operations as an independent public company. These activities are expected to
result in one-time cost increases which will occur during 1996 and 1997.
Management is currently developing its plans for the start-up, but at this time
expects that the most significant changes will occur in the areas of systems and
logistics. For a transitional period, it is expected that 3M will provide many
of these services and that stand-alone operations should be in place by the end
of 1997.
The Company intends to achieve its goals through the training and dedication of
its work force, extensive efforts to enhance its relationships with customers
and suppliers and the continued use of certain 3M trademarks during a transition
period. In addition, the Company's management team is experienced and familiar
with this industry and its opportunities and will be developing a strong new
identity tied to the Company's specific industry. This background combined with
their new roles should allow them to provide the Company with the necessary
leadership to meet these challenges.
FORWARD LOOKING STATEMENTS
Certain information, other than the historical information, discussed in this
Information Statement (including in "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS"), may constitute forward looking
statements and as such may involve risks and uncertainties. Important factors
which may cause actual results to differ from the forward looking statements
contained herein or in other public statements by the Company are described in
the section entitled "SPECIAL FACTORS", including, in particular, the Company's
ability to implement successfully its reorganization plan and future business
strategy. See "SPECIAL FACTORS -Absence of Operating History as an Independent
Company."
33
BUSINESS AND PROPERTIES OF THE COMPANY
OVERVIEW
The Company develops, manufactures and markets a wide variety of products and
services worldwide for information processing, specializing in data storage and
imaging applications. The Company's products, which number in excess of 10,000,
are used to capture, process, store, reproduce and distribute information and
images in a wide range of information-intensive markets, including enterprise
computing, network servers, personal computing, graphic arts, photographic
imaging, medical imaging, and commercial and consumer markets. The Company
offers solutions for both conventional/analog and proprietary digital work
processes for the information processing industry.
The breadth of the Company's product lines, the Company's worldwide leadership
position in a number of product classes and its global distribution network
serve to differentiate the Company from its competitors. The Company's focus is
global in nature, with nearly half of its revenues derived internationally and
expectations for this percentage to grow over time. The Company's major
products, classified by customer application are shown below.
<TABLE>
<CAPTION>
INFORMATION PROCESSING,
MANAGEMENT AND INFORMATION PRINTING MEDICAL AND PHOTO IMAGING
STORAGE APPLICATIONS APPLICATIONS APPLICATIONS
- --------------------------------- --------------------------------- ----------------------------
<S> <C> <C>
* Computer diskettes * Conventional color proofing * Laser imaging products
* Data cartridges and Travan(tm) * Digital color proofing * Laser imagers
cartridges
* Computer tapes * Printing plates * X-ray film
* Rewritable optical media * Image setting and graphic arts * "Dry" imaging products
products
* CD ROM replication services * Carbonless paper products * Film processors
* Photographic film products
</TABLE>
INFORMATION PROCESSOR SERVICE APPLICATIONS
------------------------------------------
* Technical field service support for equipment
* Customer service, documentation and training for equipment
* Engineering and office document systems
As part of 3M, the Transferred Businesses have developed leadership positions in
a number of markets serving the information processing industry, which the
Company believes can serve as platforms for future growth. For example, the
Company:
* is the world's largest supplier of branded removable magnetic and
optical media;
* is one of the world's largest suppliers of color proofing systems to
the graphic arts industry, with a number of its Matchprint(tm) and
Rainbow products serving as industry standards;
* was the first to develop the new, widely-used laser imager for medical
imaging applications, with an installed base of over 7000 imagers;
* is one of the world's largest suppliers of private label film for the
amateur photography market; and
* has introduced in 1995 and expects to introduce in 1996 several
innovative products with significant market potential, including the
Travan(tm) high capacity data storage tape cartridges, the new family
of Rainbow proofing systems, a new line of DryView(tm) imagers,
medical imaging delivery systems developed under an alliance with
Cemax/Icon and Hewlett-Packard, and a 120 MB 3.5 inch diskette, the
LS-120 diskette, which has been developed with Compaq Computer
Corporation and MKE.
34
INDUSTRY BACKGROUND
The information processing industry is concerned with the creation, capture,
manipulation, storage, production and distribution of information. Information
may exist in the form of numbers, text, sound, graphics, photos, videos or other
images. Users may view and store this information in an analog format, such as
hard copies. Increasingly, however, information is converted to a digital format
for more efficient handling, processing, storage and distribution. Digital
technologies provide much needed information processing solutions as users are
required to use, manage and store more complex information in less time, with
less resources and with greater accuracy. Methods of transporting and accessing
data are dramatically increasing due to software developments, networking and
the development of the worldwide web.
Data storage technologies provide users with solutions specific to the
particular users' needs in storing, managing and accessing digital information.
Removable data storage technologies, such as those offered by the Company,
provide a wide range of solutions that provide users with the benefits of
expandable storage capacity, data transportability, data management, data
security and the flexibility to enhance data utilization and which are not
confined to component status as is fixed rigid disk storage.
Removable data storage solutions, based on digital technologies, are used in
applications across all computing platforms -- enterprise systems, network
servers, desktop systems and mobile computing. International Data Corporation
("IDC") has estimated that there are over 150 million computer systems in use
worldwide that use removable data storage technologies. Removable data storage
technologies are used in a variety of applications including graphic imaging,
video imaging, medical diagnostics, communications systems and consumer
entertainment electronics. Overall, the data storage solution market is growing
at double digits annually, with Asia, Latin America and Eastern Europe leading
this growth, although there is significant price competition. Customer demand
for these solutions is multiplying at an ever increasing pace due to the
enhanced enabling software that increases the applications and usage rates and
the developing need by customers to manipulate, store and protect even larger
data bases. The need for convenient digital storage solutions is also
accelerating as people gain access to information of all types from many
sources, including the Internet and the World Wide Web. Increasingly, end users
want to download files and information for later use. As the number of Internet
users grow and the variety of information increases, the demand for portable,
cost-effective data storage and output media also will grow. This is true in
both commercial and consumer markets.
Imaging technologies also have been profoundly impacted by advancements in
digital technologies as many users begin to convert their conventional/analog
processes to proprietary digital processes to capture, create, manipulate,
process, transmit and store still and moving images. Conventional/analog
technologies rely upon chemical or electrical processes which capture
information onto paper, film or other media by reacting to external stimuli.
Digital technologies have significantly increased the amount of information that
can be used, managed and stored and have reduced the need for film and chemicals
in the imaging process. Many work processes in use today are hybrid systems in
which organizations continue to use conventional materials for certain processes
in their work flows utilizing the speed of digital processing.
Medical diagnostic imaging is an example in which proven X-ray films exist side
by side with high tech magnetic resonance imaging ("MRI") and computed
tomography ("CT") scanning systems. Today, an active mid-size hospital or
diagnostic imaging center may generate ten to twelve gigabytes of electronic
information daily from its scanning devices. More than 90% of this information
will be converted to film for viewing and storage in the diagnostic process.
Printing and publishing applications similarly have experienced a blending of
analog and digital work processes. Virtually all text and images used in graphic
arts processes today are converted to electronic or digital form early in the
work process and are later reconverted to film or lithographic plates for high
quality reproduction on traditional printing presses. Images and pages may be
captured photographically or electronically in a variety of formats including
removable data storage. Those that are captured in digital format allow for more
efficient processing and management. The information also may be used in the
production of high quality CD-ROMs for multi-media applications, distributed to
digital printers and copiers for reproduction, or used in the production of
images and pages for distribution over the Internet.
35
As discussed above, because digital processes are more efficient than
alternative technologies in the imaging and information processing industries,
the Company believes the use of digital technology is increasing. In 1994,
digital technologies accounted for approximately 54% of the Company's revenues.
The Company expects digital technologies to increase to approximately two-thirds
of revenues over the next two years. As the amount of information generated each
day increases, the need for efficient methods of data storage and manipulation
is increasing.
For example, in medical and photo imaging applications, the Company estimates
that a typical 400 bed hospital utilizing Computed Tomography, MRI, ultrasound
and nuclear medical technology will require between four and nine gigabytes of
new digital storage per day, along with associated recording, distribution and
imaging equipment. In information and printing applications, the Company expects
that the current mixture of digital and analog processes will continue to become
more reliant on digital technologies as such technologies become more efficient.
The Company believes that, starting from its base of products which are
currently used in these applications, it will be able to introduce new digital
products which will replace analog processes now used in these customer
applications. The Company believes that it has the technology, products and
strong customer relationships to take advantage of this opportunity.
Because the Company has existing technologies, products and customers in these
applications, the introduction of new digital technologies in these areas is not
expected to require major additional investments. The Company does anticipate,
however, entering into strategic alliances with other companies to complement
its existing technologies, as and when appropriate. The Company believes that
new digital applications and products for its existing customer base, along with
opportunities to enter into new markets not currently served by the Company,
will give the Company the benefit of additional revenues in both the short term
and the long term.
BUSINESS STRATEGY
The Company believes that the advancements in digital technology transforming
the information processing industry are creating opportunities for the Company.
The Company intends to utilize its research and development capabilities, its
solid technology platforms, its well established product lines and its strong
customer relationships to enhance its position as a leader in the information
processing industry, providing innovative, cost-effective system solutions to
its customers' information processing needs. To achieve its objectives, the
Company intends to focus on the following elements.
* REFINING PRODUCT PORTFOLIO -- Included in the Company's 1995 special
charges were costs associated with exiting lines of business which the
Company believes will not satisfy its goal of profitable growth and
generating cash flows. Following the Distribution, the Company will
continue to examine intensively its product portfolio and make
adjustments when necessary to insure that all of its resources are
focused on the Company's objective of consistent, profitable growth.
Resources freed from less profitable product lines will then be
available for new business growth opportunities.
* STREAMLINING OPERATIONS AND REDUCING COSTS -- The Company recently has
taken a number of steps to streamline its operating structure and
reduce operating costs, including reducing its employment levels by
offering various voluntary separation plans to its employees. In
addition, the Company has decided to consolidate various manufacturing
facilities and has commenced preparations to close or downsize certain
facilities and utilize efficient outsourcing. Following the
Distribution, the Company will continue its efforts to streamline its
management structure, consolidate administrative functions and
facilitate communications among various parts of the organization so
as to enable the Company to respond quickly to the rapidly changing
needs of its customers. In this regard, the Company intends to
intensively review the alternatives for further improving its
manufacturing, sales and distribution activities, both from a customer
responsiveness and a cost effectiveness point of view, with a goal of
reducing costs, improving profit margins and facilitating fast paced
decision making, so as to better enable the Company to respond quickly
to the rapidly changing needs of its customers.
* EXPANDING CUSTOMER FOCUS -- The Company will focus on understanding
the information processing challenges of both its existing and
potential customers. By utilizing its core competencies
36
in product development, as well as database marketing and electronic
interactive communications, the Company will strive to provide more
timely solutions tailored to each customer's needs, thereby enhancing
its opportunities for growth and its ability to satisfy its current
large customer base. The goal of the Company is to be perceived by its
customers as responsive and committed to their needs.
* IMPROVING CASH FLOWS -- An improved focus on cash flows is a critical
component of the Company's strategy for future growth and
diversification. To achieve this objective, the Company will instill
in its employees a strong focus on cash flow management and educate
them regarding how their actions and decisions impact the Company's
cash flows. In this regard, the Company has begun to take a number of
actions, including: (i) revising financial measurements to focus on
cash flows management, including adoption of the concept of "Economic
Profit" (the measurement of income from operations after tax and after
deducting interest and a return to shareholders), and using such
measurements as a factor in determining employee compensation, (ii)
adjusting the evaluation process for capital expenditures to focus on
the near term cash return, reflecting the short life cycle of the
Company's high technology products, and (iii) recognizing the cash
impact of reducing working capital by re-engineering the entire supply
chain process (the period of time from the procurement of raw
materials, through manufacturing and delivery of the Company's
products to its customers, and finally to the receipt of payment from
the customer), and establishing one organization within the Company to
focus on reducing this "cycle time." The Company is confident that
these and other steps to be taken in the future will result in
improved cash flow.
* EXPANDING INTERNATIONAL OPERATIONS -- The Company believes that there
are significant growth opportunities outside the United States.
Accordingly, the Company intends over the next several years to seek
to take advantage of these opportunities for growth by expanding its
international operations. A key strength of the Company lies in its
global distribution and sales network, and its long-standing
relationships with multi national customers which will facilitate this
expansion. The Company has streamlined management of its international
operations and has organized those operations into two key areas,
Europe/Middle East/Africa and Latin America/Asia/Canada. Global growth
strategies will be driven through these two focused organizations.
* CAPITALIZING ON PROPRIETARY TECHNOLOGIES TO PROVIDE CUSTOMER SOLUTIONS
-- The Company has significant proprietary technologies in information
processing. While part of 3M, the Company acquired hundreds of
patents, which are assigned or exclusively licensed to the Company by
3M in certain fields of use. See "RELATIONSHIP BETWEEN 3M AND THE
COMPANY AFTER THE DISTRIBUTION -- Intellectual Property Agreement."
Following the Distribution, the Company will continue to focus
significant efforts on the development of new products utilizing these
core technologies and systems. As described in the section entitled
"BUSINESS AND PROPERTIES OF THE COMPANY -- Customer Applications" the
Company has been successful in this regard in recent years with the
introduction of its DryView(tm) and Travan(tm) branded products. In
addition, the Company intends over time to increase the development of
new products designed to help position itself as a provider of
comprehensive, integrated solutions to the information processing
industry. As part of its strategy, the Company also intends to explore
the acquisition of new technologies through strategic alliances,
acquisitions or licensing.
* ENCOURAGING EMPLOYEE STOCK OWNERSHIP -- A key strategy and objective
of the Company is encouraging and increasing employee stock ownership
as an incentive toward consistent, profitable growth. The Company
believes that this will help drive cost reductions, quality
improvement and growth leading to achievement of Company objectives.
As described under "MANAGEMENT OF THE COMPANY -- Company 401(k) Plan
and ESOP," an employee stock ownership plan will be implemented which
is expected to lead over time to employee stock ownership (directly or
beneficially) of approximately 5 percent of the Company's outstanding
shares following the Distribution.
37
CUSTOMER APPLICATIONS
The Company's products are market leaders in the conventional/analog processes
for recording, manipulation and storage of data and images. While these
established products generate a substantial portion of the Company's revenues,
the Company seeks to leverage its existing market positions and to continually
develop and market new products and solutions to serve the changing needs of its
customers. With the industry's evolution to information processing systems based
on digital technologies, the Company is focusing its efforts on developing
solution-based products utilizing proprietary digital technologies and providing
more complete solutions to its customers' information processing needs. Set
forth below is a description of the products and services presently offered by
the Company. See Note 8 to NOTES TO HISTORICAL FINANCIAL STATEMENTS for the
revenues derived from each class of products.
INFORMATION PROCESSING, MANAGEMENT AND STORAGE APPLICATIONS
The Company is the world's largest supplier and developer of branded removable
data storage media, in both magnetic and optical formats. It is recognized as
the worldwide preferred supplier, based on its reputation for reliability and
convenience. The Company also is a supplier of CD-ROM replication and software
services provided to software developers. The Company's products include:
* Diskettes (3.5 inch, 5.25 inch and 8 inch) used for personal file
storage, for backup and for exchange of data. Diskettes are used
primarily in desktop and mobile personal computer systems, and also in
workstations, word processors and computer control equipment. In
April, the Company began shipment of a 120 MB 3.5 inch diskette, the
LS-120 diskette, which has been developed with Compaq Computer
Corporation and MKE to serve as the next industry standard. The LS-120
diskette provides 80 times the storage capacity of a standard
diskette.
* Data cartridge and Travan(tm) cartridge products used for backup of
data from hard disk storage systems and for applications in which
large volumes of information that do not need to be retrieved on a
frequent basis are stored. Used primarily on desktop personal computer
systems, local area networks and workstation computer systems, the
Travan(tm) cartridges make up a family of innovative products that
were introduced in 1995 by an alliance comprised of 3M and five other
companies. Travan(tm) more than doubles the storage capacity of the
mini-cartridge, which is the most popular tape cartridge storage media
today.
* Computer cartridge tapes used for near-line data storage and
retrieval, mass storage and archival storage of data. Large cartridge
tapes are used primarily on enterprise computer systems and in data
library systems that store very large volumes of data. The smaller 4
mm and 8 mm cartridges are used primarily in workstations and mid-size
computer systems and networks for backup and other data storage
applications.
* Rewritable optical disks including magneto-optical (90mm and 130mm),
phase change disks and CD recordable disks used for the storage of
data and images on personal computers, workstations and local area
networks. These disks are also used in library systems for mid-range
computer installations.
* CD-ROM products are produced on a made to order basis and are used for
the distribution of data and software to the personal computer and
mid-range markets.
INFORMATION AND PRINTING APPLICATIONS
The Company manufactures and markets products and provides service and technical
support for the printing, publishing and graphic arts markets. Its diverse
product line includes conventional color proofing systems, digital color
proofing systems and software, digital storage systems, laser films and image
setting materials, metal and polyester printing plates, graphic arts films,
photographic chemicals and miscellaneous supplies. The Company also markets
carbonless paper products, such as multi-part business forms. The Company has
strong leadership positions in certain product areas, including the
Matchprint(tm) color proofing system, an industry standard for more than 20
years. More recently, the Rainbow color proofing system, which provides color
proofs from digital data before a job is put on a printing press, also has
established a leadership role, winning both industry awards and acceptance as
the digital proofer of choice among many graphic arts professionals.
38
The Company's printing and publishing systems products are marketed globally,
with approximately 40 percent of its business derived from outside the United
States. This percentage is expected to grow in future years.
Products designed for printing and publishing applications are changing rapidly
in association with the digital/electronic communication revolution in the
information processing industry. This "digitization" of the image reproduction
process has greatly affected the work methods and work flow of many of the
Company's customers. Although short-run color print jobs are on the rise and
conventional lithographic printing will continue, in the Company's judgment, to
exist well into the next century, rapid changes are occurring in the pre-press
area of the graphic arts work processes. Desktop workstations, the acceptance of
digital proofing and the emergence and growth of "filmless" and chemical-free
(thus, environmentally attractive) printing processes all serve to streamline
the graphic arts process. The Company believes it is well-positioned to take
advantage of the industry transformation to digital systems. In addition to the
products mentioned above that carry leadership roles, the Company has the
technologies, color science expertise and industry relationships to aggressively
pursue emerging opportunities.
MEDICAL AND PHOTO IMAGING APPLICATIONS
The Company develops, manufactures and markets diagnostic imaging film, film
processors and imaging systems for both X-ray and electronic imaging systems.
The Company participates in the conventional X-ray film market and is the
world's leading supplier of high-quality laser imagers for producing medical
diagnostic images directly from (MRI), (CT), ultrasound, nuclear and other
electronic systems, with more than 7,000 laser imagers installed worldwide. In
December 1995, the Company announced a new line of DryView(tm) laser imagers
that produce high-quality film images without using standard wet chemistry
through a specially designed photothermographic process. Since no wet chemistry
is involved, the DryView(tm) laser imagers represent a significant technological
breakthrough and offer significant cost savings, productivity gains and
environmental benefits to the health care industry. Through a strategic alliance
with Hewlett-Packard and Cemax-Icon, the Company also provides hardware and
software solutions that help clients manage, distribute and archive their
medical images. This is an example of linking newly developed imaging solutions
based on the Company's technology platforms with the expanding requirements for
digitization and information access.
The Company's customers include major hospital network buying groups as well as
individual hospitals and medical imaging centers. Hospital administrators and
materials managers, radiology administrators and radiologists represent the key
customer decision makers. Geographically, approximately 40% of the Company's
medical imaging business is in the United States. The major industrial countries
in Europe, Latin America and Japan account for the remainder of the business.
The Company is one of the world's leading suppliers of private label film for
the amateur photography retail market. The Company's primary geographic markets
for color photographic film are the United States and Europe, representing 70%
of the global demand for film. The Company manufactures a complete line of print
and slide films which fit in standard 35mm, 110, and 126 cameras used by
consumers globally. The Company has recently added single use cameras to its
product line which are sold preloaded with the Company's ISO 400 speed film.
Single use cameras represent a high growth segment of the consumer film market.
The Company's color print film can be found in more than 125 private label
brands, as well as 3M's Scotch brand. The Company will continue to use certain
3M trademarks and tradenames including the Scotch brand for a period of time
following the Distribution. See "RELATIONSHIP BETWEEN 3M AND THE COMPANY AFTER
THE DISTRIBUTION -- Intellectual Property Agreement." These products and brands
are positioned as a high value, comparable quality alternative to global brands
such as Kodak and Fuji.
INFORMATION PROCESSOR SERVICE APPLICATIONS
The Company's team of field service technicians provides technical servicing and
other post-sale technical support for equipment sold by the Company in the
information processing industry. The Company offers superior customer service
for its products by providing a 24 hour information and customer support
hotline. Customers also benefit from user-friendly product documentation and
training programs in a variety of languages. The Company also supplies systems
and user support services to meet engineering document management needs,
produces and distributes continuous and high-contrast
39
black-and-white dry photographic papers and films, and currently is developing a
proprietary, software-based scheduling system that will help other companies
efficiently schedule field service technicians. These services and support will
be extended aggressively to customers of all the Company's product line and into
new markets to generate additional profits and customer satisfaction.
COMPETITION
The Company operates in a highly competitive environment. The Company's
principal competitors include large, well capitalized technology companies based
in the United States, Europe and Japan. These competitors include
Eastman Kodak, Fuji Photo Film, Sony, Agfa, Polaroid Corp., Konica, KAO and Du
Pont. The Company also competes in certain product markets with smaller, more
specialized firms such as Polychrome Corp. and Scitex America Corp. Businesses
in the information processing industry compete on a variety of factors such as
price, value, product quality, customer service, breadth of product line and
availability of system solutions. In these highly competitive and rapidly
changing markets, the Company intends to compete by emphasizing its global
distribution network, streamlining its supply operations, reducing its costs and
building on its industry leadership positions by developing new products and
services to address the digital environment and the information processing needs
of its customers.
DISTRIBUTOR CHANNELS
The Company's products are sold directly to users and through numerous
wholesalers, retailers, jobbers, distributors and dealers in approximately 65
countries. The Company believes it has one of the strongest global distribution
networks serving the information processing industry. The Company also plans to
utilize 3M as a sales agent to cover selected channels of distribution on an
interim basis following the Distribution. See "RELATIONSHIP BETWEEN 3M AND THE
COMPANY AFTER THE DISTRIBUTION -- Supply, Service and Sales Agency Agreements."
However, it is the Company's intention to explore all avenues of distribution
and to put in place, following the Distribution, the most cost-effective
channels of distribution.
RAW MATERIALS
The Company experienced no significant or unusual problems in the purchase of
raw materials during 1995. 3M will continue to be a major supplier of certain
raw materials and services to the Company after the Distribution. See
"RELATIONSHIP BETWEEN 3M AND THE COMPANY AFTER THE DISTRIBUTION -- Supply,
Service and Sales Agency Agreements."
RESEARCH AND PATENTS
Research and product development have historically played an important role in
the Company's activities. The Company has research laboratories for the
improvement of its existing products and development of new products. The
Company's expenditures for research and development activities were $222
million, $211 million and $217 million for 1995, 1994 and 1993, respectively.
The Company has been granted rights, on both exclusive and non-exclusive bases,
from 3M and others which will enable it to continue to use the intellectual
property presently utilized by the Transferred Businesses. The Company does not
consider that its business as a whole is materially dependent upon any one
patent, license or trade secret or any group of related patents, licenses or
trade secrets, except with respect to those rights granted from 3M. See
"RELATIONSHIP BETWEEN 3M AND THE COMPANY AFTER THE DISTRIBUTION -- Intellectual
Property Agreement."
MANUFACTURING
The Company operates 17 manufacturing, research and distribution facilities
throughout the world. The Company's plants are generally operated around the
clock at or near full capacity to minimize unit production costs and to fulfill
customer demands.
The Company is in the process of consolidating manufacturing by centralizing
such operations into the United States and Italy. This consolidation is intended
to reduce costs and improve quality by allowing the Company to adjust its
capacity to current needs and take advantage of the facilities with the most
advanced quality management system.
40
The core manufacturing competencies of the Company include coating, fine
chemical production for photographic film, state-of-the-art molding
capabilities, hardware prototyping and unit cost reduction. These competencies,
combined with the Company's research and development competencies of materials
science, color management, hardcopy imaging, magnetic and optical recording give
the Company a strong technological base to take advantage of the opportunities
in the evolving information processing industry.
PROPERTIES
The Company's headquarters are located in Oakdale, Minnesota. The Company's
major facilities (all of which are owned by the Company, except where noted),
and the products manufactured at such facilities are as follows:
FACILITY PRODUCTS
DOMESTIC
--------
Camarillo, California Data tape
Fremont, California (leased) CD-ROM
Middleway, W. Virginia Printing plates
Nekoosa, Wisconsin Carbonless paper
Oakdale, Minnesota Headquarters
Pine City, Minnesota Micrographic cards
Rochester, New York Printing plates and graphic film
St. Paul, Minnesota (leased) Laboratory Facilities
Tucson, Arizona Data tape
Vadnais Heights, Minnesota (leased) Optical
Wahpeton, North Dakota Diskettes/molding
Weatherford, Oklahoma Diskettes/photographic film
White City, Oregon Imagers/X-ray films
INTERNATIONAL
-------------
Bracknell, United Kingdom Administrative
Ferrania, Italy X-ray films/photographic film
Florida, Argentina X-ray films
Harlow, United Kingdom Research Facility
London, Ontario Administrative
Sulmona, Italy Printing plates
EMPLOYEES
As of March 31, 1996, the Company had approximately 12,000 employees,
approximately 7,500 in the United States and 4,500 internationally. The Company
has begun the process of streamlining operations which will result in a
significant reduction in the number of employees required for operations. As a
first step, several voluntary separation plans recently have been offered to the
Company's employees. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS."
LEGAL PROCEEDINGS
The Company has assumed substantially all liabilities for legal proceedings
relating to the Transferred Businesses. As a result, although 3M is the named
defendant, the Company is the party in interest and is herein described as a
defendant.
The Company is a party to various legal proceedings and administrative actions,
all of which are of an ordinary or routine nature incidental to the operations
of the Company. In the opinion of the Company's management, such proceedings and
actions should not, individually or in the aggregate, have a material adverse
effect on financial position of the Company.
ENVIRONMENTAL MATTERS
The Company's operations are subject to a wide range of environmental protection
laws. The Company has remedial and investigatory activities underway at some of
its current facilities. Under the Environmental Matters Agreement, the Company
will assume and indemnify 3M for all liabilities
41
relating to, arising out of or resulting from (i) operations at the Company's
facilities as conducted before the Closing Date; (ii) the disposal of hazardous
materials, from the Company's facilities, before the Distribution Date,
Superfund Sites, where such liabilities are discovered after the Distribution
Date; or (iii) operations of the Transferred Businesses on and after the
Distribution Date. 3M has agreed to retain responsibility for environmental
liabilities relating to former premises which may have been associated with the
Transferred Businesses and known Superfund sites associated with the current
properties of the Transferred Businesses.
It is the Company's policy to accrue environmental remediation costs if it is
probable that a liability has been incurred and the amount of such liability is
reasonably estimable. As assessments and remediations proceed, these accruals
are reviewed periodically and adjusted, if necessary, as additional information
becomes available. The accruals for these liabilities can change due to such
factors as additional information on the nature or extent of contamination,
methods of remediation required, the allocated share of responsibility among
other parties, if applicable, and other actions by governmental agencies or
private parties. However, it is often difficult to estimate the future impact of
environmental matters, including potential liabilities.
As of March 31, 1996, the Company has reserved approximately $6.5 million with
respect to environmental liabilities. Although the Company believes that its
reserves are adequate, there can be no assurance that the amount of expenses
relating to remedial actions and compliance with applicable environmental laws
will not exceed the amounts reflected in the Company's
reserves. The Company believes that such additional charges, if any, will not
have a material adverse effect on the financial position of the Company. See
"RELATIONSHIP BETWEEN 3M AND THE COMPANY AFTER THE DISTRIBUTION --
Environmental Matters Agreement."
42
MANAGEMENT OF THE COMPANY
DIRECTORS
As of the Distribution Date, the Board of Directors of the Company consists of
persons, each of whom has been elected for a term expiring at the annual meeting
of stockholders indicated below and until his successor shall have been elected
and qualified. The following table sets forth information concerning the
individuals who will serve as directors of the Company following the
Distribution.
TERM EXPIRES AT
NAME AGE ANNUAL MEETING IN
William T. Monahan 49
Linda W. Hart [55]
Daryl J. White 48
[ ]
[ ]
[ ]
The Board of Directors is presently being selected. The Board will consist of a
majority of outside directors who are familiar with the industry in which the
Company operates and with financial operations similar to the Company. The Board
is expected to be diverse, with a maximum of 13 directors.
WILLIAM T. MONAHAN will serve as Chairman of the Board, President and Chief
Executive Officer of the Company. Since June 1993 has served as Group Vice
President responsible for the Electro and Communication Group of 3M and from
May 1992 to May 1993, he was Senior Managing Director of 3M Italy. From
September 1989 to May 1992, Mr. Monahan was Vice President of Data Storage
Products.
LINDA W. HART has been the Vice Chairman of the Hart Group, a Dallas _________
company, since 1990. Prior to such time she maintained a private corporate legal
practice in Dallas. She is also the former Chairman of the Audit Committee and
member of the Compensation Committee of the boards of directors of both Conner
Peripherals, Inc., in San Jose, California and WordPerfect Corporation, in
Provo, Utah.
DARYL J. WHITE served as the Senior Vice President--Finance and Chief
Financial Officer of Compaq Computer Corporation from 1990 to _________, 1996.
Prior to such time, he held the positions of Corporate Controller and
Director of Information Management at Compaq.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company is expected to establish an Audit
Committee, a Compensation Committee and a Nominating and Governance
Committee.
The Audit Committee will, among other things, recommend the appointment of
independent public accountants; review the scope of the annual audit, including
fees and staffing; review the independence of the independent accountants;
review nonaudit services provided by the independent accountants; review
findings and recommendations of independent accountants and management's
response; review the internal audit and control function; and review compliance
with the Company's ethical business practices policy.
The Compensation Committee will review management compensation programs, approve
compensation changes for senior executive officers, review compensation changes
for senior management, and administer stock option plans and other performance
based compensation plans.
The Nominating and Governance Committee will act to select and recommend
candidates to the Board of Directors to be submitted for election at the annual
meeting. The Committee will also review and make recommendations to the Board of
Directors concerning the composition and size of the Board and its Committees,
frequency of meetings, directors' fees, and similar subjects; review and make
recommendations concerning retirement and tenure policy for Board members;
recommend proxies for meetings at which directors are elected; approve programs
for senior management succession; evaluate performance of the Board as a whole;
and consider and approve corporate governance principles.
43
COMPENSATION OF DIRECTORS
The Company intends to pay to directors who are not employees of the Company
("Non-Employee Directors") an annual fee of $40,000, subject to the terms of the
1996 Directors Stock Compensation Plan (the "Directors Program") described
below. The Company intends to pay Non-Employee Directors an additional $2,500
for each meeting they attend in excess of four meetings per year, and to
Non-Employee Directors who are Committee chairmen, an additional $5,000 per
year. In addition, the Company intends to match up to $15,000 of charitable
contributions made to a Code section 501(c) organization by each Non-Employee
Director per year. Directors are reimbursed for all reasonable travel and other
expenses of attending meetings of the Board or a Committee thereof.
DIRECTORS STOCK COMPENSATION PROGRAM
The Company has adopted the Directors Program, which was approved by 3M, the
Company's sole stockholder as of the Distribution Date, and will become
effective as of the consummation of the Distribution (the "Effective Date"). The
Directors Program will provide nonemployee directors of the Company (each an
"Eligible Director") with automatic grants of stock options ("Options") and
units equivalent to shares of Common Stock ("Restricted Share Units").
The purpose of the Directors Program is to attract and retain well-qualified
persons for service as nonemployee directors of the Company and to promote
identity of interest between directors and stockholders of the Company. The
Directors Program is designed and intended to comply with Rule 16b-3,
promulgated under the Exchange Act ("Rule 16b-3"). The Directors Program will be
administered by the Compensation Committee of the Board of Directors.
Under the Program, a maximum of 800,000 shares of Common Stock, consisting of
authorized and unissued shares or of treasury shares, will be available for
issuance during the term of the Directors Program. These shares are subject to
adjustments in the event of any recapitalization, stock split, reverse stock
split, stock dividend, reorganization, merger, consolidation, spin-off,
combination, repurchase, or share exchange, or other similar corporate
transaction or event affecting the Common Stock.
Pursuant to the Program, Eligible Directors will generally be entitled to
options to purchase 10,000 shares of Common Stock for each year of service.
Specifically, on the Effective Date, each Eligible Director and, thereafter,
each new Eligible Director who has not previously been granted Options under the
Directors Program, will automatically be issued an Option pursuant to the
Program to purchase a number of shares of Common Stock equal to 30,000
multiplied by a fraction the numerator of which is the number of years of such
Eligible Director's term of office and the denominator of which is three. Each
reelected Eligible Director will automatically be issued an Option to purchase
30,000 shares of Common Stock as of the date such Eligible Director is
reelected. Options will be granted at an option price equal to the fair market
value of the Common Stock on the date of grant.
Each Option will vest and become exercisable as to 10,000 of the shares of
Common Stock underlying such Option on each anniversary of the date of grant,
provided that all outstanding and previously unvested Options of an Eligible
Director will immediately vest and become fully exercisable upon the Eligible
Director's death or disability, or upon a Change of Control (as defined in the
Program). If an Eligible Director otherwise terminates service as an Eligible
Director, any Options that have not become exercisable will be forfeited as of
the date of such termination of service.
On the Effective Date and each anniversary thereof during the term of the
Program, each Eligible Director will automatically be granted, in lieu of 25% of
his or her annual retainer fee for services as a director of the Company, a
number of Restricted Share Units calculated by dividing 25% of such director's
annual retainer fee by the fair market value of a share of Common Stock as of
the date of grant. The value of any fractional Restricted Share Units will be
paid in cash.
Dividend equivalents will be credited to each Eligible Director's Restricted
Share Units during his or her term of office, and will be converted into
additional Restricted Share Units. Upon ceasing to be a member of the Board, the
Restricted Share Units credited to each Eligible Director will be paid to him or
her in the form of a number of shares of Common Stock equal to the number of
Restricted Share Units so credited.
44
In the event of any recapitalization, stock split, reverse stock split, stock
dividend, reorganization, merger, consolidation, spin-off, combination,
repurchase, or share exchange, or other similar corporate transaction or event
affecting the Common Stock, the maximum number or class of shares available
under the Directors Program, the number of shares of Common Stock subject to
outstanding Options and the number of Restricted Share Units to be credited
pursuant to the terms of the Directors Program will be adjusted by the Committee
to reflect any such change in the number or class of shares of Common Stock.
The Directors Program may be amended or terminated by the Board, provided that
(a) no amendment that requires stockholder approval in order for the exemptions
available under Rule 16b-3 to be applicable to the Directors Program will be
effective without the approval of the stockholders of the Company, and (b) the
Directors Program will not be amended more than once every six months, other
than to conform with changes in the Code, the Employee Retirement Income
Security Act of 1974, as amended, or the rules thereunder.
FEDERAL TAX CONSEQUENCES. The grant of Options will create no tax consequences
to the Eligible Directors or to the Company. Upon exercise of an Option, the
difference between the option price and the fair market value at the time of
exercise is treated as ordinary income to the Eligible Director and the Company
is entitled to a deduction for the same amount. Gain or loss upon a subsequent
sale of any shares of Common Stock received upon the exercise of an Option is
taxed as capital gain or loss to the participant (long-term or short-term,
depending upon the holding period of the stock sold).
An Eligible Director will not realize taxable income and the Company will not be
entitled to a deduction upon the crediting of Restricted Share Units. When the
Restricted Stock Units are paid to the Eligible Director in the form of shares
of Common Stock, the Eligible Director will realize ordinary taxable income in
an amount equal to the fair market value of the shares of Common Stock at the
time of payment, and the Company will be entitled to a deduction in the same
amount.
NEW PLAN BENEFITS
1996 DIRECTORS STOCK COMPENSATION PROGRAM
NAME AND POSITION NUMBER OF OPTIONS
Non-Executive Director Group ( persons)......
No Options have been issued yet under the Director Plan. The number of options
listed above is the number of options that the Non-Employee Directors will
receive as of the Distribution Date.
The Directors Program has been included as an exhibit to the Registration
Statement of which this Information forms a part. The preceding description is
subject in all respects to the provisions of the Directors Program.
45
EXECUTIVE OFFICERS
The following table sets forth certain information concerning the persons who
will serve as executive officers of the Company following the Distribution. Each
such person has been elected to the indicated office with the Company on or
prior to the Distribution Date and serves at the pleasure of the Board of
Directors of the Company.
NAME AGE POSITIONS
William T. Monahan 49 Chief Executive Officer
Carolyn A. Bates 49 General Counsel and Secretary
Jill D. Burchill 41 Chief Financial Officer
Dr. Krzysztof K. Burhardt 54 Vice President -- Research and Development
Wil DeBoer 51 General Manager, Field Service
Dennis A. Farmer 52 Vice President -- Corporate Marketing
David G. Mell 49 Vice President -- Corporate Business
Processes
Richard W. Northrop 58 Vice President, Europe
Charles D. Oesterlein 53 Vice President, Operations
Clifford T. Pinder 49 Vice President, Operations
Michael E. Sheridan 51 Vice President, Operations
James R. Stewart 39 Corporate Controller
David H. Wenck 52 Vice President, International
Deborah D. Weiss 40 Treasurer
Set forth below is a description of the position presently held with the Company
by each executive officer, as well as positions held with 3M prior to the
Distribution Date.
WILLIAM T. MONAHAN will serve as Chief Executive Officer. From June 1993 to the
Distribution Date, he was Group Vice President responsible for the Electro and
Communications Group and from May 1992 to May 1993, he was Senior Managing
Director of 3M Italy. From September 1989 to May 1992, he was Vice President of
Data Storage Products.
CAROLYN A. BATES will serve as General Counsel and Secretary. From 1991 to
the Distribution Date, she was Assistant Chief Intellectual Property Counsel.
JILL D. BURCHILL will serve as the Chief Financial Officer. From April 1995 to
the Distribution Date, she was Sector Controller for 3M's Information, Imaging
and Electronic Sector. From May 1993 to April 1995, she was Group Controller for
the Memory Technology Group and from July 1990 to May 1993, she was Financial
Manager for the Audio/Video Products Division.
DR. KRZYSZTOF K. BURHARDT will serve as Vice President, Research and
Development. From July 1991 to the Distribution Date, he was Research and
Development Vice President for 3M's Information, Imaging and Electronic
Sector.
WIL DEBOER will serve as General Manager, Field Service. From July 1993 to the
Distribution Date, he was Global Field Service Director and Business Director of
3M's Document Systems Department. From April 1990 to June 1993, he was
Manufacturing Director for 3M's Engineering Document Systems Division.
DENNIS A. FARMER will serve as Vice President, Corporate Marketing. From
March 1994 to the Distribution Date, he was Vice President of Data Storage
Markets and from May 1992 to February 1994, he was General Manager of Data
Storage Markets Division. From February 1991 to January 1992, he was Sales
Department Manager of Data Storage Products. From July 1988 to January 1991,
he was Group Director, Europe, for the Memory Technology Group.
DAVID G. MELL will serve as Vice President, Corporate Business Processes. He was
Vice President of Data Storage Tape Technology from May 1995 to the Distribution
Date, Vice President of Data Storage Diskette and Optical Technology from March
1994 to April 1995, and General Manager of Data Storage Diskette and Optical
Technology Division from May 1992 to February 1994. He was Department Manager of
3M's Computer Tape Technology Department Data Storage Products from September
1989 to April 1992.
46
RICHARD W. NORTHROP will serve as Vice President in charge of the Company's
European operations. He was a Managing Director of European operations for 3M's
Printing Systems, Hardgoods and Electronic Businesses from January 1994 through
the Distribution Date, a Managing Director of European operations for 3M's
Hardgood and Electronic Businesses from January 1992 through December 1993 and a
Director of 3M's Information and Imaging Divisions from January 1991 through
December 1992.
CHARLES D. OESTERLEIN will serve as Vice President, Operations. From 1994 to the
Distribution Date, he was Vice President of Printing and Publishing Systems and
from 1992 to 1994, he was General Manager of Audio and Video Technology. From
1989 to 1992, he was Department Manager of 3M's Data Storage Products Division.
CLIFFORD T. PINDER will serve as Vice President, Operations. From March 1994 to
the Distribution Date, he was Vice President of Medical Imaging Systems and from
July 1993 to March 1994, he was Vice President of Photo Color Systems. From
November 1991 to June 1993, he was General Manager of 3M's Photo Color Systems
and from 1986 to 1990, he was Managing Director of 3M Puerto Rico.
MICHAEL E. SHERIDAN will serve as Vice President, Operations. He was General
Manager of Data Storage Diskette Technology from May 1995 to the Distribution
Date, Director of Sumitomo/3M's MTG Technology and Special Projects from July
1993 to April 1995 and Group Director of 3M Europe's Memory Technologies Group
from May 1990 to July 1993.
JAMES R. STEWART will serve as Corporate Controller. From July 1995 to the
Distribution Date, he was Group Controller for 3M's Memory Technologies Group
and from March 1992 to July 1995, he was Medical Group Controller -- Europe.
From September 1989 to March 1992, he was the Financial Manager for the
Commercial Office Supply Division.
DEBORAH D. WEISS will serve as Treasurer. From 1991 to the Distribution Date,
she was Manager of 3M's Benefit Funds Investment.
DAVID H. WENCK will serve as Vice President in charge of the Company's
international operations. From May 1995 to the Distribution Date, he was General
Manager of 3M's Data Storage Optical Technology Division. From December 1994 to
April 1995, he was Department Manager of 3M's Software Media and CD-ROM Services
Department and from July 1986 to September 1994, he was Project Manager of 3M's
Optical Recording Project. From October 1981 to January 1986, he was Managing
Director of 3M's Singapore operations.
47
COMPENSATION OF EXECUTIVE OFFICERS
All of the information set forth in the following tables reflects compensation
earned based on services rendered to 3M by the Company's Chief Executive Officer
and the four other most highly paid executive officers. The services rendered to
3M were, in many cases, in capacities not equivalent to those to be provided to
the Company. Therefore, these tables may not reflect the compensation to be paid
executive officers of the Company.
The following table summarizes compensation paid to the Company's Chief
Executive Officer and the four other most highly paid executive officers based
on services rendered to 3M in 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION (1)
--------------------------------------------------------
ANNUAL COMPENSATION (1) AWARDS PAYOUTS
----------------------------------- ----------------------- ------------
PROFIT
SHARING
STOCK OPTIONS PERFORMANCE
PROFIT OTHER (RESTRICTED GRANTED UNIT PLAN
SHARING ANNUAL STOCK (NUMBER (LTIP) ALL OTHER
NAME AND PRINCIPAL POSITION SALARY (BONUS) (2) COMPENSATION AWARDS) OF SHARES)(3) PAYOUTS(4) COMPENSATION(5)
<S> <C> <C> <C> <C> <C> <C> <C>
W.T. Monahan, $236,025 $124,964 -- 0 11,948 $45,980 $14,455
Chief Executive Officer
K.K. Burhardt, $196,500 $ 90,607 -- 0 13,615 $45,980 $16,039
Vice President --
Research and Development
C.D. Oesterlein, $174,400 $ 35,014 -- 0 4,800 $37,620 $17,065
Vice President -- Operations
D.G. Mell, $164,870 $ 46,317 -- 0 4,800 $37,620 $13,479
Vice President --
Corporate Business Processes
D.A. Farmer, $161,315 $ 45,885 -- 0 4,800 $37,620 $17,936
Vice President --
Corporate Marketing
</TABLE>
(1) The amounts shown in the Summary Compensation Table do not include amounts
expensed for financial reporting purposes under 3M's pension plan. This
plan is a defined benefit plan. The amounts shown in the table do, however,
include those amounts voluntarily deferred by the named individuals under
3M's Deferred Compensation Plan. The Deferred Compensation Plan allows
management personnel to defer portions of current base salary, profit
sharing and performance unit compensation earned during the year.
(2) The amounts shown under the headings "Profit Sharing (Bonus)" are cash
payments received under 3M's Profit Sharing Plan. The term "(Bonus)" is
included to satisfy the requirements of the Securities and Exchange
Commission ("SEC"). These payments are based upon 3M's performance and are
variable in accordance with a predetermined formula. 3M's Profit Sharing
Plan provides for quarterly payments (in cash, or, as determined by 3M, in
3M common stock) based upon net income after deducting an allowance for a
predetermined 10 percent annual rate of return on stockholder equity and is
determined by multiplying the number of profit sharing units awarded to an
individual by this quarterly net income, after deduction, divided by the
number of the outstanding shares of 3M's Common Stock. Because of the
required minimum return on stockholder equity, profit sharing tends to rise
and fall relatively more sharply than changes in net income. The number of
profit sharing units awarded to the individuals named is determined by 3M
and is intended to reflect the level of responsibility of the respective
individual. Profit sharing payments are subject to limitations when
individual amounts exceed specified relationships to base salary.
(3) The number of stock options shown in this column includes both annual grants
of incentive and nonqualified stock options and Progressive Stock Options
("PSOs"), which are described more fully in footnote 1 of the table entitled
"Option Grants In Last Fiscal Year (1995)." Although these stock options are
forfeitable by these participants upon termination of employment with 3M,
the Compensation Committee of the 3M Board of Directors has decided to
continue these options for the benefit of the participants during the
continued employment of the participants by the Company, adjusted as set
forth in "TREATMENT OF EMPLOYEE OPTIONS IN THE DISTRIBUTION," pursuant to
the terms of the original grants under 3M's option plans.
(4) "LTIP Payouts" reflects the value of the total grant for each individual
under 3M's Performance Unit Plan after the three year performance period
(e.g., for 1995, the performance period is 1993-1995), but no amount
48
will be paid to these individuals under the grant for an additional three
years pursuant to the terms of the grant. The numbers shown represent
estimates based upon information available as of February 29, 1996. During
this additional three year period, interest will be paid at a rate
determined by 3M's "return on capital employed" performance. More specific
information about 3M's Performance Unit Plan is set forth in footnote
[001f](1) to the table entitled "Long-Term Incentive Plans Awards In Last
Fiscal Year (1995)". Although these rights are forfeitable by these
participants upon termination of employment with 3M, the Compensation
Committee of the 3M Board of Directors has decided to continue these
rights for the benefit of the participants during the continued employment
of the participants by the Company, pursuant to the terms of the original
grants under the operative 3M plan.
(5) "All Other Compensation" includes: (a) that amount of Performance Unit Plan
earnings allocated during the year to the base amounts determined after the
three year performance periods of each respective grant, to the extent that
such earnings are in excess of market interest rates (as determined by the
Securities and Exchange Commission); and (b) that amount deemed to be
compensation to the individuals under 3M's Senior Executive Split Dollar
Plan in accordance with rules developed by the SEC. The Senior Executive
Split Dollar Plan provides insurance to all of 3M's executive officers
under split dollar life insurance, which is partly term insurance and
partly whole life insurance with a cash value. Under this plan, 3M is
reimbursed for the premium costs of the non-term portion of coverage and a
possible return when the arrangement terminates either by insurance
proceeds incident to the death of the individual or by cash value after 15
years of participation in the plan. During 1995, amounts deemed
compensation under the plan to the named executive officers in the Summary
Compensation Table were $8,976 for Mr. Monahan; $10,560 for Dr. Burhardt;
$17,065 for Mr. Oesterlein; $13,479 for Mr. Mell; and $17,936 for Mr.
Farmer. These amounts were determined by treating the non-term portion of
the coverage as an interest-free loan.
STOCK OPTIONS TABLE
The following table shows for each person named in the Summary Compensation
Table the specified information with respect to 3M stock option grants during
1995. Since this compensation was received by the named individuals for services
rendered to 3M which are not equivalent, in many cases, to those to be provided
the Company, this table may not reflect the compensation to be paid executive
officers of the Company.
OPTION GRANTS IN LAST FISCAL YEAR (1995)
<TABLE>
<CAPTION>
INDIVIDUAL
GRANTS % OF
TOTAL
OPTIONS GRANTED DATE VALUE
GRANTED TO EXERCISE OR GRANTED DATE
OPTIONS EMPLOYEES BASE PRICE EXPIRATION PRESENT
NAME GRANTED(#) (1) IN FISCAL YEAR ($/SH.) (2) DATE VALUE (3)
<S> <C> <C> <C> <C> <C>
W.T. Monahan 9,600 0.223% $59.60 5-09-2005 $131,424
1,436 0.033% $57.10 5-05-2000 $ 13,556
912 0.021% $57.10 5-11-2001 $ 8,609
K.K. Burhardt 4,800 0.112% $59.60 5-09-2005 $ 65,712
141 0.003% $61.40 5-12-1997 $ 1,771
882 0.021% $61.40 5-10-1998 $ 11,078
1,302 0.030% $61.40 5-05-2000 $ 16,353
2,086 0.049% $61.40 5-11-2001 $ 26,200
1,914 0.045% $61.40 5-10-2002 $ 24,040
2,490 0.058% $61.40 5-07-2004 $ 31,274
C.D. Oesterlein 4,800 0.112% $59.60 5-09-2005 $ 65,712
D.G. Mell 4,800 0.112% $59.60 5-09-2005 $ 65,712
D.A. Farmer 4,800 0.112% $59.60 5-09-2005 $ 65,712
</TABLE>
(1) In connection with the Distribution, all outstanding and unexercised 3M
options, will be appropriately adjusted to reflect the Distribution. See
"TREATMENT OF EMPLOYEE OPTIONS IN THE DISTRIBUTION."
3M does not grant any stock appreciation rights ("SARs"). The options shown
for each individual include both annual grants of Incentive Stock Options
and nonqualified stock options and grants of PSO's. Nonqualified options
are subject to a reload feature when exercised with the payment of the
option price in the form of
49
previously owned shares of 3M's common stock. Such an exercise results in
further grants of PSO's. The first grant shown for each individual is the
annual grant. The remaining lines are PSO's. The PSO grants for each
individual were made on a single date, but are, pursuant to SEC rules,
shown in multiple lines because of different expiration dates.
PSO grants were made to participants who exercised nonqualified stock
options and who paid the purchase price using shares of previously owned 3M
common stock. The PSO grant is for the number of shares equal to the shares
utilized in payment of the purchase price and tax withholding, if any. The
option price for the PSO is equal to 100 percent of the market value of
3M's common stock on the date of the exercise of the primary option or,
alternatively, on the date of the PSO grant to the five named individuals
in the Table, all of whom are subject to the requirements of Section 162(m)
of the Code. The option period is equal to the remaining period of the
options exercised.
Although these tables reflect the grants of PSO's for those participants
eligible for such while employed by 3M during 1995, the 3M Compensation
Committee has decided that the named participants will no longer be
eligible for subsequent PSO grants after the Distribution Date. All
nonqualified options at the Distribution Date may be exercised once
thereafter, but 3M will not grant any new or additional options, by way of
PSO's or otherwise. All other operative terms of the options listed above
will continue past the Distribution Date, so that the options granted under
3M's plans will be exercisable during the continued employment of the
participants by the Company, notwithstanding termination of employment with
3M at the Distribution Date, per the original terms of the grants by 3M.
(2) All options granted during the period were granted at the market value on
the date of grant of initial grants, or at the fair market values discussed
in footnote 1 above in the case of PSO's, as calculated from the average of
the high and low prices reported on the New York Stock Exchange Composite
Index.
(3) Pursuant to the rules of the SEC, 3M has elected to provide a grant date
present value for these option grants determined by a modified
Black-Scholes pricing model. Among key assumptions utilized in this pricing
model were: (i) that the time of exercise of Incentive Stock Options would
be four years, and of PSOs would be two years, into the term of the option,
which could be for terms as long as ten years, in recognition of the
historical exercise patterns at 3M for these types of options; (ii)
expected volatility of 21.7 percent; (iii) risk-free rate of return of 6.26
percent for two years, and 6.86 percent for four years; and (iv) dividend
growth rate of 6.34 percent. No adjustments for non-transferability or risk
of forfeiture have been made. 3M voices no opinion that the present value
will, in fact, be realized and expressly disclaims any representation to
that effect.
OPTION EXERCISES AND YEAR-END VALUE TABLE
The following table shows for each person named in the Summary Compensation
Table the specified information with respect to 3M option exercises during 1995
and the value of unexercised 3M options at the end of 1995.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR (1995)
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
SHARES FISCAL YEAR-END (#)(2) FISCAL YEAR-END (1)
ACQUIRED VALUE EXERCISABLE
NAME ON EXERCISE REALIZED (1) EXERCISABLE UNEXERCISABLE (1) UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
W.T. Monahan 3,121 $ 51,455 36,348 11,948 $769,168 $86,818
K.K. Burhardt 10,895 116,251 27,056 13,615 608,935 76,375
C.D. Oesterlein 2,400 38,220 14,400 4,800 222,000 32,520
D.G. Mell 1,600 31,720 16,800 4,800 284,820 32,520
D.A. Farmer 100 3,256 21,548 4,800 443,467 32,520
</TABLE>
(1) The "Value Realized" or the unrealized "Value of Unexercised In-the-Money
Options at FY-End" represents the aggregate difference between the market
value on the date of exercise or at December 31, 1995, in the case of the
unrealized values, and the applicable exercise prices. These differences
accumulate over what may be, in many cases, several years. These stock
options all have option periods of ten years when first granted, and PSOs
have option periods equal to the remaining option period of the initial
nonqualified options resulting in PSOs.
(2) See "TREATMENT OF EMPLOYEE OPTIONS IN THE DISTRIBUTION."
LONG-TERM INCENTIVE PLAN AWARDS
The following table shows for each person in the Summary Compensation Table the
specified information with respect to awards during 1995 under 3M's Performance
Unit Plan. Since this
50
compensation was received by the named individuals for services rendered to 3M
which are not equivalent, in many cases, to those to be provided to the Company,
this table may not reflect the compensation to be paid executive officers of the
Company.
LONG-TERM INCENTIVE PLANS -- AWARDS
IN LAST FISCAL YEAR (1995)
<TABLE>
<CAPTION>
PERFORMANCE OR
NUMBER OF OTHER PERIOD ESTIMATED FUTURE PAYOUT
SHARES, UNITS UNTIL UNDER NON-STOCK PRICE-BASED PLANS (3)
OR OTHER MATURATION
NAME RIGHTS (1) OR PAYOUT (2) THRESHOLD TARGET MAXIMUM
<S> <C> <C> <C> <C> <C>
W.T. Monahan 950 6 years $0 $95,000 $190,000
K.K. Burhardt 550 6 years $0 $55,000 $110,000
C.D. Oesterlein 550 6 years $0 $55,000 $110,000
D.G. Mell 550 6 years $0 $55,000 $110,000
D.A. Farmer 550 6 years $0 $55,000 $110,000
</TABLE>
(1) To date, the 3M Compensation Committee has established the performance
goals based on criteria of return on capital employed and sales growth.
Performance units awarded to date have been assigned a face value of $100
each. However, the actual amount of the payments is based upon 3M's
attainment of the performance goals. If the targets established by the
Committee are attained during the performance periods, the performance unit
will have a value of $100 at the end of the performance period. If the
targets are not attained, the value will be less than $100 and, if
exceeded, will be more than $100. The ultimate value of the performance
unit can vary from no value to $200, depending upon actual performance.
Payment is contingent upon continued employment to the payment date or
earlier retirement under 3M's pension plan. The Compensation Committee of
the 3M Board of Directors has decided to extend the rights of these
participants going to the Company beyond the Distribution Date during the
continued employment of the participants by the Company, pursuant to the
terms of the original grants under 3M's Performance Unit Plan.
(2) The value of awards granted for 1995 will be determined by 3M's attainment
of return on capital employed and sales growth criteria during a three-year
performance period of 1995, 1996 and 1997. However, there will be an
additional three-year involuntary holding period thereafter during which
the base amounts determined during the performance period will earn
interest and remain subject to forfeiture if the participant discontinues
employment for any reason other than death, disability or retirement.
(3) The estimated future payouts do not include any interest factor that would
be earned annually during the three-year involuntary holding period
following the performance period. Interest during the involuntary holding
period would accrue annually at a rate equal to 50 percent of the return on
capital employed by 3M during the three years and would be payable,
together with the base award, in 2001.
TRANSACTIONS WITH MANAGEMENT
During 1995, three executive officers and directors had loans outstanding with
the Eastern Heights State Bank of St. Paul, a subsidiary of 3M. These loans were
made in the ordinary course of business on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for
comparable transactions with other persons of comparable circumstances and did
not involve more than normal risk of collectibility or present other unfavorable
features.
EMPLOYMENT AGREEMENT
The Company expects to enter into an employment agreement with William T.
Monahan, providing, among other things, for Mr. Monahan to serve as Chief
Executive Officer of the Company for a minimum term. Although the terms of such
agreement have not been finalized, Mr. Monahan's annual salary has been
increased to $_________ to reflect his new responsibilities as Chief Executive
Officer of the Company.
COMPENSATION UNDER RETIREMENT PLANS
Substantially all domestic employees of the Company will be eligible to
participate in the qualified pension and defined contribution plans that the
Company intends to establish. In addition, the executive officers of the Company
will be eligible to participate in certain nonqualified pension or deferred
compensation plans to be established by the Company's Board of Directors.
51
COMPANY PENSION PLAN
The Company expects to adopt a cash balance pension plan, and it intends that
this plan will be qualified under the applicable provisions of the Code. The
plan will become effective July 1, 1996, and will cover substantially all
domestic employees of the Company. Under this plan, benefits will be determined
by the amount of annual pay credits to each employee's account (expected to be
6% of each employee's annual earnings) and annual interest credits (equal to the
return on the 30-year U.S. Treasury bond yield) to such accounts. All former 3M
employees will retain their right to receive their benefits accrued as of the
Distribution Date under 3M's pension plan. Those former 3M employees whose age
and years of 3M service as of the Distribution Date equal or exceed 50 (with a
minimum of 10 years of 3M service) will continue to be credited with service for
purposes of early retirement subsidies under 3M's pension plan based on their
combined service with the Company and 3M, and will have their 3M accrued
benefits as of the Distribution Date increased following the Distribution by 4%
per year of employment with the Company.
The following table shows the estimated aggregate annual benefits payable from
the Company's qualified and nonqualified retirement plans to its executive
officers and other participating employees at normal retirement, assuming that
the Company adopts nonqualified pension plans similar to 3M's:
PENSION PLAN TABLE -- COMPANY PLAN
<TABLE>
<CAPTION>
EMPLOYEES ANNUAL EARNINGS YEARS WITH COMPANY (EXCLUDING SERVICE WITH 3M)
USED FOR COMPUTATION OF BENEFITS 5 YEARS 10 YEARS 15 YEARS 20 YEARS 25 YEARS
<S> <C> <C> <C> <C> <C>
$150,000 $ 5,845 $13,668 $24,136 $ 38,145 $ 56,892
200,000 7,794 18,224 32,182 50,860 75,856
250,000 9,742 22,780 40,227 63,575 94,820
300,000 11,691 27,336 48,272 76,290 113,784
350,000 13,639 31,892 56,318 89,005 132,748
400,000 15,588 36,448 64,363 101,720 151,712
450,000 17,536 41,004 72,409 114,435 170,676
500,000 19,485 45,560 80,454 127,150 189,640
</TABLE>
Under this table the normal form of benefit payment under the plan to married
employees would require a reduction in the amounts shown in the table pursuant
to an actuarially based formula to provide a benefit to a surviving spouse upon
the employee's death following retirement equal to 50% of the reduced benefit.
These amounts do not include the 4% per year additional benefit described above
which will be provided by the Company's plan.
In addition to their benefits under the Company's plan, it is estimated that the
named executive officers in the Summary Compensation Table will be entitled to
the following aggregate annual benefits payable under 3M's qualified and
nonqualified pension plans at normal retirement, based on their service with 3M
as of the Distribution Date and assuming that they remain employed by the
Company until their normal retirement date: [$239,000 for Mr. Monahan; $165,000
for Dr. Burhardt; $167,000 for Mr. Oesterlein; $165,000 for Mr. Mell; and
$161,000 for Mr. Farmer.]
PLANS ENCOURAGING EMPLOYEE STOCK OWNERSHIP
The following two plans are intended to help the Company accomplish its
objective of encouraging and increasing employee stock ownership. As a result of
these plans, the Company expects employees to eventually own (directly or
beneficially) in excess of 5% of its outstanding shares.
COMPANY 401(K) PLAN AND ESOP
The Company expects to adopt a defined contribution plan including a cash or
deferred arrangement, and it intends that this plan will be qualified under the
applicable provisions of the Code. The plan will become effective July 1, 1996,
and will cover substantially all domestic employees of the Company. Under this
plan, employees may generally elect to defer up to 15% of their pay on a
before-tax basis and have it contributed to their individual accounts, subject
to Code and Internal Revenue Service limits. The
52
Company will make matching contributions to the employees' accounts equal to 100
percent of the first 3% of pay deferred during each pay period and 25% of the
next 3% of pay deferred during each pay period. All of the Company's matching
contributions will be invested in Common Stock of the Company through an
employee stock ownership plan. Individuals currently employed by 3M who join the
Company on the Distribution Date will have their account balances under the 3M
Voluntary Investment Plan and Employee Stock Ownership Plan transferred to the
Company's plan following the Distribution Date. In addition to matching
contributions, the Company may also make annual contributions to the accounts of
all eligible employees based on its financial performance. These additional
contributions will also be invested in Common Stock of the Company through the
employee stock ownership plan.
1996 EMPLOYEE STOCK INCENTIVE PROGRAM
The Company has adopted the 1996 Employee Stock Incentive Program (the "Stock
Option Plan"), which was approved by 3M as the sole stockholder of the Company
prior to the Distribution, and will become effective upon, and only in the event
of the consummation, of the Distribution.
The Stock Option Plan is designed to provide incentives to employees to become
stockholders of the Company through the granting of incentive and nonqualified
stock options, restricted stock grants and stock appreciation rights. Further,
the Stock Option Plan is designed to ensure that compensation payable with
respect to the exercise of certain options thereunder will qualify as
performance based compensation within the meaning of section 162(m) of the Code
and thereby be fully tax-deductible by the Company.
The total number of shares of Company Common Stock (which includes treasury or
authorized but unissued shares) that may be issued or awarded under the Stock
Option Plan may not exceed 6 million, subject to equitable adjustment in the
event of a stock split, stock dividend, reduction or combination of shares,
merger, consolidation, recapitalization or other similar transactions). All
shares subject to awards under the Stock Option Plan that are forfeited or
terminated, will be available again for issuance pursuant to awards under the
Stock Option Plan. The maximum number of shares of the Company's Common Stock
that may be granted to any one participant under the Stock Option Plan by way of
options and stock appreciation rights, during the term of the plan shall not
exceed [1,000,000] (including Progressive Stock Options (as defined below)
granted to such participant.)
The Stock Option Plan will be administered by the Compensation Committee (the
"Committee") of the Board of Directors, consisting of two or more persons who
are "disinterested persons" within the meaning of Rule 16b-3 ("Rule 16b-3")
under the Securities Exchange Act of 1934, as amended and "outside directors"
within the meaning of section 162(m) of the Code. Eligibility criteria, the
number of participants, and the number of shares subject to option, restricted
stock or other awards will be determined by the Committee.
The option price of (a) incentive stock options within the meaning of section
422 of the Code ("Incentive Stock Options") will equal 100 percent of the fair
market value of the Company's Common Stock on the date the options are granted,
and (b) options other than Incentive Stock Options ("Nonqualified Stock
Options") may be equal to, less than or more than 100 percent of the fair market
value of the Company's Common Stock on the date the options are granted. Full
payment for the shares (which may be made in whole or in part, in shares of the
Company's Common Stock valued at the fair market value on the date the option is
exercised) must be made at the time the option is exercised.
Generally, options will be for a ten-year period (or shorter in the case of
Progressive Stock Options), and become exercisable commencing one year from the
date of grant (no sooner than six months from date of grant with respect to
Progressive Stock Options), unless otherwise determined by the Committee. Option
rights are forfeited by a participant in the event of termination of employment
for any cause other than retirement, death, or disability, and abbreviated
exercise periods are provided in the event of death or disability. Progressive
Stock Options are Nonqualified Stock Options equal to the number of shares of
previously owned stock delivered in payment of the option price of outstanding
Nonqualified Stock Options granted under the Stock Option Plan or in payment of
any applicable federal, state, local and employment withholding taxes.
Progressive Stock Options have as their term the
53
remaining term of the primary option being exercised and are granted at the fair
market value of the stock on the date of the primary option exercise.
Incentive Stock Options are not transferable other than by will or the laws of
descent and distribution. All options are nontransferable to the extent
necessary to comply with the applicable provisions of Rule 16b-3.
The Committee may also grant restricted stock subject to conditions and
restrictions as may be specified by the Committee. The participant shall
generally have the rights and privileges of a stockholder as to the shares of
restricted stock, including the right to vote, except that the restricted stock
shall remain in the custody of the Company until all restrictions have lapsed.
None of the shares representing the restricted stock may be sold, transferred,
assigned, pledged, or otherwise encumbered or disposed of during the period of
restrictions determined by the Committee. At the discretion of the Committee,
cash and stock dividends with respect to restricted stock awards may be either
currently paid or withheld by the Company for the participant's account, and
interest may be paid on the amount of cash dividends withheld at a rate and
subject to such terms as determined by the Committee. Cash or stock dividends so
withheld by the Committee shall not be subject to forfeiture.
Upon the satisfaction of the conditions and the lapsing of restrictions
applicable to restricted stock awards, the Company shall deliver to the
participant or the participant's beneficiary or estate, a stock certificate for
the number of shares of restricted stock granted, free of all such restrictions,
except any that may be imposed by applicable law. [No payment will be required
from the participant upon the delivery of the formerly restricted stock, except
any amounts necessary to satisfy applicable federal, state, or local tax
requirements for withholding.] The Committee may also award shares of the
Company's Common Stock under the Stock Option Plan other than restricted stock.
Under the Stock Option Plan, the Committee may grant stock appreciation rights
that entitle the recipient to receive an amount of cash or a number of shares of
the Company's Common Stock measured by the appreciation of the fair market value
of the Common Stock at the date of exercise above the fair market value of the
Common Stock at the date of the initial grant. Stock appreciation rights will be
exercisable during a period determined by the Committee, but which will commence
no sooner than six months from the date of grant and will expire no later than
ten years from the date of grant. Stock appreciation rights are forfeited by a
participant in the event of termination of employment for any cause other than
retirement, death, or disability, and abbreviated exercise periods are provided
in the event of death or disability.
The Stock Option Plan provides that all outstanding options under the Stock
Option Plan would become immediately exercisable in full for the remainder of
the respective option period and remain exercisable in full for a minimum period
of six months following a change in control of the Company (as defined in the
Stock Option Plan), and all restrictions imposed by the Committee on outstanding
grants of restricted stock or other stock awards would automatically be
terminated.
Further, in the event that the exercise of options granted under the Stock
Option Plan or the receipt of the Company's common stock as a result of a
restricted stock grant or other stock award, after an event of acceleration
(i.e., a change of control), shall be determined to be subject to the excise tax
of section 4999 of the Code, the Company will pay affected participants such
additional amounts of cash so that the net amount, after allowance for the
excise tax, any additional federal, state and local income tax and any
additional employment tax paid on the additional amount, shall be equal to the
net amount that would be retained by the participant if there were no excise tax
imposed by section 4999. Similarly, in the event that a participant should be
required to take legal action to obtain or enforce rights under the Stock Option
Plan after an event of acceleration, the Company shall pay all reasonable legal
and accounting fees and expenses incurred, unless a lawsuit is subsequently
determined to have been spurious or frivolous.
The Stock Option Plan may be amended or terminated by the Board, except that no
amendment will be made without prior approval of the Company's stockholders if
such approval is required for purposes of Rule 16b-3, or, to the extent
applicable, Section 162(m) of the Code.
The Stock Option Plan will terminate five years after its effective date.
54
FEDERAL TAX CONSEQUENCES
The grant of stock options will create no tax consequences to the participant or
to the Company. The participant will not recognize any taxable income with
respect to the exercise of an Incentive Stock Option (except that the
alternative minimum tax may apply), and the Company will not be entitled to a
deduction when such stock option is exercised, to the extent the individual
$100,000 limit on Incentive Stock Options that first become exercisable in any
calendar year is not exceeded, and to the extent that the shares acquired upon
exercise are disposed of no earlier than two years after the date of grant of
the option and one year after the date of exercise of the option. The tax
payable by the participant upon disposition of the shares acquired upon exercise
of Incentive Stock Options will be at the long-term capital gain rate. Options
that do not satisfy the Code requirements for Incentive Stock Options will be
taxed as Nonqualified Stock Options.
Upon exercise of a Nonqualified Stock Option, the difference between the option
price and the fair market value at the time of exercise is treated as ordinary
income to the participant and the Company is entitled to a deduction for the
same amount, subject to the application of section 162(m) of the Code. Gain or
loss upon a subsequent sale of any shares of Common Stock received upon the
exercise of a Nonqualified Stock Option is taxed as capital gain or loss to the
participant (long-term or short-term, depending upon the holding period of the
stock sold).
A participant generally will not realize taxable income and the Company will not
be entitled to a deduction upon the grant of restricted shares. When the shares
are no longer subject to a substantial risk of forfeiture, the participant will
realize taxable ordinary income in an amount equal to the fair market value of
the stock at the time, and the Company will be entitled to a deduction in the
same amount, subject to the provisions of section 162(m) of the Code. However, a
participant may elect to realize taxable ordinary income in the year the
restricted shares are granted in an amount equal to their fair market value at
the time, determined without regard to the restrictions. In that event, subject
to section 162(m) of the Code, the Company will be entitled to a deduction in
such year in the same amount, and any gain or loss realized by the participant
upon the subsequent disposition of the stock will be taxable at short or long
term capital gain rates but will not result in any further deduction to the
Company.
NEW PLAN BENEFITS
Prior to the Distribution, certain employees of the Company participated in 3M's
Management Stock Ownership Program covering management employees of 3M. In lieu
of a 1996 annual grant under 3M's Program, the Company intends to grant to its
employees who would otherwise have been eligible to receive a 1996 grant under
3M's Program options to purchase shares of Common Stock under the Stock Option
Plan. The number of options to be granted to each employee will be the number of
options such employee would have received under the 3M Program, multiplied by
the exercise price of 3M options issued in the 1996 grant and then divided by
the market value of the Common Stock at the time of the Distribution. The
exercise price of these options will be the fair market value of the Common
Stock at the time of the grant. As a result, shortly after the Distribution the
Company expects to grant to such employees options to purchase approximately
[1,000,000] shares of Common Stock.
55
The following table sets forth the options which would have been received in
1996 by certain employees under 3M's Management Stock Ownership Program.
NEW PLAN BENEFITS
EMPLOYEE STOCK INCENTIVE PROGRAM
NAME AND POSITION NUMBER OF OPTIONS
W.T. Monahan
K.K. Burhardt
C.D. Oesterlein
D.G. Mell
D.A. Farmer
Executive Group
Non-Executive Director Group
Non-Executive Officer Employee Group
It cannot be determined at this time what additional grants, if any, will be
made in 1996 under the Stock Option Plan. For options to purchase shares of
common stock of 3M that were granted to the five named executive officers of the
Company in the previous fiscal year under the 3M Stock Option Plan, see "--
Option Grants in Last Fiscal Year".
The Stock Option Plan has been included as an exhibit to the Registration
Statement of which this Information Statement forms a part. The preceding
description is subject in all respects to the provisions of the Stock Option
Plan.
TREATMENT OF EMPLOYEE OPTIONS AND RESTRICTED STOCK
IN THE DISTRIBUTION
Certain employees of 3M (including certain employees who, as a result of the
Distribution, will become employees of the Company) currently hold options to
purchase 3M common stock (the "3M Options") pursuant to the 3M Stock Plans.
In connection with the Distribution, and pursuant to the 3M Stock Plans and the
related option agreements, the number of shares subject to each 3M Option and
the exercise prices thereof will be equitably adjusted to reflect the
Distribution. 3M will remain solely responsible for satisfying all exercises of
3M Options.
Pursuant to the terms of the 3M Management Stock Ownership Program, and pursuant
to a determination of 3M's Compensation Committee, holders of 3M restricted
common stock will not receive shares of Common Stock in the Distribution. In
lieu of such Common Stock, the holders of 3M restricted common stock will
receive additional shares of restricted common stock of 3M with a value equal to
the value of the Common Stock which would have been received by such holders in
the Distribution with respect to such restricted common stock.
56
CERTAIN RELATIONSHIPS AND TRANSACTIONS
The businesses to be conducted by the Company have in the past engaged in
transactions with 3M and its businesses. Such transactions have included, among
other things, various types of financial support by 3M. Following the
Distribution, 3M will continue to have a relationship with the Company as a
result of the agreements being entered into between 3M and the Company in
connection with the Distribution. Except as referred to above or as otherwise
described in this Information Statement, 3M and the Company will cease to have
any material contractual or other material relationships with each other. See
"RELATIONSHIP BETWEEN 3M AND THE COMPANY AFTER THE DISTRIBUTION."
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Based on information which has been obtained from 3M's records and a review of
statements filed with the Securities and Exchange Commission pursuant to
Sections 13(d) and 13(g) of the Exchange Act with respect to 3M common stock and
received by 3M prior to March 1, 1996, no person known to the Company will be
the beneficial owner of more than 5% of the outstanding voting securities of any
class of the Company upon completion of the Distribution.
BENEFICIAL OWNERSHIP OF MANAGEMENT
The following table sets forth information with respect to the shares of Common
Stock which are expected to be beneficially owned by each director and the named
executive officers of the Company and by all directors and officers of the
Company as a group as of the Distribution Date based upon their respective
holdings of 3M common stock as of May ___, 1996. The table does not include as a
basis for calculation options to purchase shares of 3M common stock exercisable
at or within 60 days of May ___, 1996 as such options will not be converted in
the Distribution to options to purchase shares of Common Stock. See "TREATMENT
OF EMPLOYEE OPTIONS AND RESTRICTED STOCK IN THE DISTRIBUTION." In addition, the
table does not include any options which may be granted as part of the Company's
employee benefit programs following the Distribution. Based upon such data, no
director or officer will own beneficially, as of the Distribution Date, more
than 1% of the shares of Common Stock outstanding at such date and all directors
and officers as a group will beneficially own less than five-tenths of one
percent (0.5%) of the common stock outstanding at such date.
AMOUNT AND NATURE OF
NAME BENEFICIAL OWNERSHIP
William T. Monahan .............................
Linda W. Hart ..................................
Daryl J. White .................................
[ ] .........................................
[ ] .........................................
Carolyn A. Bates ...............................
Jill D. Burchill ...............................
Dr. Krzysztof K. Burhardt ......................
Wil DeBoer .....................................
Dennis A. Farmer ...............................
David G. Mell ..................................
Richard W. Northrop ............................
Charles D. Oesterlein ..........................
Clifford T. Pinder .............................
Michael E. Sheridan ............................
James R. Stewart ...............................
Deborah D. Weiss ...............................
David H. Wenck .................................
All directors and officers of the Company
as a group ( persons) .......................
57
DESCRIPTION OF COMPANY CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Under the Certificate of Incorporation, the total number of shares of all
classes of stock that the Company has authority to issue is 125 million, of
which 25 million are shares of preferred stock, and 100 million are shares of
Common Stock. Based on the number of shares of 3M common stock outstanding at
May 1, 1996, approximately 41,863,000 shares of Common Stock will be issued to
shareholders of 3M.
COMMON STOCK
The holders of Common Stock will be entitled to one vote for each share on all
matters voted on by stockholders, and the holders of such shares will possess
all voting power, except as otherwise required by law or provided in any
resolution adopted by the Board of Directors of the Company with respect to any
series of preferred stock. Subject to any preferential or other rights of any
outstanding series of Company preferred stock that may be designated by the
Board of Directors of the Company, the holders of Common Stock will be entitled
to such dividends as may be declared from time to time by the Board of Directors
of the Company from funds available therefor, and upon liquidation will be
entitled to receive pro rata all assets of the Company available for
distribution to such holders. See "SPECIAL FACTORS -- Common Stock Dividend
Policy."
PREFERRED STOCK
The Board of Directors of the Company will be authorized to provide for the
issuance of shares of preferred stock, in one or more series, and to fix for
each such series such voting powers, designations, preferences and relative,
participating, optional and other special rights, and such qualifications,
limitations or restrictions, as are stated in the resolution adopted by the
Board of Directors of the Company providing for the issuance of such series as
are permitted by the Delaware General Corporation Law (the "Delaware GCL"). See
"PURPOSES AND EFFECTS OF CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE OF
INCORPORATION AND BY-LAWS -- Preferred Stock."
NO PREEMPTIVE RIGHTS
No holder of any stock of the Company of any class authorized at the
Distribution Date will then have any preemptive right to subscribe to any
securities of the Company of any kind or class.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Norwest Bank
Minnesota, N.A.
PURPOSES AND EFFECTS OF CERTAIN PROVISIONS OF THE
CERTIFICATE OF INCORPORATION AND BY-LAWS
GENERAL
The Certificate of Incorporation and By-laws contain certain provisions that
could make more difficult the acquisition of control of the Company by means of
a tender offer, open market purchases, a proxy contest or otherwise. Set forth
below is a description of such provisions contained in the Certificate of
Incorporation and By-laws. Such description is intended as a summary only and is
qualified in its entirety by reference to the Certificate of Incorporation and
By-laws, the forms of which are included as exhibits to the Registration
Statement of which this Information Statement forms a part.
CLASSIFIED BOARD OF DIRECTORS
The Certificate of Incorporation provides that the number of directors shall be
fixed from time to time by the Board of Directors of the Company. The directors
shall be divided into three classes, as nearly equal in number as is reasonably
possible, serving staggered terms so that directors' initial terms will expire
either at the 1997, 1998 or 1999 annual meeting of the Company's stockholders.
Starting with
58
the 1997 annual meeting of the Company's stockholders, one class of directors
will be elected each year for a three-year term. See "MANAGEMENT -- Directors of
the Company."
The Company believes that a classified Board of Directors will help to assure
the continuity and stability of the Company's Board of Directors and the
Company's business strategies and policies as determined by the Board of
Directors of the Company, since a majority of the directors at any given time
will have had prior experience as directors of the Company. The Company believes
that this, in turn, will permit the board to more effectively represent the
interests of stockholders.
With a classified Board of Directors, at least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in a
majority of the Board of Directors. As a result, a classified Board of Directors
of the Company may discourage proxy contests for the election of directors or
purchases of a substantial block of the Common Stock because its provisions
could operate to prevent obtaining control of the Board of Directors of the
Company in a relatively short period of time. The classification provisions
could also have the effect of discouraging a third party from making a tender
offer or otherwise attempting to obtain control of the Company. In addition,
because under Delaware law a director serving on a classified Board of Directors
may be removed only for cause, a classified Board of Directors would delay
stockholders who do not agree with the policies of the Board of Directors from
replacing a majority of the Board of Directors for two years unless they can
demonstrate that the directors should be removed for cause and can obtain the
requisite vote. Such a delay may help ensure that the Board of Directors of the
Company, if confronted by a holder conducting a proxy contest or an
extraordinary corporate transaction, will have sufficient time to review the
proposal and appropriate alternatives to the proposal and to act in what it
believes are the best interests of the Company's stockholders.
SPECIAL MEETINGS OF STOCKHOLDERS; ACTION BY WRITTEN CONSENT; ADVANCE NOTICE
PROVISIONS
The By-laws provide that special meetings of stockholders of the Company may be
called by the Board of Directors of the Company or the Chairman of the Board.
The Certificate of Incorporation also requires that stockholder action be taken
at a meeting of stockholders and prohibits action by written consent.
STOCKHOLDER NOMINATIONS
The By-laws establish procedures that must be followed for a stockholder to
nominate individuals for election to the Company's Board of Directors.
Nominations of persons for election to the Board will be required to be made by
delivering written notice to the Secretary of the Company not less than 60 days
and not more than 90 days prior to the anniversary date of the immediately
preceding annual meeting of stockholders; PROVIDED HOWEVER, that in the event
that the annual meeting is called for a date that is not within 10 days before
or after such anniversary date, notice by the stockholder to be timely will be
required to be so received before the later of the close of business on the 10th
day following the day on which such notice of the date of the meeting was mailed
or public disclosure made of the date of the annual meeting was made, whichever
first occurs and the close of business on the day which is 60 days prior to the
date of the annual meeting. The nomination notice will be required to set forth
certain background information about the persons to be nominated, including the
nominees' principal occupation or employment and the class and number of shares
of capital stock of the Company that are beneficially owned by such person. If
the presiding officer at the annual meeting determines that a nomination was not
made in accordance with these procedures, he may so declare at the meeting and
the nomination may be disregarded.
STOCKHOLDER PROPOSALS
The By-laws establish procedures that must be followed for a stockholder to
submit a proposal at an annual meeting of the stockholders of the Company. Under
these procedures, no proposal for a stockholder vote will be able to be
submitted to the stockholders unless the submitting stockholder has timely filed
with the Secretary of the Company a written statement setting forth specified
information, including the names and addresses of the persons making the
proposal, the class and number of shares of capital stock of the Company
beneficially owned by such persons, a description of the proposal and
59
the reasons for bringing such business before the annual meeting and any
material interest of the stockholder in such business. The statement will be
required to be filed no later than the latest date for filing a nomination
notice as described above under "--Stockholder Nominations." If the presiding
officer at any stockholder meeting determines that any such proposal was not
made in accordance with these procedures or is otherwise not in accordance with
applicable law, he may so declare at the meeting and such defective proposal may
be disregarded.
PREFERRED STOCK
The Certificate of Incorporation authorizes the Board of Directors to establish
a series of preferred stock and to determine, with respect to any series of
preferred stock, the terms and rights of such series, including the following:
(i) the designation of such series; (ii) the rate and time of, and conditions
and preferences with respect to, dividends, and whether such dividends are
cumulative; (iii) the voting rights, if any, of shares of such series; (iv) the
price, timing and conditions regarding the redemption of shares of such series
and whether a sinking fund should be established for such series; (v) the rights
and preferences of shares of such series in the event of voluntary or
involuntary dissolution, liquidation or winding up of the affairs of the
Company; and (vi) the right, if any, to convert or exchange shares of such
series into or for stock or securities of any other series or class.
The Company believes that the availability of the preferred stock will provide
the Company with increased flexibility in structuring possible future financing
and acquisitions, and in meeting other corporate needs which might arise. Having
such authorized shares available for issuance will allow the Company to issue
shares of preferred stock without the expense and delay of a special
stockholders' meeting. The authorized shares of preferred stock, as well as
shares of Common Stock, will be available for issuance without further action by
the Company's stockholders, unless action is required by applicable law or the
rules of any stock exchange on which the Company's securities may be listed or
unless the Company is restricted by the terms of previously issued preferred
stock or by the Company's bank credit facility.
SUPERMAJORITY PROVISION
The Certificate of Incorporation generally provides that, whether or not a vote
of the stockholders is otherwise required, the affirmative vote of the holders
of not less than eighty percent (80%) of the outstanding shares of Common Stock
shall be required for the approval or authorization of any Business Transaction
with a related Person, or any Business Transaction in which a Related Person has
an interest; pro-vided, however, that the eighty percent (80%) voting
requirement shall not be applicable if (1) the Business Transaction is approved
by the Continuing Directors, or (2) all of the following conditions are
satisfied:
(a) the Business Transaction is a merger or consolidation or sale of
substantially all of the assets of the Company, and the aggregate amount of cash
to be received per share by holders of Common Stock in connection with such
Business Transaction is at least equal in value to the highest amount of
consideration paid by such related person for a share of Common Stock in the
transaction in which such person became a Related Person, or within one year
prior to the date such related Person became a Related Person, whichever is
higher; and
(b) after such Related Person has become the beneficial owner of not less than
ten percent (10%) of the voting power of the stock of the Company entitled to
vote generally in the election of directors, and prior to the consummation of
such Business Transaction, such Related Person shall not have become the
Beneficial Owner of any additional shares of voting stock or securities
convertible into voting stock, except (i) as a part of the transaction which
resulted in such Related Person becom-ing the beneficial owner of not less than
ten percent (10%) of the voting power of the voting stock or (ii) as a result of
a pro rata stock dividend or stock split; and
(c) prior to the consummation of such Business Transaction, such Related Person
shall not have, directly or indirectly, (i) received the benefit (other than
only a proportionate benefit as a stockholder of the Company) of any loans,
advances, guarantees, pledges, or other financial assistance or tax credits
provided by the Company or any of its subsidiaries, (ii) caused any material
change in the Company's business or equity capital structure, including, without
limitation, the issuance of shares of capital stock
60
of the Company, or (iii) except as approved by the Continuing Directors, caused
the Company to fail to declare and pay (y) at the regular date therefor any full
quarterly dividends on any out-standing preferred stock or (z) quarterly cash
dividends on the outstanding Common Stock on a per share basis at least equal to
the cash dividends being paid thereon by the corporation immediately prior to
the date on which the Related Person became a Related Person.
The term "Business Transaction" is generally defined as (a) any merger or
consolidation involving the Company or a subsidiary of the Company, (b) any
sale, lease, exchange, transfer, or other disposition (in one transaction or a
series of related transactions), including, without limitation, a mortgage or
any other security device, of all or any substantial part of the assets either
of the Company or of a subsidiary of the Company (c) any sale, lease, exchange,
transfer, or other disposition (in one transaction or a series of related
transactions) of all or any substantial part of the assets of an entity to the
Company, (d) the issuance, sale, exchange, transfer, or other disposition (in
one transaction or a series of related transactions) by the Company or a
subsidiary of the Company of any securities of the Company or any subsidiary of
the Company, (e) any recapitalization or reclassification of the securities of
the Company or other transaction that would have the effect of increasing the
voting power of a Related Person or reducing the number of shares of each class
of voting stock outstanding, (f) any liquidation, spin-off, split-off, split-up,
or dissolution of the Company, and (g) any agreement, contract, or other
arrangement providing for any of the transactions described in this definition
of Business Transaction. "Continuing Director" is generally defined as a member
of the Board of Directors on the Distribution Date and any member of the Board
of Directors whose election was approved by the Continuing Directors. "Related
Person" generally is defined as any individual or entity which, together with
its affiliates and associates owns not less than 10% of the voting power of the
voting stock of the Company.
RIGHTS AGREEMENT
The Board of Directors of the Company has declared a dividend distribution of
one right (a "Right") to purchase one one-hundredth of a share of Series A
Junior Participating Preferred Stock for each outstanding share of Common Stock
to stockholders of record of the Company on the Record Date. The description and
terms of the Rights are set forth in a Rights Agreement, dated as of ________,
1996, between the Company and Norwest Bank Minnesota, N.A. (the "Rights
Agreement").
The Rights remain non-exercisable, nontransferable and non-separable from the
Company's Common Stock until the earlier of (i) 10 days after a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person") has acquired, or obtained the right to acquire, beneficial
ownership of 15% or more of the outstanding shares of the Company's Common Stock
(the "Stock Acquisition Date") or (ii) 10 business days (or such later date as
may be determined by the Board of Directors) after the commencement of a tender
offer or exchange offer for 15% or more of the Common Stock.
In the event that a person becomes the beneficial owner of 15% or more of the
then outstanding shares of the Common Stock (except pursuant to an offer for all
outstanding shares of Common Stock that the independent directors of the Company
determine to be fair to and otherwise in the best interests of the Company and
its stockholders (an "Approved Offer"), each holder of a Right will thereafter
have the right to receive, upon exercise, shares of Common Stock (or, in certain
circumstances, cash, property or other securities of the Company) having a value
equal to two times the exercise price of the Rights. Each Right, when
exercisable, currently entitles the registered holder to purchase from the
Company one one-hundredth of a share of Series A Junior Participating Preferred
Stock at a price of $ ______, subject to adjustment. In the event that, at any
time following the Stock Acquisition Date, (i) the Company is acquired in a
merger or other business combination transaction in which the Company is not the
surviving corporation (other than a merger that follows an Approved Offer and
meets certain other requirements) or (ii) more than 50% of the Company's assets,
cash flows or earning power is sold or transferred, each holder of a Right shall
thereafter have the right to receive, upon exercise, common stock of the
acquiring company having a value equal to two times the exercise price of the
Right.
In general, at any time prior to their expiration on ___________, 2006 or until
10 days following the Stock Acquisition Date, the Board of Directors in its
discretion may redeem the Rights in whole, but not in part, at a price of $.01
per Right.
61
Each share of Series A Junior Participating Preferred Stock, when issued, will
be nonredeemable and entitled to cumulative dividends and will rank junior to
any series of Preferred Stock senior to it. Dividends are payable on the Series
A Junior Participating Preferred Stock in an amount equal to the greater of (i)
$1.00 per share or (ii) 100 times the aggregate per share amount of all cash and
noncash dividends (other than dividends payable in Common Stock) declared on the
Common Stock since the last quarterly dividend payment date or, with respect to
the first such date, since the first issuance of the Series A Junior
Participating Preferred Stock. Each share of Series A Junior Participating
Preferred Stock will entitle the holder (subject to adjustment) to 100 votes on
all matters submitted to a vote of the stockholders of the Company. The number
of shares constituting the series of Series A Junior Participating Preferred
Stock is 1,000,000.
The Rights may have certain anti-takeover effects, including deterring someone
from acquiring control of the Company in a manner or on terms not approved by
the Board of Directors. The Rights should not interfere with any merger or other
business combination approved by the Board of Directors, since the Rights may be
redeemed generally at any time by the Company as set forth above.
LIABILITY AND INDEMNIFICATION OF
DIRECTORS AND OFFICERS
GENERAL
Officers and directors of the Company are covered by certain provisions of the
Delaware GCL, the Certificate of Incorporation, the By-laws and insurance
policies which serve to limit, and, in certain instances, to indemnify them
against, certain liabilities which they may incur in such capacities. None of
such provisions would have retroactive effect for periods prior to the
Distribution Date, and the Company is not aware of any claim or proceeding in
the last three years, or any threatened claim, which would have been or would be
covered by these provisions. These various provisions are described below.
ELIMINATION OF LIABILITY IN CERTAIN CIRCUMSTANCES
In June 1986, Delaware enacted legislation which authorizes corporations to
limit or eliminate the personal liability of directors to corporations and their
stockholders for monetary damages for breach of directors' fiduciary duty of
care. The duty of care requires that, when acting on behalf of the corporation,
directors must exercise an informed business judgment based on all material
information reasonably available to them. Absent the limitations now authorized
by such legislation, directors are accountable to corporations and their
stockholders for monetary damages for conduct constituting negligence or gross
negligence in the exercise of their duty of care. Although the statute does not
change directors' duty of care, it enables corporations to limit available
relief to equitable remedies such as injunction or rescission. The Certificate
of Incorporation limits the liability of directors to the Company or its
stockholders (in their capacity as directors but not in their capacity as
officers) to the fullest extent permitted by such legislation. Specifically, the
directors of the Company will not be personally liable for monetary damages for
breach of a director's fiduciary duty as director, except for liability (i) for
any breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for unlawful payments of
dividends or unlawful stock repurchases or redemptions as provided in Section
174 of the Delaware GCL, or (iv) for any transaction from which the director
derived an improper personal benefit.
INDEMNIFICATION AND INSURANCE
As a Delaware corporation, the Company has the power, under specified
circumstances generally requiring the director or officer to act in good faith
and in a manner he reasonably believes to be in or not opposed to the Company's
best interests, to indemnify its directors and officers in connection with
actions, suits or proceedings brought against them by a third party or in the
name of the Company, by reason of the fact that they were or are such directors
or officers, against expenses, judgments, fines and amounts paid in settlement
in connection with any such action, suit or proceeding. The By-laws generally
provide for mandatory indemnification of the Company's directors and officers to
the full extent provided by Delaware corporate law.
62
The Company intends to purchase and maintain insurance on behalf of any person
who is or was a director or officer of the Company, or is or was a director or
officer of the Company serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the Company would have the power or obligation to
indemnify him against such liability under the provisions of the By-laws.
INDEPENDENT PUBLIC ACCOUNTANTS
The Company has appointed Coopers & Lybrand L.L.P. as the Company's independent
public accountants to audit the Company's financial statements as of and for the
year ending December 31, 1996. Coopers & Lybrand L.L.P. has audited the
Company's historical financial statements as of December 31, 1995 and 1994 and
for each of the three years in the period ended December 31, 1995.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form 10
(the "Registration Statement", which term shall include any amendments or
supplements thereto) under the Exchange Act with respect to the shares of Common
Stock being received by 3M stockholders in the Distribution. This Information
Statement does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto, to which reference is hereby
made. Statements made in this Information Statement as to the contents of any
contract, agreement or other document referred to herein are not necessarily
complete. With respect to each such contract, agreement or other document filed
as an exhibit to the Registration Statement, reference is made to such exhibit
for a more complete description of the matter involved, and each such statement
shall be deemed qualified in its entirety by such reference.
The Registration Statement and the exhibits thereto filed by the Company with
the Commission may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, as well as at the Regional Offices of the Commission at Northwest
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
7 World Trade Center, Suite 1300, Floor, New York, New York 10048. Copies of
such information can be obtained by mail from the Public Reference Branch of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates.
63
INDEX TO HISTORICAL FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Page
Report of Independent Accountants F-2
Historical Statements of Operations for the three month periods ended March 31,
1996 and 1995 (unaudited) and for each of the three years in the period ended
December 31, 1995 F-3
Historical Balance Sheets as of March 31, 1996 (unaudited) and as of December 31, 1995 and
1994 F-4
Historical Statements of Cash Flows for the three month periods ended March 31,
1996 and 1995 (unaudited) and for each of the three years in the period ended
December 31, 1995 F-5
Notes to Historical Financial Statements F-6
</TABLE>
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of Minnesota Mining
and Manufacturing Company:
We have audited the historical financial statements of the businesses to
comprise Imation Corp. (as described in Note 1 to the historical financial
statements) listed on page F-1 of this Information Statement. These historical
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these historical 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 our audits provide a reasonable basis for our opinion.
In our opinion, the historical financial statements referred to above present
fairly, in all material respects, the financial position of Imation Corp. as of
December 31, 1995 and 1994, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1995 in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Minneapolis, Minnesota
March 29, 1996
F-2
IMATION CORP.
HISTORICAL STATEMENTS OF OPERATIONS
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
1996 1995 1995 1994 1993
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Net revenues $576.1 $576.7 $2,245.6 $2,280.5 $2,307.8
Cost of goods sold 373.8 364.2 1,520.9 1,442.0 1,421.6
Gross profit 202.3 212.5 724.7 838.5 886.2
Operating expenses:
Selling, general and
administrative 130.7 137.9 539.4 531.5 529.0
Research and development 47.9 56.4 222.4 211.2 216.7
Restructuring charge 10.4 -- 111.8 -- --
Total 189.0 194.3 873.6 742.7 745.7
Operating income (loss) 13.3 18.2 (148.9) 95.8 140.5
Interest expense and other 3.2 5.2 17.9 14.5 13.1
Income (loss) before tax and
minority interest 10.1 13.0 (166.8) 81.3 127.4
Income tax provision
(benefit) 4.1 5.5 (70.5) 29.3 51.8
Minority interest (0.1) -- (11.3) (2.3) 0.3
Net income (loss) $ 6.1 $ 7.5 $ (85.0) $ 54.3 $ 75.3
</TABLE>
THE ACCOMPANYING NOTES TO HISTORICAL FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS.
F-3
IMATION CORP.
HISTORICAL BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
AS OF MARCH 31, AS OF DECEMBER 31,
1996 1995 1994
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets
Accounts receivable, net $ 472.2 $ 479.5 $ 476.5
Inventories:
Finished goods 240.1 244.0 290.5
Work in process 77.6 81.2 75.2
Raw materials and supplies 102.4 101.1 107.8
Total inventories 420.1 426.3 473.5
Other current assets 48.1 48.8 47.6
Total current assets 940.4 954.6 997.6
Property, Plant and Equipment, Net 503.9 513.2 654.9
Other Assets 75.7 73.7 19.2
Total Assets $1,520.0 $1,541.5 $1,671.7
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable $ 117.0 $ 125.9 $ 129.0
Accrued payroll 52.8 44.4 42.4
Other current liabilities 137.2 125.9 112.2
Total current liabilities 307.0 296.2 283.6
Other Liabilities 91.3 96.6 88.1
Commitments and Contingencies
Equity 1,121.7 1,148.7 1,300.0
Total Liabilities and Equity $1,520.0 $1,541.5 $1,671.7
</TABLE>
THE ACCOMPANYING NOTES TO HISTORICAL FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS.
F-4
IMATION, CORP.
HISTORICAL STATEMENTS OF CASH FLOWS
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEARS ENDED
MARCH 31, DECEMBER 31,
1996 1995 1995 1994 1993
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 6.1 $ 7.5 $ (85.0) $ 54.3 $ 75.3
Non-cash items included in net income (loss):
Depreciation 48.5 49.1 189.5 185.9 184.4
Deferred income taxes 6.1 0.6 (68.1) 14.0 (10.0)
Restructuring charge and asset write-offs 9.8 -- 166.3 -- --
Other (0.2) 1.6 2.1 1.5 5.1
Changes in operating assets and liabilities:
Accounts receivable 5.1 3.1 (0.6) (16.8) (53.6)
Inventories 4.6 (26.3) 25.4 (87.8) 8.7
Other (10.3) (6.1) 27.2 19.0 19.3
Net cash provided by operating activities 69.7 29.5 256.8 170.1 229.2
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (40.7) (46.0) (180.2) (182.7) (211.4)
Other 0.6 (0.9) (7.3) 3.0 1.2
Net cash used in investing activities (40.1) (46.9) (187.5) (179.7) (210.2)
CASH FLOWS FROM FINANCING ACTIVITIES
Net cash (paid to) received from 3M (27.0) 13.4 (72.9) 18.5 (13.1)
Effect of exchange rate changes on cash (2.6) 4.0 3.6 (8.9) (5.9)
Net change in cash and equivalents $ -- $ -- $ -- $ -- $ --
</TABLE>
THE ACCOMPANYING NOTES TO HISTORICAL FINANCIAL STATEMENTS ARE AN INTEGRAL
PART OF THESE STATEMENTS.
F-5
IMATION CORP.
NOTES TO HISTORICAL FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
NOTE 1 -- BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
Imation Corp. (the "Company") is a newly formed Delaware corporation which
initially will be a wholly-owned subsidiary of Minnesota Mining and
Manufacturing Company ("3M"). On November 13, 1995, 3M announced its intention
to launch its data storage and imaging systems businesses as an independent,
publicly owned company. This transaction is expected to be effected through the
distribution of shares of the Company to 3M shareholders around July 1, 1996
("the Distribution"). Prior to the Distribution, 3M plans to transfer to the
Company substantially all of the assets and liabilities associated with 3M's
global data storage and imaging systems businesses. 3M and the Company will
enter into a number of agreements to facilitate the Distribution and the
transition of the Company to an independent business enterprise.
BASIS OF PRESENTATION
The historical financial statements reflect the assets, liabilities, revenues
and expenses that were directly related to the Company as they were operated
within 3M. In cases involving assets and liabilities not specifically
identifiable to any particular business of 3M, only those assets and liabilities
expected to be transferred to the Company prior to the Distribution were
included in the Company's separate historical balance sheets. Regardless of the
allocation of these assets and liabilities, however, the Company's Statements of
Operations include all of the related costs of doing business including an
allocation of certain general corporate expenses of 3M which were not directly
related to these businesses including costs for corporate logistics, corporate
research and development, information technologies, finance, legal and corporate
executives. These allocations were based on a variety of factors including, for
example, personnel, space, time and effort, and sales volume. Management
believes these allocations were made on a reasonable basis. All material
inter-company transactions and balances between the Company's businesses have
been eliminated.
3M uses a centralized approach to cash management and the financing of its
operations. As a result, cash and equivalents, and debt were not allocated to
the Company in the financial statements. The historical statements of operations
include an allocation of 3M's interest expense (see Note 6). The Company's
financing requirements are represented by cash transactions with 3M and are
reflected in the "Net Investment by 3M" account (see Note 7). Certain assets and
liabilities of 3M such as certain employee benefit and income tax-related
balances have not been allocated to the Company and are included in the Net
Investment by 3M account. Activity in the Net Investment by 3M equity account
relates to net cash flows of the Company as well as changes in the assets and
liabilities not allocated to the Company.
The Company also participated in 3M's centralized foreign currency and interest
rate risk management functions. As part of these activities, derivative
financial instruments are utilized to manage risks generally associated with
foreign exchange rate and interest rate market volatility. 3M does not hold or
issue derivative financial instruments for trading purposes. 3M is not a party
to leveraged derivatives.
The historical balance sheets do not reflect any of the associated asset or
liability positions resulting from these activities. The historical statements
of operations and statements of cash flows, however, do reflect an allocation of
the related benefits and costs from these functions. Realized and unrealized
gains and losses are deferred until the underlying transactions are realized.
These gains and losses are recognized either as interest expense over the
borrowing period for interest rate and currency swaps or as an adjustment to
cost of goods sold for inventory-related hedge transactions. Cash flows
attributable to these financial instruments are included with the cash flows
from the associated hedged items.
The minority interest within the historical statements of operations gives
recognition to the Company's share of net income (loss) of certain majority
owned subsidiaries of 3M. The minority
F-6
shareholders' proportionate interests in the net assets of majority owned
subsidiaries have not been presented in the historical balance sheets based on
the asssumption that the Company will obtain 100 percent ownership of the assets
and liabilities of these subsidiaries in connection with the Distribution.
The financial information included herein may not necessarily be indicative of
the financial position, results of operations or cash flows of the Company in
the future or what the financial position, results of operations or cash flows
would have been if the Company had been a separate, independent company during
the periods presented.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL DATA (UNAUDITED)
The financial information presented as of March 31, 1996 and for each of the
three month periods ended March 31, 1996 and 1995 is unaudited. In the opinion
of management, this financial information reflects all adjustments necessary for
a fair presentation of the financial information for such periods. These
adjustments, except for the restructuring charge recorded in the three months
ended March 31, 1996, consist of normal, recurring items. The results of
operations for the three month period ended March 31, 1996 should not
necessarily be taken as indicative of the results of operations that may be
expected for the entire year 1996.
FOREIGN CURRENCY TRANSLATION
Local currencies are generally considered the functional currencies outside the
United States. Assets and liabilities are translated at year-end exchange rates
with cumulative translation adjustments included as a component of equity.
Income and expense items are translated at average rates of exchange prevailing
during the year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Principal areas requiring the
use of estimates include: the allocation of financial statement amounts between
the Company and 3M, determination of allowances for uncollectible accounts
receivable and obsolete/excess inventories, and assessments of the
recoverability of deferred tax assets and certain long-lived assets.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost generally
determined on a first-in first-out basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Plant and equipment are
depreciated on a straight-line basis over their estimated useful lives.
Maintenance and repairs are expensed as incurred. Periodic reviews for
impairment of the carrying value of property, plant and equipment are made based
on undiscounted future cash flows.
EMPLOYEE SEVERANCE INDEMNITIES
Employee severance indemnities consist of termination indemnities and are
accrued for each employee in accordance with labor legislation in each
applicable country.
REVENUE RECOGNITION
Revenue is recognized upon shipment of goods to customers or upon performance
of services. Revenues from service contracts are deferred and recognized over
the life of the contracts as service is performed.
F-7
CONCENTRATIONS OF CREDIT RISK
The Company sells a wide range of products and services to a diversified base of
customers around the world and performs ongoing credit evaluations of its
customers' financial condition, and therefore believes there is no material
concentration of credit risk.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred.
ADVERTISING COSTS
Advertising costs are charged to expense as incurred and totaled $52 million,
$52 million and $45 million in 1995, 1994 and 1993 respectively.
INCOME TAXES
As an operating unit within 3M, the Company does not file separate tax returns
but rather is included in the income tax returns filed by 3M and its
subsidiaries in various domestic and foreign jurisdictions. The Company's
allocated share of 3M's income tax provision was based on the "separate return"
method, except that the tax benefit of the Company's tax losses in certain
jurisdictions was allocated to the Company on a current basis if such losses
could be utilized by 3M in its tax returns and an assessment of realizability of
certain deferred tax assets was made assuming the availability of future 3M
taxable income. The balance of accrued current income taxes for the Company's
operations is included in the Net Investment by 3M equity account because 3M
pays all taxes and receives all tax refunds on the Company's behalf.
F-8
NOTE 3 -- SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
1995 1994
(MILLIONS)
<S> <C> <C>
ACCOUNTS RECEIVABLE
Accounts receivable $ 497.0 $ 495.2
Less allowances 17.5 18.7
Accounts receivable, net $ 479.5 $ 476.5
OTHER CURRENT ASSETS
Deferred taxes $ 23.4 $ 21.9
Other 25.4 25.7
Total other current assets $ 48.8 $ 47.6
PROPERTY, PLANT AND EQUIPMENT
Land $ 7.7 $ 7.6
Buildings and leasehold improvements 180.9 170.5
Machinery and equipment 1,616.2 1,489.3
Construction in progress 63.5 98.3
1,868.3 1,765.7
Less accumulated depreciation 1,355.1 1,110.8
Property, plant and equipment, net $ 513.2 $ 654.9
OTHER ASSETS
Deferred taxes $ 60.6 $ 3.2
Other 13.1 16.0
Total other assets $ 73.7 $ 19.2
OTHER CURRENT LIABILITIES
Accrued rebates $ 44.6 $ 30.6
Deferred income 35.8 38.8
Other 45.5 42.8
Total other current liabilities $ 125.9 $ 112.2
OTHER LIABILITIES
Employee severance indemnities $ 59.2 $ 49.4
Other 37.4 38.7
Total other liabilities $ 96.6 $ 88.1
</TABLE>
F-9
NOTE 4 -- RESTRUCTURING CHARGE AND ASSET WRITE-OFFS
In late 1995, the Company initiated a review of all of its operations, including
its organizational structure, manufacturing operations, products and markets. In
connection with this review, the Company has adopted a reorganization plan to
rationalize its manufacturing operations, streamline its organizational
structure and write-off impaired assets.
To reflect the direct and indirect costs associated with this reorganization
plan, 3M recognized a loss on disposal which included pre-tax charges of
approximately $340 million in the fourth quarter of 1995 as a part of its
discontinued operations. The Company will reflect the direct portion of these
charges, approximately $250 million, in its separate financial statements
partially in 1995 and partially in 1996 based upon the timing recognition
criteria required for restructuring charges. The Company recorded $166.3 million
of these charges ($88.3 million after-taxes and minority interest) in its 1995
historical financial statements and an additional $10.4 million ($6.1 million
after-taxes and minority interest) in the first quarter of 1996. The balance of
the $250 million relates primarily to employee severance costs and is expected
to be reflected in the Company's financial statements during the remaining
quarters of 1996.
The 1995 special charge of $166.3 million includes $111.8 million related to
world-wide manufacturing rationalization programs to exit less profitable
manufacturing locations and to centralize manufacturing in the United States and
in Italy, and consists principally of write-offs of property, plant and
equipment. This $111.8 million charge is included as a separate restructuring
charge in the statement of operations. The remaining 1995 special charge of
$54.5 million relates primarily to asset write-offs included in cost of goods
sold.
The first quarter 1996 restructuring charge reflects costs for certain
voluntary separation programs.
F-10
NOTE 5 -- INCOME TAXES
<TABLE>
<CAPTION>
1995 1994 1993
(MILLIONS)
<S> <C> <C> <C>
INCOME (LOSS) BEFORE TAX AND MINORITY
INTEREST
U.S. $(136.1) $63.2 $ 74.8
International (30.7) 18.1 52.6
Total $(166.8) $81.3 $127.4
INCOME TAX PROVISION (BENEFIT)
Currently payable (refundable)
Federal $ (14.0) $ 8.3 $ 24.0
State (4.3) 1.7 3.5
International 15.6 4.6 34.4
Deferred
Federal (34.9) 9.4 (5.6)
State (3.1) 0.8 (0.4)
International (29.8) 4.5 (4.1)
Total $ (70.5) $29.3 $ 51.8
</TABLE>
<TABLE>
<CAPTION>
1995 1994
(MILLIONS)
<S> <C> <C>
COMPONENTS OF NET DEFERRED TAX ASSETS AND
LIABILITIES
Receivables $ 4.0 $ 5.3
Inventories 5.9 5.8
Property, plant and equipment 44.5 (16.9)
Payroll 19.2 16.9
Other, net 9.5 4.2
Net Deferred Tax Assets and Liabilities $83.1 $ 15.3
</TABLE>
Management believes the Company, or in certain cases 3M prior to the
Distribution, will generate sufficient taxable income in future periods to
recover fully the Company's deferred tax assets.
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
RECONCILIATION OF EFFECTIVE INCOME TAX RATE
Statutory U.S. tax rate (35.0)% 35.0% 35.0%
State income taxes, net of federal benefit (6.3) 3.1 2.4
International taxes in excess of statutory rate (0.3) 3.4 9.3
All other, primarily foreign tax credits (0.7) (5.5) (6.0)
Effective Worldwide Tax Rate (42.3)% 36.0% 40.7%
</TABLE>
F-11
NOTE 6 -- INTEREST EXPENSE
The Company's financial statements include allocations of 3M's interest expense
totaling $18.8 million, $16.3 million and $13.3 million in 1995, 1994 and 1993,
respectively. These allocations are based on a targeted non-ESOP debt
anticipated at the Distribution Date of $250 million. The interest rates used
were 7.5%, 6.5% and 5.3% in 1995, 1994 and 1993, respectively, which reflect
3M's weighted average effective interest rates on non-ESOP debt during these
periods. The historical balance sheets of the Company do not include this debt
as the total capitalization of the Company is reflected in its equity.
NOTE 7 -- EQUITY
Changes in equity during each of the years ended December 31 were as follows:
<TABLE>
<CAPTION>
NET CUMULATIVE
INVESTMENT TRANSLATION TOTAL
BY 3M ADJUSTMENT EQUITY
(MILLIONS)
<S> <C> <C> <C>
Balance at December 31, 1992 $1,210.7 $(38.5) $1,172.2
Net income 75.3 75.3
Net amount paid to 3M (13.1) (13.1)
Net change in cumulative
translation (34.6) (34.6)
Balance at December 31, 1993 1,272.9 (73.1) 1,199.8
Net income 54.3 54.3
Net amount received from 3M 18.5 18.5
Net change in cumulative
translation 27.4 27.4
Balance at December 31, 1994 1,345.7 (45.7) 1,300.0
Net loss (85.0) (85.0)
Net amount paid to 3M (72.9) (72.9)
Net change in cumulative
translation 6.6 6.6
Balance at December 31, 1995 $1,187.8 $(39.1) $1,148.7
</TABLE>
NOTE 8 -- REVENUES BY CLASS OF SIMILAR PRODUCTS OR SERVICES (UNAUDITED)
The Company operates in one industry segment, the information processing
industry, supplying products and services to meet the information processing
needs for a variety of customer applications. Below are the product and service
revenues by class of similar products or services for each of the years ended
December 31.
<TABLE>
<CAPTION>
1995 1994 1993
(MILLIONS)
<S> <C> <C> <C>
REVENUE BY CLASSES OF SIMILAR PRODUCTS OR
SERVICES
Information processing, management and storage $ 930.7 $ 935.4 $ 947.3
Information printing 542.2 566.0 567.0
Medical and photo imaging 608.1 589.1 564.4
Other 164.6 190.0 229.1
Total $2,245.6 $2,280.5 $2,307.8
</TABLE>
F-12
NOTE 9 -- GEOGRAPHIC AREAS
Information in the table below is presented on the same basis utilized by the
Company to manage its business. Export sales and certain income and expense
items are reported in the geographic area where the final sale to customers is
made, rather than where the transaction originates.
<TABLE>
<CAPTION>
EUROPE OTHER
UNITED AND INTERNATIONAL ELIMINATIONS TOTAL
STATES MIDDLE EAST AREAS* AND OTHER COMPANY
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net Revenues 1995 $1,128.8 $803.8 $313.0 $2,245.6
to Customers 1994 1,199.9 764.1 316.5 2,280.5
1993 1,247.8 763.2 296.8 2,307.8
Transfers Between 1995 $ 290.9 $ 76.2 $ 4.0 $(371.1)
Geographic Areas 1994 341.2 89.4 0.1 (430.7)
1993 310.9 86.5 0.1 (397.5)
Operating ** 1995 $ (169.0) $ 55.8 $(35.7) $ (148.9)
Income 1994 1.5 72.9 21.4 95.8
1993 6.0 97.8 36.7 140.5
Identifiable
Assets 1995 $ 816.4 $575.7 $149.7 $ (0.3) $1,541.5
1994 894.9 582.9 194.7 (0.8) 1,671.7
1993 857.4 517.8 176.2 (5.8) 1,545.6
</TABLE>
* Includes Latin America, Asia and Canada.
** Includes special charges of $99.8 million in the United States, $20.4 million
in Europe and Middle East and $46.1 million in Other International Areas.
NOTE 10 -- RETIREMENT PLANS
Prior to the Distribution, employees of the Company participated in various
3M-sponsored retirement plans covering substantially all 3M United States
employees and many employees outside the United States. The following
information is provided for historical purposes only, since the Company intends
to adopt different retirement plans.
3M's pension benefits are based principally on an employee's years of service
and compensation near retirement. Plan assets are invested in common stocks,
fixed-income securities, real estate and other investments.
3M's funding policy is to deposit with an independent trustee amounts at least
equal to those required by law. A trust fund is maintained to provide pension
benefits to United States plan participants and their beneficiaries. In
addition, a number of plans are maintained by deposits with insurance companies.
The Company's allocated portion of pension costs were $24 million, $25 million
and $28 million in 1995, 1994 and 1993, respectively.
Net pension cost and the funded status of pension plans as shown below includes
all employees covered by 3M plans including those associated with the Company.
3M has decided to retain the accrued liabilities (and the assets attributable to
such liabilities) under its United States pension plan pertaining to employees
of the Company. The Company intends to adopt a separate cash balance pension
plan to be effective July 1, 1996 which will cover substantially all United
States employees of the Company. All employees of the Company who are previous
employees of 3M will retain their right to receive their accrued benefits under
3M's United States pension plan.
F-13
<TABLE>
<CAPTION>
U.S. PLAN INTERNATIONAL PLANS
1995 1994 1993 1995 1994 1993
(MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
NET PENSION COST
Service cost $ 96 $ 117 $ 110 $ 86 $ 85 $ 86
Interest cost 304 280 276 92 89 80
Return on plan assets --
actual (846) 70 (430) (124) (2) (185)
Net amortization and deferral 532 (377) 154 39 (79) 112
Net pension cost $ 86 $ 90 $ 110 $ 93 $ 93 $ 93
</TABLE>
<TABLE>
<CAPTION>
U.S. PLAN INTERNATIONAL PLANS
1995 1994 1995 1994
(MILLIONS)
<S> <C> <C> <C> <C>
FUNDED STATUS OF PENSION PLANS
Plan assets at fair value $4,134 $3,343 $1,293 $1,333
Accrued pension cost 97 161 110 97
Amount provided for future benefits $4,231 $3,504 $1,403 $1,430
Actuarial present value of:
Vested benefit obligation 3,666 2,889 1,051 1,022
Non-vested benefit obligation 521 423 108 100
Accumulated benefit obligation $4,187 $3,312 $1,159 $1,122
Amount provided for future benefits less
accumulated benefit obligation 44 192 244 308
Projected benefit obligation 4,696 3,721 1,482 1,514
Plan assets at fair value less projected benefit
obligation $ (562) $ (378) $ (189) $ (181)
Unrecognized net transition (asset) obligation (149) (187) 22 22
Other unrecognized items 614 404 57 62
Accrued pension cost $ (97) $ (161) $ (110) $ (97)
</TABLE>
<TABLE>
<CAPTION>
U.S. PLAN INTERNATIONAL PLANS
1995 1994 1993 1995 1994 1993
<S> <C> <C> <C> <C> <C> <C>
ASSUMPTIONS AT YEAR-END
Discount rate 7.00% 8.25% 7.25% 7.10% 7.45% 7.26%
Compensation rate increase 5.00% 5.00% 5.00% 5.38% 5.71% 5.31%
Long-term rate of return on assets 9.00% 9.00% 9.00% 7.59% 7.65% 7.64%
</TABLE>
Net pension cost is determined using assumptions at the beginning of the
year. Funded status is determined using assumptions at year-end.
Prior to the Distribution, U.S. employees of the Company also participated in a
3M-sponsored employee savings plan under Section 401(k) of the Internal Revenue
Code. Under this plan, 3M matches employee contributions of up to 6 percent of
compensation at rates ranging from 35 to 85 percent depending upon financial
performance. 3M's matching contributions to the employee savings plan are funded
through an employee stock ownership plan. The Company's allocation of the
expense related to the employee savings plan was $4.5 million, $4.6 million and
$4.7 million in 1995, 1994 and 1993, respectively.
The Company expects to adopt its own employee savings plan under Section 401(k)
of the Internal Revenue Code in which it will make matching contributions
through an employee stock ownership plan.
F-14
NOTE 11 -- OTHER POSTRETIREMENT BENEFITS
Prior to the Distribution, employees of the Company who were eligible to retire
from 3M were eligible to participate in various 3M health care and life
insurance benefit plans available to substantially all of 3M's United States
employees. The following information is provided for historical purposes only,
since the Company does not intend to adopt similar postretirement benefit plans.
3M has set aside funds with an independent trustee for these postretirement
benefits and makes periodic contributions to the plans. The assets held by the
trustee are invested in common stocks and fixed-income securities. Employees
outside the United States are covered principally by government-sponsored plans.
The cost of 3M-provided plans for these employees is not material. The Company's
allocation of the net charges to income for plans covering United States
employees was $9 million, $8 million and $8 million in 1995, 1994 and 1993,
respectively.
The table below sets forth the historical components of the net periodic
postretirement benefit cost and a reconciliation of the funded status of the
postretirement benefit plans for all 3M United States employees including those
associated with the Company.
1995 1994 1993
(MILLIONS)
NET PERIODIC POSTRETIREMENT BENEFIT
COST
Service cost $ 26 $ 28 $ 23
Interest cost 63 55 53
Return on plan assets -- actual (76) 16 (23)
Net amortization and deferral 51 (40) 1
Total $ 64 $ 59 $ 54
1995 1994
(MILLIONS)
FUNDED STATUS OF POSTRETIREMENT BENEFIT PLANS
Fair value of plan assets $ 398 $ 319
Accumulated postretirement benefit obligation:
Retirees $ 286 $ 256
Fully eligible active plan participants 201 167
Other active plan participants 468 367
Benefit obligation $ 955 $ 790
Plan assets less benefit obligation $(557) $(471)
Adjustments and unrecognized items 134 67
Accrued postretirement cost $(423) $(404)
The accumulated postretirement benefit obligation and related benefit cost are
determined through the application of relevant actuarial assumptions. 3M
anticipates its health care cost trend rate to slow from 6.9 percent in 1996 to
5.0 percent in 2003, after which the trend rate is expected to stabilize. The
effect of a one percentage point increase in the assumed health care cost trend
rate for each future year would increase the benefit obligation by $78 million
and the current year benefit expense by $9 million. Other actuarial assumptions
include an expected long-term rate of return on plan assets of 9.0 percent
(before taxes applicable to a portion of the return on plan assets), and a
discount rate of 7.0 percent.
F-15
NOTE 12 -- EMPLOYEE STOCK PLANS
Prior to the Distribution certain employees of the Company participated in 3M's
Management Stock Ownership Program covering management employees of 3M. In lieu
of a 1996 annual grant under 3M's program, the Company intends to grant to its
employees who would otherwise have been eligible to receive a 1996 grant under
3M's Program, options to purchase shares of the Common Stock under the new stock
option plan of the Company which was approved by 3M, as the sole stockholder of
the Company, prior to Distribution.
As a result, shortly after the Distribution the Company expects to grant to such
employees options to purchase approximately [1,000,000] shares of Common Stock.
NOTE 13 -- COMMITMENTS AND CONTINGENCIES
The Company is a party to various claims and litigation arising from the normal
course of business, including product liability and environmental claims. While
there can be no certainty that the Company may not ultimately incur charges in
excess of presently established accruals, management believes that such
additional charges, if any, will not have a material adverse effect on the
Company's financial position.
On or immediately after the Distribution, the Company expects to enter into a
debt facility agreement to borrow approximately $280 million. Of this amount,
the Company will lend $30 million to the employee stock ownership plan it
expects to establish. The terms of these borrowings are expected to contain
customary covenants including financial covenants. In addition, in connection
with the Distribution the Company intends to enter into a number of agreements
with 3M to facilitate the Distribution and the transition of the Company to an
independent business enterprise. Such agreements are expected to relate to tax
sharing matters, corporate services to be provided by 3M, environmental
liabilities, intellectual property, supply, service, contract manufacturing and
sales agency matters, and shared facilities.
NOTE 14 -- NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board issued Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." This statement requires that long-lived assets be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. If the sum of the
undiscounted expected future cash flows is less than the carrying amount of the
asset, an impairment loss is recognized. The impact of this statement on the
Company is immaterial.
In October 1995, the Financial Accounting Standards Board issued Statement No.
123, "Accounting for Stock-Based Compensation." This statement establishes
financial accounting and reporting standards for stock-based employee
compensation plans. The Company intends to follow the option that permits
entities to continue to apply current accounting standards to stock-based
employee compensation arrangements. Effective with year-end 1996 reporting, the
Company will disclose pro forma net income and earnings per share amounts as if
Statement No. 123 accounting were applied to the Company's stock compensation
programs that may exist once the Company is established as a separate entity
from 3M.
F-16
PART II
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements -- Index to Historical Financial Statements
(b) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
2.1 Transfer and Distribution Agreement, dated as of ______, 1996, between Minnesota Mining
and Manufacturing Company ("3M") and the Registrant.*
3.1 Restated Certificate of Incorporation of the Registrant.*
3.2 Amended and Restated By-Laws of the Registrant.*
4.1 Rights Agreement, dated as of _______, 1996 between the Registrant and Norwest Bank
Minnesota, N.A., as Rights Agent.*
4.2 Form of Certificate of Designations, Preferences and Rights of Series A Junior
Participating Preferred Stock of the Registrant.*
10.1 Form of Tax Sharing and Indemnification Agreement, to be dated as of July 1, 1996 between
3M and the Registrant.*
10.2 Form of Corporate Services Transition Agreement, to be dated as of July 1, 1996 between
3M and the Registrant.*
10.3 Form of Environmental Matters Agreement to be dated as of July 1, 1996 between 3M and the
Registrant.*
10.4 Form of Intellectual Property Agreement, to be dated as of July 1, 1996 between 3M and
the Registrant.*
10.5 Form of Supply Agreement, to be dated as of July 1, 1996, between 3M and the Registrant.*
10.6 Form of Lease Agreement to be dated as of July 1, 1996 between 3M and the Registrant.*
10.7 Form of Employment Agreement, to be dated as of July 1, 1996, between William T. Monahan
and the Registrant.*
10.8 Form of Imation 1996 Employee Stock Incentive Program.*
10.9 Form of Imation Pension Plan.*
10.10 Form of Imation Nonqualified Pension Plan.*
10.11 Form of Imation 401(k) Plan and Employee Stock Ownership Plan.*
10.12 Form of Imation 1996 Director Stock Compensation Plan.*
21.1 Subsidiaries of the Registrant.*
</TABLE>
* To be filed by amendment.
II-1
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
IMATION CORP.
By /s/ W.T. MONAHAN
Name: W.T. Monahan
Title: Chief Executive Officer
Date: May 24, 1996
II-2
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
<S> <C> <C>
2.1 Transfer and Distribution Agreement, dated as of _______, 1996, between Minnesota
Mining and Manufacturing Company ("3M") and the Registrant.*
3.1 Restated Certificate of Incorporation of the Registrant.*
3.2 Amended and Restated By-Laws of the Registrant.*
4.1 Rights Agreement, dated as of _______, 1996 between the Company and Norwest Bank
Minnesota, N.A., as Rights Agent.*
4.2 Form of Certificate of Designations, Preferences and Rights of Series A Junior
Participating Preferred Stock of the Registrant.*
10.1 Form of Tax Sharing and Indemnification Agreement, to be dated as of July 1, 1996
between 3M and the Registrant.*
10.2 Form of Corporate Services Transition Agreement, to be dated as of July 1, 1996
between 3M and the Registrant.*
10.3 Form of Environmental Matters Agreement to be dated as of July 1, 1996 between 3M
and the Registrant.*
10.4 Form of Intellectual Property Agreement, to be dated as of July 1, 1996 between
3M and the Registrant.*
10.5 Form of Supply Agreement, to be dated as of July 1, 1996 between 3M and the
Registrant.*
10.6 Form of Lease Agreement to be dated as of July 1, 1996 between 3M and the
Registrant.*
10.7 Form of Employment Agreement, to be dated as of July 1, 1996, between William T.
Monahan and the Registrant.*
10.8 Form of Imation 1996 Employee Stock Incentive Program.*
10.9 Form of Imation Pension Plan.*
10.10 Form of Imation Nonqualified Pension Plan.*
10.11 Form of Imation 401(k) Plan and Employee Stock Ownership Plan.*
10.12 Form of Imation 1996 Director Stock Compensation Plan.*
21.1 Subsidiaries of the Registrant.*
</TABLE>
* To be filed by amendment.
