SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO________
COMMISSION FILE NUMBER: 1-14310
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IMATION CORP.
(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 55128
OAKDALE, MINNESOTA (Zip Code)
(Address of principal executive offices)
(612) 704-4000
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
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Common Stock, $.01 per share New York Stock Exchange, Inc.;
Chicago Stock Exchange, Incorporated
Preferred Stock Purchase Rights New York Stock Exchange, Inc.;
Chicago Stock Exchange, Incorporated
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No ___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by Reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of voting stock of Imation Corp. held by
non-affiliates of the Registrant, based on the closing price of $16.875 as
reported on the New York Stock Exchange on February 27, 1998: $684 million.
The number of shares outstanding of the Registrant's common stock on
February 27, 1998 was 40,597,915.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of Registrant's Proxy Statement for Registrant's 1998
Annual Meeting are incorporated by reference into Part III.
<PAGE>
PART I
ITEM 1. BUSINESS.
INTRODUCTION
Imation Corp. (together with its subsidiaries, "Imation" or the
"Company") was incorporated as a Delaware corporation in March 1996. The
Company's principal executive offices are located at 1 Imation Place, Oakdale,
Minnesota 55128 (telephone number (612) 704-4000). Prior to July 1, 1996,
Minnesota Mining and Manufacturing Company ("3M") operated the Company's
business through various divisions and subsidiaries.
The Company was formed as a result of the decision by 3M to spin-off a
separate company comprised of substantially all of the businesses previously
operated within 3M's data storage and imaging systems groups (the "Transferred
Businesses"). To effectuate the transaction, on June 18, 1996, the Board of
Directors of 3M declared a dividend payable to the holders of record of 3M
common stock as of June 28, 1996, based upon a ratio of one share of the
Company's common stock, par value $0.01 per share (the "Common Stock"), for
every ten shares of 3M common stock owned on the record date. Effective July 1,
1996 (the "Distribution Date"), all of the outstanding shares of Common Stock
were distributed to 3M stockholders (the "Distribution"). In connection with the
Distribution, 3M and the Company entered into various agreements to facilitate
the transition of the Company to an independent business enterprise. See
"Relationship Between 3M and the Company." As used herein, references to the
"Company" or "Imation" include the historical operating results and activities
of the business and operations which comprise the Company today.
In connection with the Distribution, the Company implemented certain
reorganization actions in order to rationalize its manufacturing operations,
streamline its organizational structure and write-off impaired assets. In
connection with these actions and based upon the timing criteria required for
the recognition of such charges, the Company recorded pre-tax charges in 1995
and 1996 totaling $254.7 million. The Company recorded $166.3 million of these
charges in its 1995 statement of operations, primarily for the write-down of
assets associated with its manufacturing rationalization programs, and $76.4
million in 1996, primarily related to employee separations for direct employees
of the Company and one-time charges associated with start-up activities. In
addition, in the fourth quarter of 1996, the Company recognized a
non-tax-deductible charge of $12.0 million for the in-process research and
development costs related to its acquisition of Luminous Corporation. (See Note
3 of Notes to Consolidated Financial Statements).
<PAGE>
In July 1997, the Company aligned its organizational structure to allow
greater accountability and focus in each of its product lines and business
units. Under the new organizational structure, the Company's businesses are
grouped into three organizations--Product Technologies, Growth Technologies and
Customer Solutions. The Product Technologies organization, which includes the
Company's more mature businesses such as standard diskettes and conventional
imaging, is being managed and structured for maximizing economic profit and
return on assets. The Growth Technologies organization currently includes the
Company's developmental and growth technology platforms including DryView
medical imagers, SuperDisk products and high-end tape storage products currently
being developed by the Company. The third organization, Customer Solutions, was
created as a new business opportunity aimed at delivering total customer
workflow solutions for the graphic arts and medical imaging industry.
In October 1997, the Company announced plans to further restructure its
worldwide operations in order to improve the Company's competitive position, to
focus resources on areas of strength and on growth opportunities, and to reduce
costs and eliminate unnecessary structure. Specific planned actions include the
restructuring of European operations, the sale of the CD-ROM business, the sale
or closure of certain manufacturing facilities, and the realignment and
reduction of general and administrative, manufacturing, marketing, and selected
research and development areas. The Company recorded a $199.9 million pre-tax
charge to fourth quarter 1997 earnings. The charge included approximately $170.0
million in restructuring charges primarily associated with employee separation
benefits and fixed asset write-offs, and additional special charges of $29.9
million, primarily associated with restructuring-related asset write-downs and
other year-end adjustments. The Company's 1997 results also include a third
quarter non-tax-deductible charge of $41.7 million for in-process research and
development costs related to the acquisition of Cemax-Icon, Inc. (See Note 3 of
Notes to Consolidated Financial Statements).
BUSINESS DESCRIPTION
The Company develops, manufactures and markets worldwide a wide variety
of products and services for the imaging and information 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, medical imaging, photographic imaging, and
commercial and consumer markets. A number of 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 today, the Company is expanding
its opportunities to serve the growing needs of its customers to create,
process, manipulate, store, reproduce and distribute increasing amounts of
information and images through the use of digital technologies. The Company
intends to leverage its existing market positions to increase the use of its
products and services as well as to expand its opportunities in the information
processing industry by developing more complete work flow solutions based on
digital technologies.
The Company operates in a single industry segment, the imaging and
information industry, supplying products and services 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.
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
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(IN MILLIONS)
<S> <C> <C> <C>
REVENUE BY CLASSES OF SIMILAR PRODUCTS OR SERVICES
Data Storage Products $847.3 $923.0 $930.7
Printing and Publishing Systems 502.8 529.9 542.2
Medical Imaging Systems and Photo Color Products 699.7 673.2 608.1
Other 152.0 152.1 164.6
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Total $2,201.8 $2,278.2 $2,245.6
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</TABLE>
The Company's products and services are sold in more than 60 countries
and nearly half of the Company's revenues are derived internationally. The
Company reports its operating results in three geographic areas--United States,
Europe/Middle East/Africa, and Latin America/Asia/Canada. Financial information
by geographic area can be found in Note 11 of Notes to Consolidated Financial
Statements.
DATA STORAGE PRODUCTS
The Company is the world's largest supplier and developer of branded
removable data storage media, in both magnetic and optical formats. The
Company's products include:
* 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 do not need to be retrieved on a frequent basis. Travan
cartridges more than double the storage capacity of the prior
mini-cartridge. Used primarily on desktop personal computer systems, local
area networks and workstation computer systems, the Travan cartridges make
up a family of innovative products that were introduced in 1995 through the
joint efforts of 3M, Hewlett Packard Company and a group of drive
manufacturers.
* 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. The Company recently
introduced its digital linear tape ("DLT") 4000 and 7000 Tape Library
Systems, which are additions to the Company's multi-format tape library
systems for the entry level to high-end network server market.
* 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 notebook personal computer systems, and also in workstations,
word processors and computer control equipment. In 1996, the Company
introduced the LS-120 diskette, a "next generation" 3.5-inch diskette with
a formatted capacity of 120 MB. The LS-120 diskette provides more than 80
times the storage capacity of a standard diskette, and is read/write
backward-compatible with the existing library of more than 5 billion 1.44
MB and 720 KB DOS-formatted diskettes. In 1997, the Company unveiled the
name "SuperDisk(TM)" as the primary identifier for its products based on
<PAGE>
the LS-120 technology. The Company introduced in 1997 the Imation SuperDisk
Drive--the first external, parallel port drive for SuperDisk LS-120
technology. In 1997, disk drive manufacturers MKE and Mitsubishi Electric
Corp. began producing LS-120 drives in large quantities. Since then, a
number of leading PC original equipment manufacturers began offering or
have announced plans to offer products based on SuperDisk LS-120 diskette
technology, including Compaq Computer Corp., Gateway 2000, NEC, Acer
America, Siemens Nixdorf AG, Exabyte, Vobis, Mitsubishi Electric Corp.,
Hi-Val, Hitachi-Maxell, Ltd., Samsung and Fujitsu ICL, Twinhead Corp., USA
Identity and Everex. The LS-120 technology was originally developed as part
of the Laser Servo 120 MB program in which the Company, Compaq Computer
Corporation and MKE are co-developers.
* Rewritable optical disks including magneto-optical (both 90mm and 130mm
formats), phase change disks (PD) 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
multi-user/client server computer installations. In 1997, the Company
entered into a joint development and business agreement with TeraStor
Corporation located in San Jose, California, to develop media for a new
class of rewritable mass storage based on TeraStor's near field recording
technology, which combines hard disk and optical technologies.
* Laser discs and CD-ROM products produced on a made-to-order basis and used
for the distribution of data and software to the personal computer and
mid-range markets. This business, which had 1997 revenues of approximately
$70 million, has manufacturing facilities in Menomonie, Wisconsin; Fremont,
California; and Breda, The Netherlands. In late 1997 the Company announced
it intends to sell its CD-ROM manufacturing portion of this business. The
Company will retain the laser disc manufacturing portion of this business.
PRINTING AND PUBLISHING SYSTEMS
The Company manufactures and markets products and provides service and
technical support for the printing, publishing and graphic arts markets.
Products include conventional color proofing systems, digital color proofing
systems and software, pre-press software, laser films and image setting
materials, metal 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. The Company also offers a number of digital proofing
systems, which provide color proofs from digital data before a job is put on a
printing press. In addition to its two-page digital proofing system (the Rainbow
model 2730 digital proofer), the Company introduced in 1997 a two-page digital
proofer for professional applications (the Rainbow model 2740 digital proofer),
and a new four-page (A2 size) ink jet digital proofing solution for users who
require large format, contract quality proofs (the Rainbow model 4700 proofer).
Through its subsidiary, Imation Publishing Software Corp. (formerly Luminous
Corporation) located in Seattle, Washington, the Company develops and markets a
variety of desktop software products for the prepress, print production,
printing and graphic arts industries. These products include Color Central,
Media Manager, OPEN, PressWise, PrintersWeb, TrapWise, Virtual Network and
Virtual
<PAGE>
Network Pro. Utilizing the Company's expertise in color, workflow, global
service and support, and the software tools developed by Imation Publishing
Software, in July 1997 the Company launched a new Graphic Imaging business
focused on delivering integrated workflow solutions to assist customers in
efficiently managing, storing and re-using digital images with color fidelity.
In addition to expanding its offerings of digital workflow solutions
for the graphic arts industry, in 1997 the Company also introduced several new
products in its conventional printing and publishing product lines. In late
1997, the Company introduced a new no-process printing plate, which is a
high-quality, medium-run, negative-acting "no-process" printing plate designed
to increase productivity and deliver high-quality performance. In 1997, the
Company also began test marketing its new DryView(TM) imagesetting film, a
hard-dot quality film that requires no chemical processing. This dry film
product was developed by the Company based on the same technology used to
develop the Company's DryView(TM) Laser Imaging System for the medical imaging
market. The dry imagesetting film is used in a number of dry film imagesetters
developed by systems developers including Scitex Corporation Ltd., ECRM
Incorporated, Ultre Division of Linotype-Hell Company and Exxtra Corporation.
The advantages to the user of the Company's "no-process" plates and its DryView
imagesetting film include reduced operating costs, increased productivity and
the elimination of "wet chemistry" processing resulting in significant benefits
to the environment.
MEDICAL IMAGING SYSTEMS AND PHOTO COLOR PRODUCTS
The Company develops, manufactures and markets diagnostic imaging film,
film processors and imaging systems for both X-ray and electronic imaging
systems. The Company's customers include major hospital group buying networks,
as well as individual hospitals, medical imaging centers and government
healthcare institutions. The Company participates in the conventional X-ray film
market and is the world's leading supplier of high-quality laser imaging systems
for producing film output of the medical diagnostic images generated by MRI, CT,
ultrasound, nuclear medicine and other electronic acquisition systems. Since the
mid-1980s, the Company has sold more than 14,000 medical laser imaging systems
worldwide. As of December 31, 1997, the Company had sold more than 3,800 Imation
DryView laser imaging systems since the proprietary system was introduced in
late 1995. Through a specially designed photothermographic process, the DryView
laser imaging system produces high-quality film images without using standard
wet processing chemistry. Since no wet chemistry is involved, the DryView laser
imaging systems represent a significant technological breakthrough and offer
significant cost savings, convenience and productivity gains and environmental
benefits to the health care industry.
In August 1997, the Company acquired Cemax-Icon, Inc. of Fremont,
California, a leading software developer and network systems integrator of
medical imaging and information management systems. Cemax-Icon offers a
portfolio of Picture Archiving and Communications Systems (PACS), teleradiology
and 3D visualization software products and services. The acquisition of
Cemax-Icon, combined with the Company's DryView laser imaging systems, provides
a strong family of digital workflow solutions for the medical imaging industry.
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
<PAGE>
film are the United States and Europe, which represents approximately 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 also markets single use cameras which are sold pre-loaded
with the Company's ISO 400 speed film. The Company's color print film can be
found in more than 125 private label brands, as well as 3M's Scotch(TM) brand.
The Company continues 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--Intellectual Property Agreement." These products and
brands are positioned as a high value, comparable quality alternative to global
brands such as Kodak and Fuji.
In 1997, the Company introduced Photo Quality Inkjet Paper, which
allows desktop computer users to print photo-quality images on color ink jet
printers. This new product is believed to provide superior image quality and
color reproduction, and significantly faster drying time than competitive
products. The new product, which was designed for use with a variety of color
ink jet printers, is available through mass retail and photo stores.
CUSTOMER SERVICE TECHNOLOGY
The Company's team of field service technicians provides technical
servicing and other post-sale technical support for equipment sold by the
Company and by 3M. The Company offers 24 hour information and customer support
telephone lines for the products it supports. Customers also benefit from
user-friendly product documentation and training programs in a variety of
languages. The Company intends to expand its technical service and support
capabilities to assist customers with the installation, service, support,
integration and optimization of equipment and systems offered for sale by the
Company and other manufacturers.
INDUSTRY BACKGROUND
The imaging and information industry in which the Company operates is
concerned with the creation, capture, manipulation, storage, production and
distribution of information. In data storage and imaging applications in which
the Company specializes, the industry has been profoundly impacted by
advancements in digital technologies. Digital technologies provide much needed
information processing solutions as users are required to use, manage and store
more complex information in less time and with fewer resources and greater
accuracy. The industry is also being profoundly impacted by the availability of
new methods of transporting and accessing data through software developments,
networking and the development of the World Wide Web.
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 252 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 a double digit rate 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
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
<PAGE>
digital storage solutions is also accelerating as people gain access to
information of all types from many sources, including the Internet.
Increasingly, end users want to download files and information for later use. As
the number of Internet users grows 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 users continue to use conventional materials for certain processes in
their work flows while utilizing the speed of digital processing.
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, Konica and Du Pont. The Company also competes in
certain product markets with smaller, more specialized firms such as Polychrome,
Scitex America and Iomega. Businesses in the imaging and information industry
compete on a variety of factors such as price, value, product quality, customer
service, breadth of product line and availability of system solutions.
SALES, MARKETS AND DISTRIBUTION METHODS
The Company's products and services are sold directly to users through
the Company's field sales organizations and through numerous channels of
distribution including wholesalers, retailers, jobbers, distributors and dealers
in over 60 countries. No one customer individually accounts for a material
amount of the Company's total sales.
RAW MATERIALS
The principal raw materials used by the Company are silver, polyester
film, aluminum, paper and resins. The Company makes significant purchases of
these and other materials and components used in the Company's manufacturing
operations from many domestic and foreign sources. The Company has been able to
obtain sufficient materials and components from sources around the world to meet
its needs. 3M continues to be a major supplier to the Company of certain raw
materials and intermediate products including film, specialty chemicals and
abrasives, and certain contract manufacturing services including primarily
equipment assembly services. See "Relationship Between 3M and the
Company--Supply, Service and Contract Manufacturing 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 research and development expenses
<PAGE>
were $194.9 million, $183.1 million, and $222.4 million for 1997, 1996 and 1995,
respectively, including charges of $41.7 million and $12.0 million recorded by
the Company in 1997 and 1996, respectively, for in-process research and
development costs related to certain acquisitions. The Company expects its
research and development expenses, as a percent of total revenues, to be in the
7-8% range during the next several years.
In connection with the Distribution, the Company was granted rights, on
both exclusive and non-exclusive terms, from 3M and others which enable it to
continue to use the intellectual property previously utilized by the Company
when it was part of 3M. See "Relationship Between 3M and the
Company--Intellectual Property Agreement." 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.
MANUFACTURING
During 1996 the Company consolidated its manufacturing facilities by
centralizing such operations into the United States and Italy. This
consolidation was implemented in order 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 systems. As a result
of this consolidation, in June 1997 the Company closed its manufacturing
facility in Rochester, New York. Costs associated with this plant closing were
recorded by the Company in its 1995 and 1996 consolidated financial statements.
In connection with the Company's recently announced restructuring plans (see
Item 7.--"Management's Discussion and Analysis of Financial Condition and
Results of Operations"), the Company has announced its intention to sell its
CD-ROM manufacturing operations in Menomonie, Wisconsin; Fremont, California;
and Breda, The Netherlands. The Company also plans to close or sell certain
additional manufacturing facilities located in the United States. The Company
also plans to consolidate ongoing operations at certain other manufacturing
facilities, including shifting manufacturing locations for certain product lines
and consolidation of certain laboratory functions.
The core manufacturing competencies of the Company include coating,
fine chemical production for photographic film, state-of-the-art molding
capabilities and hardware prototyping. These competencies, combined with the
Company's research and development competencies of materials science, color
management, hardcopy imaging and magnetic and optical recording, give the
Company a strong technological base to take advantage of the opportunities in
the evolving information processing industry.
<PAGE>
EMPLOYEES
At December 31, 1997, the Company had approximately 9,800 employees,
approximately 5,800 in the United States and 4,000 internationally. In
connection with the Company's recently announced restructuring plans, the
Company expects to reduce the total number of employees by approximately 1,700
by the end of 1998. These reductions are net of a number of people the Company
expects to hire during this period to enhance certain skill sets in the Company
and to staff its internal information technology function which will operate and
maintain the Company's new information technology systems once they are
implemented in 1998. Approximately half of these reductions will occur in the
United States, with the other half occurring primarily in Europe. The separation
costs associated with these reductions were included in the restructuring charge
recorded by the Company in its 1997 consolidated financial statements. See Item
7.--"Management's Discussion and Analysis of Financial Condition and Results of
Operations"),
As of December 31, 1995, the number of employees associated with the
Transferred Businesses totaled approximately 12,300. Approximately 1,600
positions were reduced prior to the Distribution Date through employee
separation programs and as a result of the consolidation of the Company's
manufacturing operations. The separation costs associated with these reductions
were recorded by the Company in its 1996 consolidated financial statements. Most
of the cash requirements for these separation programs were funded by 3M.
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. In connection with the Distribution, the
Company assumed and agreed to indemnify 3M from all liabilities relating to,
arising out of or resulting from (i) operations at the Company's facilities as
conducted prior to the Distribution Date; (ii) the disposal of hazardous
materials from the Company's facilities before the Distribution Date and at
disposal sites operated by third parties ("Superfund Sites"), where such
liabilities are discovered after the Distribution Date, and (iii) operations of
the Company's businesses on and after the Distribution Date. 3M agreed to retain
responsibility for environmental liabilities relating to former premises which
may have been associated with the Company's businesses prior to the Distribution
Date and known Superfund Sites associated with the Company's properties as of
the Distribution Date.
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 December 31, 1997, the Company had reserved approximately $10.6
million with respect to environmental liabilities. Of this amount, $6 million
relates to anticipated environmental
<PAGE>
remediation actions at certain manufacturing facilities that will be closed in
connection with the Company's restructuring plans (see Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--General Overview"). 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.
RELATIONSHIP BETWEEN 3M AND THE COMPANY
For purposes of governing certain of the relationships between 3M and
the Company following the Distribution, 3M and the Company entered into the
Transfer and Distribution Agreement and various ancillary agreements to which
they are parties, including those described below. Certain of these agreements
have been filed as exhibits to the Company's prior filings with the Securities
and Exchange Commission, and the following summaries are qualified in their
entirety by reference to the agreements as filed.
TRANSFER AND DISTRIBUTION AGREEMENT
In connection with the Distribution, 3M and the Company entered into
the Transfer and 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.
TAX SHARING AND INDEMNIFICATION AGREEMENT
3M and the Company 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 that the Company shall indemnify 3M for any income
taxes 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 certain actions taken by the
Company or any of its subsidiaries. Prior to the Distribution, 3M received a
ruling from the Internal Revenue Service that 3M shareholders who received
shares of the Company's common stock in connection with the Distribution would
not recognize income, gain or loss upon receipt of such shares, except in
connection with any cash received in lieu of fractional shares. 3M also
generally agreed to pay all other taxes (other than those which are imposed
solely on the Company) that were payable in connection with the Distribution and
the transactions related to it, the liability for which arose on or before the
Distribution Date. 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 entered into a Corporate Services Transition
Agreement (the "Corporate Services Agreement") pursuant to which 3M agreed to
provide to the Company certain services, including engineering and environmental
services, logistics and information technology services, financial services,
human resources administration services and employee benefits
<PAGE>
administration, which 3M historically provided to the Transferred Businesses
prior to the Distribution Date. The length of time that 3M is required to
provide such services and the amount that the Company is required to pay for
such services varies based on the type of service. 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. The costs associated with
the services provided by 3M are either a fixed dollar amount based on the
estimated cost of the services provided, or an amount determined pursuant to a
formula based on the services actually provided. Services required by the
Company after July 1, 1997 are based on costs incurred plus an 8% mark-up.
Certain foreign subsidiaries of the Company and 3M entered into corporate
services agreements pursuant to which 3M agreed to provide to such subsidiaries
services similar to those being provided to the Company pursuant to the
Corporate Services Agreement. The cost of all such services supplied by 3M to
the Company totaled approximately $38 million during 1997. The Company does not
expect to obtain any material amount of services from 3M pursuant to the
Corporate Services Agreement after June 30, 1998.
ENVIRONMENTAL MATTERS AGREEMENT
3M and the Company 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 assumed and
agreed to indemnify 3M for all liabilities relating to, arising out of or
resulting from (i) operations at the Company's facilities as conducted before
the Distribution Date; (ii) the disposal of hazardous materials from the
Company's facilities before the Distribution Date and at Superfund Sites, where
such liabilities are discovered after the Distribution Date; and (iii)
operations of the Transferred Businesses on and after the Distribution Date. 3M
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 properties of the Transferred
Businesses on or before the Distribution Date.
INTELLECTUAL PROPERTY AGREEMENT
3M and the Company entered into an Intellectual Property Rights
Agreement (the "Intellectual Property Agreement") pursuant to which 3M granted
to the Company, effective as of the Distribution Date, 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 operated as of the Distribution Date and non-exclusively
in certain other fields. In addition, 3M transferred to the Company title to
certain intellectual property rights previously used by the Transferred
Businesses, subject to certain rights of 3M 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 (such periods commencing on the Distribution
Date and continuing for two, three or five years thereafter), the Company is
granted the right to use certain 3M trademarks under a royalty-bearing license.
<PAGE>
Trademarks used only by the Transferred Businesses were assigned to the Company
as of the Distribution Date.
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 are 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 licensed party's
enforcement of patents requires prior approval by the party owning the patent.
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 is required to pay a royalty, which the
Company believes is reasonable, through cash payments, commitments to purchase
product from 3M and/or engaging in certain other activities benefiting 3M. Cash
payments to 3M for royalties associated with licensed trademark rights totaled
approximately $1.9 million in 1997.
The parties have agreed to cross-license each other under certain
patents and proprietary information developed by each party during the two year
period ending June 30, 1998. 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.
3M and the Company agreed not to compete with each other in their
respective businesses for a period of five years following the Distribution
Date. 3M agreed that, except for ancillary activity involving an insubstantial
business, it would 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 was engaged as of the Distribution
Date). The Company agreed that, except for ancillary activity involving an
insubstantial business, it would 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 was engaged as of the Distribution
Date). 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.
<PAGE>
SUPPLY, SERVICE AND CONTRACT MANUFACTURING AGREEMENTS
3M and the Company entered into various product and service supply
agreements (the "Supply Agreements") providing for the supply by 3M to the
Company and by the Company to 3M, of certain products and services. Under the
Supply Agreements, 3M supplies to the Company certain raw material and
intermediate products including film, specialty chemicals and abrasives and
provides to the Company certain contract manufacturing services, primarily
equipment assembly services. Under the Supply Agreements, the Company supplies
to 3M certain semi-finished products and components and provides to 3M certain
contract manufacturing and other services, including converting, slitting and
coating services and technical field service. The prices for products supplied
by either party under the Supply Agreements are based on the cost of supplying
such product plus a 5% mark-up in 1996, a 10% mark-up in 1997 and a 15% mark-up
in 1998 and thereafter. The prices paid for contract manufacturing services
provided by either party vary depending on the services provided but generally
are based on costs incurred plus an 8% mark-up. The amount paid by the Company
to 3M for products and services delivered pursuant to the Supply Agreements
totaled approximately $110 million in 1997.
SHARED FACILITY AND LEASE AGREEMENTS
3M and the Company entered into various lease agreements with respect
to certain facilities (the "Shared Facility Agreements") at which 3M and the
Company share space. With respect to each of these facilities, the party that is
the owner (or primary tenant) of the facility leases 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 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, and in some cases include an option to
extend the term of the lease for an additional two years. The amount paid by 3M
to the Company in 1997 with respect to Shared Facility Agreements totaled
approximately $9 million; and the amount paid by the Company to 3M in 1997 with
respect to such agreements totaled approximately $9.5 million.
The Company has completed construction of an office building and
commenced construction of a research and development facility at its
headquarters site in Oakdale in order to consolidate its headquarters
operations.
See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of various factors that
could cause the Company's future financial results to differ materially from the
Company's expectations.
--------------------------
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company on March 30, 1998, together with
their ages and business experience, are set forth below.
WILLIAM T. MONAHAN, age 51, is Chairman of the Board, President and
Chief Executive Officer of the Company, and is also currently serving as the
acting President--Customer Solutions.From June 1993 to March 1996, he was Group
Vice President responsible for 3M's 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 3M's Data Storage Products
Division.
CAROLYN A. BATES, age 51, is the Company's General Counsel. From 1991
to July 1, 1996, she was Assistant Chief Intellectual Property Counsel of 3M.
JILL D. BURCHILL, age 43, is the Company's Chief Financial Officer.
From April 1995 to July 1, 1996, she was Sector Controller for 3M's Information,
Imaging and Electronic Sector. From May 1993 to April 1995, she was Group
Controller for 3M's Memory Technology Group.
DR. KRZYSZTOF K. BURHARDT, age 55, is Vice President and Chief
Technology Officer for the Company. From July 1991 to July 1, 1996, he was
Research and Development Vice President for 3M's Information, Imaging and
Electronic Sector.
DENNIS A. FARMER, age 54, is Vice President, Talent Effectiveness for
the Company. He previously served as Vice President, Marketing and Public
Affairs for the Company. From March 1994 to July 1, 1996, he was Vice President
of 3M's Data Storage Markets Division, and from May 1992 to February 1994, he
was General Manager of that division.
DAVID G. MELL, age 51, is Vice President, Corporate Business and
Manufacturing Strategy for the Company. He was Vice President of 3M's Data
Storage Tape Technology Division from May 1995 to July 1, 1996, Vice President
of 3M's Data Storage Diskette and Optical Technology Division from March 1994 to
April 1995, and General Manager of that division from May 1992 to February 1994.
CHARLES D. OESTERLEIN, age 55, is Vice President and President--Product
Technologies for the Company. From 1994 to July 1, 1996, he was Vice President
of 3M's Printing and Publishing Systems Division and from 1992 to 1994, he was
General Manager of 3M's Audio and Video Technology Division.
CLIFFORD T. PINDER, age 51, is Vice President and President--Growth
Technologies for the Company. From March 1994 to July 1, 1996, he was Vice
President of 3M's Medical Imaging Systems Division, and from July 1993 to March
1994, he was Vice President of 3M's Photo Color Systems Division.
DAVID H. WENCK, age 54, is Vice President, International for the
Company. From May 1995 to July 1, 1996, 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
<PAGE>
CD-ROM Services Department, and from July 1986 to September 1994, he was Project
Manager of 3M's Optical Recording Project.
ITEM 2. PROPERTIES
The Company's headquarters are located in Oakdale, Minnesota. During
1997, the Company completed construction of an office building and currently is
in the process of constructing a research and development facility at its
Oakdale site in order to consolidate its headquarters operations. The costs of
construction of this research and development facility are being financed
through a synthetic lease financing arrangement. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity". Construction of this facility will enable the Company to
re-locate approximately 1,100 employees currently located in facilities being
leased by the Company from 3M. The Company's major facilities (all of which are
owned by the Company, except where noted), and the products manufactured at such
facilities are listed below. The Company's facilities are in good operating
condition suitable for their respective uses and adequate for the Company's
current needs.
FACILITY PRODUCTS
United States
- -------------
Camarillo, California Data tape
Fremont, California (leased) CD-ROM
Menomonie, Wisconsin (leased) Laserdisc, CD-ROM and DVD-ROM
Middleway, W. Virginia Printing plates
Nekoosa, Wisconsin Carbonless paper
Oakdale, Minnesota Headquarters
Pine City, Minnesota Micrographic cards
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 Medical Imaging films
International
- -------------
Bracknell, United Kingdom Administrative
Beauchamp, France (leased) Printing plates
Breda, Netherlands (leased) CD-ROM services
Milan, Italy (leased) Administrative
Rotterdam, Netherlands (leased) Administrative
Ferrania, Italy X-ray films/photographic film
Florida, Argentina X-ray films
Harlow, United Kingdom Research facility
London, Ontario, Canada (leased) Administrative
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is the subject of various pending or threatened legal
actions in the ordinary course of its business. All such matters are subject to
many uncertainties and outcomes that are not predictable with assurance.
Consequently, the Company is unable to ascertain as of December 31, 1997 the
ultimate aggregate amount of any monetary liability or financial impact that may
be incurred by the Company with respect to these matters. While these matters
could materially affect operating results of any one quarter when resolved in
future periods, it is management's opinion that after final disposition, any
monetary liability or financial impact to the Company beyond that provided in
the consolidated balance sheet as of December 31, 1997 would not be material to
the Company's financial position or annual results of operations or cash flows.
In connection with the Distribution, the Company assumed substantially all
liabilities for legal proceedings relating to the Company's businesses as
conducted prior to the Distribution Date. See Item 1. "Business--Relationship
Between 3M and the Company--Transfer and Distribution Agreement."
In addition, on December 2, 1997 Eastman Kodak Company ("Kodak") filed
a civil complaint against the Company, 3M and certain of their respective
subsidiaries in the U.S. District Court for the Western District of New York.
The complaint alleges improper receipt of Kodak trade secrets by 3M's Italian
subsidiaries between 1993 and May 1996 from Harold Worden, a retired Kodak
employee. Worden has since pleaded guilty and been sentenced in the Western
District of New York on criminal charges of interstate transportation of stolen
Kodak documents. The 3M subsidiaries that dealt with Worden became subsidiaries
of the Company in connection with the Distribution in July 1996. In its
complaint, Kodak seeks unspecified compensatory damages, treble damages,
punitive damages and permanent injunctive relief.
On December 2, 1997 the Company, 3M and their respective subsidiaries
filed a suit in Italy asking the Italian Court to declare that they have no
liability to Kodak in this matter. On February 6, 1998 the Company and 3M filed
a request that the U. S. District Court dismiss the action on grounds that it is
properly venued in Italy, as well as on grounds of legal flaws in Kodak's
claims. The motion to dismiss is scheduled to be heard by the U. S. District
Court on May 7, 1998, with a decision regarding the dismissal expected in early
summer 1998. It is not possible at this time to reach any conclusions as to the
outcome of this litigation. The Company disputes any liability to Kodak and
intends to vigorously defend the action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of February 27, 1998, there were 40,597,915 shares of the Company's
common stock, $.01 par value ("Common Stock"), outstanding held by approximately
61,299 shareholders of record. The Company's Common Stock is listed on the New
York and Chicago Stock Exchanges under the symbol of IMN. The Company did not
pay any dividends during 1997. Future dividends will be determined by the
Company's Board of Directors.
<PAGE>
The following table sets forth, for the periods indicated, the high and
low sales prices of Common Stock as reported on the New York Stock Exchange
Composite Transactions. The Company's Common Stock commenced regular way trading
on the New York Stock Exchange on July 15, 1996.
1997 SALES PRICES 1996 SALES PRICES
----------------- -----------------
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter $30.38 $25.00 -- --
Second Quarter $27.38 $22.25 -- --
Third Quarter $29.69 $22.31 $26.25 $20.38
Fourth Quarter $24.25 $15.56 $33.00 $22.75
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Selected Consolidated Financial Data*
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
(In millions, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues $ 2,201.8 $ 2,278.2 $ 2,245.6 $ 2,280.5 $ 2,307.8
Gross profit 770.8 795.4 724.7 838.5 886.2
Selling, general and administrative 580.6 563.0 539.4 531.5 529.0
Research and development 194.9 183.1 222.4 211.2 216.7
Restructuring charges 170.0 53.9 111.8 -- --
Operating income (loss) (174.7) (4.6) (148.9) 95.8 140.5
Income (loss) before tax and
minority interest (206.0) (15.0) (166.8) 81.3 127.4
Net income (loss) (1) (180.1) (20.5) (85.0) 54.3 75.3
Basic and diluted earnings (loss)
per common share (4.54) (0.49) (2.02) 1.28 n/a
Balance Sheet Data:
Working capital $ 538.9 $ 607.3 $ 658.4 $ 714.0 $ 618.4
Property, plant and equipment, net 381.6 480.1 513.2 654.9 642.2
Total assets 1,665.5 1,573.3 1,541.5 1,671.7 1,545.6
Long-term debt 319.7 123.1 -- -- --
Total liabilities 983.3 643.0 392.8 371.7 345.8
Total shareholders' equity 682.2 930.3 1,148.7 1,300.0 1,199.8
Other Information:
Current ratio 2.0 2.5 3.2 3.5 3.4
Days sales outstanding 76 77 78 76 70
Months in inventory 3.4 3.2 3.4 4.0 3.2
Assets/equity 2.4 1.7 1.3 1.3 1.3
Return on assets(2) 1.3% 2.6% 0.2% 3.4% 4.9
Return on equity(2) 2.5% 3.9% 0.3% 4.3% 6.3
Capital expenditures $ 116.3 $ 167.4 $ 180.2 $ 182.7 $ 211.4
Number of employees 9,800 9,400 12,300 13,000 13,500
</TABLE>
- ----------
* See Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General Overview" for a description of the basis of
presentation of the financial information presented in this table.
(1) Net Income, excluding restructuring and other special charges, in 1997, 1996
and 1995 was $20.3 million, $40.1 million and $3.3 million, respectively (see
Note 5 of Notes to Consolidated Financial Statements).
(2) Return percentages are calculated using net income excluding restructuring
and other special charges noted in (1) above for 1997,1996, and 1995.
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL OVERVIEW
Effective July 1, 1996, the Company began operations as an independent,
publicly held company. See Item 1. "Business--Introduction." In 1997 the Company
completed its first full year of operations as an independent company. Prior to
July 1, 1996, the financial statements of the Company reflect the results of
operations, financial position and cash flows of the Transferred Businesses as
they operated within 3M. As a result, the financial statements of the Company
prior to July 1, 1996 have been carved out from the financial statements of 3M
using the historical results of operations and historical basis of the assets
and liabilities of such businesses. The Company's statements of operations prior
to July 1, 1996 include 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. Management believes these allocations were made on a reasonable
basis. The financial information included herein for periods prior to July 1,
1996, may not necessarily be indicative of the results of operations, financial
position and cash flows of the Company had the Company been a separate,
independent company during the periods presented.
The following table displays the Company's results of operations for
1997, 1996 and 1995, as reported, compared to results with the restructuring and
other special charges recorded by the Company in such years excluded.
<TABLE>
<CAPTION>
- --------------------------- -------------------------- --------------------------- ---------------------------
1997 1996 1995
(In millions, -------------------------- --------------------------- ---------------------------
except per share data) Reported Adjusted* Reported Adjusted* Reported Adjusted*
- --------------------------- ------------- ------------ ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues $2,201.8 $2,201.8 $2,278.2 $2,278.2 $2,245.6 $2,245.6
- --------------------------- ------------- ------------ ------------- ------------- ------------- -------------
Gross profit 770.8 785.8 795.4 803.3 724.7 774.9
- --------------------------- ------------- ------------ ------------- ------------- ------------- -------------
Operating income (loss) (174.7) 61.5 (4.6) 83.8 (148.9) 17.4
- --------------------------- ------------- ------------ ------------- ------------- ------------- -------------
Net income (loss) (180.1) 20.3 (20.5) 40.1 (85.0) 3.3
- --------------------------- ------------- ------------ ------------- ------------- ------------- -------------
Basic and diluted $(4.54) $0.51 $(0.49) $0.97 $(2.02) $0.08
earnings (loss) per
common share
- --------------------------- ------------- ------------ ------------- ------------- ------------- -------------
</TABLE>
* Adjusted results exclude restructuring charges, special costs
related to restructuring, acquisition related charges, and other
year-end adjustments.
The Company has completed substantially all of its 1995 and 1996
Distribution-related restructuring plans. As part of these restructuring
activities, the number of reported employees of the Company was reduced from
approximately 12,300 at December 31, 1995 to 9,800 at
<PAGE>
December 31, 1997. The 1997 restructuring is expected to result in an additional
net reduction of approximately 1,700 employees worldwide by the end of 1998. See
Item 1. "Business--Employees."
At the time of the Distribution, the Company established an overall
financial goal of improving the Company's economic profit (measured as operating
income after taxes in excess of a charge for the use of capital) by $150 million
over the three-year period ending December 31, 1998. As a result of a number of
factors contributing to the Company's financial performance in 1997, the Company
does not expect to achieve its $150 million economic profit improvement goal by
the end of 1998. As of December 31, 1997, the Company had achieved approximately
$64 million in economic profit improvement since December 31, 1995. Cost
reductions during this period contributed $35 million to this improvement and
improved asset management contributed $39 million. Revenue declines during this
period partially offset these improvements by $10 million.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to revenue
of certain items in the Company's Consolidated Statements of Operations for the
years indicated.
<TABLE>
<CAPTION>
- -------------------------------------- ----------------------------------- -----------------------------------
Percentage of revenue Percentage of dollar
increase (decrease)
- ------------- ----------- ------------ ----------------------------------- ----------------- -----------------
1997 1996 1995 1997 vs 1996 1996 vs 1995
- ------------- ----------- ------------ ----------------------------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
100.0% 100.0% 100.0% Net revenues (3.4)% 1.5%
- ------------- ----------- ------------ ----------------------------------- ----------------- -----------------
35.0 34.9 32.3 Gross profit (3.1) 9.8
- ------------- ----------- ------------ ----------------------------------- ----------------- -----------------
26.4 24.7 24.0 Selling, general and 3.1 4.4
administrative
- ------------- ----------- ------------ ----------------------------------- ----------------- -----------------
8.8 8.0 9.9 Research and development 6.4 (17.7)
- ------------- ----------- ------------ ----------------------------------- ----------------- -----------------
7.7 2.4 5.0 Restructuring charges 215.4 (51.8)
- ------------- ----------- ------------ ----------------------------------- ----------------- -----------------
(7.9) (0.2) (6.6) Operating loss (3,697.8) 96.9
- ------------- ----------- ------------ ----------------------------------- ----------------- -----------------
1.5 0.5 0.8 Non-operating expense, net 201.0 (41.9)
- ------------- ----------- ------------ ----------------------------------- ----------------- -----------------
(1.2) 0.2 (3.1) Income tax provision (benefit) n/a n/a
- ------------- ----------- ------------ ----------------------------------- ----------------- -----------------
(8.2) (0.9) (3.8) Net loss (778.5) 75.9
- ------------- ----------- ------------ ----------------------------------- ----------------- -----------------
</TABLE>
The following table includes the same information as above, but excludes the
impact of restructuring and other special charges as discussed in "General
Overview" above.
<TABLE>
<CAPTION>
- --------------------------------------------- ------------------------------- --------------------------------
Percentage of revenue (excluding Percentage of dollar
restructuring and other special
charges) increase (decrease)
- --------------------------------------------- ------------------------------- --------------------------------
<PAGE>
- --------------- -------------- -------------- ------------------------------- ---------------- ---------------
1997 1996 1995 1997 vs 1996 1996 vs 1995
- --------------- -------------- -------------- ------------------------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
100.0% 100.0% 100.0% Net revenues (3.4)% 1.5%
- --------------- -------------- -------------- ------------------------------- ---------------- ---------------
35.7 35.3 34.5 Gross profit (2.2) 3.7
- --------------- -------------- -------------- ------------------------------- ---------------- ---------------
25.9 24.1 24.0 Selling, general and 4.1 1.7
administrative
- --------------- -------------- -------------- ------------------------------- ---------------- ---------------
7.0 7.5 9.7 Research and development (10.5) (21.5)
- --------------- -------------- -------------- ------------------------------- ---------------- ---------------
2.8 3.7 0.8 Operating income (26.6) 381.6
- --------------- -------------- -------------- ------------------------------- ---------------- ---------------
1.2 0.5 0.8 Non-operating expense, net 149.0 (41.9)
- --------------- -------------- -------------- ------------------------------- ---------------- ---------------
0.7 1.4 (0.1) Income tax provision (benefit) (54.6) n/a
- --------------- -------------- -------------- ------------------------------- ---------------- ---------------
0.9 1.8 0.1 Net income (49.4) 1115.2
- --------------- -------------- -------------- ------------------------------- ---------------- ---------------
</TABLE>
NET REVENUES
The following table sets forth the components of net revenue changes
for 1997, 1996 and 1995.
<TABLE>
<CAPTION>
- ------------ -------------------------------- ------------------------------- --------------------------------
1997 1996 1995
---------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ----------
U.S. INTL. TOTAL U.S. INTL. TOTAL U.S. INTL. TOTAL
- ------------ ---------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Volume 3.3% 9.0% 6.1% 5.6% 10.1% 7.9% (0.5)% 6.3% 2.7%
- ------------ ---------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ----------
Price (4.1) (6.7) (5.4) (2.9) (7.0) (4.9) (5.4) (7.3) (6.3)
- ------------ ---------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ----------
Translation - (8.3) (4.1) - (2.9) (1.5) - 4.3 2.0
- ------------ ---------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ----------
Total (0.8)% (6.0)% (3.4)% 2.7% 0.2% 1.5% (5.9)% 3.3% (1.6)%
- ------------ ---------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ----------
</TABLE>
Net revenues in 1997, 1996 and 1995 were $2,201.8 million, $2,278.2
million and $2,245.6 million, respectively. Net revenues decreased 3.4% percent
in 1997 compared to an increase of 1.5 percent in 1996. Volume growth was 6.1
percent in 1997 compared to 7.9 percent in 1996. Volume growth in 1997 was
driven by increased sales of newly introduced product platforms (primarily
DryView laser imaging systems, SuperDisk products, Travan data cartridges, and
Rainbow digital proofing systems), the acquisitions of Luminous Corporation and
Cemax-Icon, Inc., and greater international market penetration in Asia and Latin
America. Price declines were 5.4 percent in 1997 compared to 4.9 percent in
1996. Price erosion increased slightly during 1997 as the Company continues to
experience pricing pressure across many of its product lines. The Company
expects price declines to continue in the five to six percent range in the near
term. Changes in currency exchange rates negatively impacted net revenues 4.1
percent in 1997 while
<PAGE>
negatively impacting net revenues 1.5 percent in 1996. The Company expects 1998
revenues to be positively impacted by the continued growth of its newly
introduced product platforms and acquisitions partially offset by revenue
declines in its mature products and businesses to be exited as part of its
restructuring plans, continued pricing pressures, and negative impacts of
foreign currency exchange rates.
Approximately 48 percent of the Company's net revenues in 1997 were
from sales outside the United States compared to 49 percent in 1996, with this
decrease primarily due to the impact of currency exchange rates. In 1995, 50
percent of the Company's net revenues were from outside the United States. In
the Company's international operations, volume rose 9.0 percent in 1997 and 10.1
percent in 1996. The increase in volume growth in 1997 and 1996 was due to
greater market penetration in Asia and Latin America and new product platforms.
Price declines of 6.7 percent and 7.0 percent occurred in 1997 and 1996,
respectively. The net result of the volume and price changes was a 2.3 percent
revenue growth in local currencies in 1997 while local currency revenue
increased 3.1 percent in 1996. Changes in currency exchange rates negatively
impacted international net revenues by 8.3 percent in 1997 and by 2.9 percent in
1996. The Company continues to expect currency fluctuations and slowing
international economies to negatively impact revenues in 1998.
United States net revenues declined by 0.8 percent in 1997 compared to
an increase of 2.7 percent in 1996. The decrease in 1997 was driven by price
declines in the Company's mature product lines and a decline in the desktop data
cartridge business. Volume growth was 3.3 percent and 5.6 percent in 1997 and
1996, respectively, while price declines were 4.1 percent in 1997 compared to
2.9 percent in 1996.
GROSS PROFIT
Gross profit for 1997 was $770.8 million, which includes the impact of
$15.0 million in special charges related primarily to the write-down of
inventory. Gross profit for 1996 was $795.4 million, which includes the impact
of $7.9 million in special charges primarily related to the write-off of certain
packaging materials in connection with the Distribution. Gross profit in 1995
was $724.7 million, which includes the impact of $50.2 million in special
charges primarily related to asset write-offs. Excluding the impact of special
charges, gross profit in 1997, 1996 and 1995 would have been $785.8 million,
$803.3 million and $774.9 million or 35.7 percent, 35.3 percent and 34.5 percent
of revenues, respectively. This margin improvement was primarily due to volume
increases, productivity improvements, and lower raw material costs, partially
offset by lower selling prices, weakness in the desktop data cartridge business,
and the impact of currency exchange rates. The general industry price increases
for silver in early 1998 are expected to negatively impact 1998 gross profit;
however, the Company hedges certain raw material commodity purchases which will
somewhat offset the effect of these increased prices.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In 1997, 1996 and 1995, selling, general and administrative expenses
were $580.6 million, $563.0 million and $539.4 million, respectively. Excluding
special charges of $9.5 million in 1997 and $14.6 million in 1996, selling,
general and administrative expenses would have been $571.1 million and $548.4
million, or 25.9 percent and 24.1 percent of revenues, in 1997 and
<PAGE>
1996, respectively. Selling, general and administrative expenses increased in
1997 in line with the Company's spending plans for increased advertising and
promotional activities related to new product introductions (primarily SuperDisk
products ) and for investments in the Company's information technology
infrastructure and remained essentially unchanged in 1996 from 1995, when
selling, general and administrative expenses were 24.0 percent of revenues. The
1997 and 1996 selling, general and administrative expenses include $20.8 million
and $41.8 million, respectively, of start-up costs related to designing and
implementing more efficient business processes and developing the Company's
brand identity. These start-up costs are expected to continue in 1998. In 1998,
the Company expects to begin amortizing capitalized software development costs
associated with the design, testing and implementation of the Company's new IT
systems. The Company expects these costs to be less than the amounts currently
paid to 3M, through service contracts, for use of their systems.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses in 1997 and 1996 were $194.9 million
and $183.1 million, respectively. Expenses in 1997 include a non-tax-deductible
charge of $41.7 million for acquired in-process research and development costs
related to the Company's acquisition of Cemax-Icon, Inc., while 1996 expenses
include a non-tax-deductible charge of $12.0 million for acquired in-process
research and development costs related to the Company's acquisition of Luminous
Corporation. Research and development expenses in 1995 were $222.4 million,
which include $4.3 million in special charges related to asset write-offs.
Excluding the impact of acquisition-related and special charges, research and
development expenses in 1997, 1996 and 1995 would have been $153.2 million,
$171.1 million and $218.1 million, or 7.0 percent, 7.5 percent and 9.7 percent
of revenues, respectively. The decrease in 1997 expenses of $17.9 million
(excluding special charges) is due to continuing research and development cost
structure improvements in line with Company expectations. The decrease in
expenses from 1995 to 1996 is due to a consolidation of laboratories from
fourteen to seven and higher than normal spending in 1995 reflecting investments
made in a number of the Company's new products which came to market during 1995
and early 1996. In 1998, the Company will continue to invest in research and
development relating to its growth businesses while decreasing its research and
development costs for mature products.
RESTRUCTURING CHARGES
The Company recorded restructuring charges of $170.0 million, $53.9
million and $111.8 million in 1997, 1996 and 1995, respectively. These charges
relate to the Company's reorganization and restructuring activities and include
costs associated with employee separation benefits, fixed asset write-offs, and
other business exit costs. The 1997 restructuring charge of $170.0 million
consists of $91.5 million for employee separation related costs, $61.5 million
for fixed asset write-downs, and $17.0 million for other business exit costs. In
1998, the Company expects cost savings from the restructuring activities
announced in 1997 of approximately $35 million.
OPERATING INCOME (LOSS)
The operating loss for 1997, 1996 and 1995 was $174.7 million, $4.6
million and $148.9 million, respectively. Losses in these years were the result
of the restructuring and other special
<PAGE>
charges discussed above. Excluding these charges, operating income would have
been $61.5 million in 1997 and $83.8 million in 1996. The decrease of $22.3
million in 1997 reflects lower gross profit and higher selling, general and
administrative costs offset by lower research and development costs. Excluding
the restructuring and other special charges, operating income would have been
$17.4 million in 1995, with 1996 operating income representing an improvement of
$66.4 million. This improvement is primarily a result of sales growth, higher
gross profit, and lower research and development spending as discussed above.
NON-OPERATING EXPENSE
Non-operating expense for 1997 totaled $31.3 million as compared to
$10.4 million for 1996. This increase is primarily due to increased interest
expense on outstanding borrowings and foreign currency transaction losses. In
1996, non-operating expense decreased by $7.5 million from $17.9 million in
1995. This decrease is due to an increase in other income of $2.9 million,
primarily related to investment gains prior to the Distribution, and to lower
interest expense due to lower outstanding debt levels and a lower effective
interest rate. Interest expense prior to the Distribution was based on an
assumed $250 million in outstanding debt and 3M's effective interest rate during
the period. The allocation of interest prior to the Distribution is more fully
discussed in Note 7 of the Notes to Consolidated Financial Statements. The
Company utilized certain financial instruments to manage risks associated with
interest rate and foreign currency risks. See Note 8 of the Notes to
Consolidated Financial Statements for a description of financial instruments
held by the Company.
INCOME TAX
Excluding restructuring and other special charges, the Company's
effective tax rate was 42.9 percent, 45.9 percent and 42.3 percent of pre-tax
income for 1997, 1996 and 1995, respectively. While the Company continues to
earn profits in high tax jurisdictions, future profits and the benefits of a tax
effective structure are expected to decrease future tax rates. The Company has
performed an analysis of the recoverability of deferred tax assets and has
recorded valuation allowances for the portion not considered recoverable. At
December 31, 1997, the Company had net deferred tax assets of $89.1 million. The
future recoverability of the Company's net deferred tax assets is dependent upon
the generation of future taxable income, primarily in the U. S. The Company
believes that its restructuring plans announced in 1997 will result in the
generation of sufficient future taxable income to recover the Company's recorded
net deferred tax assets. See Note 6 of the Notes to Consolidated Financial
Statements for a discussion of the years in which the net operating loss
carryforwards available to the Company expire.
MINORITY INTEREST
Minority interest was $0.4 million and $11.3 million in 1996 and 1995,
respectively. The 1995 minority interest includes $7.7 million of restructuring
charges related to the Company's operations in Japan.
NET INCOME (LOSS)
The net loss for 1997 totaled $180.1 million ($4.54 per basic and
diluted share), compared to a net loss of $20.5 million ($0.49 per basic and
diluted share) in 1996 and $85.0 million ($2.02 per basic and diluted share) in
1995. Excluding restructuring and other special charges, net income would have
been $20.3 million ($0.51 per basic and diluted share), $40.1 million ($0.97 per
basic and diluted share), and $3.3 million ($0.08 per basic and diluted share)
in 1997, 1996 and 1995,
<PAGE>
respectively. All per share amounts prior to the Distribution are based on an
average number of shares outstanding equal to one-tenth the weighted average
number of 3M shares outstanding based on the distribution ratio of one share of
the Company's stock for ten shares of 3M stock.
PERFORMANCE BY GEOGRAPHIC AREA
UNITED STATES
In 1997, United States net revenues totaled $1,150.5 million, down 0.8
percent from $1,159.5 million in 1996. Volume increased 3.3 percent while
selling prices decreased 4.1 percent. Operating losses were $200.4 million in
1997 compared to $95.3 in 1996. Excluding restructuring and other special
charges of $174.9 million in 1997 and $77.1 million in 1996, the operating loss
would have been $25.5 million in 1997 and $18.2 million in 1996. The change of
$7.3 million in 1997 is primarily due to continued price declines in the
Company's mature products.
EUROPE, MIDDLE EAST AND AFRICA
Net revenues totaled $722.6 million in 1997, down 11.5 percent from
$816.2 million in 1996. In 1997, volume increased 3.2 percent, selling prices
declined 5.3 percent, and changes in currency exchange rates negatively impacted
revenues by 9.4 percent. Excluding restructuring and other special charges in
Europe of $64.5 million in 1997 and $9.8 million in 1996, operating income would
have been $65.8 million in 1997 and $88.6 million in 1996, a decrease of $22.8
million.
LATIN AMERICA, ASIA AND CANADA
Net revenues increased by 8.7 percent in 1997 to $328.7 million.
Changes in currency exchange rates caused revenues to decrease by 5.1 percent.
Revenues were up 21.8 percent due to volume increases offset by selling price
declines of 8.0 percent. Operating income increased by $13.2 million, after
excluding restructuring and other special charges of $2.2 million in 1997 and
$1.5 million in 1996.
FINANCIAL POSITION
The Company had 3.4 months of inventory on hand at December 31, 1997,
compared to 3.2 months at December 31, 1996. The accounts receivable days sales
outstanding was 76 days at December 31, 1997, down from 77 days at December 31,
1996. Other current assets were $141.7 million at December 31, 1997 compared to
$94.5 million at December 31, 1996. This increase is primarily due to an
increase in current deferred tax assets of $33.4 million, an increase in taxes
receivable of $12.4 million, and an increase in prepaid expenses in Europe of
$24.1 million, primarily related to prepaid value added taxes, offset by
decreases in other prepaid items.
The net book value of property, plant and equipment at December 31,
1997 was $381.6 million, a decrease of $98.5 million from $480.1 million at
December 31, 1996. This decrease is due to lower capital spending than
depreciation expense, the write-down of assets as part of the Company's
reorganization and restructuring process, and the effect of foreign exchange
rates on translation of foreign subsidiary financial statements.
<PAGE>
Accounts payable at December 31, 1997 decreased by $11.9 million from
December 31, 1996. The balance in other current liabilities at December 31, 1997
was $313.7 million, an increase of $154.9 million over 1996. This increase is
primarily due to an increase in the accrual for restructuring costs as discussed
above.
LIQUIDITY
Cash provided by operating activities was $133.5 million in 1997,
$306.0 million in 1996 and $256.8 million in 1995. The adjustments to net income
include depreciation and amortization, which ranged from $147.5 million to
$189.5 million per year during these periods, and restructuring and other
special charges which were $241.6 million, $88.4 million and $166.3 million in
1997, 1996 and 1995, respectively. The Company expects net cash payments of
approximately $100 million in 1998 related to the 1997 restructuring actions.
Working capital and related cash requirements increased by $24.8 million in 1997
compared to a decrease of $40.3 million in 1996 and $30.7 million in 1995. The
Company expects 1998 depreciation expense to be approximately $125 million.
Investing activities utilized cash of $240.6 million in 1997, $184.6
million in 1996 and $187.5 million in 1995. In 1997, capital spending was $116.3
million, and the Company expects capital expenditures in 1998 to be
approximately $100 million. The Company also capitalized $97.8 million and $13.5
million of software expenditures in 1997 and 1996, respectively, primarily
related to the development, testing and implementation of the Company's new IT
systems. The Company plans to spend an additional $40 million during the first
half of 1998. In addition, net cash paid in 1997 and 1996 related to
acquisitions totaled $29.0 million and $10.3 million, respectively.
Prior to July 1, 1996, cash and equivalents and debt were not allocated
to the Company from 3M since 3M uses a centralized approach to cash management
and the financing of its operations. The Company's financing requirements prior
to July 1, 1996 are represented by cash transactions with 3M and are reflected
in "Net cash paid to 3M" in the consolidated statements of cash flows. This
financial support was discontinued following the Distribution.
At December 31, 1997, the Company had borrowed $313.0 million under its
$350 million 5-year revolving credit facility with a syndicate of banks (the
"Credit Agreement"). As a result of the restructuring and other special charges
recorded by the Company in its 1997 consolidated financial statements, as of
December 31, 1997, the Company was not in compliance with certain of its
financial covenants contained in the Credit Agreement. In December 1997, the
Company obtained a limited waiver from the lenders who are parties to the Credit
Agreement under which the lenders agreed to waive compliance by the Company with
the financial covenants contained in the Credit Agreement during the period from
December 17, 1997 to March 30, 1998. On March 30, 1998, the Company entered into
a Limited Waiver and Amendment to its Credit Agreement, which provides for an
extension through January 5, 1999 of the limited waiver granted in December
1997. During the extended waiver period, borrowings under the Credit
Agreement will be collateralized by substantially all of the Company's assets
and the Company will be required to
<PAGE>
maintain a specified minimum level of earnings before income taxes, depreciation
and amortization (EBITDA). The Company will also incur certain fees and
increased interest rates on outstanding borrowings under the Credit Agreement
during the extended waiver period. The Credit Agreement also contains a number
of provisions restricting the Company's ability to take certain actions,
including the incurrence of additional indebtedness, the creation of additional
liens, the making of certain restricted payments and the sale of substantial
assets of the Company. It also contains certain ongoing reporting requirements,
including computations regarding the Company's financial condition, absence of
events of default and absence of material adverse changes in the financial
condition or results of operations of the Company. The Company expects to enter
into a new credit facility prior to December 31, 1998.
In addition to borrowings under the Company's Credit Agreement, certain
subsidiaries have arranged borrowings locally outside of the Credit Agreement.
As of December 31, 1997, $38.0 million of borrowings were outstanding, primarily
short-term, under these arrangements.
In March 1997, the Company entered into a synthetic lease facility to
fund the cost of construction of a new research and development facility at the
Company's headquarters. Construction is expected to be completed in June 1998,
at which time lease payments under the lease will commence. The Company has the
option to purchase the facility at the end of the five-year lease term. In the
event the Company elects not to exercise its purchase option, it will be
obligated to arrange for the sale of the facility. The Company has guaranteed
the lessor a sale price of $58.5 million in connection with any such sale of the
facility. The synthetic lease facility contains a cross default provision to the
Credit Agreement. The facility also requires that the Company comply with the
financial covenants contained from time to time in the Company's Credit
Agreement, or a replacement thereof, provided that any amendment or waiver of
such covenants approved by the lenders under the Credit Agreement are also
effective under the synthetic lease facility.
As of December 31, 1997, the Company had a ratio of debt to total
capital of approximately 34 percent. The Company believes this ratio will
decrease over time due to savings from restructuring activities and additional
focus on more efficient utilization of working capital. The Company believes it
has the financial resources needed to meet its business requirements in the
foreseeable future.
On February 4, 1997, the Company announced a stock repurchase plan,
authorizing the Company to repurchase up to two million shares of the Company's
common stock. On March 13, 1997, the Company's Board of Directors increased the
stock repurchase authorization to a total of six million shares of the Company's
common stock. During the first and second quarters of 1997, the Company
repurchased a total of approximately 2.5 million shares of the Company's common
stock. As of December 31, 1997, the Company held 2.3 million shares of treasury
stock acquired at an average price of $24.51 per share.
YEAR 2000 COMPLIANCE
The Company is currently assessing the impact of Year 2000 issues on
its operations. A committee has been formed to oversee the identification,
evaluation, and implementation of any changes necessary to achieve Year 2000
compliance in the Company's products, operations, and supply arrangements. The
Company is in the process of designing, installing and implementing new
corporate-wide IT systems that will enable it to operate independently from 3M.
Major implementation efforts are scheduled to occur at the end of second quarter
1998. The Company presently believes that Year 2000 issues will not pose
significant operational problems for the
<PAGE>
Company's new IT systems, as implemented. However, the Year 2000 issue may have
a material impact on the operations of the Company in the event the Company's
new IT systems are not implemented as planned. In addition, the Company is
currently evaluating its product and service offerings to determine whether any
modifications will be necessary to ensure Year 2000 functionality. At this time,
the Company is unable to quantify the cost of any such modifications or other
activities required to address the Year 2000 issue and therefore is unable to
determine if such costs and expenses will be material to the Company.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Company will adopt Statement of financial Accounting Standards
("SFAS") No. 130, REPORTING COMPREHENSIVE INCOME, in 1998. SFAS No. 130
establishes standards for the reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements.
Comprehensive income is defined as the change in equity during the period of a
business enterprise resulting from non-owner sources. Adjustments to the
Company's net income to arrive at comprehensive income principally relate to
foreign currency translation adjustments.
Effective with year-end 1998 reporting, the Company will adopt SFAS No.
131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS
No. 131 establishes standards for the reporting of operation segment information
in both annual reports and interim financial reports issued to shareholders. The
Company is reviewing the requirements of SFAS No. 131 but has not yet determined
what segment information will be reported upon adoption. The Company believes
that it may be required to present segment information beyond the one segment
currently presented.
FORWARD LOOKING STATEMENTS
The Company and its representatives may from time to time make written
or oral forward-looking statements with respect to future goals of the Company,
including statements contained in this Report, the Company's other filings with
the Securities and Exchange Commission and in the Company's reports to
shareholders.
The words or phrases "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project," "believe" or similar
expressions identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from historical results and those presently anticipated or projected.
The Company wishes to caution readers not to place undue reliance on any such
forward looking statements, which speak only as of the date made. Among the
factors that could cause the Company's actual results in the future to differ
materially from any opinions or statements expressed with respect to future
periods are the following:
THE COMPANY'S ABILITY TO ESTABLISH A NEW BRAND AND IDENTITY. 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 entered into with 3M, the Company continues to have the use of
certain 3M trademarks for an agreed upon period of time following the
Distribution. The Company's right to use certain 3M trademarks (such as the
Scotch(TM) trademark)
<PAGE>
expires on June 30, 1998, while the right to use other 3M trademarks expires on
June 30, 1999. The Company has made and continues to make significant
investments in the development of the Company's identity and brand. However,
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.
COMPETITIVE INDUSTRY CONDITIONS. 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 rapid technological
change, frequent new product introductions, evolution to digital business
solutions, and declining prices in certain product lines. In these highly
competitive markets, the Company's success will depend to a significant extent
on its ability to continue to develop and introduce differentiated and
innovative products and customer solutions successfully on a timely basis. The
success of the Company's offerings is dependent on several factors including
understanding customer needs, strong digital technology, differentiation from
competitive offerings, market acceptance and lower costs. 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.
CHANGING TECHNOLOGIES. The information processing industry is
undergoing rapid technological change. 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
solutions using digital technologies. In particular, the data storage market is
characterized by short product development cycles that are driven by rapidly
changing technology and consumer preferences as well as declining product
prices. There can be no assurance that the Company will be able to continue to
introduce new proprietary products, that the market will be receptive to its new
products or that the Company's competitors will not introduce more advanced
products ahead of the Company. In addition, while the Company currently has
access to significant proprietary technologies through internal development and
licensing arrangements with third parties, there can be no assurance that it
will continue to have access to new competitive technologies that may be
required to introduce new growth products in the markets served by the Company.
In addition, new technological innovations generally require a substantial
investment before any assurance is available as to their commercial viability.
Therefore, the Company must make strategic decisions from time to time as to the
technologies in which the Company desires to invest. If the Company is not
successful in continuing to introduce new proprietary products in growth
segments of the markets served by the Company, the Company may incur a material
adverse impact on its business and financial results.
THE COMPANY'S ABILITY TO ESTABLISH INDEPENDENT IT SYSTEMS AND BUSINESS
PROCESSES. The Company is making significant investments in establishing the
Company's information technology ("IT") infrastructure and in re-engineering the
Company's business processes. Prior to the Distribution, these and other
corporate services were provided to the Transferred Businesses by 3M. For a
transition period following the Distribution, 3M has continued to provide such
services to the Company. See Item 1. "Business--Relationship Between 3M and the
Company--Corporate
<PAGE>
Services Transition Agreement." During this transitional period the Company must
establish its own services and support systems independent of 3M. The Company
presently intends to implement a major portion of its new IT systems at the end
of the second quarter of 1998 and is performing extensive testing on the new
systems to detect any errors in the systems. However, as with all major IT
system installations, there are a number of risks associated with
implementation. If the Company is not able to implement the IT systems as
planned or if the Company incurs delays or problems in the implementation, or if
the installation results in lost data that is critical to the Company's
operations, the additional costs associated with such events may have a material
adverse impact on the Company's business and financial results.
INTERNATIONAL OPERATIONS AND FOREIGN CURRENCY. The Company does
business in more than 60 countries outside the United States. International
operations, which comprised approximately 48% of the Company's revenues in 1997,
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, 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. In addition, the Company's
business and financial results are affected by fluctuations in world financial
markets, including foreign currency exchange rates. The Company's foreign
currency hedging policy attempts to mitigate some of these risks; however, these
risk management activities are not comprehensive and there can be no assurance
that these programs will offset more than a portion of the adverse financial
impact resulting from unfavorable movements in foreign exchange rates.
INTELLECTUAL PROPERTY RIGHTS. The Company's success depends in part on
its ability to obtain and protect its intellectual property rights and to defend
itself against intellectual property infringement claims of others. If the
Company is not successful in defending itself against claims that may arise from
time to time alleging infringement of the intellectual property rights of
others, the Company could incur substantial costs in implementing remediation
actions, such as redesigning its products or processes or acquiring license
rights. Such costs or the disruption to the Company's operations occasioned by
the need to take such actions could have a material adverse effect on the
Company. See Note 16 of Notes to Consolidated Financial Statements. In addition,
the Company utilizes valuable non-patented technical know-how and trade secrets
in its product development and manufacturing operations. Although the Company
utilizes confidentiality agreements and other measures to protect such
proprietary information, there can be no assurance that these agreements will
not be breached or that competitors of the Company will not acquire the
information as a result of such breaches or through independent development. The
Company has pursued a policy of aggressively enforcing its intellectual property
rights against others who may infringe those rights. In connection with such
enforcement actions, the Company may incur significant costs for which the
Company may or may not be reimbursed by the alleged infringer.
NET LOSSES FOR 1997, 1996 AND 1995; RESTRUCTURING CHARGES. The Company
began operations as an independent public company on July 1, 1996 and therefore
does not have a lengthy operating history as an independent company. The Company
reported net losses of $180.1 million in 1997, $20.5 million in 1996 and $85.0
million in 1995. These results include
<PAGE>
restructuring charges and other special charges totaling $241.6 million in 1997,
$88.4 million in 1996 and $166.3 million in 1995. Excluding these charges, the
Company would have reported net income of $20.3 million in 1997, $40.1 million
in 1996 and $3.3 million in 1995. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations." While the
Company's recently announced restructuring plans are designed to reduce the
Company's cost structure and improve its profitability, there can be no
assurance that the Company will be successful in achieving its financial
improvement goals in the future. In addition, although the Company has no
current plans to do so, if it becomes necessary for the Company to shut down or
restructure additional businesses and operations in the future, it could incur
substantial, additional charges in the process. The recording of these charges
could have a material adverse impact on the Company's financial condition.
FLUCTUATIONS IN THE COMPANY'S STOCK PRICE. The Company's stock price
may be subject to significant volatility. If revenue or earnings in any quarter
fail to meet the investment community's expectations, there could be an
immediate impact on the Company's stock price. The stock price may also be
affected by broader market trends unrelated to the Company's performance.
FUTURE CAPITAL REQUIREMENTS. In connection with the Distribution, the
Company entered into a $350 million credit facility with a syndicate of banks.
As of December 31, 1997, the Company had borrowed $313.0 million under this
facility. As a result of the restructuring and other special charges recorded by
the Company in its 1997 consolidated financial statements, the Company is not
currently in compliance with certain of its financial covenants contained in its
Credit Agreement. The Company has obtained waivers for compliance with those
covenants from its lenders through January 5, 1999. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity." The
Company expects to enter into a new credit facility prior to January 5, 1999 and
believes that it will be able to obtain a credit facility of a size and with
financial covenants acceptable to the Company. However, the terms of the new
credit facility, including the financial covenants contained therein, may affect
the Company's sources and cost of capital.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF IMATION CORP.:
We have audited the accompanying consolidated balance sheets of Imation
Corp. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits 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 financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Imation
Corp. and subsidiaries as of December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
February 6, 1998, except for
the second paragraph of Note 7,
as to which the date is March 30, 1998
<PAGE>
<TABLE>
<CAPTION>
IMATION CORP.
- ---------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- ---------------------------------------------------------------------------------------
Years Ended December 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------
(In millions, except per share amounts)
<S> <C> <C> <C>
Net revenues $ 2,201.8 $ 2,278.2 $ 2,245.6
Cost of goods sold 1,431.0 1,482.8 1,520.9
- ---------------------------------------------------------------------------------------
Gross profit 770.8 795.4 724.7
Operating expenses:
Selling, general and administrative 580.6 563.0 539.4
Research and development 194.9 183.1 222.4
Restructuring charges 170.0 53.9 111.8
- ---------------------------------------------------------------------------------------
Total operating expenses 945.5 800.0 873.6
Operating loss (174.7) (4.6) (148.9)
Interest expense 15.7 14.2 18.8
Other, net 15.6 (3.8) (0.9)
- ---------------------------------------------------------------------------------------
Loss before tax
and minority interest (206.0) (15.0) (166.8)
Income tax provision (benefit) (25.9) 5.9 (70.5)
Minority interest - (0.4) (11.3)
- ---------------------------------------------------------------------------------------
Net loss $ (180.1) $ (20.5) $ (85.0)
=======================================================================================
Basic and Diluted loss per common share $ (4.54) $ (0.49) $ (2.02)
=======================================================================================
Weighted average shares outstanding 39.7 41.3 42.0
=======================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
<TABLE>
<CAPTION>
IMATION CORP.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1997 1996
- ---------------------------------------------------------------------------------------
(In millions, except share amounts)
<S> <C> <C>
Assets
Current Assets
Cash and equivalents $ 103.5 $ 61.7
Accounts receivable, net 459.3 479.6
Inventories 399.9 392.8
Other current assets 141.7 94.5
- ---------------------------------------------------------------------------------------
Total current assets 1,104.4 1,028.6
Property, Plant and Equipment, Net 381.6 480.1
Other Assets 179.5 64.6
- ---------------------------------------------------------------------------------------
Total Assets $ 1,665.5 $ 1,573.3
=======================================================================================
Liabilities and Shareholders' Equity
Current Liabilities
Accounts payable $ 182.2 $ 194.1
Accrued payroll 38.3 41.9
Short-term debt 31.3 26.5
Other current liabilities 313.7 158.8
- ---------------------------------------------------------------------------------------
Total current liabilities 565.5 421.3
Other Liabilities 98.1 98.6
Long-term Debt 319.7 123.1
Commitments and Contingencies
Shareholders' Equity
Preferred stock, $.01 par value, authorized
25,000,000 shares, none issued and outstanding -- --
Common stock, $.01 par value, authorized
100,000,000 shares, 42,927,627 and 42,879,880 issued
as of December 31, 1997 and 1996, respectively 0.4 0.4
Additional paid-in capital 1,025.8 1,011.5
Retained earnings (accumulated deficit) (171.1) 11.2
Cumulative translation adjustment (78.1) (46.2)
Unearned ESOP shares (37.3) (46.6)
Treasury stock, at cost, 2,345,759 shares
as of December 31, 1997 (57.5) --
- ---------------------------------------------------------------------------------------
Total shareholders' equity 682.2 930.3
- ---------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $ 1,665.5 $ 1,573.3
=======================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
IMATION CORP.
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Retained
Additional Earnings Unearned Cumulative Net Total
Common Paid-In (Accumulated Treasury ESOP Translation Investment Shareholders'
(In millions, except share amounts) Stock Capital Deficit) Stock Shares Adjustment by 3M Equity
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 -- -- -- -- -- $(45.7) $1,345.7 $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 -- -- -- -- -- (39.1) 1,187.8 1,148.7
Net equity
transactions with 3M (164.0) (164.0)
Issuance of common
stock to 3M shareholders
(41,930,187 shares) $0.4 $991.7 (992.1) --
Loan to ESOP $(50.0) (50.0)
Amortization of
unearned ESOP shares 0.4 3.4 3.8
Issuance of common
stock (922,845 shares)
in connection with
Luminous acquisition -- 14.6 14.6
Value of stock options
issued in connection
with Luminous acquisition 4.8 4.8
Exercise of stock --
options (26,848 shares) -- --
Net income (loss) $11.2 (31.7) (20.5)
Net change in
cumulative translation (7.1) (7.1)
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 0.4 1,011.5 11.2 -- (46.6) (46.2) -- 930.3
Amortization of
unearned ESOP shares .5 9.3 9.8
Purchase of treasury stock
(2,488,132 shares) (60.9) (60.9)
Exercise of stock options
(190,120 shares) -- .2 (2.2) 3.4 1.4
Value of stock options and
warrants issued in connection
with Cemax acquisition 13.6 13.6
Net loss (180.1) (180.1)
Net change in
cumulative translation (31.9) (31.9)
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $0.4 $1,025.8 $(171.1) $(57.5) $(37.3) $(78.1) -- $682.2
=======================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
<TABLE>
<CAPTION>
IMATION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997 1996 1995
- --------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net loss $ (180.1)$ (20.5)$ (85.0)
Adjustments to reconcile net loss to
net cash provided by operating activities:
Depreciation and amortization 147.5 181.1 189.5
Deferred income taxes (45.2) 12.6 (68.1)
Restructuring and other special charges 241.6 88.4 166.3
Accounts receivable 0.4 -- (0.6)
Inventories (22.0) 22.3 25.4
Other current assets (30.4) (29.8) 1.1
Accounts payable (11.6) 85.7 (4.5)
Accrued payroll and other current liabilities 38.8 (37.9) 9.3
Other (5.5) 4.1 23.4
- --------------------------------------------------------------------------------
Net cash provided by operating activities 133.5 306.0 256.8
Cash Flows from Investing Activities
Capital expenditures (116.3) (167.4) (180.2)
Capitalized software (97.8) (13.5) --
Acquisitions, net of cash acquired (29.0) (10.3) --
Other 2.5 6.6 (7.3)
- --------------------------------------------------------------------------------
Net cash used in investing activities (240.6) (184.6) (187.5)
Cash Flows from Financing Activities
Net change in short-term debt 5.8 25.4 --
Other borrowings of debt 505.2 270.3 --
Other repayments of debt (312.6) (146.3) --
Purchase of treasury stock (60.9) -- --
Exercise of stock options 1.4 -- --
Decrease in unearned ESOP shares 9.3 3.4 --
Loan to ESOP -- (50.0) --
Net cash paid to 3M -- (155.9) (72.9)
- --------------------------------------------------------------------------------
Net cash provided by (used in)
financing activities 148.2 (53.1) (72.9)
Effect of exchange rate changes on cash 0.7 (6.6) 3.6
- --------------------------------------------------------------------------------
Change in cash and equivalents 41.8 61.7 --
Cash and equivalents - beginning of year 61.7 -- --
- --------------------------------------------------------------------------------
Cash and equivalents - end of year $ 103.5 $ 61.7 $ --
================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
Imation Corp. (the "Company") became an independent, publicly-held company as of
July 1, 1996 (the "Distribution Date"), when Minnesota Mining and Manufacturing
Company ("3M") spun off its data storage and imaging systems businesses as an
independent, publicly owned company ("the Distribution"). One share of the
Company's common stock was issued for every ten shares of 3M stock outstanding
to stockholders of record on June 28, 1996. The Company is a global leader in
the data storage and imaging industries, providing products and services for
data storage, medical imaging, printing and publishing, and photographic
applications.
BASIS OF PRESENTATION
SUBSEQUENT TO THE DISTRIBUTION. The consolidated financial statements include
the accounts and operations of the Company on a stand-alone basis. 3M and the
Company have entered into a number of agreements to facilitate the transition of
the Company to an independent business enterprise.
PRIOR TO THE DISTRIBUTION. The consolidated financial statements for the periods
prior to July 1, 1996 reflect the assets, liabilities, revenues and expenses
that were directly related to the Company as it was operated within 3M. Where
assets and liabilities were not specifically identifiable to any particular
business of 3M, only those assets and liabilities transferred to the Company are
included in the Company's consolidated balance sheets. Regardless of the
allocation of these assets and liabilities, however, the Company's consolidated
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 the Company 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.
Cash and equivalents and debt were not allocated to the Company in the financial
statements as 3M uses a centralized approach to cash management and the
financing of its operations. The consolidated statements of operations include
an allocation of 3M's interest expense (see Note 7). The Company's financing
requirements are represented by cash transactions with 3M and are reflected in
the "Net Investment by 3M" account (see Consolidated Statements of Shareholders'
Equity). 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 interest rate risk management
function. As part of this activity, derivative financial instruments were
utilized to manage risks generally associated with interest rate market
volatility. 3M did not hold or issue derivative financial instruments for
trading purposes. 3M was not a party to leveraged derivatives. The consolidated
balance sheets of the Company do not reflect any of the associated asset or
liability positions resulting from this activity because the Company did not
assume any of 3M's derivative financial instruments in connection with the
Distribution. The consolidated statements of operations and statements of cash
flows, however, do reflect an allocation of the related gains and losses. Such
gains and losses were recognized by 3M as interest expense over the borrowing
period and, as a result, are reflected in the effective interest rates utilized
by the Company in deriving its interest expense.
<PAGE>
The minority interest within the consolidated statements of operations gives
recognition to the Company's share of net income (loss) of certain majority
owned subsidiaries of 3M. The minority shareholders' proportionate interests in
the Company's net assets of majority owned subsidiaries have not been presented
in the consolidated balance sheets as the Company obtained 100 percent ownership
of the assets and liabilities of these subsidiaries in connection with the
Distribution.
The financial information included herein for periods prior to the Distribution
may not necessarily be indicative of the financial position, results of
operations or cash flows of Company if it had been a separate, independent
company during the periods prior to the Distribution.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION. Commencing with the Distribution, the consolidated financial
statements include the accounts of the Company and its majority-owned
subsidiaries. Prior to the Distribution, the consolidated financial statements
include the accounts of the Company as described in Note 1. All significant
intercompany transactions and balances have been eliminated.
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 for periods prior to the
Distribution, the determination of allowances for uncollectible accounts
receivable and obsolete/excess inventories, the evaluation of costs associated
with restructuring activities, the determination of certain accrued liabilities,
valuation of certain intangibles, and the assessments of recoverability of
deferred tax assets and certain long-lived assets.
RECLASSIFICATIONS. Certain reclassifications have been made to the prior years'
financial statements to conform with the current year presentation.
FOREIGN CURRENCY. Local currencies are considered the functional currencies
outside the U.S. except for Imation Europe B.V., the Company's European holding
company, and subsidiaries located in highly inflationary economies. For
operations in local currency environments, assets and liabilities are translated
at year-end exchange rates with cumulative translation adjustments included as a
component of shareholders' equity. Income and expense items are translated at
average rates of exchange prevailing during the year. For operations in which
the U.S. dollar is considered the functional currency, certain financial
statement amounts are translated at historical exchange rates, with all other
assets and liabilities translated at year-end exchange rates. These translation
adjustments are reflected in the results of operations. Net foreign currency
exchange losses included in results of operations were $13.8 million in 1997 and
not material in 1996 and 1995.
The Company will adopt Statement of Financial Accounting Standards No. ("SFAS")
130, REPORTING COMPREHENSIVE INCOME, in 1998. SFAS 130 establishes standards for
the reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. Comprehensive income is defined as
the change in equity during the period of a business enterprise resulting from
non-owner sources. Adjustments to the Company's net income to arrive at
comprehensive income principally relate to foreign currency translation
adjustments.
<PAGE>
FINANCIAL INSTRUMENTS. The Company uses, or may use, interest rate swaps and
foreign currency and commodity forward and option contracts to manage risks
generally associated with interest rate, exchange rate and commodity market
volatility. All hedging instruments are designated as, and effective as, hedges
and are highly correlated as required by generally accepted accounting
principles. Instruments that do not qualify for hedge accounting are marked to
market with changes recognized currently in the results of operations. The
Company does not hold or issue derivative financial instruments for trading
purposes and is not a party to leveraged derivatives.
Realized and unrealized gains and losses on foreign currency and commodity
forward and option contracts for qualifying hedge instruments are deferred until
offsetting gains and losses on the underlying transactions are recognized in
earnings. These gains and losses generally are recognized as an adjustment to
cost of goods sold for inventory-related hedge transactions, or as adjustments
to foreign currency transaction gains/losses included in non-operating expenses
for foreign denominated payables- and receivables- related hedge transactions.
For interest rate swaps, the differential paid or received on the swaps is
recognized on an accrual basis as an adjustment to interest expense. Gains and
losses on terminated foreign currency and commodity forward and option contracts
are deferred until the underlying hedged item is recognized in the results of
operations. Gains and losses on terminated interest rate swaps are amortized and
reflected in interest expense over the remaining term of the underlying debt.
Cash flows attributable to these financial instruments are included with cash
flows of the associated hedged items.
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.
CASH EQUIVALENTS. Cash equivalents consist of temporary investments purchased
with original maturities of three months or less. The carrying value of cash
equivalents approximates the fair value as of December 31, 1997 and 1996.
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 generally 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 expected future cash flows.
INTANGIBLE ASSETS. Intangible assets consist primarily of goodwill and
capitalized software. The Company capitalizes external and internal costs
related to the design and implementation of internally developed software, along
with related interest. Intangible assets are amortized over their useful lives,
which currently range from five to seven years. The carrying value of intangible
assets are periodically reviewed to assess recoverability based on undiscounted
expected future cash flows.
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.
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 $83 million, $73 million and $52 million in 1997, 1996 and 1995,
respectively. Advertising costs in 1997 and 1996 include $14 million and $22
million, respectively, related to start-up costs for identity development.
<PAGE>
INCOME TAXES. Upon the Distribution, the Company became responsible for its
income taxes and the filing of its own income tax returns. Prior to the
Distribution, the Company did not file separate tax returns but rather was
included in the income tax returns filed by 3M. For purposes of the Company's
consolidated financial statements prior to the Distribution, 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. Prior to the Distribution, the balance of accrued current income
taxes for the Company's operations is included in the Net Investment by 3M
equity account because 3M paid all taxes and received all tax refunds on the
Company's behalf.
TREASURY STOCK. The Company's repurchases of shares of common stock are recorded
as treasury stock and are presented as a reduction of shareholders' equity. When
treasury shares are reissued, the Company uses a first-in, first-out method and
the excess of repurchase cost over reissuance price is treated as an adjustment
to retained earnings (accumulated deficit).
STOCK-BASED COMPENSATION. The Company accounts for stock-based compensation
using the intrinsic value approach under Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. Accordingly, compensation cost for
stock options is measured as the excess, if any, of the quoted market price of
the Company's common stock at the date of the grant over the amount an employee
must pay to acquire the stock.
EARNINGS PER SHARE. In February 1997, the Financial Accounting Standards Board
issued SFAS 128, EARNINGS PER SHARE, which specifies the computation,
presentation, and disclosure requirements for earnings per share ("EPS"). SFAS
128 replaces the presentation of primary and fully diluted EPS with basic and
diluted EPS. Basic EPS excludes all dilution and is based upon the weighted
average number of common shares outstanding during the period. Diluted EPS
reflects the potential dilution that would occur if securities or other
contracts to issue common stock were exercised or converted into common stock.
The Company has adopted SFAS 128, effective December 31, 1997, for periods
subsequent to the Distribution; however, no difference exists between basic and
diluted EPS for the periods presented. For periods prior to the Distribution,
the number of weighted average shares outstanding used in the earnings per share
calculation is one-tenth of the weighted average number of 3M shares outstanding
based on the distribution of one share of the Company for ten shares of 3M
pursuant to the Distribution.
NOTE 3 -- ACQUISITIONS
In August 1997, the Company acquired all of the outstanding common shares of
Cemax-Icon, Inc. ("Cemax") for $51.8 million, consisting of $29.0 million in
cash (net of cash acquired) and non-cash amounts consisting of $9.2 million
representing the Company's previous investment in Cemax preferred shares and
$13.6 million related to the fair value of stock options and warrants to acquire
approximately 971,000 shares of the Company's common stock to replace stock
options and warrants previously granted by Cemax. In addition, the Company
issued certain contingent payment rights which allow Cemax shareholders to
receive additional payments of up to $44.8 million if Cemax attains certain
revenue targets in the twelve month periods ended June 30, 1998 and 1999. At the
election of the Cemax shareholders, the contingent payments are payable in cash
or the Company's common stock. Cemax designs, manufactures, and markets medical
imaging and information systems.
<PAGE>
The acquisition was accounted for using the purchase method of accounting. The
Company allocated a portion of the purchase price to in-process research and
development projects that had not yet reached technological feasibility and had
no probable alternative future uses, which resulted in a one-time
non-tax-deductible charge of $41.7 million. The excess of the initial purchase
price over net assets acquired and in-process research and development of
approximately $17.7 million was allocated to goodwill and is being amortized
over seven years. Any additional payments pursuant to the contingent payment
rights will be recorded as additional goodwill when the contingencies are met.
Operating results for Cemax are included in the Company's results of operations
from the date of acquisition.
The following unaudited pro forma summary combines the consolidated results of
operations of the Company and Cemax as if the acquisition had occurred at the
beginning of the years presented after giving effect to certain adjustments,
including amortization of goodwill, increased interest expense on acquisition
debt, and related income tax effects. The pro forma information excludes the
non-recurring charge of $41.7 million related to purchased in-process research
and development. The pro forma information does not necessarily reflect the
results of operations that actually would have been achieved had the acquisition
been consummated as of that time.
Pro Forma Summary (Unaudited)
Year Ended December 31,
(In millions, except per share amounts) 1997 1996
- ----------------------------------------------- --------------- -------------
Net revenues .................................. $2,218.7 $2,299.4
Net loss ...................................... (144.4) (25.1)
Basic and Diluted loss per common share ....... (3.64) (0.61)
=============================================== =============== =============
In October 1996, the Company acquired all of the outstanding common and
preferred shares of Luminous Corporation ("Luminous") for $29.7 million,
consisting of $10.3 million in cash and non-cash amounts consisting of $14.6
million related to the issuance of approximately 923,000 shares of the Company's
common stock and $4.8 million related to the fair value of stock options to
acquire approximately 317,000 shares of the Company's common stock to replace
stock options previously granted by Luminous. Luminous is a developer and
marketer of desktop software to the pre-press, print production, printing and
graphic arts industries. The acquisition was accounted for using the purchase
method of accounting. The Company allocated a portion of the purchase price to
in-process research and development projects that had not yet reached
technological feasibility and had no probable alternative future uses, which
resulted in a one-time non-tax-deductible charge of $12.0 million. The Company
has allocated the remaining excess purchase price over net assets acquired to
goodwill which is being amortized over seven years. Operating results for
Luminous are included in the Company's results of operations from the date of
acquisition. The pro forma effect on prior periods' results of operations is not
material.
<PAGE>
NOTE 4 -- SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
(In millions) 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Accounts Receivable
Accounts receivable $ 484.9 $ 502.9
Less allowances (25.6) (23.3)
- -----------------------------------------------------------------------------------------
Accounts receivable, net $ 459.3 $ 479.6
Inventories
Finished goods $ 272.6 $ 248.1
Work in process 59.7 57.3
Raw materials and supplies 67.6 87.4
- -----------------------------------------------------------------------------------------
Total inventories $ 399.9 $ 392.8
Other Current Assets
Deferred taxes $ 71.7 $ 38.3
Other 70.0 56.2
- -----------------------------------------------------------------------------------------
Total other current assets $ 141.7 $ 94.5
Property, Plant and Equipment
Land $ 8.4 $ 8.3
Buildings and leasehold improvements 190.5 185.0
Machinery and equipment 1,491.2 1,472.6
Construction in progress 14.4 44.0
- -----------------------------------------------------------------------------------------
Total 1,704.5 1,709.9
Less accumulated depreciation 1,322.9 1,229.8
- -----------------------------------------------------------------------------------------
Property, plant and equipment, net $ 381.6 $ 480.1
Other Assets
Deferred taxes $ 19.4 $ 8.1
Capitalized software 113.0 15.2
Other 47.1 41.3
- -----------------------------------------------------------------------------------------
Total other assets $ 179.5 $ 64.6
Other Current Liabilities
Employee separation costs $ 91.5 $ --
Accrued rebates 42.2 42.9
Deferred income 25.1 26.1
Taxes other than income taxes 44.6 23.2
Other 110.3 66.6
- -----------------------------------------------------------------------------------------
Total other current liabilities $ 313.7 $ 158.8
Other Liabilities
Employee severance indemnities $ 39.3 $ 49.3
Other 58.8 49.3
- -----------------------------------------------------------------------------------------
Total other liabilities $ 98.1 $ 98.6
</TABLE>
<PAGE>
NOTE 5 -- RESTRUCTURING CHARGES AND OTHER SPECIAL CHARGES
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 adopted a reorganization plan to
rationalize its manufacturing operations, streamline its organizational
structure and write-off impaired assets.
The Company reflected pre-tax restructuring and other special charges of $254.7
million in its financial statements, partially in 1995 and partially in 1996
based upon the timing recognition criteria required for the restructuring
charges. The Company recorded $166.3 million of these charges ($88.3 million
after taxes and minority interest) in its 1995 financial statements and an
additional $88.4 million ($60.6 million after taxes) in 1996.
The 1995 restructuring and other special charges 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 U.S. 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
charges of $54.5 million relates primarily to asset write-offs included in cost
of goods sold.
In 1996, restructuring and other special charges of $88.4 million were recorded.
These charges include $53.9 million in restructuring charges primarily for
employee separation programs related to the reduction of approximately 1,600
employees and $22.5 million of special charges associated with start-up
activities which are included in costs of goods sold and selling, general and
administrative expenses. The unpaid restructuring charges for the employee
separation programs as of June 30, 1996, were retained by 3M pursuant to the
Distribution. In addition to the above charges, the Company also recognized a
non-tax-deductible charge of $12.0 million for the in-process research and
development related to the Luminous acquisition (see Note 3).
In 1997, the Company announced plans to further restructure its worldwide
operations in order to improve the Company's competitive position, to focus
resources on areas of strength and on growth opportunities, and to reduce costs
and eliminate unnecessary structure. The Company recorded a $199.9 million
pre-tax charge ($158.7 million after taxes) to fourth quarter 1997 earnings. The
charge included approximately $170.0 million in restructuring charges primarily
associated with employee separation benefits and fixed asset write-offs and
additional special charges of $29.9 million included in cost of goods sold,
selling, general and administrative expenses, and non-operating expenses,
primarily associated with restructuring-related asset write downs and other
year-end adjustments. Specific planned actions include the restructuring of
European operations, the sale of the CD-ROM business, and the realignment and
reduction of general and administrative, manufacturing, marketing, and selected
research and development areas. The 1997 restructuring charge of $170.0 million
consists of $91.5 million for employee separation related costs, $61.5 million
for fixed asset write-downs, and $17.0 million for other business exit costs.
The Company expects the restructuring to result in an additional net reduction
of approximately 1,700 employees worldwide by the end of 1998. The Company's
1997 results also include a third quarter non-tax-deductible charge of $41.7
million for in-process research and development costs related to the Cemax
acquisition (see Note 3).
<PAGE>
NOTE 6 -- INCOME TAXES
The components of loss before tax and minority interest are as follows:
<TABLE>
<CAPTION>
(In millions) 1997 1996 1995
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. $ (131.1) $ (16.9) $ (136.1)
International (74.9) 1.9 (30.7)
- ------------------------------------------------------------------------------------------
Total $ (206.0) $ (15.0) $ (166.8)
The income tax provision (benefit) is as follows:
(In millions) 1997 1996 1995
- ------------------------------------------------------------------------------------------
Currently payable (refundable)
Federal $ 1.2 $ (9.9) $ (14.0)
State 0.1 (0.4) (4.3)
International 18.0 3.9 15.6
Deferred
Federal (33.2) 3.3 (34.9)
State (3.7) (0.4) (3.1)
International (8.3) 9.4 (29.8)
- ------------------------------------------------------------------------------------------
Total $ (25.9) $ 5.9 $ (70.5)
The components of net deferred tax assets and liabilities are as follows:
(In millions) 1997 1996
- ------------------------------------------------------------------------------------------
Receivables $ (0.1) $ 7.8
Inventories 19.1 15.4
Capitalized software (19.7) --
Property, plant and equipment 13.2 (0.4)
Payroll and severance 35.7 3.2
Foreign tax credit carryforwards 14.3 3.4
Net operating loss carryforwards 23.4 --
Other, net 17.5 14.5
- ------------------------------------------------------------------------------------------
Total 103.4 43.9
Valuation allowance (14.3) --
- ------------------------------------------------------------------------------------------
Net deferred tax assets and liabilities $ 89.1 $ 43.9
A valuation allowance of $14.3 million was provided to account for uncertainties
regarding the recoverability of certain foreign tax credit carryforwards. The
Company has available net operating loss carryforwards totaling approximately
$60.1 million which expire in years 2011 and 2012.
The provision (benefit) for income taxes differs from the amount computed by
applying the statutory U.S. income tax rate (35%) because of the following
items:
(In millions) 1997 1996 1995
- ------------------------------------------------------------------------------------------
Tax at statutory U.S. tax rate $ (73.2) $ (5.3) $ (58.4)
State income taxes, net of federal benefit (5.2) (1.2) (5.4)
International taxes in excess of
statutory U.S. tax rate 35.9 7.1 (7.7)
Non-deductible expense related to acquisitions 17.5 4.9 --
Other (0.9) 0.4 1.0
- ------------------------------------------------------------------------------------------
Income tax provision (benefit) $ (25.9) $ 5.9 $ (70.5)
</TABLE>
<PAGE>
As of December 31, 1997, approximately $153 million of earnings attributable to
international subsidiaries (inclusive of earnings prior to the Distribution for
certain international subsidiaries) were considered to be permanently invested.
No provision has been made for taxes that might be payable if these earnings
were remitted to the U.S. It is not practical to determine the amount of
incremental tax that might arise if these earnings were to be remitted.
Cash paid for income taxes in 1997 was $10.9 million and was not material for
the period from July 1, 1996 to December 31, 1996. Prior to July 1, 1996, 3M
paid all taxes and received all tax refunds on the Company's behalf.
NOTE 7 -- DEBT
The components of long-term debt as of December 31, 1997 and 1996 are as
follows:
(In millions) 1997 1996
- ----------------------------------------------------------------------------
Revolving credit facility $ 313.0 $ 120.0
Other 7.6 4.0
- ----------------------------------------------------------------------------
320.6 124.0
Less current portion (0.9) (0.9)
- ----------------------------------------------------------------------------
Total long-term debt $ 319.7 $ 123.1
The Company maintains a $350 million revolving credit facility with a syndicate
of banks which expires June 30, 2001 (the Credit Agreement.) The commitment fee
for the credit facility is based on the Company's interest coverage ratio, and
as of December 31, 1997 and 1996, was .25 and .15 of one percent on the total
amount of the credit facility, respectively. Borrowings under the credit
facility bear interest based on the London interbank offered rate (LIBOR) or the
administrative agent bank's base rate, plus an applicable margin based on the
Company's interest coverage ratio. As of December 31, 1997 and 1996, $313
million and $120 million in borrowings under this credit facility were
outstanding, respectively, at interest rates ranging from 6.49% to 6.55% and
5.80% to 5.86%, respectively. The Credit Agreement contains financial covenants
that include a maximum debt to capital ratio, a minimum interest coverage ratio,
and a minimum tangible net worth and contains a Material Adverse Change (MAC)
provision.
As a result of the Company's restructuring plans and the restructuring and other
special charges recorded by the Company in its 1997 consolidated financial
statements, as of December 31, 1997, the Company was not in compliance with
certain of its financial covenants contained in the Credit Agreement. In
December 1997, the Company obtained a limited waiver from the lenders who are
parties to the Credit Agreement under which the lenders agreed to waive
compliance by the Company with the financial covenants contained in the Credit
Agreement during the period from December 17, 1997 to March 30, 1998. On March
30, 1998, the Company entered into a Limited Waiver and Amendment to its Credit
Agreement which provides an extension through January 5, 1999 of the limited
waiver granted in December 1997. During the extended waiver period, borrowings
under the Credit Agreement will be collateralized by substantially all of the
Company's assets and the Company will be required to maintain a specified
minimum level of earnings before income taxes, depreciation and amortization
(EBITDA). The Company will also incur certain fees and increased interest rates
on outstanding borrowings under the Credit Agreement during the extended waiver
period. The Credit Agreement also contains a number of provisions restricting
the Company's ability to take certain actions, including the incurrence of
additional indebtedness, the creation of additional liens, the making of certain
restricted payments and the sale of substantial assets of the Company. It also
contains certain ongoing reporting requirements, including computations
regarding the Company's financial condition, absence of events of defaults and
absence of material adverse changes in the financial condition or results of
operations of the Company.
Long-term debt maturities are as follows:
(In millions) 1998 1999 2000 2001 Total
- --------------------------------------------------------------------------------
Long-term debt maturities $0.9 $ 2.8 $3.9 $313.0 $320.6
<PAGE>
Short-term debt as of December 31, 1997, consisted of $30.4 million of
uncollateralized borrowings primarily held by international subsidiaries. These
borrowings have original maturities of one year or less and have a weighted
average interest rate of 3.4% and 2.9% as of December 31, 1997 and 1996,
respectively. As of December 31, 1997, the Company had an additional $44.4
million available under credit facilities held by various subsidiaries outside
the U.S.
The Company estimates that the fair value of short-term and long-term debt
approximates the carrying amount of debt as of December 31, 1997 and 1996.
The Company's interest expense for 1997 was $15.7 million (net of $2.5 million
capitalized) and for the period from July 1, 1996 to December 31, 1996 was $6.8
million. Cash paid for interest in these periods was $13.2 million and $6.2
million, respectively. Prior to the Distribution, the Company's financial
statements include allocations of 3M's interest expense totaling $7.4 million
for the period from January 1, 1996 to June 30, 1996, and $18.8 million for
1995. Allocations prior to the Distribution were based on an assumed non-ESOP
debt level of $250 million. The interest rates used were 6.4% and 7.5% in 1996
and 1995, respectively, which reflect 3M's weighted average effective interest
rates on non-ESOP debt during these periods. The consolidated balance sheet of
the Company prior to the Distribution does not include this debt as the total
capitalization of the Company was reflected in the Net Investment by 3M equity
account.
NOTE 8 -- FINANCIAL INSTRUMENTS
To manage interest rate risk, the Company has entered into an interest rate swap
agreement with a financial institution effective March 25, 1997, which expires
March 31, 2000. This notional amount of the interest rate swap agreement is $100
million with the Company paying a fixed rate of 6.63% and receiving a variable
rate based on LIBOR. The notional amount serves solely as a basis for the
calculation of interest payment streams to be exchanged and is not a measure of
the exposure to the Company through its use of such derivative.
To manage risks associated with foreign currency exchange rates and silver
market volatility, the Company has entered into foreign currency and commodity
forward and option contracts. These contracts generally have maturities of less
than six months. The face amount of forward and options contracts as of December
31, 1997 and 1996 are as follows:
(In millions) 1997 1996
- --------------------------------------------------------------------------------
Foreign currency forward contracts $93.9 $28.5
Foreign currency option contracts purchased 1.8 -
Silver commodity forwards contracts 8.4 3.4
- --------------------------------------------------------------------------------
The carrying and fair value of the interest rate swap and foreign currency and
commodity forward and option contracts are not material as of December 31, 1997
and 1996.
The Company is exposed to credit loss in the event of nonperformance by
counter-parties in interest rate swaps, and foreign currency and commodity
forward and option contracts, but does not anticipate nonperformance by any of
these counter-parties. The Company actively monitors its exposure to credit risk
through the use of credit approvals and credit limits, and by selecting major
international banks and financial institutions as counter-parties.
<PAGE>
NOTE 9 -- LEASES
In March 1997, the Company entered into a Master Lease and Security Agreement in
connection with the construction of a new research and development facility at
the Company's headquarters site. Construction is expected to be completed in
June 1998, at which time the lease payments will commence. The Company has the
option to purchase the facility at the end of the lease term, March 2002. In the
event the Company chooses not to exercise this purchase option, the Company is
obligated to arrange for the sale of the facility and has guaranteed the lessor
a sale price of $58.5 million.
Rent expense under operating leases, which primarily relate to equipment and
office space, amounted to $23.5 million, $15.1 million and $9.0 million in
1997, 1996 and 1995, respectively. The following table sets forth the minimum
rental payments under operating leases with non-cancelable terms in excess of
one year as of December 31, 1997 and under the Master Lease and Security
Agreement:
(In millions) 1998 1999 2000 2001 2002 Total
- --------------------------------------------------------------------------------
Minimum lease payments $16.6 $17.5 $11.1 $ 7.6 $59.1 $111.9
NOTE 10 -- SHAREHOLDERS' EQUITY
The Company maintains a shareholder rights plan under which the Company has
issued one preferred share purchase right (Right) for each common share of the
Company. Each Right will entitle its holder to purchase one one-hundredth of a
share of Series A Junior Participating Preferred Stock at an exercise price of
$125, subject to adjustment. The Rights are exercisable only if a person or
group acquires beneficial ownership of 15 percent or more of the Company's
outstanding common stock. The Rights expire on July 1, 2006 and may be redeemed
earlier by the Board of Directors for $0.01 per Right.
In connection with the acquisition of Cemax, the Company assumed certain
outstanding warrants on Cemax stock which the Company agreed to convert into
warrants to acquire 93,375 shares of the Company's common stock. The warrants
have an exercise price of $20.77 and became exercisable upon the acquisition of
Cemax by the Company.
<PAGE>
NOTE 11 -- SEGMENT INFORMATION
The Company operates in one industry segment, the imaging and information
industry, supplying products and services to meet the information processing
needs for a variety of customer applications. Geographic 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>
OTHER
UNITED INTERNATIONAL ELIMINATIONS TOTAL
(In millions) STATES EUROPE(1) AREAS(2) AND OTHER COMPANY
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues 1997 $ 1,150.5 $ 722.6 $ 328.7 $ 2,201.8
to customers 1996 1,159.5 816.2 302.5 2,278.2
1995 1,128.8 808.4 308.4 2,245.6
Transfers between 1997 $ 330.6 $ 97.7 $ 19.3 $ (447.6)
geographic areas 1996 351.1 92.5 6.8 (450.4)
1995 290.9 76.2 4.0 (371.1)
Operating 1997(3) $ (200.4) $ 1.3 $ 24.4 $ (174.7)
income (loss) 1996(4) (95.3) 78.8 11.9 (4.6)
1995(5) (169.0) 55.8 (35.7) (148.9)
Identifiable 1997 $ 995.1 $ 544.1 $ 126.3 $ 1,665.5
assets 1996 789.1 618.1 166.1 -- 1,573.3
1995 816.4 575.7 149.7 $ (0.3) 1,541.5
</TABLE>
(1) Includes operations in the Middle East and Africa since such regions are
managed together with Europe. These operations are not material to the overall
financial results of the Company.
(2) Includes Latin America, Asia and Canada.
(3) Includes restructuring and other special charges of $174.9 million in the
United States, $64.5 million in Europe and $2.2 million in Other International
Areas.
(4) Includes restructuring and other special charges of $77.1 million in the
United States, $9.8 million in Europe and $1.5 million in Other International
Areas.
(5) Includes restructuring and other special charges of $99.8 million in the
United States, $20.4 million in Europe and $46.1 million in Other International
Areas.
Effective with year-end 1998 reporting, the Company will adopt SFAS 131,
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS 131
establishes standards for the reporting of operating segment information in both
annual reports and interim financial reports issued to shareholders. The Company
is reviewing the requirements of SFAS 131 but has not yet determined what
segment information will be reported upon adoption. The Company believes that it
may be required to present segment information beyond the one segment currently
presented.
<PAGE>
NOTE 12 -- RETIREMENT PLANS
The Company has various non-contributory defined benefit employee pension plans
covering substantially all U.S. employees and certain employees outside the U.S.
For the U.S. plan, employees are eligible to participate at date of hire and are
fully vested after five years of service, including pension service time while
employed by 3M. Benefits are based primarily on employees' annual salary and
annual interest credits. For plans outside the U.S., benefits are based
principally on years of service and compensation near retirement. The Company's
funding policy is to deposit with a trustee amounts at least equal to those
required by law. Pension investments consist primarily of common stocks and
fixed-income securities.
Prior to the Distribution, employees of the Company participated in various
3M-sponsored retirement plans. For U.S. employees, 3M has retained
responsibility for the benefits earned under the 3M plan prior to the
Distribution. For plans outside the U.S., the Company generally has assumed the
assets and related liabilities. For periods prior to the Distribution, pension
expense was allocated to the Company as part of 3M. Allocated pension expense
was $12.0 million in the period from January 1, 1996 to June 30, 1996, and $24.0
million in 1995. Total pension expense was $20.0 million, $21.3 million and
$24.0 million in 1997, 1996 and 1995, respectively.
The following table details net pension cost for the year ended December 31,
1997 and for the period from July 1, 1996 to December 31, 1996 :
<TABLE>
<CAPTION>
U.S. PLAN July 1- December 31,
(In millions) 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Service cost $ 16.7 $ 7.5
Interest cost 0.6 --
Return on plan assets--actual -- --
Net amortization and deferral (0.2) --
- ------------------------------------------------------------------------------------------------
Net pension cost $ 17.1 $ 7.5
INTERNATIONAL PLANS July 1 - December 31,
(In millions) 1997 1996
- ------------------------------------------------------------------------------------------------
Service cost $ 2.6 $ 1.5
Interest cost 4.2 2.0
Return on plan assets--actual (5.9) (2.0)
Net amortization and deferral 2.0 0.3
- ------------------------------------------------------------------------------------------------
Net pension cost $ 2.9 $ 1.8
The following table details the funded status of the pension plans as of
December 31, 1997 and 1996:
U.S. PLAN
(In millions) 1997 1996
- ------------------------------------------------------------------------------------------------
Actuarial present value of:
Vested benefit obligation $ 20.9 $ 6.9
Non-vested benefit obligation 4.7 0.6
- ------------------------------------------------------------------------------------------------
Accumulated benefit obligation $ 25.6 $ 7.5
Projected benefit obligation $ 25.6 $ 7.5
Plan assets at fair value $ 7.0 $ --
Plan assets less than the projected benefit obligation $ (18.6) $ (7.5)
- ------------------------------------------------------------------------------------------------
Accrued pension cost $ (18.6) $ (7.5)
INTERNATIONAL PLANS
(In millions) 1997 1996
- ------------------------------------------------------------------------------------------------
Actuarial present value of:
Vested benefit obligation $ 37.0 $ 36.2
Non-vested benefit obligation 5.3 5.6
- ------------------------------------------------------------------------------------------------
Accumulated benefit obligation $ 42.3 $ 41.8
Projected benefit obligation $ 59.3 $ 60.3
Plan assets at fair value $ 57.9 $ 52.5
Plan assets less than the projected benefit obligation $ (1.4) $ (7.8)
Unrecognized net transition obligation 0.9 0.9
Other unrecognized items -- 5.6
- ------------------------------------------------------------------------------------------------
Accrued pension cost $ (0.5) $ (1.3)
<PAGE>
The assumptions at year end 1997 and 1996 are as follows:
U.S. PLAN 1997 1996
- ------------------------------------------------------------------------------------------------
Discount rate 7.25% 8.00%
Compensation rate increase 4.75% 4.75%
Long-term rate of return on assets 9.00% 9.00%
INTERNATIONAL PLANS 1997 1996
- ------------------------------------------------------------------------------------------------
Discount rate 7.90% 8.00%
Compensation rate increase 6.20% 6.20%
Long-term rate of return on assets 8.30% 8.30%
</TABLE>
Net pension cost was determined using assumptions as of January 1, 1997 for 1997
and as of July 1, 1996 (Distribution Date), for 1996. The funded status is
determined using the assumptions as of year end.
In addition to the above, the Company's Italian subsidiary sponsors an employee
severance indemnity plan as required by law. The accrued liability for this
severance indemnity plan is included in other liabilities and was $39.3 million
and $49.3 million as of December 31, 1997 and 1996, respectively. The Company
measures the vested benefit obligation as the amount that would be payable if
the employees under the plan would separate currently. Expense for this plan was
$4.7 million, $5.0 million and $7.8 million in 1997, 1996 and 1995,
respectively.
NOTE 13 -- EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLANS
The Company sponsors a 401(k) retirement savings plan under which eligible U.S.
employees may choose to save up to 15% of eligible compensation on a pre-tax
basis, subject to certain IRS limitations. The Company matches employee
contributions 100% on the first three percent of eligible compensation and 25%
on the next three percent of eligible compensation. The Company also sponsors a
variable compensation program, in which the Company will contribute up to three
percent of eligible employee compensation to employees' 401(k) retirement
accounts, depending upon Company performance.
The Company established an Employee Stock Ownership Plan (ESOP) during 1996 as a
cost-effective way of funding the employee retirement savings benefits noted
above. The ESOP borrowed $50.0 million from the Company in 1996 and used the
proceeds to purchase approximately 2.2 million shares of the Company's common
stock, with the ESOP shares pledged as collateral for the debt. The Company
makes monthly contributions to the ESOP equal to the debt service plus an
applicable amount so that the total contribution releases a number of shares
equal to that required to satisfy the Company's matching requirements. As the
debt is repaid, shares are released from collateral and allocated to employee
accounts. The shares pledged as collateral are reported as unearned ESOP shares
in the consolidated balance sheets. The Company reports compensation expense
equal to the current market price of the shares released, and released shares
are considered outstanding for the computation of earnings per share. Total
compensation expense related to the ESOP was $8.5 million in 1997 and $5.1
million in the period from July 1, 1996 to December 31, 1996.
The ESOP shares as of December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Released and allocated shares 551,164 146,149
Unreleased shares 1,624,723 2,029,738
- -------------------------------------------------------------------------------------------
Total ESOP shares 2,175,887 2,175,887
===========================================================================================
Fair value of unreleased shares as of December 31 $25,996,000 $57,086,000
===========================================================================================
</TABLE>
<PAGE>
Prior to July 1, 1996, U.S. employees of the Company participated in a
3M-sponsored employee savings plan under Section 401(k) of the Internal Revenue
Code. 3M matched employee contributions of up to six percent of compensation at
rates ranging from 35 to 85 percent depending upon financial performance. The
Company's allocation of the expense related to the 3M employee savings plan was
$2.3 million in the period from January 1, 1996 to June 30, 1996, and $4.5
million in 1995 . Total expense related to employee savings and stock ownership
plans was $8.5 million, $7.4 million and $4.5 million in 1997, 1996 and 1995,
respectively.
NOTE 14 -- EMPLOYEE STOCK PLANS
The Company currently has stock options outstanding under the Imation 1996
Employee Stock Incentive Program (the "Employee Plan"), the Imation 1996
Directors Stock Compensation Program (the "Directors Plan"), the Imation Stock
Option Plan for Employees of Luminous Technology Corporation (the "Luminous
Plan") and the Imation Stock Option Plan for Employees of Cemax-Icon Corp. (the
"Cemax Plan").
The Employee Plan was approved and adopted by 3M on June 18, 1996, as the sole
shareholder of the Company, and became effective on July 1, 1996, at
Distribution. The total number of shares of common stock that may be issued or
awarded under the Employee Plan may not exceed 6,000,000. All shares subject to
awards under the Employee Plan that are forfeited or terminated will be
available again for issuance pursuant to awards under the Employee Plan. Grant
prices are equal to the fair market value of the Company's common stock at date
of grant. The options normally have a term of ten years and generally become
exercisable from one to five years after grant date. At December 31, 1997 and
1996, there were 1,915,170 and 3,677,352 shares available for grant under the
Employee Plan, respectively.
The Directors Plan was also approved and adopted by 3M prior to the
Distribution, as the sole shareholder of the Company, and became effective on
July 1, 1996. The total number of shares of common stock that may be issued or
awarded under the Directors Plan may not exceed 800,000. The outstanding options
are non-qualified options with a term of ten years and generally become
exercisable one year after grant date. Grant prices are equal to the fair market
value of the Company's common stock at date of grant. As of December 31, 1997
and 1996, there were 676,750 and 740,000 shares available for grant under the
Directors Plan, respectively.
The Luminous Plan was approved and adopted by the shareholders of Luminous prior
to the acquisition of Luminous by the Company (see Note 3). In connection with
the acquisition, the Company assumed certain obligations pursuant to outstanding
stock options held by Luminous employees and agreed to convert such options into
options to purchase 317,062 shares of the Company's common stock. The
outstanding options were amended to accelerate the dates on which the options
become exercisable. No additional grants may be made pursuant to the Luminous
Plan.
The Cemax Plan was approved and adopted by the shareholders of Cemax prior to
the acquisition of Cemax by the Company (see Note 3). In connection with the
acquisition, the Company assumed certain obligations pursuant to outstanding
stock options held by Cemax employees and agreed to convert such options into
options to purchase 877,554 shares of the Company's common stock. The
outstanding options were amended to accelerate the dates on which the options
become exercisable. No additional grants may be made pursuant to the Cemax Plan.
The following table summarizes stock option activity for 1997 and 1996:
<TABLE>
<CAPTION>
Year-Ended December 31, 1997 July 1- December 31, 1996
---------------------------- -------------------------
Stock Weighted Average Stock Weighted Average
Options Exercise Price Options Exercise Price
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Oustanding at beginning of year 2,648,157 $ 21.31 -
Granted 2,903,244 21.11 2,699,530 $ 21.14
Exercised (190,120) 11.50 (26,848) 2.16
Forfeited (176,605) 23.84 (24,525) 22.54
- -------------------------------------------------------------------------------------------------------------------
Outstanding, end of year 5,184,676 21.47 2,648,157 $ 21.31
Exercisable, end of year 2,121,243 19.95 131,857 $ 10.58
</TABLE>
<PAGE>
The following table summarizes information about stock options outstanding as of
December 31, 1997:
<TABLE>
<CAPTION>
Weighted Average Options Outstanding- Options Exercisable-
Range of Options Remaining Weighted Average Options Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.31 119,082 8.5 years $ 0.31 76,144 $ 0.31
8.22 485,835 9.5 years 8.22 299,860 8.22
16.15 to 22.90 2,631,399 9.0 years 22.37 1,590,148 22.58
24.60 to 26.80 1,948,360 8.5 years 24.86 155,091 25.33
--------------- --------- -------
$ 0.31 to $26.80 5,184,676 2,121,243
</TABLE>
The Company has adopted the disclosure only provisions of SFAS 123, "Accounting
for Stock-Based Compensation". Accordingly, no compensation expense has been
recognized for the stock option plans. If the fair value of options granted had
been recognized as compensation expense on a straight-line basis over the
vesting periods in accordance with the provisions of SFAS 123, pro forma pre-tax
loss would have been $16.0 million higher ($9.8 million after taxes or $0.23 per
Basic and Diluted share) for 1997, $9.4 million higher ($5.1 million after taxes
or $0.12 per Basic and Diluted share) in 1996 and $3.4 million higher ($1.9
million after taxes or $0.05 per Basic and Diluted share) in 1995.
The weighted average fair value at date of grant for options granted by the
Company in 1997 and 1996 are as follows:
1997 1996
---------------------
Exercise price equals market price on grant date: $ 9.55 $ 8.96
Exercise price less than market price on grant date: $17.71 $ 21.97
As part of 3M, certain employees of the Company were granted stock options prior
to the Distribution to purchase 3M stock. Options granted to the Company's
employees under 3M's General Employees' Stock Purchase Plan (GESPP) were for
72,522 shares in the period from January 1, 1996 to June 30, 1996 and 144,366
shares in 1995. The weighted average fair value per option granted under the
GESPP was $10.37 in 1996 and $8.60 in 1995. Options granted to the Company's
employees under 3M's Management Stock Option Plan (MSOP) were for 271,200 shares
in 1995 with a weighted average fair value of $12.48 per option. No options were
issued to the Company's employees under the MSOP in 1996. Pursuant to the
Distribution, options granted to the Company's employees while part of 3M have
not been converted into options to purchase shares of the Company's stock.
The fair values at date of grant were estimated using the Black-Scholes option
pricing model with the following weighted average assumptions (1995 grants
reflect 3M assumptions):
1997 1996 1995
- -------------------------------------------------------------------------------
Volatility 40.00% 40.00% 14.40%
Risk free interest rate 6.47% 6.38% 5.90%
Expected life (months) 52 49 66
Dividend growth Zero Zero 5.2%
<PAGE>
NOTE 15 -- SUPPLEMENTAL NON-CASH ITEMS
Pursuant to the Distribution on July 1, 1996, certain assets and liabilities
with a net value of $8.1 million were retained by 3M, primarily comprised of
certain deferred tax assets of $26.9 million and severance obligations of $23.9
million. Non-cash items related to acquisitions are described in Note 3.
NOTE 16 -- COMMITMENTS AND CONTINGENCIES
In connection with the Distribution, the Company assumed substantially all
liabilities for legal proceedings relating to the Company's businesses as
conducted prior to the Distribution.
The Company is the subject of various pending or threatened legal actions and
other claims, including proceedings under laws and regulations related to
environmental and other matters, in the ordinary course of its business. All
such matters are subject to many uncertainties and outcomes that are not
predictable with assurance. Consequently, the Company is unable to ascertain as
of December 31, 1997 the ultimate aggregate amount of any monetary liability or
financial impact that may be incurred by the Company with respect to these
matters. While these matters could materially affect operating results of any
one quarter when resolved in future periods, it is management's opinion that
after final disposition, any monetary liability or financial impact to the
Company beyond that provided in the consolidated balance sheet as of December
31, 1997 would not be material to the Company's financial position, annual
results of operations or cash flows.
In addition, on December 2, 1997 Eastman Kodak Company ("Kodak") filed a civil
complaint against the Company, 3M and certain of their respective subsidiaries
in the U.S. District Court for the Western District of New York. The complaint
alleges improper receipt of Kodak trade secrets by 3M's Italian subsidiaries
between 1993 and May 1996 from Harold Worden, a retired Kodak employee. Worden
has since pleaded guilty and been sentenced in the Western District of New York
on criminal charges of interstate transportation of stolen Kodak documents. The
3M subsidiaries that dealt with Worden became subsidiaries of the Company in
connection with the Distribution. In its complaint, Kodak seeks unspecified
compensatory damages, treble damages, punitive damages and permanent injunctive
relief.
On December 2, 1997 the Company, 3M and their respective subsidiaries filed a
suit in Italy asking the Italian Court to declare that they have no liability to
Kodak in this matter. On February 6, 1998 the Company and 3M filed a request
that the Court dismiss the action on grounds that it is properly venued in
Italy, as well as on grounds of legal flaws in Kodak's claims. The motion to
dismiss is scheduled to be heard by the Court on May 7, 1998, with a decision
regarding the dismissal expected in early summer 1998. It is not possible at
this time to reach any conclusions as to the outcome of this litigation. The
Company disputes any liability to Kodak and intends to vigorously defend the
action.
<PAGE>
NOTE 17 -- QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
(In millions,
except per share amounts) First Second Third Fourth Total
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997*
Net revenues $ 547.7 $ 554.8 $ 529.5 $ 569.8 $ 2,201.8
Gross profit 199.0 193.0 191.2 187.6 770.8
Operating income (loss) 28.2 10.0 (32.0) (180.9) (174.7)
Net income (loss) 12.0 4.4 (38.7) (157.8) (180.1)
Basic and Diluted earnings
(loss) per common share 0.29 0.11 (1.00) (4.05) (4.54)
1996**
Net revenues $ 576.1 $ 561.2 $ 559.3 $ 581.6 $ 2,278.2
Gross profit 202.3 192.7 196.6 203.8 795.4
Operating income (loss) 13.3 (55.6) 24.5 13.2 (4.6)
Net income (loss) 6.1 (37.8) 11.8 (0.6) (20.5)
Basic and Diluted earnings
(loss) per common share 0.14 (0.90) 0.29 (0.02) (0.49)
</TABLE>
(*) Includes a non-tax-deductible charge of $41.7 million in third quarter for
in-process research and development costs related to the Cemax acquisition and a
$199.9 million pre-tax charge ($158.7 million after taxes) in fourth quarter for
$170.0 million of restructuring charges primarily related to employee separation
benefits and fixed asset write-offs, and $29.9 million of other restructuring
related assets write-downs and other year-end adjustments (see Note 5).
(**) Includes charges of $10.4 million ($6.1 million after taxes) and $66.0
million ($42.5 million after taxes) in first quarter and second quarter,
respectively, for restructuring charges primarily related to employee separation
benefits and one-time charges associated with start-up activities, and a
non-tax-deductible charge of $12.0 million in third quarter for in-process
research and development costs related to the Luminous acquisition (see Note 5).
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
Certain information required by Part III is omitted from this Report on
Form 10-K. The Company will file its definitive Proxy Statement for its Annual
Meeting of Shareholders to be held on June 4, 1998, pursuant to Regulation 14A
of the Securities Exchange Act of 1934, as amended (the "Proxy Statement"), not
later than 120 days after the end of the fiscal year covered by this Report.
Certain information included in the Proxy Statement is incorporated herein by
reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
A list of the Company's directors, together with a description of their
business experience, is set forth below:
LAWRENCE E. EATON served as Executive Vice President of the
Information, Imaging and Electronic Sector and Corporate Services of 3M (a
diversified manufacturer) from 1991 to his retirement in August 1996. Prior to
1991, Mr. Eaton served in various other capacities at 3M, including from 1986 to
1991 as Group Vice President, Memory Technologies Group. Mr. Eaton has been a
director of the Company since July 1996.
MICHAEL S. FIELDS has been President of The Fields Group (a management
consulting firm) since May 1997. In June 1992, Mr. Fields founded Open Vision
(supplier of computer systems management applications for open client/server
computing environments). Mr. Fields served as Chairman and Chief Executive
Officer of that company from July 1992 to July 1995 and continued to serve as
Chairman of the Board until April 1997. Prior to such time, Mr. Fields held a
number of executive positions at Oracle Corporation. Mr. Fields has been a
director of the Company since January 1998 and is also a director of Netnoir,
Adamation, Sceneware, ReachCast and the Hurwitz Group.
WILLIAM W. GEORGE is Chairman and Chief Executive Officer of Medtronic,
Inc. (a medical technology company). He joined Medtronic in 1989 as President
and Chief Operating Officer, was elected Chief Executive Officer in 1991 and
became Chairman of the Board in August 1996. Prior to such time, Mr. George
served as the President of Honeywell Space and Aviation Systems and the
President of Honeywell Industrial Automation and Control. Mr. George has been a
director of the Company since July 1996 and is also a director of Dayton Hudson
Corporation and Allina Health System.
LINDA W. HART is Vice-Chairman and Chief Executive Officer of Hart
Group, Inc. (a diversified group of companies primarily involved in insulation
manufacturing and residential and commercial services). Prior to joining Hart
Group in 1990, Ms. Hart was engaged in the private practice of law in Dallas,
Texas. Ms. Hart is a former director of both Conner Peripherals, Inc. and
WordPerfect Corporation and is currently a director of each of the Hart Group
companies, Hart Group, Inc. (management services and investments), Rmax, Inc.
(insulation manufacturing), Axon,
<PAGE>
Inc. (residential and commercial services), and Hart Leasing, Inc. (vehicle and
equipment leasing). Ms. Hart has been a director of the Company since July 1996.
RONALD T. LEMAY is the President and Chief Operating Officer of Sprint
Corporation (a telecommunications company). He was appointed to that position in
February 1996. He became a director of Sprint in 1993. From March 1995 to
September 1996, Mr. LeMay served as the Chief Executive Officer of Sprint
Spectrum, a partnership among Sprint, Tele-Communications, Inc., Comcast
Corporation and Cox Communications. From October 1989 to March 1995, Mr. LeMay
served as President and Chief Operating Officer of Sprint Long Distance. Mr.
LeMay has been a director of the Company since July 1996 and is also a director
of Yellow Corporation and Ceridian Corp.
MARVIN L. MANN has been Chairman and Chief Executive Officer of Lexmark
International, Inc. (a supplier of network and personal printers and information
processing supplies) since March 1991 when the company was formed. Prior to such
time, Mr. Mann served in a number of executive positions at International
Business Machines Corporation. Mr. Mann has been a director of the Company since
January 1997 and is also a director of M. A. Hanna Company and a member of the
Fidelity Investments Board of Trustees.
WILLIAM T. MONAHAN was elected Chairman of the Board, President and
Chief Executive Officer of the Company when the Company was formed in March 1996
in connection with the Distribution. From June 1993 to March 1996, Mr. Monahan
served as Group Vice President responsible for the Electro and Communication
Group of 3M, and from May 1992 to May 1993, he served as Senior Managing
Director of 3M Italy. From September 1989 to May 1992, Mr. Monahan was Vice
President of the Data Storage Products Division of 3M.
MARK A. PULIDO has been Chief Executive Officer and President of
McKesson Corporation (a supplier of healthcare products and services) since
April 1997. From May 1996 to April 1997 he served as the President and Chief
Operating Officer of McKesson. From January 1996 to May 1996, Mr. Pulido served
as President and Chief Executive Officer of Sandoz Pharmaceuticals Corporation
(a research-based pharmaceutical manufacturer). From December 1994 to December
1995, Mr. Pulido served as Chief Operating Officer of Sandoz. Prior to that
time, Mr. Pulido served as Chairman, President & Chief Executive Officer of Red
Line HealthCare Corporation (a supplier of medical supplies and reimbursement
services to the long-term healthcare industry), an affiliate of Sandoz. Mr.
Pulido has been a director of the Company since July 1996.
DARYL J. WHITE served as the Senior Vice President of Finance and Chief
Financial Officer of Compaq Computer Corporation (a computer equipment
manufacturer) from 1988 to May 1996. Prior to such time, he held the positions
of Corporate Controller and Director of Information Management at Compaq. Mr.
White has been a director of the Company since July 1996 and is also a director
of Paracelsus Healthcare Corp.
The information contained in the sections entitled "Information
Concerning Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" contained in the Company's Proxy Statement for its 1998 Annual
Shareholders Meeting is incorporated herein by reference. See also "Executive
Officers of the Company" in Part I above.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.
The sections entitled "Compensation of Executive Officers" and
"Compensation of Directors" contained in the Company's Proxy Statement for its
1998 Annual Shareholders Meeting is incorporated herein by reference. The
information appearing under the heading "Committee Report on Executive
Compensation" is not incorporated herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information contained in the sections entitled "Security Ownership
of Certain Beneficial Owners" and "Security Ownership of Management" contained
in the Company's Proxy Statement for its 1998 Annual Shareholders Meeting is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Not applicable.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT.
1. FINANCIAL STATEMENTS
The following Report of Independent Accountants and consolidated
financial statements of the Company are contained in Part II of this Report:
Page
Report of Independent Accountants ................................
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995 ............................
Consolidated Balance Sheets as of December 31, 1997 and 1996 .....
Consolidated Statements of Shareholders' Equity for the Years
Ended December 31, 1997, 1996 and 1995 ......................
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995.............................
Notes to Consolidated Financial Statements .......................
2. FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted because of the absence of
the conditions under which they are required or because the required information
is included in the Consolidated Financial Statements or the notes thereto.
<PAGE>
3. EXHIBITS
The following Exhibits are filed as part of, or incorporated by
reference into, this Report:
Exhibit
Number Description of Exhibit
------ ----------------------
3.1 Restated Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to Registration
Statement on Form 10, No. 1-14310)
3.2 Amended and Restated By-Laws of the Registrant (incorporated
by reference to Exhibit 3.2 to the Company's 1996 Annual
Report on Form 10-K)
4.1 Rights Agreement, dated as of June 18, 1996 between the
Registrant and Norwest Bank Minnesota, N.A., as Rights Agent
(incorporated by reference to Exhibit 4.1 to Registration
Statement on Form 10, No. 1-14310)
4.2 Certificate of Designations, Preferences and Rights of Series
A Junior Participating Preferred Stock of the Registrant
(incorporated by reference to Exhibit 4.2 to Registration
Statement on Form 10, No. 1-14310)
4.3 Credit Agreement dated as of July 1, 1996 among the Company,
the Lenders named therein and Citicorp USA, Inc., as Agent
(incorporated by reference to Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September
30, 1997)
4.4 Amendment No. 1 dated as of September 10, 1997 to the Credit
Agreement dated as of July 1, 1996 among the Company, the
Lenders named therein and Citicorp USA, Inc., as Agent among
the Company, the Lenders named therein and Citicorp USA, Inc.,
as Agent (incorporated by reference to Exhibit 4.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997)
4.5 Limited Waiver and Amendment No. 2 dated as of March 30, 1998
to the Credit Agreement dated as of July 1, 1996 among the
Company, the Lenders named therein and Citicorp USA, Inc., as
Agent
10.1 Transfer and Distribution Agreement, dated as of July 1, 1996,
between Minnesota Mining and Manufacturing Company ("3M") and
the Registrant (incorporated by reference to Exhibit 2.1 to
Registration Statement on Form 10, No. 1-14310)
10.2 Tax Sharing and Indemnification Agreement, dated as of July 1,
1996 between 3M and the Registrant (incorporated by reference
to Exhibit 10.1 to Registration Statement on Form 10, No.
1-14310)
10.3 Corporate Services Transition Agreement, dated as of July 1,
1996 between 3M and the Registrant (incorporated by reference
to Exhibit 10.2 to Registration Statement on Form 10, No.
1-14310)
10.4 Environmental Matters Agreement dated as of July 1, 1996
between 3M and the Registrant (incorporated by reference to
Exhibit 10.3 to Registration Statement on Form 10, No.
1-14310)
10.5 Intellectual Property Rights Agreement, dated as of July 1,
1996 between 3M and the Registrant (incorporated by reference
to Exhibit 10.10 to Amendment No. 2 to Registration Statement
on Form S-4, No. 333-28837)
10.6 Supply Agreement, dated as of July 1, 1996, between 3M and the
Registrant (incorporated by reference to Exhibit 10.5 to
Registration Statement on Form 10, No. 1-14310)
10.7 Lease Agreement dated as of July 1, 1996 between 3M and the
Registrant (incorporated by reference to Exhibit 10.6 to
Registration Statement on Form 10, No. 1-14310)
<PAGE>
10.8* Employment Agreement, dated as of July 1, 1996, between
William T. Monahan and the Registrant (incorporated by
reference to Exhibit 10.7 to Registration Statement on Form
10, No. 1-14310)
10.9* Imation 1996 Employee Stock Incentive Program (incorporated by
reference to Exhibit 10.8 to Registration Statement on Form
10, No. 1-14310)
10.10* Imation Excess Benefit Plan (incorporated by reference to
Exhibit 10.10 to Registration Statement on Form 10, No.
1-14310)
10.11* Imation 1996 Retirement Investment Plan (incorporated by
reference to Exhibit 10.11 to Registration Statement on Form
10, No. 1-14310)
10.12* Imation 1996 Directors Stock Compensation Program, as Amended
(incorporated by reference to Exhibit 10.12 to 1996 Annual
Report on Form 10-K)
10.13* Imation 1998 Success Sharing Program
10.14* Form of Indemnity Agreement between the Company and each of
its directors (incorporated by reference to Exhibit 10.13 to
1997 Annual Report on Form 10-K)
11.1 Computation of Common Shares and Common Share Equivalents
21.1 Subsidiaries of Imation Corp.
23.1 Consent of Independent Accountants
24.1 Power of Attorney
27.1 Financial Data Schedule
- ---------------
*Items that are management contracts or compensatory plans or arrangements
required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
(b) REPORTS ON FORM 8-K
The Company did not file any Reports on Form 8-K during the quarter
ended December 31, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
IMATION CORP.
By: /s/ William T. Monahan
William T. Monahan
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Date: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
NAME TITLE DATE
/s/ William T. Monahan Chairman, President, Chief March 31, 1998
- ---------------------- Executive Officer and Director
William T. Monahan (principal executive officer)
/s/ Jill D. Burchill Chief Financial Officer March 31, 1998
- ---------------------- (principal financial and
Jill D. Burchill principal accounting officer)
________*__________ Director March 31, 1998
Lawrence E. Eaton
________*__________ Director March 31, 1998
Michael S. Fields
________*__________ Director March 31, 1998
Linda W. Hart
________*__________ Director March 31, 1998
William W. George
________*___________ Director March 31, 1998
Ronald T. LeMay
________*__________ Director March 31, 1998
Marvin L. Mann
________*__________ Director March 31, 1998
Mark A. Pulido
________*__________ Director March 31, 1998
Daryl J. White
By: /s/ Carolyn A. Bates
----------------
Carolyn A. Bates
Attorney-in-fact
EXHIBIT 4.5
LIMITED WAIVER AND
AMENDMENT NO. 2
[EXECUTION COUNTERPART]
LIMITED WAIVER AND AMENDMENT NO. 2
LIMITED WAIVER AND AMENDMENT NO. 2 (this "Agreement") dated as
of March 30, 1998 among:
IMATION CORP., a Delaware corporation (the "Borrower");
each of the lenders party to the Credit Agreement referred to
below (the "Lenders"); and
CITICORP USA, INC., as administrative agent (in such capacity,
the "Administrative Agent").
The Borrower, the Lenders, certain Issuing Banks and Swing
Line Lenders and the Administrative Agent are parties to the Credit Agreement
dated as of July 1, 1996 (as from time to time amended, the "Credit Agreement").
The Borrower has requested the Lenders to waive compliance with certain
provisions of the Credit Agreement in certain respects for the period from the
date hereof to January 5, 1999, and to amend the Credit Agreement in certain
respects, all on the terms and conditions set forth herein.
To induce the Lenders to enter into this Agreement, the
Borrower has agreed (1) to execute and deliver (and cause its U.S. Subsidiaries
to execute and deliver) mortgages, pledge agreements and security agreements
providing for security interests and Liens (subject to no equal or prior Liens,
other than Liens permitted under the Credit Agreement) to be granted by them on
certain of their respective personal and real property located in the United
States, on all of the capital stock of their direct and indirect U.S.
Subsidiaries and on 65% of the capital stock of their direct non-U.S.
Subsidiaries, as collateral security for the Obligations of the Borrower under
the Credit Agreement and, on a second priority basis and only for so long as
Obligations under the Credit Agreement are so secured, for all other Obligations
owing by the Borrower to the Lenders, and (2) to cause its U.S. Subsidiaries to
guarantee such Obligations.
Accordingly, the parties hereto hereby agree as follows:
Section 1. Definitions. Except as otherwise defined in this
Agreement, terms defined in the Credit Agreement are used herein as defined
therein.
Section 2. Limited Waiver. Subject to the satisfaction of the
conditions precedent set forth in Section 5, but effective as of the date
hereof, the Lenders hereby waive compliance with Sections 5.04(a), (b) and (c)
of the Credit Agreement during the period from December 17, 1997 to January 5,
1999.
<PAGE>
Section 3. Amendments. Subject to the satisfaction of the
conditions precedent set forth in Section 5, but effective as of the date
hereof, the Credit Agreement shall be amended as follows:
A. Definitions. Section 1.01 of the Credit Agreement shall be
amended by inserting the following definitions (or, in the case of any
definition for a term that is defined in the Credit Agreement before
giving effect to this Agreement, by amending and restating such
definition to read as set forth below):
"Applicable Fee Percentage" means (1) during the
period from March 30, 1998 through and including June 30,
1998, 0.25%; (2) during the period from July 1, 1998 through
and including September 30, 1998, 0.375%; and (3) from and
after October 1, 1998, 0.50%.
"Applicable Margin" means:
(a) for Eurodollar Advances (1) during the period
from March 30, 1998 through and including June 30, 1998,
1.50%; (2) during the period from July 1, 1998 through and
including September 30, 1998, 1.875%; and (3) from and after
October 1, 1998, 2.75%; and
(b) for Base Rate Advances, 1.00%.
"Loan Documents" means, collectively, this Agreement,
the Notes, the Security Documents and the Subsidiary
Guarantees.
"Mortgage" means a Mortgage, Deed of Trust,
Assignment of Rents, Security Agreement and Fixture Filing or
other similar document executed by the Borrower and each of
its U.S. Subsidiaries in favor of the Administrative Agent (or
a collateral trustee selected by the Administrative Agent) for
the benefit of the Administrative Agent and the Lenders, in
form and substance satisfactory to the Administrative Agent,
covering real estate, fixtures and related property comprising
part of the Pledged Property, as the same shall be modified
and supplemented and in effect from time to time.
"Non-U.S. Subsidiary" means a Subsidiary of the
Borrower that is not a U.S. Subsidiary.
"Pledged Property" means, collectively, all of the
right, title and interest of the Borrower and its U.S.
Subsidiaries (whether now owned or hereafter acquired, and
wherever located) in and to:
(x) all personal and real property located
in the United States (including, without limitation,
inventory, equipment, accounts receivable,
intercompany and other notes, other instruments and
other general
<PAGE>
intangibles), but excluding inventory in the
Borrower's "Customer Solutions" business,
intellectual property and leasehold interests;
(y) all capital stock of their respective
U.S. Subsidiaries; and
(z) 65% of the capital stock of their
respective direct Non-U.S. Subsidiaries.
"Post-Default Rate" means a rate per annum equal to
2% plus the Base Rate as in effect from time to time plus the
Applicable Margin for Base Rate Advances (provided that, if
the Post-Default Rate is being determined with respect to the
principal of a Eurodollar Rate Advance and the date of
determination is a day other than the last day of the Interest
Period therefor, the "Post-Default Rate" for such principal
shall be, for the period for and including such due date to
but excluding the last day of such Interest Period, 2% plus
the interest rate for such Advance as provided in Section
2.08(a)(ii) and, thereafter, the rate provided for above in
this definition).
"Receivables Subsidiary" means a Subsidiary of the
Borrower formed solely for the purpose of acquiring and
selling receivables (and performing related obligations) under
a Permitted Receivables Facility.
"Required Date" means:
(a) with respect to real estate and fixtures,
June 30, 1998;
(b) with respect to capital stock of Non-U.S.
Subsidiaries, June 30, 1998; and
(c) with respect to all other Pledged Property
(including, without limitation, inventory, equipment, accounts
receivable, intercompany and other notes, other instruments,
other general intangibles and capital stock of U.S.
Subsidiaries), April 30, 1998.
"Rolling Period" means a period of four consecutive
fiscal quarters of the Borrower; provided that, for purposes
of determining compliance with Section 5.04(d) for any time
prior to December 31, 1998, "Rolling Period" means the fiscal
quarters of the Borrower that have ended after December 31,
1997.
"Security Agreement" means a Pledge and Security
Agreement, in form and substance satisfactory to the
Administrative Agent, between the Borrower and the
Administrative Agent covering the Pledged Property owned by
the Borrower, as the same shall be modified and supplemented
and in effect from time to time.
<PAGE>
"Security Documents" means, collectively, the
Security Agreement, the Mortgages, all Subsidiary Security
Agreements, all other security agreements required to be
executed and delivered pursuant hereto and all Uniform
Commercial Code financing statements and other instruments
required by such documents to be filed with respect to the
security interests and Liens in personal property, real estate
and fixtures created pursuant thereto.
"Subsidiary Guarantee" means a Subsidiary Guarantee
Agreement, in form and substance satisfactory to the
Administrative Agent, between a U.S. Subsidiary of the
Borrower and the Administrative Agent pursuant to which such
Subsidiary guarantees (x) the Obligations of the Borrower
under the Credit Agreement and (y) only for so long as
Obligations under the Credit Agreement are so guaranteed, all
other Obligations owing by the Borrower to the Lenders, as the
same shall be modified and supplemented and in effect from
time to time.
"Subsidiary Security Agreement" means a Pledge and
Security Agreement, in form and substance satisfactory to the
Administrative Agent, between a U.S. Subsidiary of the
Borrower and the Administrative Agent covering the Pledged
Property owned by such Subsidiary, as the same shall be
modified and supplemented and in effect from time to time.
"U.S. Subsidiary" means a Subsidiary of the Borrower
that is organized under the laws of the United States.
B. Mandatory Prepayments. Section 2.07(b) of the Credit
Agreement shall be amended by restating clause (i) thereof to read as
follows:
"(i) Sale of Assets. Without limiting the obligation
of the Borrower to obtain the consent of the Required Lenders
pursuant to Section 5.02(d) to any Disposition not otherwise
permitted hereunder, on January 5, 1999 the Commitments shall
be reduced, and, to the extent required by Section 2.07(c),
the Borrower shall prepay the Advances (and/or provide cover
for Letter of Credit Liabilities as specified in Section
2.07(d)), in an aggregate amount equal to (A) 100% of the Net
Available Proceeds of all Dispositions theretofore consummated
minus (B) the amount of such Net Available Proceeds
theretofore reinvested in the Borrower's "Product Technology",
"Customer Solutions" and "Growth Technology" businesses
(PROVIDED that, if the property that was the subject of such
Disposition constituted Pledged Property, such Net Available
Proceeds must be so reinvested in property constituting
Pledged Property subject (or required to be subject) to the
Liens under the Security Documents); provided that (1) for
purposes of this clause (i) the aggregate Net Available
Proceeds of each Disposition or series of related Dispositions
shall be deemed to be reduced by $10,000,000 (but shall not be
deemed to be less than zero) and (2) neither Permitted
Sale-Leaseback Transactions, sales of Receivables nor
Dispositions
<PAGE>
identified on Schedule I to Limited Waiver and Amendment No. 2
hereto shall be deemed to be "Dispositions" for purposes of
this clause (i)."
C. Post-Default Rate. Section 2.08 of the Credit Agreement
shall be amended by restating paragraph (b) thereof to read as follows:
"(b) Post-Default Interest. Notwithstanding Section
2.08(a), if (x) the Borrower shall fail to pay when due (by
prepayment, acceleration or otherwise) any amount payable
under any Loan Document, or (y)(i) an Event of Default shall
have occurred and be continuing during any period and (ii) the
Administrative Agent or the Required Lenders, through the
Administrative Agent, shall have notified the Borrower
thereof, the Borrower shall, notwithstanding anything else in
this Agreement to the contrary, pay to the Administrative
Agent for account of each Lender interest, so long as such
failure or Event of Default continues, at the applicable
Post-Default Rate on any principal of any Advance made by such
Lender to the Borrower, and on any other amount whatsoever
then due and payable by the Borrower hereunder or under the
Notes held by such Lender to or for account of such Lender,
such interest to be payable from time to time on demand."
D. Material Adverse Change Representation. Section 4.01(f)
of the Credit Agreement shall be amended by restating clause (iii)
thereof to read as follows:
"(iii) Except as disclosed in the quarterly reports
filed by the Borrower with the Securities and Exchange
Commission on Form 10-Q with respect to the Borrower's fiscal
quarters ended March 31, 1997, June 30, 1997 and September 30,
1997, and in the reports filed by the Borrower with the
Securities and Exchange Commission on Form 8-K during the
period from October 1, 1997 through March 1, 1998, since
December 31, 1996, there has been no Material Adverse Change."
E. Financial Advisor. The Credit Agreement shall be amended by
adding the following Section 5.01(j) thereto:
"(j) Financial Advisor. As soon as possible and in
any event by no later than April 30, 1998, engage one of the
firms identified on Schedule II-A to Limited Waiver and
Amendment No. 2 hereto as financial advisor for the Borrower
and its Subsidiaries to assist the Borrower and its
Subsidiaries with the matters identified on Schedule II-B to
Limited Waiver and Amendment No. 2 hereto."
F. Obligations Respecting Subsidiaries, Etc. The Credit
Agreement shall be amended by adding the following Section 5.01(k)
thereto:
<PAGE>
"(k) New Subsidiaries. In the event that it or any of
its U.S. Subsidiaries shall form or acquire any new U.S.
Subsidiary (other than a Receivables Subsidiary) after March
1, 1998, cause such new U.S. Subsidiary, as soon as possible
and in any event within 30 days after such formation or
acquisition, (x) to execute and deliver a Subsidiary
Guarantee, (y) to pledge and grant a security interest in all
or substantially all of the Pledged Property owned by such new
Subsidiary to the Administrative Agent for the benefit of the
Lenders pursuant to a Subsidiary Security Agreement, one or
more Mortgages and other Security Documents and (z) to deliver
such proof of corporate action, incumbency of officers,
opinions of counsel and other documents as is consistent with
those delivered by the Borrower and each of its Subsidiaries
pursuant to Section 5.01(l) or as the Administrative Agent
shall have requested. In addition, after March 1, 1998, the
Borrower will not, and will not permit any of its Material
Subsidiaries (other than a Receivables Subsidiary) to, enter
into any indenture, agreement, instrument or other arrangement
(including, without limitation, any amendment or other
modification of any indenture, agreement or instrument
outstanding on March 1, 1998) that, directly or indirectly,
prohibits or restrains, or has the effect of prohibiting or
restraining, or imposes materially adverse conditions upon,
the incurrence or payment of Debt, the granting of Liens, the
declaration or payment of dividends, the making of loans,
advances or other investments or the sale, assignment,
transfer or other disposition of property (in each case except
for such provisions contained herein or in the other Loan
Documents)."
G. Collateral Security, Etc. The Credit Agreement shall be
amended by adding the following new Section 5.01(l) thereto:
"(l) Collateral Security, Etc. Execute and deliver,
and cause each of its U.S. Subsidiaries (other than
Receivables Subsidiaries) to execute and deliver, (x) as soon
as possible and in any event, for any type of Pledged
Property, by no later than the Required Date therefor, (i) in
the case of the Borrower, the Security Agreement, one or more
Mortgages and other Security Documents, and (ii) in the case
of each such U.S. Subsidiary of the Borrower, a Subsidiary
Security Agreement, one or more Mortgages and other Security
Documents, collectively granting to the Administrative Agent,
for the benefit of the Lenders, a security interest in and
lien on all or substantially all of the Pledged Property,
subject to no equal or prior liens (other than Liens permitted
under Section 5.02(b) of the Credit Agreement); and (y) as
soon as possible and in any event by no later than April 30,
1998, a Subsidiary Guarantee by each such U.S. Subsidiary, in
each case together with:
(1) Stock Certificates, Etc. All stock
certificates and other instruments comprising part of
the Pledged Property, accompanied by undated stock
powers executed in blank. In addition, the Borrower
and each such U.S. Subsidiary shall have taken such
other action (including, without limitation,
delivering to the Administrative Agent, for filing,
<PAGE>
appropriately completed and duly executed copies of
Uniform Commercial Code financing statements) as the
Administrative Agent shall have requested in order to
perfect the security interests created pursuant to
the Security Agreement, the Subsidiary Security
Agreements and the other Security Documents.
(2) Mortgage Insurance, Etc. One or more
mortgagee policies of title insurance on forms of and
issued by one or more title companies satisfactory to
the Administrative Agent (the "Title Companies"),
insuring the validity and priority of the Liens
created under the Mortgages for and in amounts
satisfactory to the Administrative Agent, subject
only to such exceptions as are satisfactory to the
Administrative Agent and, to the extent necessary
under applicable law, for filing in the appropriate
county land offices, Uniform Commercial Code
financing statements covering fixtures, in each case
appropriately completed and duly executed; if
requested by the Administrative Agent, as-built
surveys of recent date of each of the facilities to
be covered by the Mortgages, showing such matters as
may be required by the Administrative Agent, which
surveys shall be in form and content acceptable to
the Administrative Agent, and certified to the
Administrative Agent and to each Lender and the Title
Companies, and shall have been prepared by a
registered surveyor acceptable to the Administrative
Agent; and certified copies of permanent and
unconditional certificates of occupancy (or, if it is
not the practice to issue certificates of occupancy
in the jurisdiction in which the facilities to be
covered by the Mortgages are located, then such other
evidence reasonably satisfactory to the
Administrative Agent) permitting the fully
functioning operation and occupancy of each such
facility and of such other permits necessary for the
use and operation of each such facility issued by the
respective governmental authorities having
jurisdiction over each such facility. In addition,
the Borrower shall have paid to the Title Companies
all expenses and premiums of the Title Companies in
connection with the issuance of such policies and in
addition shall have paid to the Title Companies an
amount equal to the recording and stamp taxes payable
in connection with recording the Mortgages in the
appropriate county land offices.
(3) Corporate Documents, Etc. Certified
copies of the charter and by-laws (or equivalent
documents) of the Borrower and each of its
Subsidiaries that is required to be a party to a
Security Document or a Subsidiary Guarantee (each, an
"Obligor") and of all corporate or other authority
for each Obligors (including, without limitation,
board of director resolutions and evidence of the
incumbency, including specimen signatures, of
officers) with respect to the execution, delivery and
performance of such of the Security Documents to
which such Obligor is intended to be a party and each
other document to be delivered by such Obligor from
time to time in connection herewith.
<PAGE>
(4) Opinion of Counsel to the Obligors.
Opinions of counsel to each Obligor, in form and
substance (and delivered by counsel) satisfactory to
the Administrative Agent covering the Security
Documents (and any Subsidiary Guarantee) to which
such Obligor is a party and as to such other matters
as the Administrative Agent or any Lender may
reasonably request.
(5) Opinions of Local Counsel. To the extent
reasonably requested by the Administrative Agent
(determined in light of the value of the related
Pledged Property), opinions of local counsel in all
or a portion of the jurisdictions in which the
Pledged Property is located and in which any Non-U.S.
Subsidiary is organized, in each case in form and
substance (and delivered by counsel) satisfactory to
the Administrative Agent and covering such others
matters as the Administrative Agent or any Lender may
reasonably request.
(6) Opinion of Special New York Counsel to
the Administrative Agent. An opinion of Milbank,
Tweed, Hadley & McCloy, special New York counsel to
the Administrative Agent, as to the matters
contemplated hereby and otherwise in form and
substance satisfactory to the Administrative Agent.
(7) Environmental Survey and Questionnaire.
To the extent requested by the Administrative Agent,
an environmental survey and assessment prepared by a
firm of licensed engineers (familiar with the
identification of toxic and hazardous substances) in
form and substance satisfactory to the Administrative
Agent, such environmental survey and assessment to be
based upon physical on-site inspections by such firm
of each of the existing sites and facilities owned,
operated or leased by the Borrower and its
Subsidiaries within the United States, as well as an
historical review of the uses of such sites and
facilities and of the business and operations of the
Borrower and its Subsidiaries (including any former
Subsidiaries or divisions of the Borrower or any of
its Subsidiaries that have been disposed of prior to
the date of such survey and assessment and with
respect to which the Borrower or any of its
Subsidiaries may have retained liability for
environmental claims).
(8) Other Documents. Such other documents as
the Administrative Agent or any Lender or special New
York counsel to the Administrative Agent may
reasonably request."
H. Liens. Section 5.02(a) of the Credit Agreement shall be
amended:
(1) by adding, at the end of clause (i) thereof, ",
excluding from the operation of the foregoing restrictions in
this clause (i) Liens in favor of the
<PAGE>
Administrative Agent for the benefit of the Administrative
Agent and the Lenders, Swing Line Lenders and Issuing Banks
hereunder"; and
(2) by adding, at the end thereof, "Notwithstanding
the foregoing provisions of this Section 5.02(a), Liens on
property of Non-U.S. Subsidiaries may be granted to secure
Obligations (including, without limitation, Debt and
contingent liabilities) outstanding, or committed to be made,
as of March 1, 1998."
I. Minimum EBITDA. Section 5.04 of the Credit Agreement
shall be amended by adding the following paragraph (d) thereto:
"(d) Minimum EBITDA. Maintain EBITDA of not less than
the amount set forth below for each Rolling Period ending on
the dates set forth below:
Date Amount
March 31, 1998 $ 31,000,000
June 30, 1998 $ 78,000,000
September 30, 1998 $135,000,000
December 31, 1998 $209,000,000"
J. Events of Default. Section 6.01 of the Credit Agreement
shall be amended by restating paragraphs (b) and (c) to read as set
forth below and by adding the following new paragraphs (n) and (o)
thereto:
"(b) any representation or warranty made by the
Borrower or any of its Subsidiaries (or any of their
respective officers) under or in connection with any Loan
Document shall prove to have been incorrect in any material
respect when made; or
(c) the Borrower shall fail to perform or observe any
term, covenant or agreement contained in clause (j), (k) or
(l) of Section 5.01, or clause (a), (b), (c), (d), (e), (f),
(g) or (i) of Section 5.02, or clause (a), (f) or (k) of
Section 5.03, or Section 5.04; or
(n) the Borrower or any of its Subsidiaries shall
default in the performance of any of its obligations in any of
the Security Documents and such default shall continue
unremedied for a period of thirty or more days after notice
thereof to the Borrower by the Administrative Agent or any
Lender (through the Administrative Agent); or
(l) the Liens created by the Security Documents shall
at any time not constitute a valid and perfected Lien on the
collateral intended to be covered thereby (to the extent
perfection by filing, registration, recordation or possession
is required herein or therein) in favor of the Administrative
Agent, free and clear
<PAGE>
of all other Liens (other than Liens permitted under Section
5.02(b) or under the respective Security Documents), or,
except for expiration in accordance with its terms, any of the
Security Documents shall for whatever reason be terminated or
cease to be in full force and effect, or the enforceability
thereof shall be contested by the Borrower or any of its
Subsidiaries;"
K. Certain Consents. The Credit Agreement shall be amended by
adding the following Section 8.15 thereto:
"Section 8.15. Consents under Security Documents.09
Consents under Other Loan Documents. The Administrative Agent
may, with the prior consent of the Required Lenders (but not
otherwise), consent to any modification, supplement or waiver
under any of the Security Documents, provided that, without
the prior consent of each Lender, the Administrative Agent
shall not (except as provided herein or in the Security
Documents) release any collateral or otherwise terminate any
Lien under any Security Document providing for collateral
security, agree to additional obligations being secured by
such collateral security (unless the Lien for such additional
obligations shall be junior to the Lien in favor of the other
obligations secured by such Security Document, in which event
the Administrative Agent may consent to such junior Lien
provided that it obtains the consent of the Required Lenders
thereto), alter the relative priorities of the obligations
entitled to the benefits of the Liens created under the
Security Documents, except that no such consent shall be
required, and the Administrative Agent is hereby authorized,
to release any Lien covering property that is the subject of
either a disposition of property permitted hereunder or a
disposition to which the Required Lenders have consented."
L. General. References in the Credit Agreement to "this
Agreement" (including indirect references such as "hereunder",
"hereby", "herein" and "hereof") shall be deemed to be references to
the Credit Agreement as amended hereby.
Section 4. Representations and Warranties. The Borrower hereby
represents and warrants to the Administrative Agent and the Lenders that, after
giving effect hereto:
(a) the representations and warranties contained in each Loan
Document are correct on and as of the date hereof, as though made on
and as of such date (or, if any such representation or warranty is
expressly stated to have been made as of a specific date, as of such
specific date); and
(b) no event has occurred and is continuing that constitutes a
Default or an Event of Default.
Section 5. Conditions Precedent. The waivers set forth in
Section 2, and the amendments to the Credit Agreement set forth in Section 3,
shall become effective (as of the date
<PAGE>
hereof) upon the satisfaction of the conditions precedent that the
Administrative Agent shall have received the following:
(a) Executed Agreement. This Agreement, duly executed and
delivered by the Borrower, the Required Lenders and the Administrative
Agent.
(b) Up-Front Fees, Etc. Such fees as the Borrower shall have
agreed to pay in connection with the waivers and amendments
contemplated hereby.
(c) Other Documents. Such other documents as the
Administrative Agent, any Lender or special New York counsel to the
Administrative Agent may reasonably request.
Section 6. Costs and Expenses. Without limiting Section
8.04(a) of the Credit Agreement, the Borrower agrees to pay on demand all costs
and expenses of the Administrative Agent in connection with the preparation,
execution, delivery and performance of this Agreement, the Security Documents
and Subsidiary Guarantees (whether or not any of the transactions contemplated
by this Agreement are consummated), including the reasonable fees and expenses
of Milbank, Tweed, Hadley & McCloy, special counsel to the Administrative Agent.
Section 7. Miscellaneous. Except as herein provided, the
Credit Agreement and each of the other Loan Documents shall remain unchanged and
in full force and effect. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Agreement by signing
any such counterpart. This Agreement shall be governed by, and construed in
accordance with, the law of the State of New York.
* * *
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective officers thereunto duly authorized,
as of the date first above written.
THE BORROWER
IMATION CORP.
By____________________________
Name:
Title:
THE ADMINISTRATIVE AGENT
CITICORP USA, INC.
By____________________________
Name:
Title:
THE LENDERS
CITICORP USA, INC.
By____________________________
Name:
Title:
<PAGE>
BANCA COMMERCIALE ITALIANA-
CHICAGO BRANCH
By____________________________
Name:
Title:
By____________________________
Name:
Title:
FIRST BANK NATIONAL ASSOCIATION
By____________________________
Name:
Title:
THE SUMITOMO BANK, LIMITED, CHICAGO
BRANCH
By____________________________
Name:
Title:
BANK OF MONTREAL
By____________________________
Name:
Title:
<PAGE>
THE BANK OF TOKYO-MITSUBISHI, LTD.,
CHICAGO BRANCH
By____________________________
Name:
Title:
DEUTSCHE BANK AG NEW YORK AND/OR
CAYMAN ISLANDS BRANCHES
By____________________________
Name:
Title:
By____________________________
Name:
Title:
MELLON BANK, N.A.
By____________________________
Name:
Title:
THE SAKURA BANK, LIMITED-CHICAGO
BRANCH
By____________________________
Name:
Title:
<PAGE>
WESTDEUTSCHE LANDESBANK
GIROZENTRALE, NEW YORK BRANCH
By____________________________
Name:
Title:
By____________________________
Name:
Title:
THE YASUDA TRUST & BANKING
COMPANY, LIMITED
By____________________________
Name:
Title:
BANK OF AMERICA ILLINOIS
By____________________________
Name:
Title:
THE FUJI BANK, LIMITED
By____________________________
Name:
Title:
<PAGE>
THE LONG-TERM CREDIT BANK OF JAPAN,
LTD. CHICAGO BRANCH
By____________________________
Name:
Title:
NORWEST BANK MINNESOTA, NATIONAL
ASSOCIATION
By____________________________
Name:
Title:
SOCIETE GENERALE
By____________________________
Name:
Title:
NATIONSBANK, N.A.
By____________________________
Name:
Title:
EXHIBIT 10.13
IMATION 1998 SUCCESS SHARING PROGRAM
IMATION CORP.
FEBRUARY 1998
I. Objectives of the Success Sharing Plan
II. Success Sharing Plan and Imation's Compensation Philosophy
III. Participation
IV. Success Sharing Metrics
A. Company Performance
B. Business Unit Performance
V. Calculation and Payment of Awards
VI. General Provisions
SUCCESS SHARING PLAN OBJECTIVES
IMATION'S SUCCESS SHARING PLAN IS DESIGNED TO REWARD EMPLOYEES FOR THEIR
CONTRIBUTIONS TO THE COMPANY'S ANNUAL FINANCIAL SUCCESS. THE PLAN PROVIDES
PARTICIPATING EMPLOYEES WITH A VARIABLE COMPONENT TO THEIR TOTAL CASH
COMPENSATION. THE PLAN PROVIDES THE OPPORTUNITY TO RECEIVE AN ABOVE-MARKET LEVEL
OF TOTAL CASH COMPENSATION IN CORRELATION WITH AN ABOVE-TARGET LEVEL OF BUSINESS
UNIT AND COMPANY FINANCIAL PERFORMANCE. CORRESPONDINGLY, EMPLOYEES' VARIABLE
COMPONENT (OF TOTAL CASH COMPENSATION) WOULD BE REDUCED IN CORRELATION WITH
REDUCED LEVELS OF FINANCIAL PERFORMANCE.
The Plan provides a variable component of each participating employee's total
cash compensation and is designed to create a strong linkage between the
employee participants and company shareholders. A primary focus of the
corporation (and the employees making up the corporation) is value creation for
Imation's shareholders through the achievement of company and business unit
financial targets.
The purpose and objectives of the Success Sharing Plan are:
* More closely align employees' interests with those of shareholders;
* Reward team performance and customer satisfaction that supports the
achievement of the business units' and company's annual financial
objectives;
* Attract, retain and motivate a highly effective employee population
possessing the skills, talents and mindset necessary to achieving
organizational success; and
* Provide the opportunity for employees to be an engaged participant in
Imation's profitability and success
SUCCESS SHARING PLAN AND IMATION'S COMPENSATION PHILOSOPHY
The Success Sharing Plan supports Imation's compensation philosophy of having
employees participate in the risk and rewards associated with the company's
financial performance:
Imation's compensation philosophy is based on the principal of
attracting, retaining and motivating people with the skills, knowledge
and capabilities necessary for Imation to compete and excel in an
ever-evolving marketplace. Rewards will be focused on performance,
demonstrated competencies and employee innovation and risk taking. The
company's business strategies, (internal and external) economic factors
and Imation's ability to pay will be primary influences in the design
and administration of compensation programs.
Compensation programs will be targeted to be competitive with other
companies in similar industries with whom Imation competes for
employees. Imation believes in providing compensation programs which
allow employees to share in the risk and rewards of the company's
financial performance, thus aligning employees' interests with those of
Imation's shareholders.
Imation's compensation philosophy includes a commitment to open,
on-going communications and fair program administration.
The guiding principles of Imation's compensation program will be beneficial in
understanding the Success Sharing Plan. These principles are:
* Pay for performance
* Implement compensation programs which motivate employees to become key
stakeholders in the success of the company
* Maintain a market-competitive compensation program which attracts,
retains and motivates a talented, high-performing workforce
* Incorporate a variable component to total cash compensation programs
VARIABLE PAY STRATEGY
Imation has a strong commitment to making variable pay a component of every
employee's total compensation. This variable component provides the opportunity
for participants' total cash compensation to be significantly greater than
market when the company's financial performance exceeds operational targets.
PARTICIPATION IN THE SUCCESS SHARING PLAN
While it is the company's desire to move all Imation employees to the Success
Sharing Plan, incorporating a variable component to each employees' pay, most
current participants are limited to regular Imation (full- and part-time)
employees in Career Bands C through G, excluding those employees who are covered
under a specific incentive pay plan for their plant or business organization.
Typically, sales-commissioned employees (regardless of Career Band positioning)
will be excluded from participation in the Plan as this time.
SUCCESS SHARING PERFORMANCE METRICS
The 1998 Success Sharing Plan will have two components of financial performance:
Company and Business Unit. Each Plan participant (within a business unit) will
have his/her payout determined by a combination of company and business unit
financial performance. Company performance will comprise 50% of the total payout
opportunity, and business unit performance will determine the remaining 50%
payout opportunity. Corporate and Advanced Imaging Technology employees, along
with those European employees not assigned to specific business units, will have
their payouts determined 100% by overall company performance. Employees in MOW
(Most of World) will have their payout determined by a combination of company
and MOW performance.
<TABLE>
<CAPTION>
Employee Assigned to:
--------------- ----------------------- ---------------------- ------------------
Advanced
Corporate Europe Imaging Tech. Business Unit
Organizational
Performance --------------- -------- ----------------------- ------------------
Metric(s) B.U. Non B.U.
--------------- -------- -------------- ---------------------- ------------------
<S> <C> <C> <C> <C> <C>
Corporate 100% 50% 100% 100% 50%
- -------------------------- --------------- -------- -------------- ---------------------- ------------------
Business Unit 50% 50%
- -------------------------- --------------- -------- -------------- ---------------------- ------------------
</TABLE>
Business unit financial success is critical to an overall successful performance
by the total company; however, a respective business unit could potentially
achieve a level of performance below the threshold with business unit employees
still having the opportunity for a partial payout based upon overall company
performance - and vice versa.
COMPANY PERFORMANCE - 50% OF TOTAL PAYOUT OPPORTUNITY
Company financial targets are established annually by the CEO and approved by
the Compensation Committee of the Board of Directors. Imation must exceed a
threshold level of annual performance in order for any payout to occur from the
corporate performance component of the Plan. The company's 1998 performance
metric is a target level of Economic Profit improvement. The Corporate
performance targets will be provided to Plan participants in a separate
schedule.
- --------------------------------------------------------------------------------
ECONOMIC PROFIT: OPERATING INCOME AFTER TAX - CAPITAL CHARGE ON ASSETS
- --------------------------------------------------------------------------------
<PAGE>
This metric is further broken down as follows:
OPERATING INCOME = REVENUE - OPERATING EXPENSES
OPERATING INCOME represents earnings derived from the direct activities of the
business, before taking other income and other expenses into account -- such as
investment income and interest expense.
REVENUE includes product sales, service contracts and lease revenues
OPERATING EXPENSES include cost of sales, cost of leased equipment,
cost of services, development and engineering costs, marketing, and
general and administrative expenses.
The CAPITAL CHARGE ON ASSETS represents the finance cost of carrying business
assets - equipment, inventory, receivables, buildings, etc. along with
occasional, one-time charges associated with activities such as acquisitions or
divestitures. This includes the costs associated with borrowing or losing the
use of cash in order to obtain the assets as well as a risk component (called
the beta factor) that the market has determined for our business. This carrying
cost represents the minimal return on investment that Imation shareholders
desire.
Achievement of the following Corporate performance levels will result in the
associated level of payout from the CORPORATE COMPONENT of Success Sharing
target compensation:
-------------------------------------------------------------------------
CORPORATE
-------------------------------------------------------------------------
PERFORMANCE LEVEL SUCCESS SHARING
AT: PAYOUT PERCENT
----------------------------- -------------- ----------------------------
Threshold (Floor) = 75%
----------------------------- -------------- ----------------------------
Risk-Adjusted Target = 100%
----------------------------- -------------- ----------------------------
Business Model Target = 150%
----------------------------- -------------- ----------------------------
Maximum (Ceiling) = 200%
----------------------------- -------------- ----------------------------
There will be no payout for achievement of a Corporate economic profit
performance below the threshold level and the maximum payout would be 200% of
the corporate component of a participating employee's Success Sharing target
award. Payouts will be made at levels between those indicated above and will be
calculated based on fiscal year-end results.
BUSINESS UNIT PERFORMANCE - 50% OF TOTAL PAYOUT OPPORTUNITY
Management determines the appropriate financial targets for each respective
business making up Imation. These targets are then reviewed by the Compensation
Committee in conjunction with their review and approval of the corporate target.
Individual businesses must exceed a threshold level of annual performance in
order for any payout to occur from the business unit component of the Plan.
The 1998 performance metrics will vary by business, dependent upon the
respective business model. These metrics may be ECONOMIC PROFIT, SALES, AND/OR
OPERATING INCOME. Plan
<PAGE>
participants will receive specific information related to their 1998 business
unit Plan metrics via a separate schedule.
Achievement of the following Business Unit performance levels will result in the
associated level of payout from the BUSINESS UNIT COMPONENT of Success Sharing
target compensation:
-------------------------------------------------------------------------
BUSINESS UNIT
-------------------------------------------------------------------------
----------------------------- -------------- ----------------------------
PERFORMANCE LEVEL SUCCESS SHARING
AT: PAYOUT PERCENT
----------------------------- -------------- ----------------------------
----------------------------- -------------- ----------------------------
Threshold (Floor) = 75%
----------------------------- -------------- ----------------------------
----------------------------- -------------- ----------------------------
Risk-Adjusted Target = 100%
----------------------------- -------------- ----------------------------
----------------------------- -------------- ----------------------------
Business Model Target = 150%
----------------------------- -------------- ----------------------------
----------------------------- -------------- ----------------------------
Maximum (Ceiling) = 200%
----------------------------- -------------- ----------------------------
There will be no payout for achievement of any performance below the threshold
level defined for respective businesses, and the maximum payout would be 200% of
each business unit component of a participating employee's Success Sharing
target award. Payouts will be made at levels between those indicated previously
and will be calculated based on fiscal year-end results.
CALCULATION OF SUCCESS SHARING AWARDS
As indicated previously, Success Sharing Plan participants will have their
annual payouts determined by a combination of business unit and corporate
performance, with the exception of Corporate, Advanced Imaging Technology, and
some European employees.
<TABLE>
<CAPTION>
Employee Assigned to:
--------------- ----------------------- ---------------------- ------------------
Advanced
Corporate Europe Imaging Tech. Business Unit
Organizational
Performance --------------- -------- -------------- ---------------------- ------------------
Metric(s) B.U. Non B.U.
- -------------------------- --------------- -------- -------------- ---------------------- ------------------
<S> <C> <C> <C> <C> <C>
Corporate 100% 50% 100% 100% 50%
- -------------------------- --------------- -------- -------------- ---------------------- ------------------
Business Unit 50% 50%
- -------------------------- --------------- -------- -------------- ---------------------- ------------------
</TABLE>
Examples of Bonus Calculations
ASSUMPTIONS FOR FOLLOWING EXAMPLES:
CORPORATE ACHIEVES BUSINESS MODEL TARGET PERFORMANCE = $25 MILLION = 150% NEW
GROWTH VENTURES SALES ACHIEVES RISK-ADJUSTED PERFORMANCE = 1 .5 MILLION =100%
NEW GROWTH VENTURES OPERATING INCOME COMES IN AT THRESHOLD LEVEL = .25 MILLION
= 75%
Mary Smith, employed in the Corporate Finance group, has an annual Success
Sharing target of $5,000. The business model target level of $25MM in corporate
economic profit is achieved; therefore, Mary's 1998 Success Sharing award will
be:
<PAGE>
- --------------------------------------------------------------------------------
$5,000 x 150% = $7,500
- --------------------------------------------------------------------------------
Brad Olson is an employee within the New Growth Ventures (NGV) business, and he
has an annual target Success Sharing bonus of $6,000. Year-end corporate
economic profit results hit the business model target level of $25MM. Brad's
business unit metrics are NGV sales and NGV operating income. NGV sales for the
year fall short of the business model target, but the group does achieve its 80%
business model level in sales of 1.5MM; additionally, NGV's operating income for
the year meets the $.25MM threshold level of performance. Brad's 1998 annual
Success Sharing payment would be calculated as:
- --------------------------------------------------------------------------------
CORPORATE: $6,000 X .50 X 150% = $4,500
- --------------------------------------------------------------------------------
BUSINESS:
- --------------------------------------------------------------------------------
NGV SALES $6,000 X .25 X 100% = $1,500
- --------------------------------------------------------------------------------
NGV O.I. $6,000 X .25 X 75% = $1,125
- --------------------------------------------------------------------------------
TOTAL AWARD PAYOUT $7,125
- --------------------------------------------------------------------------------
4
Imation's Success Sharing Plan year runs from January 1 through December 31,
1998. Award payments are generally paid annually, during the February following
Plan year-end.
1998 PLAN PROGRESS PAYMENT
As a one-time, transitional process, 1998 award opportunities will be considered
for payment twice - mid-year in July 1998 and year-end during February 1999.
Corporate operating income must reach a minimum level (for the period January 1
through June 30, 1998) in order for the progress payment (a partial, mid-year
payout) to be distributed to Plan participants. This mid-year operating income
figure will be distributed to Plan participants via a separate schedule. If the
mid-year operating income target is achieved, all participating employees will
receive a payment equal to 35% of their target annual Success Sharing
compensation. Any payment resulting would be distributed during July 1998 and
will be deducted from actual year-end awards.
Referring to one of the previous payout examples, progress and adjusted year-end
payments would be calculated as follows:
Mary's progress payment - Target Award of $5,000 x .35 = $1,750 Mary's
year-end payment - Year-end Award of $7,500 - $1,750 = $5,750
PAYOUT ELIGIBILITY
To be eligible to receive the 1998 Plan Progress Payment, Plan participants must
be an active employee of Imation on June 30, 1998; Plan participants must be
active employees of Imation on December 31, 1998 to be eligible for any year-end
payout opportunity. Employees hired throughout the year will receive a pro-rated
portion of their target annual Success Sharing award, based upon the portion of
the Plan year employed. Any exceptions to this are noted as follows:
<PAGE>
Disability, Retirement, or Death
In the event of total disability, retirement, or death, a pro-rated award will
be made to the participant or the participant's estate based on the portion of
the year worked up to the time of total disability, retirement or death.
Transfers Between Businesses
Employees transferring between discrete business units throughout the Plan year
will have their year-end payouts pro-rated based upon the period of time worked
in each business unit. For example, if an employee works in Corporate 3 months
of the Plan year and then transfers to the Internet Products group for the
remaining 9 months, his/her award would be calculated as follows:
OLD: 100% Corporate NEW: 50% Corporate + 50% Internet Products
YEAR-END PAYOUT = .25(Corporate) + .75[(.5(Corporate)) + (.5 (Internet
Products))] less mid-year progress payment
GENERAL PROVISIONS
Imation reserves the right to modify or terminate this Plan at any time and for
any reason, as determined by the Board of Directors. For example, mergers,
acquisitions, or divestitures of Imation businesses will necessarily result in
modifications to financial metrics. Should such a modification or termination
occur, Plan participants will be notified of such change as soon as
administratively possible.
The terms of this Plan are not intended to modify the at-will employment
relationship between Imation and its employees.
EXHIBIT 11.1
IMATION CORP. AND SUBSIDIARIES
COMPUTATION OF COMMON SHARES AND COMMON SHARE EQUIVALENTS
(IN MILLIONS)
(UNAUDITED)
Year ended December 31, 1997 1996 1995
------ ------ ------
Weighted average number of shares outstanding
during the period (a) 41.5 42.1 42.0
Weighted average number of shares held by the
ESOP not committed to be released (1.8) (0.8) --
------ ------ ------
Weighted average common shares outstanding (b) 39.7 41.3 42.0
Common share equivalents resulting from
the assumed exercise of stock options 0.2 0.2 --
------ ------ ------
Total weighted average common shares and
common share equivalents 39.9 41.5 42.0
====== ====== ======
Notes to Exhibit:
(a) Prior to July 1, 1996, the Company was not a separate, independent company,
but rather was comprised of the businesses operated within 3M's data storage and
imaging groups. As such, the number of shares used to compute earnings per share
for the periods prior to July 1, 1996 are based on one-tenth of the average 3M
shares outstanding based on the distribution ratio of one share of the Company's
common stock for every ten shares of 3M common stock held on the record date.
(b) Represents weighted average common shares outstanding used for both Basic
and Diluted loss per share as common stock equivalents are anti-dilutive.
EXHIBIT 21.1
SUBSIDIARIES OF IMATION CORP.
<TABLE>
<CAPTION>
Country or State In Percentage of
Which Subsidiary Was Ownership
Organized (Note 1)
<S> <C> <C>
Cemax-Icon, Inc. Delaware 100
Imation Club of the United States, Inc. Minnesota 100
Imation Enterprises Corp. Delaware 100
Imation Funding Corp. Delaware 100
Imation Greece S.A. Greece 100
Imation Publishing Software Corp. Delaware 100
Rip-It Corporation Washington 100
Imation Argentina S.A.C.I.F.I.A. Argentina 100
Imation do Brasil Ltda Brazil 100
Imation Chile S.A. Chile 100
Imation Colombia S.A. Colombia 100
Imation de Cost Rica S.A. Cost Rica 100
Imation Dominicana, S.A. Dominican Republic 100
Imation de El Salvador de C.V. El Salvador 100
Imation Ecuador S.A. Ecuador 100
Imation de Guatemala S.A. Guatemala 100
Imation Mexico S.A. de C.V. Mexico 100
Imation Panama, S.A. Panama 100
Imation Peru S.A. Peru 100
Imation Puerto Inc. Puerto Rico 100
Imation Venezuela, S.A. Venezuela 100
Imation Canada Inc. Canada 100
Imation (Barbados) Corp. Barbados 100
Imation (Thailand) Ltd. Thailand 100
Imation Asia Pacific Pte Ltd Singapore 100
Imation ANZ Pty Ltd Australia 100
Imation (Shanghai) Co. Ltd. China 100
Imation Hong Kong Limited Hong Kong 100
Imation India Private Limited India 100
Imation Corporation Japan Japan 60*
Imation Korea, Inc. Korea 100
Imation (Malaysia) SDN.BHD. Malaysia 100
Imation Singapore Pte. Ltd. Singapore 100
Imation Taiwan Ltd. Taiwan 100
Imation Europe B.V. Netherlands 100
Imation Imaging and Information
Systems GmbH Austria 100
Imation Belgium NV Belgium 100
Imation Spol. Sr.o. Czech Republic 100
Imation A/S Denmark 100
Imation Finland Oy Finland 100
Imation France S.A. France 100
Imation Deutschland GmbH Germany 100
Imation Hungary "Kft." Ltd. Hungary 100
Imation Finanziaria S.p.A. Italy 100
Imation Ricerche S.p.A. Italy 100
Imation S.p.A. Italy 100
Imation International B.V. Netherlands 100
Imation Norge A/S Norway 100
Imation Poland Sp.zo.o. Poland 100
Imation So. Africa (Proprietary) Ltd. South Africa 100
Imation Iberia, S.A. Spain 100
Imation Sweden AB Sweden 100
Imation (Schweiz) AG Switzerland 100
Imation U.K. Limited United Kingdom 100
Imation Research Ltd. United Kingdom 100
</TABLE>
Note 1 - Except where noted, the percentage of ownership refers to the
total ownership by the indicated parent corporation.
* Japan is a Joint Venture
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statements of Imation Corp. on Form S-8 (Registration Nos. 333-15273,
333-15275, 333-15277 and 333-35591) and on Form S-4 (Registration No.
333-28837), of our report dated February 6, 1998, except for the second
paragraph of Note 7, as to which the date is March 30, 1998, on our
audits of the consolidated financial statements of Imation Corp. and
subsidiaries as of December 31, 1997 and 1996, and for each of the
three years in the period ended December 31, 1997, which report is
included in this Annual Report on Form 10-K.
/s/ Coopers & Lybrand L.L.P.
Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
March 31, 1998
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints William T. Monahan, Jill D.
Burchill and Carolyn A. Bates, and each of them, his or her true and lawful
attorneys-in-fact and agents, each acting alone, with full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities, to sign the 1997 Annual Report on Form 10-K of Imation
Corp., and any and all amendments thereto, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, each acting alone, or
the substitutes for such attorneys-in-fact and agents, may lawfully do or cause
to be done by virtue hereof.
<TABLE>
<CAPTION>
NAME TITLE DATE
<S> <C> <C>
/S/ WILLIAM T. MONAHAN Chairman, President, Chief March 10, 1998
- ------------------------------------ Executive Officer and Director
William T. Monahan (principal executive officer)
/S/ JILL D. BURCHILL Chief Financial Officer March 10, 1998
- ------------------------------------ (principal financial and
Jill D. Burchill accounting officer)
/S/ LAWRENCE E. EATON Director March 10, 1998
- ------------------------------------
Lawrence E. Eaton
/S/ MICHAEL S. FIELDS Director March 10, 1998
- ---------------------
Michael S. Fields
/S/ WILLIAM W. GEORGE Director March 10, 1998
- ------------------------------------
William W. George
/S/ LINDA W. HART Director March 10, 1998
- ------------------------------------
Linda W. Hart
/S/ RONALD T. LEMAY Director March 10, 1998
- ------------------------------------
Ronald T. LeMay
/S/ MARVIN L. MANN Director March 10, 1998
- ------------------------------------
Marvin L. Mann
/S/ MARK A. PULIDO Director March 10, 1998
- ------------------------------------
Mark A. Pulido
/S/ DARYL J. WHITE Director March 10, 1998
- ------------------------------------
Daryl J. White
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH CONSOLIDATED FINANCIAL STATEMENTS AND NOTES.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 103,500
<SECURITIES> 0
<RECEIVABLES> 484,900
<ALLOWANCES> (25,600)
<INVENTORY> 399,900
<CURRENT-ASSETS> 1,104,400
<PP&E> 1,704,500
<DEPRECIATION> (1,322,900)
<TOTAL-ASSETS> 1,665,500
<CURRENT-LIABILITIES> 565,500
<BONDS> 319,700
<COMMON> 400
0
0
<OTHER-SE> 681,800
<TOTAL-LIABILITY-AND-EQUITY> 1,665,500
<SALES> 2,201,800
<TOTAL-REVENUES> 2,201,800
<CGS> 1,431,000
<TOTAL-COSTS> 1,431,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,700
<INCOME-PRETAX> (206,000)
<INCOME-TAX> (25,900)
<INCOME-CONTINUING> (180,100)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (180,100)
<EPS-PRIMARY> (4.54)
<EPS-DILUTED> (4.54)
</TABLE>
