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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 OR
___ 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
incorporation or organization) Identification No.)
1 IMATION PLACE
OAKDALE, MINNESOTA 55128
(Address of principal executive offices)
(612) 704-4000
(Registrant's telephone number, including area code)
--------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes _X_. No ___.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 40,648,076 shares of Common
Stock, par value $0.01 per share, were outstanding at October 30, 1998.
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<PAGE>
IMATION CORP.
INDEX
PAGE(S)
-------
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations
for the three and nine months ended
September 30, 1998 and 1997 3
Condensed Consolidated Balance Sheets as
of September 30, 1998 and December 31, 1997 4
Condensed Consolidated Statements of Cash
Flows for the nine months ended
September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6-10
Report of Independent Accountants 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 12-22
PART II. OTHER INFORMATION 23-24
SIGNATURE 25
EXHIBIT INDEX 26
2
<PAGE>
PART I. FINANCIAL INFORMATION
IMATION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Millions, Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues $ 520.8 $ 529.5 $ 1,557.3 $ 1,632.0
Cost of goods sold 323.4 338.3 991.4 1,048.8
---------- ---------- ---------- ----------
Gross profit 197.4 191.2 565.9 583.2
Operating expenses:
Selling, general and
administrative 142.0 144.8 416.2 420.4
Research and development 35.8 78.4 105.9 156.6
Restructuring (13.2) -- (16.8) --
---------- ---------- ---------- ----------
Total 164.6 223.2 505.3 577.0
Operating income (loss) 32.8 (32.0) 60.6 6.2
Other income and expense:
Interest expense 5.5 3.9 16.3 10.1
Other, net (1.3) 1.6 1.3 3.8
---------- ---------- ---------- ----------
Total 4.2 5.5 17.6 13.9
Income (loss) before taxes 28.6 (37.5) 43.0 (7.7)
Income tax provision 15.2 1.2 22.8 14.6
---------- ---------- ---------- ----------
Net income (loss) $ 13.4 $ (38.7) $ 20.2 $ (22.3)
========== ========== ========== ==========
Basic and diluted earnings
per common share $ .34 $ (1.00) $ .51 $ (.56)
========== ========== ========== ==========
Weighted average basic
shares outstanding 39.5 38.8 39.3 39.9
========== ========== ========== ==========
Weighted average diluted
shares outstanding 39.6 38.8 39.4 39.9
========== ========== ========== ==========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
3
<PAGE>
IMATION CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions, Except Share Amounts)
<TABLE>
<CAPTION>
September 30,
1998 December 31,
(Unaudited) 1997
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents $ 37.6 $ 103.5
Accounts receivable - net 515.3 459.3
Inventories 364.8 399.9
Other current assets 107.3 141.7
---------- ----------
Total current assets 1,025.0 1,104.4
Property, plant and equipment - net 313.9 381.6
Other assets 254.3 179.5
---------- ----------
Total assets $ 1,593.2 $ 1,665.5
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 196.0 $ 182.2
Accrued payroll 38.9 38.3
Short-term debt 30.8 31.3
Other current liabilities 268.1 313.7
---------- ----------
Total current liabilities 533.8 565.5
Other liabilities 73.3 98.1
Long-term debt 265.1 319.7
Commitments and contingencies
Shareholders' equity
Preferred stock, $0.01 par value, authorized 25.0
million shares, none issued and outstanding -- --
Common stock, $0.01 par value, authorized 100.0
million shares, 42.9 million issued as of
September 30, 1998 and December 31, 1997 0.4 0.4
Additional paid-in capital 1,025.0 1,025.8
Accumulated deficit (155.2) (171.1)
Unearned ESOP shares (28.9) (37.3)
Cumulative translation adjustments (66.8) (78.1)
Treasury stock, at cost, 2.2 million and 2.3
million shares as of September 30, 1998
and December 31, 1997, respectively (53.5) (57.5)
---------- ----------
Total shareholders' equity 721.0 682.2
---------- ----------
Total liabilities and shareholders' equity $ 1,593.2 $ 1,665.5
========== ==========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
4
<PAGE>
IMATION CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 20.2 $ (22.3)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 96.2 111.4
Restructuring and other one-time charges (16.8) 41.7
Working capital changes (31.7) (62.3)
Other (22.2) 12.7
--------- ---------
Net cash provided by operating activities 45.7 81.2
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (49.6) (92.8)
Capitalized software (56.5) (64.8)
Acquisition, net of cash acquired -- (29.0)
Proceeds from sale of businesses 38.0 --
Other 4.7 1.5
--------- ---------
Net cash used in investing activities (63.4) (185.1)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term debt 0.3 2.0
Other borrowings of debt 95.6 392.8
Other repayments of debt (150.2) (258.5)
Purchases of treasury stock -- (60.9)
Decrease in unearned ESOP shares 8.4 6.7
Exercise of stock options and other 1.3 1.5
--------- ---------
Net cash (used in) provided by financing activities (44.6) 83.6
Effect of exchange rate changes on cash (3.6) 1.7
--------- ---------
Net change in cash and equivalents (65.9) (18.6)
Cash and equivalents - beginning of period 103.5 61.7
--------- ---------
Cash and equivalents - end of period $ 37.6 $ 43.1
========= =========
</TABLE>
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART
OF THESE STATEMENTS.
5
<PAGE>
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. FINANCIAL STATEMENTS
The interim consolidated financial statements are unaudited but, in the opinion
of management, reflect all adjustments necessary for a fair presentation of
financial position, results of operations and cash flows for the periods
presented. These adjustments, except for the restructuring charge adjustments in
the second and third quarters of 1998, and the special in-process research and
development charge in the third quarter of 1997, consist of normal, recurring
items. The results of operations for any interim period are not necessarily
indicative of results for the full year. The consolidated financial statements
and notes are presented as permitted by the requirements for Form 10-Q and do
not contain certain information included in the Company's annual consolidated
financial statements and notes. This Form 10-Q should be read in conjunction
with the Company's consolidated financial statements and notes included in its
1997 Annual Report on Form 10-K.
2. EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 128, EARNINGS PER SHARE, which the Company has
adopted for all periods presented. SFAS No. 128 requires companies to compute
earnings per share under two different methods, basic and diluted earnings per
share. Prior period amounts have been restated to conform with this standard.
Basic earnings per share is calculated using the weighted average number of
shares outstanding during the period adjusted for Employee Stock Ownership Plan
(ESOP) shares not committed. Diluted earnings per share is computed on the basis
of the weighted average basic shares outstanding plus the dilutive effect of
outstanding stock options using the "treasury stock" method. The following table
sets forth the computation of the weighted average basic and diluted shares
outstanding for the three and nine month periods ended September 30, 1998
and 1997:
6
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1998 1997 1998 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Weighted average
shares outstanding 40.8 40.6 40.7 41.7
Weighted average ESOP
shares not committed (1.3) (1.8) (1.4) (1.8)
------- ------- ------- -------
Weighted average
basic shares outstanding 39.5 38.8 39.3 39.9
Dilutive effect of
common stock equivalents (1) 0.1 -- 0.1 --
------- ------- ------- -------
Weighted average diluted
shares outstanding 39.6 38.8 39.4 39.9
======= ======= ======= =======
</TABLE>
(1) For the three and nine month periods ended September 30, 1997, common stock
equivalents were excluded since their effect was anti-dilutive.
3. SUPPLEMENTAL BALANCE SHEET INFORMATION
September 30,
1998 December 31,
(Unaudited) 1997
--------- ---------
(In millions)
Inventories
Finished goods $ 261.3 $ 272.6
Work in process 40.9 59.7
Raw materials and supplies 62.6 67.6
--------- ---------
Total inventories $ 364.8 $ 399.9
========= =========
Property, Plant and Equipment
Property, plant and equipment $ 1,530.7 $ 1,704.5
Less accumulated depreciation (1,216.8) (1,322.9)
--------- ---------
Property, plant and equipment - net $ 313.9 $ 381.6
========= =========
4. COMMITMENTS AND CONTINGENCIES
Discussion of legal matters is cross-referenced to this Form 10-Q, Part II, Item
1, Legal Proceedings, and should be considered an integral part of the
Consolidated Financial Statements and Notes.
7
<PAGE>
5. RESTRUCTURING
In the fourth quarter of 1997, the Company recorded a $170.0 million pre-tax
charge for the restructuring of 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 following table represents the activity related to the Company's
restructuring reserves for the nine months ended September 30, 1998:
Original Adjustments Ending
Charge Usage and New Programs Balance
------- ----- ---------------- -------
(In millions)
Severance & pension $ 91.5 $ (40.5) $ 0.4 $ 51.4
Fixed Assets 61.5 (55.3) (6.2) --
Other 17.0 (3.6) (7.4) 6.0
-------- -------- -------- --------
Total $ 170.0 $ (99.4) $ (13.2) $ 57.4
======== ======== ======== ========
Of the original $170.0 million pre-tax charge and the $13.2 million net benefit
adjustment discussed below, $99.4 million has been used, leaving a remaining
balance of $57.4 million. This remaining amount is comprised primarily of
expected severance payments and other exit costs.
During the nine months ended September 30, 1998 the Company made cash payments
of $28.7 million related to this restructuring and reduced its headcount by
approximately 1,400. As part of this restructuring plan, the Company closed a
research facility in the United Kingdom and sold its CD-ROM business. The
Company also has announced its intention to exit its metal printing plates
manufacturing facility in Middleway, West Virginia.
During the third quarter of 1998, the Company recorded a $26.2 million benefit
in the restructuring line of the Statement of Operations as an adjustment of the
restructuring charge recorded in 1997. This benefit resulted primarily from
three factors: a better than expected result from the sale of the Company's
CD-ROM business, lower than expected costs from closing certain research and
development facilities (primarily the facility in the United Kingdom) and lower
than expected costs associated with employee terminations. This benefit was
recorded as a result of the Company's policy to evaluate its restructuring
reserves quarterly and adjust such reserves to reflect changes in estimates as
information becomes available.
Also in the third quarter of 1998, the Company approved and recorded an
additional restructuring charge of $13 million, primarily related to asset
write-downs, reflecting further portfolio rationalizations.
In the second quarter of 1998, the Company recorded a $3.6 million benefit in
the restructuring line of the Statement of Operations reflecting final
adjustments of the restructuring reserves established in the fourth quarter of
1995. For the nine months ended September
8
<PAGE>
30, 1998, the Company recorded a net restructuring benefit of $16.8 million.
6. PENDING SALE OF BUSINESS UNIT
On July 31, 1998, the Company and Eastman Kodak Company signed an asset purchase
agreement for the sale of the Company's worldwide medical imaging business.
Discussion of this matter is cross-referenced to this Form 10-Q, Part I, Item
2, Management's Discussion and Analysis of Financial Condition and Results of
Operations, Pending Sale of Business Unit, and should be considered an integral
part of the Consolidated Financial Statements and Notes.
7. COMPREHENSIVE INCOME
In the first quarter of 1998, the Company adopted SFAS No. 130, REPORTING OF
COMPREHENSIVE INCOME. The standard requires the display and reporting of
comprehensive income (loss), which includes all changes in shareholders' equity
with the exception of additional investments by shareholders or distributions to
shareholders. Comprehensive income (loss) for the Company includes net income
(loss) and the effects of translation which are charged or credited to the
cumulative translation adjustments account within shareholders' equity.
Comprehensive income (loss) for the three and nine month periods ended September
30, 1998 and 1997 was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(In millions) 1998 1997 1998 1997
-------- -------- -------- --------
Net income (loss) $ 13.4 $ (38.7) $ 20.2 $ (22.3)
Changes in cumulative
translation adjustments 12.9 (3.3) 11.3 (25.5)
-------- -------- -------- --------
Comprehensive
income (loss) $ 26.3 $ (42.0) $ 31.5 $ (47.8)
======== ======== ======== ========
8. NEW ACCOUNTING STANDARDS
Effective with year-end 1998, the Company will adopt SFAS No. 131, DISCLOSURE
ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 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 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.
9
<PAGE>
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This standard
establishes accounting and reporting standards for derivative instruments and
hedging activities. The Company must adopt this standard no later than January
1, 2000. The Company is reviewing the requirements of this standard and has not
yet determined the impact of this standard on the financial statements of the
Company.
****
PricewaterhouseCoopers LLP, the Company's independent accountants, have
performed a review of the unaudited interim consolidated financial statements
included herein and their report thereon accompanies this filing.
10
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Imation Corp.:
We have reviewed the accompanying condensed consolidated balance sheet of
Imation Corp. (the Company) as of September 30, 1998, and the related
consolidated statements of operations for the three and nine months ended
September 30, 1998 and 1997, and condensed consolidated statements of cash flows
for the nine months ended September 30, 1998 and 1997. These consolidated
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1997, and the
related consolidated statements of operations, shareholders' equity and cash
flows for the year then ended (not presented herein); and in our report dated
February 6, 1998, except for the second paragraph of Note 7, as to which the
date is March 30, 1998, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 1997,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
November 12, 1998
11
<PAGE>
IMATION CORP.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL OVERVIEW
Imation Corp. (the Company) began operations as an independent, publicly held
company on July 1, 1996 when Minnesota Mining and Manufacturing Company (3M)
spun off substantially all of the businesses previously operated within its data
storage and imaging systems groups.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Net revenues for the third quarter of 1998 were $520.8 million, a decrease of
$8.7 million or 1.6 percent from the same period in 1997. Volume increases of 5
percent were offset by price declines of 6 percent and the negative effect of
changes in currency exchange rates of 1 percent. Volume growth was positively
impacted by continued strength of DryView(TM) and SuperDisk(TM), as well as by
strength in network storage products including Travan NS series data cartridges.
These increases were offset by volume declines in the Company's more mature
product lines, especially in Europe. Based on currency exchange rates as of the
end of the quarter, the Company expects translation effects to have a slight
positive impact on revenues in the fourth quarter of 1998 as compared with the
fourth quarter of 1997.
Net revenues in the United States increased 4 percent with volume growth of 10
percent offset by price declines of 6 percent. International net revenues
decreased by 8 percent driven by price declines of 6 percent and the negative
impact of changes in currency exchange rates of 2 percent. International volume
was flat compared with the same quarter last year. International revenues
accounted for 42 percent of the Company's third quarter 1998 revenues, compared
with 45 percent for the third quarter 1997.
Gross profit in the third quarter of 1998 was $197.4 million, or 37.9 percent of
revenues, compared with the third quarter of 1997 which was $191.2 million, or
36.1 percent of revenues. The gross profit percentage increase is due to the
weaker dollar, especially in Europe, improved product mix, and continued cost
reductions which outpaced the negative effect of selling price erosion.
Selling, general and administrative (SG&A) expenses were $142 million, or 27.3
percent of revenues. SG&A expenses in the third quarter of 1997 were $144.8
million, and also 27.3 percent of revenues. The lower dollar level of SG&A
reflects the impact of the Company's 1997 restructuring program partially offset
by costs
12
<PAGE>
associated with the Company's launch of its SuperDisk(TM) program and costs
attributable to its information technology (IT) infrastructure development.
Research and development (R&D) costs totaled $35.8 million, or 6.9 percent of
revenues in the third quarter of 1998, down $42.6 million from $78.4 million or
14.8 percent of revenues, in the same period in 1997. Included in the third
quarter 1997 R&D costs was the write-off of $41.7 million of in-process R&D
related to the acquisition of Cemax-Icon (Cemax). Excluding this write-off, R&D
costs would have been $36.7 million in 1997, essentially flat with 1998 R&D
costs.
The Company recorded a $13.2 million net benefit in the third quarter of 1998 in
the restructuring line of the Statement of Operations, reflecting a $26.2
million reversal of restructuring reserves established in the fourth quarter of
1997, offset by $13.0 million of new charges, primarily related to asset
write-downs, identified and approved by the Company in the third quarter. The
$26.2 million adjustment to the 1997 restructuring charge resulted primarily
from three factors: a better than expected result from the sale of the Company's
CD-ROM business, lower than expected costs from closing certain research and
development facilities (primarily the facility in the United Kingdom) and lower
than expected costs associated with employee terminations.
Operating income for the third quarter of 1998 was $32.8 million compared with
an operating loss of $32 million for the same period last year. Excluding the
net restructuring benefit recorded in the third quarter of 1998 and the special
R&D charge recorded in the third quarter of 1997, operating income increased
$9.9 million and operating income margin increased 2.0 percentage points to 3.8
percent of revenues compared with 1.8 for the third quarter of 1997.
Third quarter 1998 interest expense was $5.5 million, up $1.6 million from the
same quarter last year. This increase resulted primarily from higher borrowing
margins on the Company's revolving credit facility and to a lesser extent a
higher average level of debt outstanding in 1998 versus 1997.
The net other income and expense in the third quarter of 1998 totaled $1.3
million of income. In the same period of 1997, net other income and expense was
$1.6 million of expense. This variance is primarily the result of reduced
currency transaction losses in the third quarter of 1998 compared with the same
period in 1997.
The Company's effective tax rate in the third quarter of 1998 was 53 percent
compared with 29 percent in the third quarter of 1997 (excluding the impact of
the non-recurring, non-tax deductible write-off of $41.7 million of in-process
R&D related to the acquisition of Cemax.) The third quarter 1997 rate reflects
the impact of lowering the expected annual effective tax rate to 43 percent. The
third
13
<PAGE>
quarter 1998 tax rate of 53 percent is higher than last year's rate due
primarily to a higher ratio of profits in high tax geographies. The Company's
effective income tax rate may fluctuate significantly between periods depending
upon the relative mix of income and losses the Company is projected to generate
in the various jurisdictions in which it operates around the world.
Net income in the third quarter of 1998 was $13.4 million, or $0.34 per basic
and diluted share, compared with a loss of $38.7 million, or $1.00 per basic and
diluted share, for the same period in 1997 for the reasons discussed above.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
On a year-to-date basis, net revenues were $1,557.3 million, a decrease of $74.7
million or 4.6 percent from the same period in 1997. Volume increases of 3
percent were more than offset by price declines of 6 percent and the negative
effect of changes in currency exchange rates of 2 percent. Volume growth was
positively impacted by continued strength of DryView(TM) and SuperDisk(TM)
technologies as well as by higher revenues in the Customer Solutions businesses
driven by the Company's 1997 acquisition of Cemax. These increases were offset
by volume declines in the Company's more mature product lines, especially in
Europe. Based on currency exchange rates as of the end of the quarter, the
Company expects translation impacts to turn slightly positive on revenues in the
fourth quarter.
Net revenues in the United States were flat as volume increases of 6 percent
were offset by price declines. International revenues decreased 10 percent while
international volume increases of 1 percent were more than offset by price
declines of 7 percent. Also, international revenues were negatively impacted 4
percent by changes in currency translation rates year over year. International
revenues accounted for 45 percent of the Company's revenues in the first nine
months of 1998, as compared with 48 percent in the same period in 1997.
Gross profit for the first nine months of 1998 was $565.9 million or 36.3
percent of revenues. This compares with $583.2 million, or 35.7 percent of
revenues in 1997. The increase in gross margin for the quarter ended September
30, 1998 positively impacted the gross margin for the nine month period ended
September 30, 1998.
SG&A expenses were $416.2 million or 26.7 percent of revenues. This compares
with $420.4 million or 25.8 percent of revenues in the first nine months of
1997. The increase in SG&A expenses as a percentage of revenues is due to the
decline in revenues plus the Company's launch of its SuperDisk(TM) program and
costs attributable to the Company's IT infrastructure development partially
offset by the impact of the Company's 1997 restructuring program.
R&D costs totaled $105.9 million, or 6.8 percent of revenues in the first nine
months of 1998, down $50.7 million, or 32 percentage points from the same period
in 1997. Excluding the 1997 write-off of $41.7 million of in-process R&D costs
related to the acquisition of Cemax, R&D costs in 1997 would have been $114.9
million. In 1998, R&D costs decreased 7.8 percent compared with 1997 excluding
the special charge.
14
<PAGE>
This decrease reflects the impact of the Company's 1997 restructuring program.
The Company recorded a $16.8 million benefit in the restructuring line of the
Statement of Operations in the nine month period ended September 30, 1998. The
Company recorded a $3.6 million benefit in the second quarter of 1998 reflecting
final adjustments of the restructuring reserves established in the fourth
quarter of 1995. The Company also recorded a net $13.2 million benefit in the
third quarter of 1998 reflecting a $26.2 million reversal of the restructuring
reserves established in the fourth quarter of 1997 offset by $13.0 million of
new charges, primarily related to asset write-downs, that the Company identified
and approved in the third quarter of 1998.
Operating income for the first nine months of 1998 was $60.6 million, or 3.9
percent of revenues. This represents a $54.4 million increase over operating
income in the same period of 1997. Excluding the net restructuring benefits in
1998 and the special R&D charge in 1997, operating income would have shown a
$4.1 million decline in the first nine months of 1998 over the same period of
1997.
Interest expense for the first nine months of 1998 was $16.3 million, up $6.2
million from the same period of 1997. This increase resulted from higher
borrowing margins on the Company's revolving credit facility and a higher
average level of debt outstanding in 1998 versus 1997.
The net other income and expense in the first nine months of 1998 totaled $1.3
million of expense, compared with $3.8 million of expense in the comparable
period of 1997. This variance is primarily the result of reduced currency
transaction losses in the third quarter of 1998 compared with the same period in
1997.
The Company's effective tax rate for the first nine months of 1998 was 53
percent, compared with 43 percent in the same period in 1997 (excluding the
impact of the non-recurring, non-tax deductible write-off of $41.7 million of
in-process R&D costs related to the acquisition of Cemax.) This increase is
driven by a change in the estimated level and mix by jurisdiction of pre-tax
income and losses expected for the full year of 1998.
Year-to-date net income in 1998 was $20.2 million, or $0.51 per share. Net loss
in the comparable period of 1997 was $22.3 million, or a loss of $0.56 per
share.
FINANCIAL POSITION
The Company had 3.3 months of inventory on hand at September 30, 1998, compared
with 3.4 at December 31, 1997. The accounts receivable days sales outstanding
(DSO) was 88 days at September 30, 1998, up from 76 days at December 31, 1997.
This 12 day increase in
15
<PAGE>
DSO is primarily due to transitory timing impacts of the IT implementation
combined with higher sales in the medical imaging business which carry a higher
DSO.
The book value of property, plant and equipment at September 30, 1998 was $313.9
million, a decrease of $67.7 million from the December 31, 1997 balance of
$381.6 million. This decrease is primarily due to capital spending being lower
than depreciation and the impact related to the Company's restructuring
activities including disposals and reserve adjustments. Other assets increased
by $74.8 million from December 31, 1997 primarily due to capitalization of costs
related to the design, implementation and testing of the Company's new worldwide
IT systems. The decrease in other current liabilities reflects the impact of the
Company's restructuring activities. Discussion of this matter is
cross-referenced to this Form 10-Q, Part I, Item 1, Notes to Consolidated
Financial Statements, Restructuring.
LIQUIDITY
Cash provided by operating activities was $45.7 million during the nine months
ended September 30, 1998, compared with $81.2 million during the same period in
1997. Changes in working capital used $31.7 million of cash in 1998 compared
with $62.3 million during the same period in 1997, with increased accounts
receivable and changes in current liabilities being only partially offset by
reduced inventory. Depreciation and amortization was $96.2 million in the first
nine months of 1998, as compared with $111.4 million in 1997. For the nine
months ended September 30, 1998, the Company made cash payments of $28.7 million
associated with its restructuring. The Company expects to incur future net cash
payments related to restructuring of approximately $50 million.
Cash used in investing activities was $63.4 million for the nine months ended
September 30, 1998 compared with $185.1 million in the comparable period of
1997. Investing activities included capital expenditures of $49.6 million for
the first nine months of 1998 compared with $92.8 million during the same period
of 1997. Capitalized software was $56.5 million in the first nine months of
1998, compared with $64.8 million in the same period in 1997. These expenditures
related primarily to the design, implementation and testing of the Company's new
IT systems. Amortization of these costs which began during the second quarter of
1998 are expected to be about $5.0 million per quarter.
Net financing activities during the first three quarters of 1998 used cash of
$44.6 million compared with providing $83.6 million of cash in the comparable
1997 period. The primary component of the 1998 amount was net other repayments
of debt of $54.6 million, whereas the 1997 amount included net other borrowings
of $134.3 million and share repurchases of $60.9 million.
At September 30, 1998, the Company had borrowed $261.0 million under its $350
million revolving credit facility with a syndicate of banks (the Credit
Agreement). During the fourth quarter of 1997 and the first quarter of 1998, the
Company obtained from its lenders waivers of compliance with and amendment of
certain financial covenants through January 5, 1999 under the Credit Agreement
to accommodate
16
<PAGE>
the restructuring and other special charges recorded in the fourth quarter of
1997. During this waiver period, borrowings under the Credit Agreement are
collateralized by substantially all of the Company's assets; the Company is
required to maintain a specified minimum level of earnings before interest,
income taxes, depreciation and amortization (EBITDA); and the Company will be
subject to increased borrowing margins. As of September 30, 1998, the Company
was in compliance with the amended financial covenants of the Credit Agreement.
The Company expects to enter into a new credit facility in conjunction with the
closing of the sale of its medical imaging business. Discussion of this matter
is cross-referenced to this Form 10-Q, Part I, Item 2, Management's Discussion
and Analysis of Financial Condition and Results of Operations, Pending Sale of
Business Unit.
At September 30, 1998, the Company's ratio of total debt to total capital was
29% as compared with 34% at December 31, 1997. The Company expects that cash and
equivalents, together with cash flow from operations and availability of
borrowings under its current and future sources of financing, will provide
sufficient liquidity to operate the Company.
YEAR 2000 COMPLIANCE
Introduction (Phases)
In preparation for the change in the millennium, the Company's Year 2000 (Y2K)
Operating Team has instituted a seven-phase plan to address the Company's Y2K
readiness in the following areas: internal IT systems, non-IT systems (including
plants, facilities, process control and building control equipment,
communications systems, laboratory and test equipment, etc.), the Company's
products, and external business relationships. The seven phases of the plan are:
(1) perform inventory of all items potentially subject to Y2K effect and
prioritize on the basis of business criticality; (2) develop a plan for
assessing Y2K compliance of all inventoried items; (3) determine whether
inventoried items are Y2K compliant; (4) design a remediation strategy (e.g.,
remediate, replace, retire, etc.) for non-compliant inventoried items and
develop contingency plans; (5) develop and test remediation solutions; (6)
implement remediation solutions; and (7) document verification of compliance of
remediated solutions.
Inventories of each area have been completed and determinations made regarding
Y2K impact. Inventoried items have been prioritized, assessment plans have been
completed and remediation solutions are being developed. Field implementation of
remediation solutions for critical Y2K items is expected for completion by the
end of March 1999, with remediation of least critical items expected to be
completed by the end of June 1999. Verification of compliance of remediated
solutions is planned to occur contemporaneously with the field installation of
solutions.
17
<PAGE>
IT System
A significant portion of the Company's new global IT infrastructure has been
completed with the remaining expected to be completed by September 1999. The
Company required a new IT system after the Company's spin-off from 3M and a
significant factor in the Company's selection of this system was its Y2K
compliance status. The Company believes that the new system, when fully
implemented, will significantly reduce the likelihood of Y2K-related
interruptions to normal operations. The Company must, however, test all software
applications added to the new IT system for Y2K compliance, as well as all
custom code written for the system. Although the Company does not foresee a
material adverse effect on its business, results of operations, or financial
position related to Y2K issues and the Company's IT system, risk is not
eliminated until the system is fully installed, tested, and all non-compliant
code identified and corrected.
Non-IT Systems
The Company is assessing its non-IT systems in its plants and facilities on a
world-wide basis for issues of Y2K compliance. This assessment includes
reviewing not only the Company's manufacturing process control equipment, but
also systems that control temperature, utility equipment, telephone systems, and
security systems. Laboratory and test equipment are also being evaluated. While
the Company does not believe that it is likely to experience material adverse
effects related to Y2K in the area of non-IT systems, failure to identify all
Y2K vulnerable controls or equipment, or failure to remediate them in a timely
way, could result in an inability to manufacture or test product or conduct
business in the ordinary course at a particular plant or facility.
Products
The majority of Company products do not have electronic date functionality.
Those products that do have electronic date functionality are being assessed and
remediation strategies are being developed to address any issues of Y2K
non-compliance. The Company believes it has sufficient resources dedicated to
product compliance activities and it does not foresee any material adverse
impact on the Company's business, results of operations, or financial position
due to Y2K product issues; however, there remains the possibility that the
Company could fail to identify all susceptible products or be unable to
implement all field remediations for which it is responsible prior to January 1,
2000.
Third Parties
Y2K preparedness of third parties with whom the Company does business could
impact the Company's ability to deliver products and services in the new
millennium. This constitutes an area of potentially significant risk to the
Company's business, results of operations, and financial position. Suppliers of
critical raw materials and providers of utility and communication services could
particularly impair the Company's ability to conduct business in the ordinary
18
<PAGE>
course if those third parties fail to successfully assess and remediate their
own products and internal operations. While third party risk related to the Y2K
problem is difficult to quantify or control, the Company is taking steps in an
effort to try to minimize the potential adverse effect of Y2K problems that
could arise based on the Company's external business relationships.
The Company has sent Y2K surveys to its suppliers asking for the compliance
status of suppliers' products and internal operations. The Company is
re-contacting its most critical suppliers. A new purchase order form has been
implemented by the Company setting forth, among other things, the Company's Y2K
requirements.
The Company plans to develop third party contingency plans as it identifies
partners evidencing inadequate Y2K preparations. Contingency plans may include
plans to accumulate extra inventory and/or establish alternative sources of
supply and channels of distribution. However, even with diligent planning, third
party providers pose an uncertain risk which cannot be entirely eliminated.
Expenditures
Aside from expenditures made by the Company in implementing its new corporate IT
system, the Company has not incurred any significant Y2K related costs to date.
The Company expects to complete the remediation design phase of its Y2K program
by December 1998. Until that phase is completed, the Company cannot accurately
forecast its total possible Y2K costs. At this time, the Company estimates,
based on existing information and resources, that the Company could spend $2
million to $3 million on completing its Y2K program excluding already
anticipated costs for completion of its new corporate IT system. This estimate
is subject to change as the Company moves through its Y2K plan. While the
Company's management does not believe that the Company's Y2K costs will have a
material adverse effect on the Company's business, results of operations, or
financial position, Y2K costs could increase if currently unknown Y2K
deficiencies are discovered in Company IT systems, non-IT systems or products,
or with external business partners.
Summary
Due to the uncertain nature of the Y2K problem, the Company's management cannot
state with certainty whether Y2K issues will have a material adverse effect on
the Company's business, results of operations, or financial position. The
Company believes it is taking reasonable steps to address the Y2K problem, but
the Y2K problem is a very complex one. If several of Company's external business
partners should fail to implement successful Y2K programs, or if the Company
should fail to identify Y2K deficiencies in critical IT and non-IT systems, or
if Company's product remediations should fail to be implemented in the field by
January 1, 2000, Y2K problems could have a material adverse effect on the
Company's business, results of operations, or financial position.
19
<PAGE>
The projected expenditures and dates contained in this discussion are based on
the Company's best estimates and are derived from assumptions about future
events, including the availability of resources and other factors. The Company
does not guarantee that these estimates will be achieved and results may vary
due to uncertainties.
The foregoing discussion excludes the Company's worldwide medical imaging
business due to its anticipated sale. However, the Company's seven-phase Y2K
program is being applied to the medical imaging business until the sale closes.
The forward-looking statements contained in this section under the heading "Year
2000 Compliance" should be read in conjunction with the Company's disclosure
below under the heading "Forward-Looking Statements."
EURO CONVERSION STATUS
On January 1, 1999 eleven of the fifteen member countries of the European Union
will adopt the Euro as their new common currency. The Euro will trade on
currency exchanges and will be used for non-cash transactions. Effective January
1, 2002 and through July 1, 2002 the participating countries will begin using
the Euro as the legal tender and will withdraw all legacy currencies.
The Euro conversion may involve transparency of the market (i.e. with a common
currency the prices in different countries are more readily comparable) which
may lead to increased competition between countries and potential erosion of
margins. The Company is reviewing its marketing strategies to address possible
increased competition and is also reviewing and testing its software
compatibility with the Euro conversion. The Company will continue to review the
impact of the conversion to the Euro. However, the Company does not expect that
the Euro conversion will have a material impact on the Company's financial
position or results of operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
Effective with year-end 1998, the Company will adopt Statement of Financial
Accounting Standard (SFAS) No. 131, DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE
AND RELATED INFORMATION. SFAS No. 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 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.
20
<PAGE>
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. This standard
establishes accounting and reporting standards for derivative instruments and
hedging activities. The Company must adopt this standard no later than January
1, 2000. The Company is reviewing the requirements of this standard and has not
yet determined the impact of this standard on the financial statements of the
Company.
PENDING SALE OF BUSINESS UNIT
On July 31, 1998, the Company and Eastman Kodak Company (Kodak) signed an asset
purchase agreement for the sale and purchase of most of the Company's worldwide
medical imaging business, including the manufacturing facilities in White City,
Oregon and Oakdale, Minnesota and all of the outstanding stock of the Company's
wholly-owned subsidiary, Cemax. The business being sold generated approximately
$500 million in revenues annually with approximately $280 million in net assets.
Approximately 1600 employees will transfer to Kodak.
Under the terms of the agreement, Kodak will acquire such assets for
approximately $520 million in cash at closing and the assumption of certain
related liabilities. The Company contemplates an initial closing on a
substantial portion of the assets by the end of 1998 and closings on the
remaining assets to be completed in the spring of 1999.
The Company will retain its manufacturing facility in Ferrania, Italy, where it
will manufacture x-ray and wet laser medical imaging film for Kodak under a
supply agreement for a minimum of two years. Kodak will also pay the Company up
to an additional $25 million no later than termination of the supply agreement.
Under a separate supply agreement, Kodak will supply the Company with document
imaging products out of the White City facility for up to five years.
Kodak will also reimburse the Company for payments of up to $44.8 million made
to the former shareholders of Cemax for certain contingent value rights issued
in connection with the Company's acquisition of Cemax. A payment of $12.6
million was made to such persons in August, 1998 and an additional amount will
be paid based on the performance of Cemax during the twelve-month period which
will end on June 30, 1999.
In addition, upon closing of the sale, or if the transaction does not close due
to the failure to receive applicable regulatory approvals, the civil litigation
concerning certain intellectual property disputes between the companies in the
United States and Italy will be settled without payment by either party.
Principal products included in the Company's medical imaging business are
DryView(TM) laser imaging systems and film, wet laser imagers and film,
conventional x-ray film processing systems, Imation chest
21
<PAGE>
system, Trimax(TM) x-ray film and Cemax-Icon's digital picture-archiving and
communication systems products. In addition to the medical imaging assets, Kodak
will acquire the Company's DryView(TM) Imagesetting Film business in the graphic
arts industry and the document imaging sales and service business in Germany.
The transaction is subject to customary closing conditions, including regulatory
approvals. The waiting period under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976 has expired and Kodak has received antitrust clearance from the
European Union.
The Company estimates it will net approximately $450 to $500 million in cash
from the sale and report an after-tax gain at closing of approximately $70 to
$80 million net of other costs associated with the sale.
The Company currently anticipates potential uses for the sale proceeds in three
areas, as appropriate: to support investments in the Company's core growth
opportunity areas, to repay debt and to buy back the Company's stock.
Kodak will reimburse the Company, on a fully burdened cost basis, for certain
services Kodak has determined they will need to support the business while it is
being integrated. The services, which may generally be provided for up to two
years, include services such as information technology, logistics and finance.
FORWARD-LOOKING STATEMENTS
Certain information contained in this report which does not relate to historical
financial information may be deemed to constitute forward looking statements.
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 which 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 market acceptance of newly introduced products (including the
Company's SuperDisk(TM) products), implementation of the Company's restructuring
plans, closure of the sale of the Company's medical imaging business to Kodak,
competitive industry conditions including historical price erosion in certain
product categories, technological developments in the markets served by the
Company, foreign currency fluctuations, the Company's ability to establish its
operations as an independent company (including the implementation of its global
information technology systems), the Company's ability to identify and address
all Y2K issues, and the various factors set forth in the Company's filings with
the Securities and Exchange Commission, including its 1997 Annual Report on Form
10-K.
22
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 3. "Legal Proceedings" included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997. The
following previously reported legal proceedings had developments during the
first three quarters of 1998:
EASTMAN KODAK COMPANY vs. MINNESOTA MINING AND MANUFACTURING CORPORATION, et.
al. (U.S. District Court for the Western District of New York, Civil Action No.
97-CV-6535T), and IMATION S.P.A., et. al. (Civil Court of Savona, Italy, No.
2259/97). On December 2, 1997 Eastman Kodak Company (Kodak) filed a civil
compliant 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 spin-off of the Company from 3M in July 1996. In its
complaint, Kodak seeks unspecified 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 May 15, 1998,
the parties requested that the legal proceedings in the United States and Italy
be stayed pending ongoing settlement discussions among the parties. On July 31,
1998, the parties entered into an agreement that upon closing of the medical
imaging sale, or if the transaction does not close due to the failure to receive
applicable regulatory approvals, the civil litigation concerning certain
intellectual property disputes between the companies in the United States and
Italy will be settled. Criminal investigation of the matter has been terminated,
with no action taken by the authorities.
The Company is also 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 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 September 30, 1998 would not be material to the Company's financial
position or annual results of operations or cash flows.
23
<PAGE>
Items 2-5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed as exhibits to this Report.
10.1 Letter dated July 6, 1998 to Steven D. Ladwig regarding
executive compensation.
15.1 An awareness letter from the Company's independent
accountants regarding unaudited interim financial
statements.
27.1 Financial data schedule
(b) During the quarter ended September 30, 1998, the Company filed a
report on Form 8-K dated July 31, 1998 relating to the announcement
by the Company that it had executed an Asset Purchase Agreement with
Kodak for Kodak to acquire the Company's worldwide medical imaging
business.
24
<PAGE>
SIGNATURE
Pursuant to the requirements 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.
(REGISTRANT)
Date: November 16, 1998 By: /s/ Robert L. Edwards
----------------------------
Robert L. Edwards
Senior Vice President,
Strategy, Planning
Chief Financial Officer and
Chief Administrative Officer
25
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- - ------- -----------------------------------------------------------------
10.1 Letter dated July 6, 1998 to Steven D. Ladwig regarding executive
compensation.
15.1 An awareness letter from the Company's independent accountants
regarding unaudited interim financial statements.
27.1 Financial data schedule.
26
EXHIBIT 10.1
CONFIDENTIAL
July 6, 1998 (Update)
Federal Express
Mr. Steven D. Ladwig
[Address]
Dear Steve:
Imation Corp. is pleased to offer you a position as the President of Data
Storage Products & Technologies. Your starting salary will be a base pay of
$280,000 per year plus approximately $186,000 per year in variable compensation
called Success Sharing in which payments will vary according to the economic
profit improvement of our corporation for the entire calendar year. Your total
annual cash compensation is targeted to be $466,000 per year. We are prepared to
guarantee 100% of your first 12 months of Success Sharing. A copy of our Success
Sharing Plan Document is enclosed.
If you accept this offer of employment, you will be granted by Imation's
Compensation Committee nonqualified stock options to purchase a total of 40,000
shares of Imation stock at an exercise price equal to the fair market value of
one share of Imation Common Stock (IMN) on your first day of employment with
Imation Corp. This stock option will vest over a five-year period: 50% after
three years; 75% after four years and 100% after five years. The stock options
will have a 10-year life.
To replace the value of the long-term incentives that you have with your present
employer, we will grant you 100,000 shares of Imation Common Stock that will
vest over four years; 50% at two years, 75% at three years and 100% at four
years.
At the August 1998 Board meeting, we will propose that you be elected as an
executive officer of the company and a Vice President of Imation Corp.
As an executive member of the Imation Corp. Operating Team, you will be
qualified to participate in the Imation Split Dollar Life Insurance Plan. A
summary of the benefits and features is enclosed. The Split Dollar Plan has been
designed to provide you with coverage approximately equal to three times your
annual preretirement compensation until your age 65, and 1.5 times your final
annual preretirement compensation at age 65 and after.
27
<PAGE>
As an employee of the company, you will be entitled to 20 days of vacation. Our
vacation year runs from July 1 through June 30. Vacation is earned on a monthly
basis.
We will include you in our Homeowners Relocation Policy (enclosed) instead of
our New Hire Policy. This means that your home sale will be covered by a home
loss provision. If you leave Imation voluntarily during your first two years of
employment, you will be required to refund to Imation a prorated cost of your
relocation. Upon acceptance of our offer, you will be contacted by a member of
the Prudential relocation team.
Our offer is contingent upon:
1. The determination that this position doesn't conflict with your noncompete
agreement with your present employer. As a condition of employment with
Imation, you will be required to sign an Employee Agreement on your first
day of employment. Also, if you have signed any employee agreements with
previous employers, please send a copy to me prior to your scheduled first
day of employment.
2. The acceptable results of the pre-employment screening process of a
reference check, background check and a medical evaluation which includes
a drug/alcohol screening. As soon as possible, contact Jeannette Black at
(612) 704-7653 for the name of a participating clinic in your area to make
an appointment for the medical evaluation, and bring the completed medical
forms enclosed with you.
The United States government requires all employers to verify that its new
employees are authorized to work in the United States. Therefore, if you accept
our offer of employment, you will be required to complete an Employment
Eligibility Form (Dept. of Justice Form I-9) and provide one or more documents
that identify you and certify that you are authorized to work in the United
States.
Please complete the Imation job application as well as the other documentation
that is part of our new hire process and return it to Kathy Brackey (704-3182)
as soon as possible.
In the event of dismissal without cause or dismissal due to change of control of
the company, Imation is willing to commit that you will be offered a year's pay
as severance and all of your restricted stock will vest immediately contingent
on your signing a release of claims against the company.
Two original letters have been prepared and signed by me. Please indicate your
acceptance of our offer by signing below and returning one letter for our files.
28
<PAGE>
Steve, we are excited about the potential of you joining the Imation family.
Since this is a critically important position, we hope to have your decision as
soon as possible. If you have any questions, please don't hesitate to contact
me.
Sincerely yours, Accepted by:
/s/ Dennis Farmer /s/ Steven D. Ladwig
- - ------------------------------------- -------------------------------------
D. A. Farmer Steven D. Ladwig
Date: July 6, 1998 Date: July 6, 1998
-------------- --------------
cc: J. Hanson
W. Monahan
Desk File
Enclosures:
BENEFITS HIGHLIGHTS
EMPLOYMENT APPLICATION
FORM I-9
HOMEOWNERS RELOCATION POLICY
MEDICAL PREPLACEMENT PACKET
SPLIT DOLLAR POLICY
SUCCESS SHARING PLAN
29
EXHIBIT 15.1
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Imation Corp.
Registrations on Form S-8 and Form S-4
We are aware that our report dated November 12, 1998 on our reviews of the
interim consolidated financial statements of Imation Corp. (the Company) for the
three and nine months ended September 30, 1998 and 1997, and included in the
Company's Form 10-Q for the quarter ended September 30, 1998, is incorporated by
reference in the Company's Registration Statements on Form S-8 (Registration
Nos. 333-15273, 333-15275, 333-15277 and 333-35591) and on Form S-4
(Registration No. 333-28837). Pursuant to Rule 436(c), under the Securities Act
of 1933, this report should not be considered part of the Registration
Statements prepared or certified by us within the meaning of Sections 7 and 11
of that Act.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
November 16, 1998
30
<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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 37,600
<SECURITIES> 0
<RECEIVABLES> 544,000
<ALLOWANCES> (28,700)
<INVENTORY> 364,800
<CURRENT-ASSETS> 1,025,000
<PP&E> 1,530,700
<DEPRECIATION> (1,216,800)
<TOTAL-ASSETS> 1,593,200
<CURRENT-LIABILITIES> 533,800
<BONDS> 265,100
0
0
<COMMON> 400
<OTHER-SE> 720,600
<TOTAL-LIABILITY-AND-EQUITY> 1,593,200
<SALES> 1,557,300
<TOTAL-REVENUES> 1,557,300
<CGS> 991,400
<TOTAL-COSTS> 991,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,300
<INCOME-PRETAX> 43,000
<INCOME-TAX> 22,800
<INCOME-CONTINUING> 20,200
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<EPS-PRIMARY> 0.51
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