SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
IMATION CORP.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transactions applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11. (Set forth the amount on which the
filing fee is calculated and state how it was determined.)
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing party:
(4) Date filed:
<PAGE>
[LOGO]
IMATION
BORNE OF 3M INNOVATION
IMATION CORP.
------------------
1998 PROXY STATEMENT &
1997 FINANCIAL INFORMATION
April 30, 1998
Dear Imation Corp. Shareholders:
You are cordially invited to attend the Imation Corp. 1998 Annual Meeting of
Shareholders. The Meeting will be held this year on Thursday, June 4, 1998, at
9:30 a.m., local time, in the Grand Ballroom 3 of the Grand Hyatt Atlanta, 3300
Peachtree Road, Atlanta, Georgia.
All holders of the Company's outstanding common stock as of April 9, 1998 are
entitled to vote at the Annual Meeting. Time will be set aside for discussion of
each item of business described in the accompanying Notice of Annual Meeting and
Proxy Statement. A current report on the business operations of the Company will
be presented at the Annual Meeting and shareholders will have an opportunity to
ask questions.
This year we have included the detailed financial information relating to our
business and operations during 1997 in an appendix to the Proxy Statement
instead of in a separate annual report to shareholders. In our continuing effort
to improve communications with our shareholders, we have prepared a new Summary
Annual Report, which is also enclosed.
We hope you will be able to attend the Annual Meeting. Whether or not you expect
to attend, you are urged to vote your shares either by telephone (via the 800
number indicated on the accompanying proxy card) or by mail. If you choose to
vote by mail, please complete, sign, date and return the accompanying proxy card
in the enclosed envelope in order to ensure that your shares will be represented
at the Annual Meeting.
Sincerely,
/s/ William T. Monahan
William T. Monahan
Chairman of the Board, President and
Chief Executive Officer
<PAGE>
IMATION CORP.
1 IMATION PLACE
OAKDALE, MINNESOTA 55128
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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
June 4, 1998
------------------
To the Shareholders of Imation Corp.:
The 1998 Annual Meeting of Shareholders of IMATION CORP. will be held on
Thursday, June 4, 1998, at 9:30 a.m., local time, in the Grand Ballroom 3 of the
Grand Hyatt Atlanta, 3300 Peachtree Road, Atlanta, Georgia, for the following
purposes:
1. To elect three Class II directors of the Company to serve for a
three-year term;
2. To ratify the appointment of Coopers & Lybrand L.L.P., independent
accountants, to audit the consolidated financial statements of Imation
Corp. for the year 1998; and
3. To transact such other business that may properly come before the meeting
or any adjournment or adjournments thereof.
These items are more fully described in the following pages of the Proxy
Statement.
The Board of Directors has fixed April 9, 1998, as the record date for the
determination of shareholders entitled to notice of and to vote at the Annual
Meeting.
By Order of the Board of Directors,
/s/ Cathy R. Sams
Cathy R. Sams
CORPORATE SECRETARY
Oakdale, Minnesota
April 30, 1998
IMPORTANT NOTICE
----------------
PLEASE VOTE BY TELEPHONE OR MARK, DATE, SIGN AND PROMPTLY MAIL
THE ACCOMPANYING PROXY CARD IN THE ENCLOSED ENVELOPE SO THAT YOUR SHARES WILL
BE REPRESENTED AT THE MEETING
<PAGE>
IMATION CORP.
------------------
PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 4, 1998
------------------
TABLE OF CONTENTS
------------------
PAGE
----
Information Concerning Solicitation and Voting ........................... 1
Voting Procedures ...................................................... 1
Security Ownership of Certain Beneficial Owners ........................ 2
Security Ownership of Management ....................................... 3
Section 16(a) Beneficial Ownership Reporting Compliance ................ 3
Board of Directors ....................................................... 4
Meetings of the Board and Board Committees ............................. 4
Committees of the Board ................................................ 4
Compensation of Directors .............................................. 4
Board Retirement Policy ................................................ 5
Indemnification Agreements ............................................. 5
Item No. 1--Election of Directors ........................................ 5
General Information .................................................... 5
Information Concerning Directors ....................................... 6
Item No. 2--Ratification of the Appointment of Independent Auditors ...... 8
Other Business ........................................................... 8
Executive Officers of the Company ........................................ 8
Compensation Committee Report on Executive Compensation .................. 9
Compensation of Executive Officers ....................................... 12
Compensation Under Retirement Plans .................................... 13
Employment Agreement ................................................... 14
Shareholder Return Performance Graph ..................................... 15
Common Stock Information ................................................. 16
General .................................................................. 16
Appendix--1997 Financial Information ............................ A-1 thru A-38
<PAGE>
[LOGO]
IMATION
BORNE OF 3M INNOVATION
IMATION CORP.
INFORMATION CONCERNING SOLICITATION AND VOTING
VOTING PROCEDURES
This Proxy Statement is furnished in connection with the solicitation of proxies
by the Board of Directors of Imation Corp. (the "Company" or "Imation") for use
at the Annual Meeting of Shareholders of Imation to be held on June 4, 1998, and
at all adjournments thereof. All shareholders of record on April 9, 1998 are
entitled to vote at the Annual Meeting and, as of that date, there were
40,597,915 shares of common stock, $.01 par value, of the Company (the "Common
Stock") outstanding. Each share of Common Stock entitles the holder to one vote.
Shares of Common Stock held in the Company's treasury will not be voted and will
not be considered present at the Annual Meeting for purposes of determining a
quorum and for purposes of calculating the vote.
The Company anticipates that this Proxy Statement and the accompanying form of
proxy will first be sent to its shareholders on or about April 30, 1998.
A proxy card is enclosed for your use. IN ORDER TO REGISTER YOUR VOTE, COMPLETE,
DATE AND SIGN THE PROXY CARD AND RETURN IT IN THE ENVELOPE PROVIDED OR VOTE YOUR
PROXY BY TELEPHONE IN ACCORDANCE WITH THE TELEPHONE VOTING INSTRUCTIONS SET
FORTH ON THE PROXY CARD.
You have three choices on each matter to be voted upon at the Annual Meeting.
For the election of directors, by checking the appropriate box on your proxy
card, you may (i) vote for all of the director nominees as a group; (ii)
withhold authority to vote for all director nominees as a group; or (iii) vote
for all director nominees as a group except those nominees you identify by
striking a line through such nominees' name. See "General Information" under
Item No. 1. Concerning Item No. 2, by checking the appropriate box, you may (i)
vote "FOR" the item; (ii) vote "AGAINST" the item; or (iii) "ABSTAIN" from
voting on the item.
You may revoke your proxy at any time before it is actually voted at the Annual
Meeting by delivering written notice of revocation to the Corporate Secretary of
the Company, by submitting a subsequently dated proxy, or by attending the
meeting and withdrawing the proxy. You may also be represented by another person
present at the meeting by executing a form of proxy designating such person to
act on your behalf. Each unrevoked proxy card properly executed and received
prior to the close of the meeting will be voted as indicated. Where specific
instructions are not indicated, the proxy will be voted FOR the election of all
directors as nominated and FOR ratification of the appointment of Coopers &
Lybrand L.L.P. as the Company's independent accountants for 1998.
If an executed proxy card is returned and the shareholder has voted "abstain" on
any matter (or "withhold authority" as to the election of any director), the
shares represented by such proxy will be considered present at the meeting for
purposes of determining a quorum and for purposes of calculating the vote, but
will not be considered to have been voted in favor of such matter. If an
executed proxy is returned by a broker holding shares in street name which
indicates that the broker does not have discretionary authority as to certain
shares to vote on one or more matters, such shares
<PAGE>
will be considered present at the meeting for purposes of determining a quorum,
but will not be considered to be represented at the meeting for purposes of
calculating the vote with respect to such matters.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth the holdings, as of the date indicated, of the
Company's outstanding Common Stock of each person known to the Company to own
beneficially (as defined by the Securities and Exchange Commission for proxy
statement purposes) more than 5% of any class of the Company's voting
securities:
AMOUNT AND NATURE
OF BENEFICIAL PERCENT
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP OF CLASS
- -------------------------------------- ------------------ -----------
Harris Associates, Inc. 4,989,240(1) 12.23%
Two North LaSalle Street, Suite 500
Chicago, Illinois 60602-3790
FMR Corp. 4,222,488(2) 10.00%
82 Devonshire Street
Boston, Massachusetts 02109
Private Capital Management, Inc. 3,051,500(3) 7.52%
3003 Tamiami Trail North
Naples, Florida 33940
State Street Bank and Trust Company 2,487,021(4) 6.10%
225 Franklin Street
Boston, Massachusetts 02110
Pioneering Management Corporation 2,320,500(5) 5.72%
60 State Street
Boston, Massachusetts 02109
- ------------------
(1) The Company received a copy of a Schedule 13G filed with the Securities and
Exchange Commission by Harris Associates, Inc., indicating that, at October
31, 1997, Harris Associates, Inc. and certain of its affiliates, as
investment advisor to Harris Associates Investment Trust and various other
clients, beneficially held a total of 4,989,240 shares of Common Stock. Of
such shares, such entities had sole power to dispose of 3,126,640 shares and
shared power to dispose of 1,862,600 shares. Such entities had shared power
to vote all such shares.
(2) The Company received a copy of a Schedule 13G filed with the Securities and
Exchange Commission by FMR Corp., indicating that, at December 31, 1997, FMR
Corp. and certain of its affiliates and subsidiaries, as investment advisor
to various investment company mutual funds, beneficially held a total of
4,222,488 shares of Common Stock. Such entities had sole power to vote
139,418 of such shares and sole dispositive power with respect to all such
shares.
(3) The Company received a copy of a Schedule 13G filed with the Securities and
Exchange Commission by Private Capital Management, Inc., indicating that, at
February 12, 1998, Private Capital Management, Inc. and certain of its
affiliates, as investment advisors, beneficially held a total of 3,051,500
shares of Common Stock. Of such shares, such entities had sole power to vote
10,500 shares, sole power to dispose of 10,500 shares and shared power to
dispose of 3,041,000 shares.
(4) The Company received a copy of a Schedule 13G filed with the Securities and
Exchange Commission by State Street Bank and Trust Company, indicating that,
at December 31, 1997, State Street Bank and Trust Company, as trustee of the
Imation Retirement Investment Plan and other trust accounts, held a total of
2,487,021 shares of Common Stock. Of such shares, State Street Bank and
Trust Company had sole power to vote 203,726 shares, shared power to vote
2,279,615 shares, sole power to dispose of 206,618 shares and shared power
to dispose of 2,280,403 shares.
(5) The Company received a copy of a Schedule 13G filed with the Securities and
Exchange Commission by Pioneering Management Corporation, indicating that,
at March 25, 1998, Pioneering Management Corporation, in its capacity as an
investment advisor, beneficially held a total of 2,320,500 shares of Common
Stock. Such entity had sole power to vote and to dispose of all such shares.
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth the number of shares of Common Stock of the
Company beneficially owned as of March 30, 1998, by each director, each officer
named in the Summary Compensation Table on page 12, and all directors and
executive officers as a group. Except as otherwise indicated, the named
beneficial owner has sole voting and investment powers with respect to the
shares held by such beneficial owner.
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1)(2)
- -------------------------------------- ---------------------------
William T. Monahan 64,942
Lawrence E. Eaton 30,792
Michael S. Fields 3,386
William W. George 24,809
Linda W. Hart 23,061
Ronald T. LeMay 15,026
Marvin L. Mann 17,603
Mark A. Pulido 23,340(3)
Daryl J. White 20,779
Jill D. Burchill 10,763
David G. Mell 9,737
Charles D. Oesterlein 9,574
Clifford T. Pinder 9,952
All Directors and Executive
Officers as a Group (17 persons) 304,737
- ------------------
(1) The shares shown include: (i) the following shares issuable on exercise of
stock options granted under the Company's 1996 Employee Stock Incentive
Program that were exercisable as of March 30, 1998 or within 60 days
thereafter: Mr. Monahan, 56,540 shares; Mr. Eaton, 20,000 shares; Mr.
Fields, 3,386 shares; Mr. George, 20,000 shares; Ms. Hart, 20,000 shares;
Mr. LeMay, 14,247 shares; Mr. Mann, 13,534 shares; Mr. Pulido, 20,000
shares; Mr. White, 20,000 shares; Ms. Burchill, 5,410 shares; Mr. Mell,
8,610 shares; Mr. Oesterlein, 8,610 shares; Mr. Pinder, 8,610 shares; and
all directors and executive officers as a group, 252,387 shares; and (ii)
the following shares allocated as of December 31, 1997 to the accounts of
participants under the Imation Retirement Investment Plan: Mr. Monahan, 569
shares; Ms. Burchill, 353 shares; Mr. Mell, 566 shares; Mr. Oesterlein, 364
shares; Mr. Pinder, 480 shares; and all executive officers as a group, 4,283
shares. The participants in the Imation Retirement Investment Plan have
shared voting and investment power with respect to such shares.
(2) As of March 30, 1998, the percentage of shares of Common Stock beneficially
owned by any director, by any named executive officer and by all directors
and executive officers as a group was less than 1% of the outstanding Common
Stock of the Company.
(3) Includes 276 shares owned by Mr. Pulido's wife, as to which Mr. Pulido
disclaims beneficial ownership.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors and executive officers to file reports of ownership and changes in
ownership of the Company's Common Stock with the Securities and Exchange
Commission and the New York Stock Exchange, and the Company is required to
identify any of those individuals who failed to file such reports on a timely
basis. The Company believes that during 1997 all directors and executive
officers of the Company complied with their Section 16(a) filing requirements,
except that a stock purchase and stock sale by James R. Stewart in November 1997
were reported late on a Form 5 filed on his behalf for the year ended December
31, 1997.
<PAGE>
BOARD OF DIRECTORS
MEETINGS OF THE BOARD AND BOARD COMMITTEES
During 1997, the Board of Directors held a total of five meetings and the
various committees of the Board met a total of 16 times. Each director attended
75% or more of the total meetings of the Board of Directors and the Board
committees on which the director served.
COMMITTEES OF THE BOARD
The standing committees of the Board of Directors include the Audit,
Compensation, and Nominating and Governance Committees. Each of the Board
Committees has adopted a committee charter which sets forth the function and
responsibilities of the committee.
AUDIT COMMITTEE. The Audit Committee consists of four non-employee directors:
Messrs. White (Chair), Eaton, LeMay and Mann. The Audit Committee held five
meetings in 1997. The Audit Committee reviews the Company's consolidated
financial statements; makes recommendations regarding the Company's independent
accountants and the scope of their services; reviews the adequacy of accounting
and audit policies, compliance procedures and internal controls; reviews
nonaudit services performed by the independent accountants in order to maintain
their independence; and reports to the Board of Directors on the adequacy of
financial statement disclosures and adherence to accounting principles.
COMPENSATION COMMITTEE. The Compensation Committee consists of four
non-employee directors: Messrs. Pulido (Chair), Fields and White and Ms. Hart.
The Compensation Committee held five meetings in 1997. The Compensation
Committee reviews compensation and benefits programs for the Company's
executive officers; reviews the selection of officers; evaluates senior
management performance; and administers certain stock and benefit plans.
NOMINATING AND GOVERNANCE COMMITTEE. The Nominating and Governance Committee
consists of three non-employee directors: Ms. Hart (Chair) and Messrs. George
and Mann. The Nominating and Governance Committee held five meetings in 1997.
The Nominating and Governance Committee advises and makes recommendations to
the Board on all matters concerning directorship and corporate governance
matters and the selection of candidates as nominees for election as directors.
The Nominating and Governance Committee will consider qualified nominees for
Board membership submitted by shareholders. A shareholder wishing to nominate a
candidate should forward the candidate's name and a detailed background of the
candidate's qualifications to the Corporate Secretary of the Company at 1
Imation Place, Oakdale, Minnesota 55128. Generally, candidates must be highly
qualified and have broad training and experience in their chosen fields. They
should represent the interests of all shareholders and not those of a special
interest group. Any nominations for director to be made at an Annual Meeting of
Shareholders must be made in accordance with the requirements set forth in the
Company's Bylaws, a copy of which may be obtained upon request from the
Corporate Secretary of the Company at the address listed above.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company receive an annual retainer of
$40,000 and an additional fee of $5,000 per year for serving as chair of a Board
committee. Non-employee directors are paid $1,500 for attendance at each meeting
of the Board of Directors in excess of four meetings per year, $1,000 for
attendance at meetings of Board committees, and $500 for attendance at each
meeting of the Board or Board committee held by telephone or video conference.
In addition, the Company matches gifts by each non-employee director to
qualified charitable institutions up to $15,000 per year.
Under the terms of the 1996 Directors Stock Compensation Program (the "Directors
Plan"), each non-employee director automatically receives, in lieu of 25% of his
or her annual retainer fee, shares of restricted Common Stock equal in value to
such portion of the retainer fee. Restrictions on the stock lapse three years
after the date of grant. The Directors Plan also permits non-employee directors
to
<PAGE>
elect to receive all or part of the remainder of their annual retainer and
meeting fees in shares of Common Stock or in restricted stock units equivalent
to shares of Common Stock. In addition, each non-employee director automatically
receives an initial stock option grant for Common Stock on the date he or she
becomes a director and an additional annual stock option grant on the date of
the Annual Meeting of Shareholders each year. The number of shares subject to
each option grant is 10,000, with the number of shares subject to the initial
grant prorated for the number of months the director served as a director during
the year. The options are nonqualified stock options with a term of ten years
and are granted at an option price equal to the fair market value of the Common
Stock on the date of grant. Each option becomes fully exercisable on the date of
the Annual Meeting of Shareholders in the year following the date of grant,
provided that all outstanding options of a director will immediately vest and
become fully exercisable upon the director's death or disability, or upon a
change of control (as defined in the Directors Plan).
Employee directors are not compensated for their service on the Board of
Directors.
BOARD RETIREMENT POLICY
The Board has adopted a retirement policy that requires (i) non-employee
directors to retire from the Board at the annual meeting of shareholders
following either 15 years of service as a director or the director attaining the
age of 70, (ii) a director who is also the chief executive officer to submit his
or her resignation from the Board when he or she ceases to hold that position,
and (iii) any other director who is an employee of the Company to retire from
the Board upon termination of his or her active service as an employee or upon
attaining the age of 65, whichever is earlier.
INDEMNIFICATION AGREEMENTS
It is the Company's policy to indemnify its directors and officers against any
costs, expenses and other liabilities to which they may become subject by reason
of their service to the Company and to insure its directors and officers against
such liabilities to the extent permitted by applicable law. The Company's Bylaws
provide for indemnification of its directors, officers and employees against
such costs, expenses and other liabilities so long as the director, officer or
employee acts in good faith and in a manner he or she reasonably believes to be
in or not opposed to the Company's best interests. The Company has also entered
into Indemnity Agreements with each of its directors pursuant to which the
Company has agreed to indemnify each of its directors to the full extent
provided by applicable law and the Company's Bylaws as currently in effect.
ITEM NO. 1
ELECTION OF DIRECTORS
GENERAL INFORMATION
The Board of Directors of the Company is divided into three classes. The members
of each class are elected to serve three year terms with the term of office of
each class ending in successive years. The three directors serving in Class II
have terms expiring at the 1998 Annual Meeting. The Class II directors currently
serving on the Board, Messrs. George, Mann and White, have been nominated by the
Board of Directors for re-election to three-year terms at the Annual Meeting.
The three Class II director nominees currently are directors of the Company.
Each of the nominees standing for re-election has indicated a willingness to
serve if elected. However, if any nominee becomes unable to serve before the
election, the shares represented by proxy may be voted for a substitute
designated by the Board, unless an instruction to the contrary is indicated on
the proxy card.
Each Class II nominee elected will hold office until the Annual Meeting of
Shareholders to be held in 2001 or until a successor has been duly elected and
qualified, unless prior to such meeting the director shall resign, or his or her
directorship shall become vacant due to the director's death or removal.
Mr. Pulido, who currently serves as a Class III director, has announced he will
be leaving the Board of Directors effective May 1, 1998. The Company wishes to
express its sincere appreciation for his
<PAGE>
contributions to the Company during his tenure on the Board. The Company does
not currently have any definitive plans regarding the filling of the vacancy
created by Mr. Pulido's resignation.
INFORMATION CONCERNING DIRECTORS
DIRECTOR NOMINEES -- CLASS II (TERM ENDING 2001)
William W. George William W. George, age 55, 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.
Marvin L. Mann Marvin L. Mann, age 64, 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.
Daryl J. White Daryl J. White, age 50, 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.
BOARD MEMBERS CONTINUING IN OFFICE -- CLASS III (TERM ENDING 1999)
Linda W. Hart Linda W. Hart, age 57, 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, 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.
William T. Monahan William T. Monahan, age 50, was elected Chairman of the
Board, President and Chief Executive Officer of the
Company in March 1996 when the Company was spun-off from
Minnesota Mining and Manufacturing Company ("3M") (a
diversified manufacturer). 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.
<PAGE>
Mark A. Pulido Mark A. Pulido, age 45, 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.
BOARD MEMBERS CONTINUING IN OFFICE -- CLASS I (TERM ENDING 2000)
Lawrence E. Eaton Lawrence E. Eaton, age 60, served as Executive Vice
President of the Information, Imaging and Electronic
Sector and Corporate Services of 3M 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 Michael S. Fields, age 52, 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 June 1992, 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 a number of private companies.
Ronald T. LeMay Ronald T. LeMay, age 52, has served as President and
Chief Operating Officer of Sprint Corporation (a
telecommunications company) since February 1996 (except
for the period from July 1997 to October 1997 when he
served as Chairman and Chief Executive Officer of Waste
Management, Inc. (provider of waste management
services). 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 1989 to
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 (except for the
period mentioned above when he served as Chairman and
Chief Executive Officer of Waste Management) and is also
a director of Yellow Corporation and Ceridian
Corporation.
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE FOR THE ELECTION OF EACH OF THE
NOMINEES IN CLASS II AS DIRECTORS OF THE COMPANY FOR A THREE-YEAR TERM. Assuming
the presence of a quorum, directors shall be elected by a plurality of the votes
cast at the Annual Meeting by holders of Common Stock voting for the election of
directors.
<PAGE>
ITEM NO. 2
RATIFICATION OF THE APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors, on the recommendation of the Audit Committee, has
appointed Coopers & Lybrand L.L.P. ("C&L"), an independent certified public
accounting firm, to audit the consolidated financial statements of the Company
for 1998. C&L has audited the Company's financial statements for the years 1993
through 1997. Representatives of the firm will attend the Annual Meeting and
will have an opportunity to make a statement if they desire, and also will be
available to answer questions.
THE BOARD OF DIRECTORS RECOMMENDS YOU VOTE FOR RATIFICATION OF THE APPOINTMENT
OF THE INDEPENDENT AUDITORS. The affirmative vote of the holders of a majority
of the shares of Common Stock present in person or by proxy and entitled to vote
at the Annual Meeting is required for ratification of the appointment of the
independent auditors.
OTHER BUSINESS
The Company is not aware of any business to be acted upon at the Annual Meeting
other than that which is explained in this Proxy Statement. In the event that
any other business calling for a vote of the shareholders is properly presented
at the Annual Meeting, the holders of the proxies will have discretionary voting
authority to vote your shares.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company on April 15, 1998, together with their
ages and business experience, are set forth below.
WILLIAM T. MONAHAN, age 50, 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.
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.
Dr. Burhardt has announced his retirement from the Company effective April 30,
1998.
ROBERT L. EDWARDS, age 42, became Senior Vice President, Strategy, Planning and
Chief Financial Officer for the Company on April 6, 1998. From 1995 to April
1998, he was Senior Vice President, Business Development for Santa Fe Pacific
Pipelines, Inc. (an energy and transportation company.) From 1991 to 1994, he
was Senior Vice President, Treasurer and Chief Financial Officer of that
company. Prior to that time, Mr. Edwards served in a number of executive
positions at Santa Fe Pacific Corporation.
DENNIS A. FARMER, age 54, is Vice President, Talent Effectiveness for the
Company. From July 1996 to January 1997, he served as Vice President, Marketing
and Public Affairs for the Company. From March 1994 to July 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 Processes 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.
<PAGE>
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 CD-ROM Services Department, and from July 1986 to
September 1994, he was Project Manager of 3M's Optical Recording Project.
COMPENSATION COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
The Company's executive compensation program is administered by the Compensation
Committee of the Board of Directors (the "Committee"). The Committee is
comprised entirely of independent non-employee directors. The Committee is
responsible for establishing the Company's executive compensation philosophy and
administering the Company's compensation and stock ownership programs.
The Company uses cash and stock-based compensation for the following purposes:
(i) to motivate executives to achieve the Company's strategic objectives, (ii)
to align the interests of executives with those of shareholders, (iii) to
provide competitive total compensation in order to attract and retain highly
qualified key executives, and (iv) to reward individual and Company performance.
In early 1997, based on a comparative compensation study conducted by a
professional compensation consultant, the Committee made certain changes to the
Company's executive compensation program which are discussed in this Report. At
the end of 1996, the cash compensation of the Company's executive officers
remained at essentially the same levels as such officers had received as
employees of 3M prior to July 1, 1996 when the Company was spun-off from 3M (the
"Spin-Off"). Prior to July 1, 1996 (the "Spin-Off Date"), the Company's Chief
Executive Officer and the four other most highly paid executive officers were
employees of 3M and served in capacities not comparable to the positions
currently held by those individuals for the Company. The market study conducted
by the compensation consultant analyzed the base salaries, incentive
compensation and stock-based compensation of the Company's executive officers as
compared to a number of peer group companies selected by the Committee with the
assistance of the compensation consultant. The compensation peer group includes
15 companies which were selected based on the type of business, total revenues
and/or financial structure of such companies. All of the companies in the
compensation peer group are included in the S&P 400 Index. The compensation peer
group, however, is broader than the Pacific Stock Exchange High Technology Index
used in the Shareholder Return Performance Graph on page 15, since the Company's
product lines are generally more diverse than those of the technology companies
included in that index.
The key components of the Company's executive compensation program are base
salary, cash incentive compensation, and long-term stock-based incentive
compensation. These components are described separately below. In determining
compensation, the Committee considers all elements of an executive's
compensation package. The Company's compensation program is designed to enhance
shareholder value by linking a significant portion of executive officers'
compensation directly to the Company's financial performance. The objective is
to target cash incentive compensation for executive officers at competitive
levels compared to executive officers of companies in the compensation peer
group such that the executive's total cash compensation (comprising incentive
compensation and base salaries) will be slightly below the 50th percentile of
the targeted total cash compensation levels of executive officers in the peer
group.
<PAGE>
BASE SALARY. Based on the findings of the compensation study referenced above,
the Committee adjusted the base salary levels for the Company's executive
officers, effective January 1, 1997. In general, the salary levels of the
executive officers were increased to approximately the 40th percentile of base
salary levels for comparable positions at companies in the compensation peer
group, consistent with the Company's desire to emphasize incentive compensation
for executive officers. In late 1997, as a result of the Company's financial
performance in 1997 and the restructuring actions recently announced by the
Company, the Company announced a pay freeze for all of its employees to remain
in effect through June 30, 1998. Therefore, the Committee will not consider any
adjustments to the base salary levels of the Company's executive officers until
after June 30, 1998.
The Committee intends to review the base salaries of executive officers on an
annual basis. In determining appropriate salary levels, the Committee will
consider individual performance, level of responsibility, scope and complexity
of the position, and salary levels for comparable positions at companies in the
compensation peer group. Factors to be considered in determining base salary are
not assigned pre-determined relative weights.
INCENTIVE COMPENSATION. During 1997, quarterly incentive compensation payments
were made to executive officers and other management personnel pursuant to the
Company's Success Sharing Plan based upon the achievement of specified quarterly
economic profit improvement targets for the Company as a whole. These targets
were based on the overall financial goal established by the Company at the time
of the Spin-Off of improving the Company's economic profit by $150 million over
the three-year period ending December 31, 1998. For purposes of the Success
Sharing Plan, the Company defines "economic profit" as the measurement of
operating income after taxes in excess of a charge for the cost of capital. The
Company achieved 84 and 17 percent, respectively, of the Company's economic
profit improvement targets for the first and second quarters of 1997, resulting
in incentive payments to the five most highly compensated executive officers as
reported in the Summary Compensation Table. During the third and fourth quarters
of 1997, the Company did not achieve any economic profit improvement and,
therefore, no incentive compensation payments were made for those quarters.
The Committee has made a number of changes to the Company's incentive
compensation program for 1998 in order to strengthen the incentives for building
shareholder wealth. Under the Company's 1998 Success Sharing Program, no
incentive compensation will be payable unless at least 75 percent of the
specified performance targets are achieved, and an accelerator will be applied
to the incentive compensation payable in the event the Company exceeds targeted
performance. The accelerated payment for above-target performance is designed to
motivate the Company's executives and other management personnel to exceed the
very aggressive financial goals established by the Company for 1998. Incentive
compensation payable to the executive officers will be based on the achievement
of a specified economic profit improvement target for the Company as a whole.
Incentive compensation for other management personnel will be based on a
combination of specified business unit and corporate performance targets. The
1998 Success Sharing Plan provides for an annual payment of incentive
compensation earned under the Plan, with a mid-year progress payment of up to
35% of total year targeted incentive compensation, payable only in the event the
Company generates a level of operating income during the first six months of
1998 that equals or exceeds the amount of operating income reflected in the
Company's business plan for that period.
STOCK-BASED COMPENSATION. The Committee and management believe that broad and
significant employee ownership of Company stock effectively motivates the
building of shareholder wealth and aligns the interests of employees with those
of the Company's shareholders.
The Committee uses the Company's 1996 Employee Stock Incentive Program (the
"1996 Plan") to attract and retain qualified employees by awarding stock
options, stock appreciation rights and other stock-based awards. Stock options
are granted periodically by the Committee in its discretion to executive
officers and other employees based on their potential impact on corporate
results (i.e., the person's level of responsibility in the organization) and on
their individual performance. A total of 1,530 employees were granted options
under the 1996 Plan during 1997. The size of stock option grants to
<PAGE>
the Chief Executive Officer and other executive officers is periodically
reviewed against option grants made by companies in the compensation peer group
to their chief executive officers and other senior executives. The size of each
stock option grant made to executive officers in 1997 was determined by
targeting the value of the option grant at the median value of option grants
made by other companies in the compensation peer group to executives in
comparable positions. The table entitled "Option Grants in Last Fiscal Year
(1997)" on page 13 summarizes the stock options granted during 1997 to the five
most highly compensated executive officers.
The 1996 Plan also authorizes the Committee to make awards of restricted stock
to selected employees, and in so doing to determine the number of shares to be
awarded, the length of the restricted period, the purchase price, if any, to be
paid by the employee, and whether any other restriction will be imposed in
connection with such awards. No awards of restricted stock have been made
pursuant to the 1996 Plan; however, the Committee may consider awards of
restricted stock if such awards are deemed important in retaining, attracting
and motivating key management personnel.
CHIEF EXECUTIVE OFFICER COMPENSATION. The Chief Executive Officer's base salary
was established by the Committee at $530,040 in January 1997. This amount places
Mr. Monahan's base salary at approximately the 40th percentile of competitive
base salary levels for chief executive officers in the compensation peer group,
reflecting the fact that the Company places more emphasis on variable
compensation than it does on base salary for executive officers. Mr. Monahan
received quarterly incentive payments in 1997 totaling $108,575 based on the
achievement of corporate economic improvement targets pursuant to the Company's
Success Sharing Plan as discussed above. Mr. Monahan also received options to
purchase a total of 45,000 shares of Company stock during 1997. The size of the
stock option grant was based on the median value of option grants made by other
companies in the compensation peer group to their chief executive officers.
At the time of the Spin-Off, the Company entered into an employment agreement
with Mr. Monahan, the terms of which are described below under "Employment
Agreement."
The non-employee members of the Board of Directors met without the CEO on
January 6, 1998 to evaluate the CEO's performance for 1997. The results of the
evaluation will be used by the Committee for purposes of determining any changes
to the CEO's compensation for 1998.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION. Section 162(m) of the Internal Revenue
Code limits the Company's ability to deduct, for federal income tax purposes,
certain compensation in excess of $1 million per year paid to persons named in
the Summary Compensation Table. The Committee intends to ensure that all
compensation paid to the executive officers named in the Summary Compensation
Table continues to meet the deductibility requirements of Section 162(m) to the
extent that such requirements do not compromise the Company's ability to design
effective compensation plans that meet the Company's executive compensation
objectives described above.
SUMMARY. The Compensation Committee believes the compensation plans for the
Company's executive officers have been designed so as to focus the efforts of
the Company's executive officers on the achievement of the Company's business
strategy and corporate objectives and to align the executives' interests with
those of its shareholders. The Committee will continue to evaluate these
programs to ensure they continue to do so.
COMPENSATION COMMITTEE
Mark A. Pulido, Chair
Michael S. Fields
Linda W. Hart
Daryl J. White
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ANNUAL COMPENSTION LONG-TERM COMPENSATION
-------------------------------------- -----------------------------------
AWARDS PAYOUTS
------------------------- ---------
SECURITIES
RESTRICTED UNDERLYING LTIP ALL OTHER
YEAR BONUS OTHER ANNUAL STOCK OPTIONS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION (1) SALARY (2) COMPENSATION AWARDS (3) (4) (5)
- ----------------------------- ------ ----------- ----------- -------------- ------------ ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
W. T. Monahan, 1997 $530,040 $108,575 $0 $0 45,000 $ 0 $ 16,357
Chairman and Chief 1996 467,500 390,410 0 0 212,489 85,690 203,764
Executive Officer 1995 236,025 124,964 0 0 11,948 48,455 18,997
C. T. Pinder, 1997 220,020 39,138 0 0 18,000 0 12,212
Vice President & 1996 198,880 59,804 0 0 35,146 49,610 51,582
President Growth 1995 171,800 26,916 0 0 6,618 39,645 11,142
Technologies
C. D. Oesterlein, 1997 220,020 39,138 0 0 18,000 0 19,325
Vice President & 1996 184,680 69,928 0 0 32,660 49,610 64,526
President, Product 1995 174,400 35,014 0 0 4,800 39,645 20,101
Technologies
J. D.Burchill 1997 220,020 39,138 0 0 18,000 0 4,432
Chief Financial Officer(6) 1996 168,230 71,594 0 0 32,660 0 34,975
1995 111,554 27,699 0 0 2,497 0 2,946
D. G. Mell, 1997 215,040 39,138 0 0 18,000 0 20,511
Vice President, Corporate 1996 183,900 64,582 0 0 32,660 49,610 67,225
Business Processes and 1995 164,870 46,316 0 0 4,995 39,645 19,789
Manufacturing Strategy
</TABLE>
- ------------------
(1) Compensation for 1995 and the first half of 1996 was determined solely by 3M
and was for services rendered by the named individuals prior to the Spin-Off
Date. The services rendered to 3M were, in many cases, in capacities not
comparable to the positions currently held by those individuals for the
Company.
(2) The amounts shown under the heading "Bonus" for 1995 are cash payments
received by the named individuals under 3M's Profit Sharing Plan. Payments
under the 3M Profit Sharing Plan were based upon 3M's performance and were
variable in accordance with a predetermined formula. The amounts shown in
this column for 1996 include the following total cash payments received by
the named individuals under the 3M Profit Sharing Plan during the first half
of 1996: W. T. Monahan, $170,068; C. T. Pinder, $27,614; C. D. Oesterlein,
$30,141; J. D. Burchill, $31,400 and D. G. Mell, $34,770. The remainder of
the amounts shown for 1996 and the amounts shown for 1997 are cash payments
received by the named individuals during such periods under the Company's
Success Sharing Plan. These amounts were based on the Company's achievement
of certain economic profit improvement targets for the Company as a whole.
See "Compensation Committee Report on Executive Compensation."
(3) The stock options shown in this column for 1995 were granted to the named
individuals by 3M prior to the Spin-Off Date and represent options to
purchase 3M stock. In connection with the Spin-Off, options to purchase 3M
stock ("3M Options") held by employees of the Company on the Spin-Off Date
were retained as adjusted 3M options and were not converted to options for
Common Stock. 3M remains solely responsible for satisfying all exercises of
3M Options. The number of stock options shown for 1996 includes the
following 3M Options granted to the named individuals by 3M prior to the
Spin-Off Date pursuant to the exercise of a reload feature in outstanding 3M
stock options: W. T. Monahan, 3,899 shares; C. T. Pinder, 2,486 shares; C.
D. Oesterlein, 0 shares; J. D. Burchill, 0 shares; and D. G. Mell, 0 shares.
The 3M Options are forfeitable by the named individuals upon termination of
employment with the Company. The remainder of the stock options shown for
1996 and the stock options shown for 1997 are options to purchase Common
Stock granted under the 1996 Plan.
(4) "LTIP Payouts" shown in this column for 1995 and 1996 reflect the value of
certain LTIP grants made to the named individuals by 3M prior to the
Spin-Off Date. The amounts shown reflect the value of the total grant for
each individual under 3M's Performance Unit Plan after the three-year
performance period (e.g., for 1996, the performance period was 1994-1996);
however, no amount will be paid to these individuals under the grant for an
additional three years pursuant to the terms of the grant. During this
additional three-year period, interest will be paid at a rate determined by
3M's "return on capital employed." These rights are forfeited by the named
individuals upon termination of employment with the Company. 3M remains
solely responsible for amounts earned under all such LTIP grants made to the
named individuals in years prior to 1996. The Company will be responsible
for amounts payable pursuant to such LTIP grants made to the named
individuals in 1996.
<PAGE>
(5) "All Other Compensation" includes the following components: (a) the value of
Company contributions of Common Stock to the accounts of the named
individuals under the Retirement Investment Plan; (b) the value of premiums
paid by the Company on split-dollar life insurance; (c) reimbursement for
unused vacation time (for 1996 only); and (d) that amount of the 3M
Performance Unit Plan earnings allocated during the year to the base amounts
determined after the three year performance periods of each respective
grant, to the extent that such earnings are in excess of market interest
rates (as determined by the Securities and Exchange Commission) (for 1995
and 1996 only). For 1997, "All Other Compensation" included only components
(a) and (b) described above, and the dollar value of each such component is:
W. T. Monahan -- (a) $6,820; and (b) $9,537; C. T. Pinder -- (a) $6,688; and
(b) $5,524; C. D. Oesterlein -- (a) $4,444; and (b) $14,881; J. D. Burchill
-- (a) $4,432; and (b) $0; and D. G. Mell -- (a) $6,688; and (b) $13,823.
(6) Ms. Burchill left the employ of the Company on March 31, 1998.
OPTION GRANTS IN LAST FISCAL YEAR (1997)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
----------------------------------------------------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS GRANTED EERCISE GRANT
UNDERLYING TO EMPLOYEES IN PRICE EXPIRATION DATE
NAME OPTIONS GRANTED (#) FISCAL YEAR ($/SHARE) DATE PRESENT VALUE(2)
- ------------------ --------------------- ----------------- ----------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
W. T. Monahan 45,000 1.91% $ 25.00 8-10-2007 $503,100
C. T. Pinder 18,000 0.76% 25.00 8-10-2007 201,240
C. D. Oesterlein 18,000 0.76% 25.00 8-10-2007 201,240
J. D. Burchill 18,000 0.76% 25.00 8-10-2007 201,240
D. G. Mell 18,000 0.76% 25.00 8-10-2007 201,240
</TABLE>
- ------------------
(1) All options were granted at the fair market value of a share of Common Stock
on the grant date, become exercisable over a five-year period, and expire
ten years from the grant date. All options vest immediately in the event of
a change of control.
(2) In accordance with Securities and Exchange Commission Rules, the
Black-Scholes option pricing model was chosen to estimate the grant date
present value of the options set forth in this table. The Company's use of
this model should not be construed as an endorsement of its accuracy at
valuing options. All stock option valuation models, including the
Black-Scholes model, require a prediction about the future movement of the
stock price. The following assumptions were made for purposes of calculating
the Grant Date Present Value for the options granted: expected life of the
option of five years, volatility at 40%, no dividend yield, and discount
rate at 6.18%.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR (1997)
AND FISCAL YEAR-END OPTION VALUES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES VALUE OPTIONS AT FISCAL YEAR-END (#) AT FISCAL YEAR-END($)(1)
ACQUIRED ON REALIZED ------------------------------- ---------------------------------
NAME EXERCISE (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------ -------------- --------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
W. T. Monahan 2,000 $5,240 56,540 195,050 $0 $0
C. T. Pinder 0 0 8,610 42,050 0 0
C. D. Oesterlein 0 0 8,610 42,050 0 0
J. D. Burchill 3,200 20,320 5,410 42,050 0 0
D. G. Mell 0 0 8,610 42,050 0 0
</TABLE>
COMPENSATION UNDER RETIREMENT PLANS
The Company's Cash Balance Pension Plan (the "Pension Plan"), which is qualified
under the applicable provisions of the Internal Revenue Code, covers
substantially all domestic employees of the Company. Under the Pension Plan,
benefits are determined by the amount of annual pay credits to each employee's
account (equal to 6% of each employee's annual eligible earnings) and annual
interest credits (equal to the return on 30-year U.S. Treasury Bonds as of
November of the previous year) to such accounts. For the Plan year 1997, the
interest crediting rate was 6.48%. At retirement, participants eligible for
benefits may receive their account balance in a lump sum or as a monthly pension
having an equivalent actuarial value. Certain limitations on the amount of
benefits under tax qualified plans, such as the Company's Retirement Investment
Plan and the Pension Plan, were imposed by the Employee Retirement Income
Security Act of 1974 ("ERISA") and Tax Reform Act of
<PAGE>
1986 ("TRA"). The Company's nonqualified supplemental benefit plan provides for
the payment of amounts to employees who may be affected by those limitations so
that, in general, total benefits will be equal to the level of benefits which
would have been payable under the named plans but for the ERISA and TRA
limitations.
The estimated annual compensation payable to each of the individuals named in
the Summary Compensation Table as a single life annuity payable at age 65 under
both the Company's qualified and nonqualified plans (assuming that the named
individuals continue to be employed by the Company until age 65 and receive 5%
annual compensation increases) are as follows: W. T. Monahan, $170,573; C. T.
Pinder, $60,157; C. D. Oesterlein, $36,215; J. D. Burchill, $130,821; and D. G.
Mell, $61,276.
Each of the individuals named in the Summary Compensation Table also will
retain, so long as such individual remains employed with the Company, his or
her right to receive benefits accrued as of the Spin-Off Date under 3M's
pension plan. Employees who were 3M employees immediately prior to the
Spin-Off, including the individuals named in the Summary Compensation Table,
whose age and years of 3M pension service as of the Spin-Off Date equal or
exceed 50 (with a minimum of 10 years of 3M pension service) continue to be
credited with service for purposes of early retirement subsidies under 3M's
pension plan based on their combined pension service with the Company and 3M,
and will have their 3M accrued benefits as of the Spin-Off Date increased
following the Spin-Off by 4% per year of employment with the Company. One half
of the 4% per year increase will be paid to the individual by 3M and one half
will be paid by the Company. Each of the individuals named in the Summary
Compensation Table is eligible to continue to accrue service credit under 3M's
pension plan as described above. The annual amount payable by the Company to
each of the named individuals (assuming retirement from the Company at age 65)
is as follows: W. T. Monahan, $56,093; C. T. Pinder, $26,544; C. D. Oesterlein,
$28,904; J. D. Burchill, $23,117; and D. G. Mell, $34,696.
EMPLOYMENT AGREEMENT
The Company has entered into an employment agreement with Mr. Monahan, which
commenced as of the Spin-Off Date for an initial four-year term, with automatic
one-year renewals commencing as of the second anniversary of the Spin-Off Date,
unless notice not to renew is given by either party. Pursuant to the agreement,
Mr. Monahan will serve as the Chief Executive Officer of the Company, and the
Company will use its best efforts to have Mr. Monahan elected to the Board.
The agreement provides that if Mr. Monahan's employment is terminated by the
Company without cause or by Mr. Monahan for good reason, he will be entitled to
receive, for the remainder of the term of the agreement (i) base salary, (ii)
annual incentive compensation equal to the average annual incentive awards for
the three completed years immediately preceding the date of employment
termination (including, if applicable annual incentive awards received from 3M
for any year within the applicable three-year period), plus a pro rata annual
incentive award for the year in which termination of employment occurs, (iii)
the additional benefits that Mr. Monahan would have been entitled to receive
under the Company's defined benefit pension plans had he remained an employee
during the remainder of the term of the agreement, based on the base salary and
incentive compensation levels described in clauses (i) and (ii) above, and (iv)
continued participation in all welfare benefit plans, subject to an offset to
the extent similar benefits are made available to Mr. Monahan without cost under
welfare benefit plans of a subsequent employer. In addition, Mr. Monahan's
equity-based awards will become fully vested and, with respect to his stock
options, fully exercisable, as of his date of termination.
The agreement provides that if Mr. Monahan's employment is terminated by reason
of death, his estate or designated beneficiary will be entitled to receive his
base salary and a prorated annual incentive compensation award for a period of
one year. If his employment is terminated by reason of disability, he will be
entitled to receive a prorated annual incentive compensation award for a period
of one year.
The agreement also provides that if Mr. Monahan receives payments under his
agreement that would subject him to any federal excise tax due under Section
280G of the Internal Revenue Code, then he will also receive a cash "gross-up"
payment so that he will be in the same net after-tax position that he would have
been in had such excise tax not been applied.
<PAGE>
During (i) the term of the agreement, (ii) any period during which Mr. Monahan
continues to receive salary pursuant to the terms of the agreement, and (iii)
the one-year period following termination of Mr. Monahan's employment by the
Company for cause or by Mr. Monahan other than for good reason, Mr. Monahan is
required to comply with provisions regarding non-competition, non-solicitation
of employees, disparagement of the Company, return of work papers and compliance
with policies regarding confidentiality of information.
SHAREHOLDER RETURN PERFORMANCE GRAPH
The graph and table below compare the cumulative total shareholder return on the
Company's Common Stock during the period commencing July 15, 1996 (the date on
which the Common Stock began regular way trading on the New York Stock Exchange)
and ending on December 31, 1997 with the cumulative total return on the S&P 400
Index and the Pacific Stock Exchange High Technology Index ("PSE High Tech
Index") over the same period. The graph and table assume the investment of $100
on July 15, 1996 in each of the Company's Common Stock, the S&P 400 Index and
the PSE High Tech Index and reinvestment of all dividends.
COMPARISON OF TOTAL RETURN
AMONG IMATION CORP., S&P 400 INDEX AND PSE HIGH TECH INDEX
[PLOT POINTS GRAPH]
<TABLE>
<CAPTION>
(TOTAL RETURN INDEX) 7/15/96 9/30/96 12/31/96 3/31/97 6/30/97 9/30/97 12/31/97
- ------------------------------ ------------ ------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Imation Corp ................. $ 100.00 $ 102.80 $ 117.19 $ 104.17 $ 109.38 $ 110.67 $ 66.67
S&P 400 Index ................ 100.00 111.04 117.36 115.20 131.58 152.17 152.94
PSE High Tech Index .......... 100.00 121.95 133.09 132.95 155.05 184.68 159.64
</TABLE>
<PAGE>
COMMON STOCK INFORMATION
As of April 9, 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 IMN. The Company did not pay any
dividends during 1997. Future dividends will be determined by the Company's
Board of Directors.
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
GENERAL
The costs of preparing, printing and mailing this Proxy Statement will be paid
by the Company, including the reimbursement to banks, brokers and other
custodians, nominees and fiduciaries for their costs in sending the proxy
materials to the beneficial owners. The Company has retained Georgeson & Company
Inc. to assist in the solicitation of proxies from shareholders for a fee of
$15,000, plus reimbursement for certain out-of-pocket expenses. In addition to
the use of the mail, proxies may be solicited personally or by telephone by
regular employees of the Company without additional compensation, as well as by
employees of Georgeson & Company Inc.
A copy of the Company's 1997 Summary Annual Report to Shareholders is being sent
to shareholders with this Proxy Statement. IMATION WILL FURNISH TO SHAREHOLDERS
WITHOUT CHARGE A COPY OF ITS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED
DECEMBER 31, 1997, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, UPON
RECEIPT OF WRITTEN REQUEST ADDRESSED TO:
INVESTOR RELATIONS
IMATION CORP.
1 IMATION PLACE
OAKDALE, MN 55128
Any shareholder proposal intended to be presented for consideration at the 1999
Annual Meeting must be received at the principal executive offices of the
Company by the close of business on December 28, 1998 in order to be included in
the Company's Proxy Statement. Such proposals must also comply with all
applicable statutes and regulations. Proposals should be sent to the attention
of the Corporate Secretary.
Dated: April 30, 1998 BY ORDER OF THE BOARD OF DIRECTORS,
/s/ Cathy R. Sams
Cathy R. Sams
Corporate Secretary
<PAGE>
IMATION CORP.
1997 FINANCIAL INFORMATION
(APPENDIX TO PROXY STATEMENT)
<PAGE>
IMATION CORP.
1997 FINANCIAL INFORMATION
PAGE
-----
Selected Consolidated Financial Data ......................... A-3
Management's Discussion and Analysis of
Financial Condition and Results of Operations .............. A-4
Consolidated Statements of Operations ........................ A-14
Consolidated Balance Sheets .................................. A-15
Consolidated Statements of Shareholders' Equity .............. A-16
Consolidated Statements of Cash Flows ........................ A-17
Notes to Consolidated Financial Statements ................... A-18
Report of Independent Accountants. ........................... A-37
Management's Responsibility for Financial Reporting .......... A-38
<PAGE>
IMATION CORP.
SELECTED CONSOLIDATED FINANCIAL DATA*
<TABLE>
<CAPTION>
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 "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>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL OVERVIEW
The Company was formed in March 1996 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 Company began operations as an independent, publicly held company. 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 such businesses 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.
In connection with the Spin-Off, 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
changes, 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).
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 business 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(TM) medical
imagers, SuperDisk(TM) products and high-end tape storage products currently
being developed by the Company. The third organization, Customer Service
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
<PAGE>
$170.0 milion 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).
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 earnings
(loss) per common share $ (4.54) $ 0.51 $ (0.49) $ 0.97 $ (2.02) $ 0.08
</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
Spin-Off-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 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.
At the time of the Spin-Off, 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 and the
restructuring actions recently announced by the Company, 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 DOLLAR
PERCENTAGE OF REVENUE 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 administrative 3.1 4.4
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>
<PAGE>
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
RESTRUCTURING AND OTHER SPECIAL PERCENTAGE OF DOLLAR
CHARGES) 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%
35.7 35.3 34.5 Gross profit (2.2) 3.7
25.9 24.1 24.0 Selling, general and administrative 4.1 1.7
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 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.
<PAGE>
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 Spin-Off. 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 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
<PAGE>
$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 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 Spin-Off, and to lower interest expense
due to lower outstanding debt levels and a lower effective interest rate.
Interest expense prior to the Spin-Off 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 Spin-Off 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, respectively. All per share amounts prior to the
Spin-Off are based on an average number of shares outstanding equal to one-tenth
the weighted average number of 3M shares outstanding based on the Spin-Off ratio
of one share of the Company's stock for ten shares of 3M stock.
<PAGE>
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.
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
<PAGE>
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 Spin-Off.
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 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
<PAGE>
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 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
Spin-Off, 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 Spin-Off. The Company's right to use
certain 3M trademarks (such as the Scotch(TM) trademark) 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
<PAGE>
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 imaging and information 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 Spin-Off, these and other corporate
services were provided to the Transferred Businesses by 3M. For a transition
period following the Spin-Off, 3M has continued to provide such services to the
Company. 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
<PAGE>
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 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 Spin-Off, the Company
entered into a $350 million credit facility with a syndicate of banks. As of
December 31, 1997, the Company had borrowed approximately $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>
IMATION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
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>
IMATION CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
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.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
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 .......................... 0.5 9.3 9.8
Purchase of treasury stock
(2,488,132 shares) .............. $ (60.9) (60.9)
Exercise of stock options
(190,120 shares) ................ -- 0.2 (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>
IMATION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 1996 1995
- ------------------------------------------------ -------- ------- -------
(IN MILLIONS)
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 $ --
======= ====== ======
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
IMATION CORP.
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 "Spin-Off Date"), when Minnesota Mining and
Manufacturing Company ("3M") spun off its data storage and imaging systems
businesses as an independent, publicly owned company ("the Spin-Off"). 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 SPIN-OFF. 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 SPIN-OFF. 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
Spin-Off. 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.
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
<PAGE>
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1 -- BACKGROUND AND BASIS OF PRESENTATION (CONTINUED)
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 Spin-Off.
The financial information included herein for periods prior to the Spin-Off
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 Spin-Off.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION. Commencing with the Spin-Off, the consolidated financial
statements include the accounts of the Company and its majority-owned
subsidiaries. Prior to the Spin-Off, 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
Spin-Off, 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.
RECLASSIFCATIONS. 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.
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.
<PAGE>
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
INCOME TAXES. Upon the Spin-Off, the Company became responsible for its
income taxes and the filing of its own income tax returns. Prior to the
Spin-Off, 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 Spin-Off, 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 Spin-Off, the balance of
<PAGE>
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 Spin-Off; however, no difference exists between basic and
diluted EPS for the periods presented. For periods prior to the Spin-Off, 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 Spin-Off.
NOTE 3 -- ACQUISITION
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.
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
<PAGE>
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3 -- ACQUISITION (CONTINUED)
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.
YEAR ENDED DECEMBER 31,
----------------------------
PRO FORMA SUMMARY 1997 1996
- ------------------------------------------------- ------------- ------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
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>
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- SUPPLEMENTAL BALANCE SHEET INFORMATION
1997 1996
------------ -----------
(IN MILLIONS)
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
<PAGE>
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
Spin-Off. 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>
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- INCOME TAXES
The components of loss before tax and minority interest are as follows:
1997 1996 1995
------------ ------------ ------------
(IN MILLIONS)
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:
1997 1996 1995
----------- ---------- -----------
(IN MILLIONS)
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:
1997 1996
---------- ---------
(IN MILLIONS)
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.
<PAGE>
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6 -- INCOME TAXES (CONTINUED)
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:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
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>
As of December 31, 1997, approximately $153 million of earnings
attributable to international subsidiaries (inclusive of earnings prior to the
Spin-Off 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:
1997 1996
----------- -----------
(IN MILLIONS)
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 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
statement, 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
<PAGE>
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7 -- DEBT (CONTINUED)
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 on
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, deprecation 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 in 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 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:
1998 1999 2000 2001 TOTAL
--------- -------- -------- ---------- ----------
(IN MILLIONS)
Long-term debt maturities $ 0.9 $ 2.8 $ 3.9 $ 313.0 $ 320.6
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 United States.
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 Spin-Off, 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 Spin-Off 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 Spin-Off 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:
<PAGE>
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- FINANCIAL INSTRUMENTS (CONTINUED)
1997 1996
---------- ----------
(IN MILLIONS)
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.
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:
1998 1999 2000 2001 2002 TOTAL
------ ------ ------ ----- ------ -------
(IN MILLIONS)
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.
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.
<PAGE>
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11 -- SEGMENT INFORMATION (CONTINUED)
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
STATES EUROPE(1) AREAS(2) AND OTHER COMPANY
-------- -------- -------- --------- --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues 1997 $1,150.5 $ 722.6 $ 328.7 $2,201.8
to unaffiliated 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.
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 United States. 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 United States,
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 Spin-Off, 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
<PAGE>
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- RETIREMENT PLANS (CONTINUED)
prior to the Spin-Off. For plans outside the U.S., the Company generally has
assumed the assets and related liabilities. For periods prior to the Spin-Off,
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:
JULY 1 - DECEMBER 31,
U.S. PLAN 1997 1996
- --------------------------------- ---------- -------------------------
(IN MILLIONS)
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
JULY 1 - DECEMBER 31,
INTERNATIONAL PLANS 1997 1996
- --------------------------------- --------- -----------------------
(IN MILLIONS)
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
<PAGE>
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- RETIREMENT PLANS (CONTINUED)
The following table details the funded status of the pension plans as of
December 31, 1997 and 1996:
U.S. PLAN 1997 1996
- -------------------------------------------------------- ---------- --------
(IN MILLIONS)
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 1997 1996
- -------------------------------------------------------- -------- -------
(IN MILLIONS)
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)
The assumptions at year end 1997 and 1996 are as follows:
U.S. PLAN 1997 1996
- ------------------------------------ ---------- ----------
(IN MILLIONS)
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
- ------------------------------------ ---------- ----------
(IN MILLIONS)
Discount rate 7.90% 8.00%
Compensation rate increase 6.20% 6.20%
Long-term rate of return on assets 8.30% 8.30%
Net pension cost was determined using assumptions as of January 1, 1997 for
1997 and as of July 1, 1996 (Spin-Off 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,
<PAGE>
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12 -- RETIREMENT PLANS (CONTINUED)
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:
1997 1996
- --------------------------------------------------------------------------------
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
=========== ===========
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
Spin-Off. 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
<PAGE>
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 -- EMPLOYEE STOCK PLANS (CONTINUED)
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
Spin-Off, 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>
Outstanding 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>
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14 -- EMPLOYEE STOCK PLANS (CONTINUED)
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 Spin-Off 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
Spin-Off, 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%
NOTE 15 -- SUPPLEMENTAL NON-CASH ITEMS
Pursuant to the Spin-Off 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.
<PAGE>
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16 -- COMMITMENTS AND CONTINGENCIES
In connection with the Spin-Off, the Company assumed substantially all
liabilities for legal proceedings relating to the Company's businesses as
conducted prior to the Spin-Off.
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 Spin-Off. 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>
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 17 -- QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
----------- ----------- ----------- ----------- -------------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<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>
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.
Minneapolis, Minnesota
February 6, 1998, except for
the second paragraph of Note 7,
as to which the date is March 30, 1998
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
Management is responsible for the integrity and objectivity of the
financial information included in this report. The financial statements have
been prepared in accordance with generally accepted accounting principles. Where
necessary, they reflect estimates based on management judgment.
Established accounting procedures and related systems of internal control
provide reasonable assurance that assets are safeguarded, that the books and
records properly reflect all transactions, and that policies and procedures are
implemented by qualified personnel. Internal auditors review the accounting and
control systems.
The Audit Committee, comprised of four members of the Board of Directors
who are not employees of the Company, meets regularly with representatives of
management, the independent accountants and the Company's internal auditors to
monitor the functioning of the accounting control systems and to review the
results of the auditing activities. The Audit Committee recommends independent
accountants for appointment by the Board, subject to shareholder ratification.
The independent accountants and the internal auditors have full and free access
to the Audit Committee.
The independent accountants conduct an objective, independent audit of the
financial statements.
/s/ William T. Monahan /s/ Robert L. Edwards
William T. Monahan Robert L. Edwards
Chairman, President and Senior Vice President--Strategy,
Chief Executive Officer Planning and Chief Financial
Officer
<PAGE>
[LOGO]
IMATION
BORNE OF 3M INNOVATION IMATION CORP.
1998 PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby appoints William T. Monahan and Carolyn A. Bates, and
each of them, as proxies with full power of substitution, to vote all shares of
Common Stock which the undersigned has power to vote at the Annual Meeting of
Shareholders of Imation Corp. to be held at 9:30 a.m. (local time), Thursday,
June 4, 1998, at the Grand Ballroom 3, Grand Hyatt Atlanta, 3300 Peachtree Road,
Atlanta, Georgia 30305, and at any adjournment thereof, in accordance with the
instructions set forth herein and with the same effect as though the undersigned
were present in person and voting such shares. The proxies are authorized in
their discretion to vote upon such other business as may properly come before
the Meeting or any adjournment thereof.
Furthermore, as a participant in, and a named fiduciary under, the Imation
Retirement Investment Plan ("RIP"), I hereby direct State Street Bank and Trust
Company, as RIP Trustee, to vote at the 1998 Annual Meeting of Shareholders of
Imation Corp. and any adjournment thereof, all shares of Imation Corp. Common
Stock allocated as of April 9, 1998, to my account in the Imation RIP, plus a
pro rata portion of the shares that have not been allocated to participant
accounts or for which no instructions are received, as designated below. I
understand that this card must be received by Norwest Bank Minnesota, N.A.,
acting as tabulation agent for the RIP Trustee, by June 1, 1998. If it is not
received by that date, or if the voting instructions are invalid because this
form is not properly signed and dated, the shares held in my account will be
voted by State Street Bank and Trust Company in the same proportion that the
other participants in the plan direct the RIP Trustee to vote shares allocated
to their accounts. All voting instructions given by Participants shall be held
in strict confidence by the RIP Trustee.
(CONTINUED, AND TO BE SIGNED AND DATED ON REVERSE SIDE)
<PAGE>
VOTE BY TELEPHONE ---------------
QUICK *** EASY *** IMMEDIATE COMPANY #
CALL TOLL FREE *** ON A TOUCH TONE TELEPHONE CONTROL #
1-800-240-6326 -- ANYTIME ---------------
- --------------------------------------------------------------------------------
YOUR TELEPHONE VOTE AUTHORIZES THE NAMED PROXIES TO VOTE YOUR SHARES IN THE SAME
MANNER AS IF YOU MARKED, SIGNED AND RETURNED YOUR PROXY CARD. THE DEADLINE FOR
TELEPHONE VOTING IS NOON (ET), ONE BUSINESS DAY PRIOR TO THE ANNUAL MEETING DATE
(EXCEPT FOR PARTICIPANTS VOTING SHARES HELD IN THE IMATION RETIREMENT INVESTMENT
PLAN, FOR WHOM THE DEADLINE FOR TELEPHONE VOTING IS NOON (ET) THREE BUSINESS
DAYS PRIOR TO THE ANNUAL MEETING DATE). BY VOTING BY PHONE, YOU AUTHORIZE EACH
OF THE PROXIES TO VOTE, IN THEIR DISCRETION, UPON ANY ITEMS OF BUSINESS IN
ADDITION TO THE PROPOSALS DESCRIBED BELOW AS MAY PROPERLY COME BEFORE THE
MEETING.
1. USING A TOUCH-TONE TELEPHONE, DIAL 1-800-240-6326. YOU MAY DIAL THIS TOLL
FREE NUMBER AT YOUR CONVENIENCE 7 DAYS/WEEK, 24 HRS/DAY.
2. WHEN PROMPTED, ENTER THE 3 DIGIT COMPANY NUMBER LOCATED IN THE BOX ON THE
UPPER RIGHT HAND CORNER OF THE PROXY CARD.
3. WHEN PROMPTED, ENTER YOUR 7 DIGIT NUMERIC CONTROL NUMBER THAT FOLLOWS THE
COMPANY NUMBER.
OPTION #1: TO VOTE AS THE IMATION CORP. BOARD OF DIRECTORS RECOMMENDS ON ALL
PROPOSALS: PRESS 1
WHEN ASKED, PLEASE CONFIRM YOUR VOTE BY PRESSING 1 -- THANK YOU FOR
VOTING
OPTION #2: IF YOU CHOOSE TO VOTE ON EACH PROPOSAL SEPARATELY, PRESS 0. YOU WILL
HEAR THESE INSTRUCTIONS:
Proposal 1: To vote FOR ALL nominees, press 1; to WITHHOLD AUTHORITY
TO VOTE FOR ALL nominees, press 9; to WITHHOLD AUTHORITY
TO VOTE FOR AN INDIVIDUAL nominee, press 0 and listen to
the instructions.
Proposal 2: To vote FOR Proposal 2, press 1; to vote AGAINST
Proposal 2, press 9; to ABSTAIN, press 0.
WHEN ASKED, PLEASE CONFIRM YOUR VOTE BY PRESSING 1 -- THANK YOU FOR VOTING
IF YOU VOTE BY TELEPHONE, DO NOT MAIL BACK YOUR PROXY
PLEASE DETACH HERE
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[ ] CHECK THIS BOX IF YOU PLAN TO ATTEND THE ANNUAL MEETING. IF YOU CHOOSE
TO VOTE YOUR PROXY BY TELEPHONE, PLEASE DO NOT HANG UP UNTIL YOU HAVE
BEEN PROMPTED AND HAVE REPLIED REGARDING YOUR ATTENDANCE AT THE ANNUAL
MEETING.
THE DIRECTORS RECOMMEND A VOTE "FOR" ITEMS 1 AND 2
1. Election of Three Directors (Class I) to serve a term of three years
[ ] FOR [ ] WITHHOLD Authority to
all nominees vote for all nominees
listed above listed above
NOMINEES:
01 William W. George, 02 Marvin L. Mann, 03 Daryl J. White
To withhold authority to vote for any nominees, write the number(s) of the
nominee(s) in the box to the right.
2. Ratification of appointment of Coopers & Lybrand L.L.P. as independent
auditors [ ] FOR [ ] AGAINST [ ] ABSTAIN
THIS PROXY WILL BE VOTED AS DIRECTED. IF NO DIRECTION IS MADE, IT WILL BE
VOTED "FOR" ITEMS 1 AND 2. DISCRETIONARY AUTHORITY IS HEREBY CONFERRED AS
TO ALL OTHER MATTERS WHICH MAY PROPERLY COME BEFORE THE MEETING.
Address Change? Mark Box [ ] Indicate change below:
Date
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Signature(s) in Box
Please sign exactly as name appears at the
left. When shares are held by joint tenants,
either or both may sign. When signing as
attorney, executor, administrator, trustee
or guardian, please give full title as such.
If the shareholder is a corporation, please
sign in full corporate name by president or
other authorized officer. If the shareholder
is a partnership, please sign in partnership
name by authorized person.
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IMATION CORP.
ANNUAL SHAREHOLDERS MEETING
GRAND BALLROOM 3
GRAND HYATT ATLANTA
3300 PEACHTREE ROAD
ATLANTA, GEORGIA 30305
JUNE 4, 1998
9:30 A.M. LOCAL TIME
PLEASE DETACH HERE
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