================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: February 18, 2000
(Date of earliest event reported)
IMATION CORP.
(Exact name of registrant as specified in its charter)
-----------------
DELAWARE 1-14310 41-1838504
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification Number)
1 IMATION PLACE
OAKDALE, MINNESOTA 55128
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (651) 704-4000
None
(Former name or former address, if changed since last report)
================================================================================
<PAGE>
Item 5. Other Events.
The Consolidated Financial Statements of Imation Corp. and Subsidiaries as
of December 31, 1999 and 1998 and for each of the three years in the period
ended December 31, 1999, together with the Report of Independent Accountants by
PricewaterhouseCoopers LLP, filed as Exhibit 20 to this Current Report on Form
8-K.
Item 7. Financial Statements and Exhibits.
EXHIBITS
Exhibit Description
- ------- -----------
20 Consolidated Financial Statements of Imation Corp. and
Subsidiaries as of December 31, 1999 and 1998 and for each of the
three years in the period ended December 31, 1999, together with
the Report of Independent Accountants by PricewaterhouseCoopers
LLP, filed as Exhibit 20 to this Current Report on Form 8-K.
23 Consent of Independent Accountants
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
IMATION CORP.
(Registrant)
Date: February 18, 2000 By: /s/Robert L. Edwards
--------------------
Robert L. Edwards
Senior Vice President,
Chief Financial Officer
and Chief Administrative Officer
2
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
20 Consolidated Financial Statements of Imation Corp. and
Subsidiaries as of December 31, 1999 and 1998 and for each of the
three years in the period ended December 31, 1999, together with
the Report of Independent Accountants by PricewaterhouseCoopers
LLP, filed as Exhibit 20 to this Current Report on Form 8-K.
23 Consent of Independent Accountants
3
IMATION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- ----------------------------------------------------------------------------------------------
(In millions, except per share amounts)
<S> <C> <C> <C>
Net revenues $ 1,412.6 $ 1,328.9 $ 1,502.1
Cost of goods sold 979.0 902.1 1,000.3
- ----------------------------------------------------------------------------------------------
Gross profit 433.6 426.8 501.8
Operating expenses:
Selling, general and administrative 294.2 366.8 385.9
Research and development 76.0 87.8 97.1
Restructuring - (16.8) 160.0
- ----------------------------------------------------------------------------------------------
Total operating expenses 370.2 437.8 643.0
Operating income (loss) 63.4 (11.0) (141.2)
Interest expense 2.1 11.7 9.6
Other (income) and expense, net (8.0) (0.7) 15.0
- ----------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes 69.3 (22.0) (165.8)
Income tax provision (benefit) 27.0 (9.3) (30.2)
- ----------------------------------------------------------------------------------------------
Income (loss) from continuing operations 42.3 (12.7) (135.6)
Discontinued operations:
Income (loss) from operations of discontinued
businesses, net of income taxes 4.6 33.4 (44.5)
(Loss) gain on disposal of discontinued
businesses, net of income taxes (3.0) 36.4 -
- ----------------------------------------------------------------------------------------------
Net income (loss) $ 43.9 $ 57.1 $ (180.1)
==============================================================================================
Earnings (loss) per common share - basic:
Continuing operations $ 1.13 $ (0.33) $ (3.42)
Discontinued operations 0.05 1.78 (1.12)
- ----------------------------------------------------------------------------------------------
Net income (loss) $ 1.18 $ 1.45 $ (4.54)
Earnings (loss) per common share - diluted:
Continuing operations $ 1.12 $ (0.33) $ (3.42)
Discontinued operations 0.05 1.78 (1.12)
- ----------------------------------------------------------------------------------------------
Net income (loss) $ 1.17 $ 1.45 $ (4.54)
Weighted average basic shares outstanding 37.3 39.4 39.7
Weighted average diluted shares outstanding 37.6 39.5 39.7
==============================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
<PAGE>
IMATION CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31, 1999 1998
- -----------------------------------------------------------------------------------------------
(In millions, except per share amounts)
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents $ 194.6 $ 64.2
Accounts receivable, net 252.4 326.3
Inventories 191.3 263.7
Other current assets 133.1 265.7
- -----------------------------------------------------------------------------------------------
Total current assets 771.4 919.9
Property, plant and equipment, net 212.8 233.8
Other assets 143.4 159.6
- -----------------------------------------------------------------------------------------------
Total assets $1,127.6 $1,313.3
===============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 104.4 $ 128.9
Accrued payroll 37.0 30.3
Short-term debt 27.3 25.2
Other current liabilities 188.5 228.8
- -----------------------------------------------------------------------------------------------
Total current liabilities 357.2 413.2
Other liabilities 44.0 106.3
Long-term debt 1.1 32.7
Commitments and contingencies
Shareholders' equity
Preferred stock, $.01 par value, authorized
25 million shares, none issued and outstanding - -
Common stock, $.01 par value, authorized
100 million shares, 42.9 million issued 0.4 0.4
Additional paid-in capital 1,030.5 1,027.7
Accumulated deficit (84.1) (123.9)
Accumulated other comprehensive loss (82.1) (68.5)
Unearned ESOP shares and other compensation (21.2) (27.6)
Treasury stock, at cost, 5.7 million and 1.9 million shares
as of December 31, 1999 and 1998, respectively (118.2) (47.0)
- -----------------------------------------------------------------------------------------------
Total shareholders' equity 725.3 761.1
- -----------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,127.6 $1,313.3
===============================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
5
<PAGE>
IMATION CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Retained Accumulated Unearned
Additional Earnings Other ESOP Shares Total
Common Paid-In (Accumulated) Comprehensive and Other Treasury Shareholders'
(In millions, except share amounts) Stock Capital Deficit) Loss Compensation Stock Equity
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 0.4 $ 1,011.5 $ 11.2 $ (46.2) $ (46.6) $ 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
Comprehensive loss:
Net loss (180.1) (180.1)
Net change in cumulative
translation adjustment (31.9) (31.9)
-------
Comprehensive loss (212.0)
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 0.4 1,025.8 (171.1) (78.1) (37.3) (57.5) 682.2
Amortization of
unearned ESOP shares (0.9) (2.0) 11.1 8.2
Exercise of stock options
(416,732 shares) (7.9) 10.5 2.6
Other unearned compensation 1.6 (1.4) 0.2
Tax benefit from shareholder
transactions 1.2 1.2
Comprehensive income:
Net income 57.1 57.1
Net change in cumulative
translation adjustment 9.6 9.6
-------
Comprehensive income 66.7
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 0.4 1,027.7 (123.9) (68.5) (27.6) (47.0) 761.1
Amortization of
unearned ESOP shares 0.9 (0.8) 6.0 6.1
Purchase of treasury stock
(4,437,343 shares) (86.8) (86.8)
Exercise of stock options
(582,092 shares) (3.3) 16.2 12.9
Other unearned compensation 0.4 0.4
Tax benefit from shareholder
transactions 1.9 1.9
Other (0.6) (0.6)
Comprehensive income:
Net income 43.9 43.9
Net change in cumulative
translation adjustment (13.6) (13.6)
-------
Comprehensive income 30.3
- -----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 $ 0.4 $ 1,030.5 $ (84.1) $ (82.1) $ (21.2) $(118.2) $ 725.3
=======================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
6
<PAGE>
IMATION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 43.9 $ 57.1 $(180.1)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation 72.4 110.5 144.2
Amortization 15.3 18.9 3.3
Deferred income taxes (15.1) 23.7 (45.2)
Restructuring and other special charges - (16.8) 241.6
Gain on sale of medical imaging businesses and related charges - (65.0) -
Accounts receivable 24.7 (57.6) 0.4
Inventories 10.2 46.3 (22.0)
Other current assets (25.3) (1.4) (30.4)
Accounts payable (6.8) (29.6) (11.6)
Accrued payroll and other current liabilities (25.3) (89.7) 38.8
Other (9.3) (2.8) (5.5)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 84.7 (6.4) 133.5
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (64.1) (132.4) (116.3)
Capitalized software - (59.3) (97.8)
Acquisitions, net of cash acquired - - (29.0)
Proceeds from sale of photo color and medical imaging businesses 201.9 389.2 -
Other 5.0 50.1 2.5
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 142.8 247.6 (240.6)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short-term debt 3.5 (9.4) 5.8
Other borrowings of debt 53.1 201.7 505.2
Other repayments of debt (83.7) (486.2) (312.6)
Purchase of treasury stock (86.8) - (60.9)
Exercise of stock options 12.9 2.6 1.4
Decrease in unearned ESOP shares 6.0 11.1 9.3
- ---------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (95.0) (280.2) 148.2
Effect of exchange rate changes on cash and equivalents (2.1) (0.3) 0.7
- ---------------------------------------------------------------------------------------------------------------------
Change in cash and equivalents 130.4 (39.3) 41.8
Cash and equivalents - beginning of year 64.2 103.5 61.7
- ---------------------------------------------------------------------------------------------------------------------
Cash and equivalents - end of year $ 194.6 $ 64.2 $ 103.5
=====================================================================================================================
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
Imation Corp. (the Company) became an independent, publicly-held company as of
July 1, 1996, when Minnesota Mining and Manufacturing Company (3M) spun off its
data storage and imaging systems businesses as an independent, publicly-held
company. The Company is a global leader in the data storage and information
management, color management and imaging industries.
BASIS OF PRESENTATION
On August 2, 1999, the Company closed on the sale of its worldwide Photo Color
Systems business and its manufacturing facility in Ferrania, Italy. As a result
of this sale, the Company has completed the disposition of its Medical Imaging
and Photo Color Systems segment and, therefore, these operations are presented
in the Company's Statements of Operations as discontinued operations for all
years presented. Unless otherwise noted, disclosures of revenues and expenses in
the Notes to Consolidated Financial Statements refer to continuing operations
only.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION. The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. All significant intercompany
transactions 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.
RECLASSIFICATIONS. Certain balance sheet amounts in the prior year's financial
statements have been reclassified to be consistent with the current period's
presentation. These reclassifications had no impact on total shareholders'
equity.
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, where the
U.S. dollar is considered the functional currency. Generally, income and expense
items are translated at average rates of exchange prevailing during the year.
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. 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 were not
material in 1999 and 1998.
DERIVATIVE FINANCIAL INSTRUMENTS. The Company uses, or may use from
time-to-time, foreign currency and commodity forward and option contracts and
interest rate swaps to manage risks generally associated with interest rate and
exchange rate volatility. In general, 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.
8
<PAGE>
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.
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, effective January
1, 2000. The Company does not anticipate that the adoption of SFAS No. 133 will
have a material impact on its financial statements.
FAIR VALUE DISCLOSURE OF OTHER FINANCIAL INSTRUMENTS. The Company's other
financial instruments consist principally of cash and equivalents, and
short-term receivables and payables, for which their current carrying amounts
approximate fair market value.
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.
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. 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. The cost and related accumulated
depreciation of assets sold or otherwise disposed of are removed from the
related accounts and resulting gains or losses are reflected in the results of
operations.
Plant and equipment are generally depreciated on a straight-line basis over
their estimated useful lives. The estimated depreciable lives range from 20 to
40 years for buildings and 3 to 15 years for machinery and equipment. Leasehold
improvements are amortized over the lesser of the remaining life of the lease or
the estimated useful life of the improvement.
INTANGIBLE ASSETS. Intangible assets consist primarily of capitalized software
and goodwill. The Company capitalizes certain external and internal costs
related to the design and implementation of internally developed software, along
with related interest. Intangible assets are amortized over their estimated
useful lives, which currently range from five to eight years. The carrying
amount of intangible assets is 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.
9
<PAGE>
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 approximately $35 million, $53 million and $56 million in 1999, 1998 and
1997, respectively. Advertising costs in 1997 include approximately $10 million
related to start-up costs for identity development. These costs were not
material in 1998 and 1999.
INCOME TAXES. The Company accounts for income taxes under the provisions of SFAS
No. 109, ACCOUNTING FOR INCOME TAXES. Under the asset and liability method
prescribed in SFAS No. 109, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.
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 last-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
employee 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.
COMPREHENSIVE INCOME. Comprehensive income (loss) for the Company includes net
income (loss) and the effects of currency translation, which are charged or
credited to the cumulative translation adjustment account within shareholders'
equity. Comprehensive income (loss) for all periods presented is included in the
Consolidated Statements of Shareholders' Equity.
EARNINGS PER SHARE. Basic earnings per share is calculated using the weighted
average number of shares outstanding during the period adjusted for Employee
Stock Ownership Plan (ESOP) shares not committed. Diluted earnings per share is
computed on the basis of the weighted average basic shares outstanding plus the
dilutive effect of outstanding stock options using the "treasury stock" method.
The following table sets forth the computation of the weighted average basic and
diluted shares outstanding for:
<TABLE>
<CAPTION>
Years ended December 31,
(In millions) 1999 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted average number of shares outstanding
during the period 38.3 40.8 41.5
Weighted average number of shares held by the
ESOP not committed to be released (1.0) (1.4) (1.8)
- ------------------------------------------------------------------------------------------
Weighted average common shares outstanding 37.3 39.4 39.7
Potential common shares resulting from the
assumed exercise of stock options 0.3 0.1 0.2
- ------------------------------------------------------------------------------------------
Total weighted average common shares and
common share equivalents 37.6 39.5 39.9
==========================================================================================
</TABLE>
Options to purchase 3.7 million and 4.5 million shares of the Company's common
stock were outstanding as of December 31, 1998 and 1997, respectively, that were
not included in the computation of potential common shares because the effect of
the options would be antidulitive. As of December 31, 1999, the number of such
options was immaterial. For 1997, no potential common shares were included in
the calculation of diluted earnings per share because the Company had a net loss
and to do so would have been antidilutive.
10
<PAGE>
NOTE 3 -- SALE OF MEDICAL IMAGING AND PHOTO COLOR SYSTEMS SEGMENT AND
ACQUISITION
SALE OF MEDICAL IMAGING AND PHOTO COLOR SYSTEMS SEGMENT
On November 30, 1998, the Company sold its worldwide Medical Imaging Systems
business (the Medical Imaging Sale) to Eastman Kodak Company (Kodak). In
connection with the sale, Kodak acquired the assets and assumed the liabilities
of the Company's Medical Imaging Systems business in North America, Latin
America and Asia, including manufacturing facilities in Oregon and Minnesota and
all the outstanding shares of Cemax-Icon, Inc. (Cemax), a wholly-owned
subsidiary of the Company. The formal closings of the sale of the Company's
Medical Imaging Systems business in Europe (European Businesses) to Kodak
occurred on a country-by-country basis in the first quarter of 1999. Under the
terms of the Asset Purchase Agreement (as defined below), beginning December 1,
1998, Kodak was entitled to the operating results and cash flows of the European
Businesses. Excluded from the Medical Imaging Sale was the Company's medical
imaging/photo color manufacturing facility in Ferrania, Italy (the Ferrania
Facility), at which the Company agreed to manufacture wet laser and x-ray film
and hardware pursuant to an exclusive supply agreement (the Ferrania Supply
Agreement) with Kodak. In exchange for retaining the Ferrania Facility and
pursuant to certain conditions, Kodak agreed to pay the Company up to $25.0
million at such time as it was sold.
Under the terms of the asset purchase agreement dated as of July 31, 1998 and
amended and restated as of November 30, 1998 between the Company and Kodak (as
amended and restated, the Asset Purchase Agreement), Kodak paid the Company
$532.2 million in cash prior to December 31, 1998, of which $18.0 million
represented a nonrefundable deposit under the Ferrania Supply Agreement. Of the
$532.2 million cash proceeds, the Company was restricted from using $143.0
million until the European Businesses were legally transferred to Kodak in the
first quarter of 1999; this amount is classified as restricted cash in other
current assets in the December 31, 1998 Consolidated Balance Sheet.
The Company recorded a pre-tax gain of $65.0 million ($36.4 million after
taxes), net of related costs, in 1998 from the Medical Imaging Sale. The related
costs included $40.8 million for the impairment of certain manufacturing assets
which were not sold to Kodak, determined based on estimated recoverable costs.
In addition, these costs included the write-off of capitalized software costs of
$27.9 million which were directly related to the Medical Imaging Systems
business, reflecting the abandonment of certain functionality and utility,
pension and other curtailment and settlement costs related to employees
transferred to Kodak of $16.9 million, and other costs of the transaction.
On August 2, 1999, the Company closed on the sale of its worldwide Photo Color
Systems business, together with the Ferrania Facility, the Ferrania Supply
Agreement and certain other associated businesses, to Schroder Ventures, through
Schroder Ventures' wholly owned affiliate, Ferrania Lux, S.A.R.L. In connection
with this transaction, the Company recorded a loss of $3.0 million, net of
income tax benefits of $7.1 million, in 1999. Post-closing adjustments to the
sale price are expected to be finalized in 2000, and the transaction is expected
to generate after-tax cash of approximately $50.0 million, $25.0 million of
which arises out of payment from Kodak related to the sale of the Ferrania
Facility.
Kodak has challenged the Company's claim for the full $25.0 million as well as
claims for other amounts which the Company believes are due from Kodak in
connection with the Medical Imaging Sale. The Company has retained cash, as
reflected in its financial statements, which it collected on behalf of Kodak in
an amount approximately equal to the disputed items. While the Company cannot
predict with certainty the ultimate outcome of these disputed items, it believes
its positions are supported by the applicable contractual terms.
11
<PAGE>
In connection with the sale of the Medical Imaging and Photo Color Systems
businesses, the Company receives reimbursement for certain transition services
and distribution agreements that the Company has agreed to provide Kodak for up
to a period of two years, and Schroder Ventures while it integrates accounting
and information systems. Kodak and Schroder Ventures, at their option, may
terminate the transition services agreement with respect to individual
categories of service upon prior notice, the length of which varies according to
the nature of the service. Reimbursements for these transition services are
presented as a reduction of general and administrative expenses in the
Consolidated Statements of Operations.
As a result of the sale of the Photo Color Systems business and the Ferrania
Facility, the Company has completed the disposition of its Medical Imaging and
Photo Color Systems segment. As such, the Company's Consolidated Statements of
Operations have been reclassified to present Photo Color Systems and the Medical
Imaging Systems businesses as discontinued operations for all years presented.
Income (loss) from operations of discontinued businesses include interest
expense allocations based on the ratio of net assets of discontinued operations
to consolidated net assets plus debt.
The results of discontinued operations for the years ended December 31, 1999,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1999 1998 1997
- -------------------------------------------------------------------------------------------
(In millions)
<S> <C> <C> <C>
Net revenues $ 124.7 $ 717.6 $ 699.7
Income (loss) before income taxes 9.3 66.9 (40.2)
Income tax provision 4.7 33.5 4.3
- -------------------------------------------------------------------------------------------
Income (loss) from operations of discontinued
businesses, net of income taxes 4.6 33.4 (44.5)
(Loss) gain on disposal of discontinued
businesses, net of income taxes (3.0) 36.4 -
- -------------------------------------------------------------------------------------------
Total discontinued operations $ 1.6 $ 69.8 $ (44.5)
===========================================================================================
</TABLE>
ACQUISITION
In August 1997, the Company acquired all of the outstanding common shares of
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 allowed Cemax shareholders to receive additional
payments of up to $44.8 million if Cemax attained certain revenue targets in the
twelve month periods ended June 30, 1998 and 1999. In connection with the sale
of the Company's Medical Imaging Systems business, as discussed above, the
contingent payment obligations were transferred to Kodak. Operating results for
Cemax are included in the Company's results from discontinued operations from
the date of acquisition through November 30, 1998, when Cemax was sold as part
of the Medical Imaging Sale.
12
<PAGE>
NOTE 4 -- SUPPLEMENTAL BALANCE SHEET INFORMATION
(In millions) 1999 1998
- -----------------------------------------------------------------------
ACCOUNTS RECEIVABLE
Accounts receivable $ 268.0 $ 345.5
Less allowances (15.6) (19.2)
- -----------------------------------------------------------------------
Accounts receivable, net $ 252.4 $ 326.3
INVENTORIES
Finished goods $ 123.8 $ 166.4
Work in process 14.6 48.8
Raw materials and supplies 52.9 48.5
- -----------------------------------------------------------------------
Total inventories $ 191.3 $ 263.7
OTHER CURRENT ASSETS
Deferred income taxes $ 41.1 $ 50.7
Restricted cash 33.5 143.0
Other 58.5 72.0
- -----------------------------------------------------------------------
Total other current assets $ 133.1 $ 265.7
PROPERTY, PLANT AND EQUIPMENT
Land $ 3.3 $ 7.1
Buildings and leasehold improvements 134.8 193.9
Machinery and equipment 822.5 1,135.5
Construction in progress 20.6 18.1
- -----------------------------------------------------------------------
Total 981.2 1,354.6
Less accumulated depreciation (768.4) (1,120.8)
- -----------------------------------------------------------------------
Property, plant and equipment, net $ 212.8 $ 233.8
OTHER ASSETS
Deferred income taxes $ 39.7 $ 14.7
Capitalized software 85.1 126.4
Other 18.6 18.5
- -----------------------------------------------------------------------
Total other assets $ 143.4 $ 159.6
OTHER CURRENT LIABILITIES
Employee separation costs $ 12.2 $ 33.6
Rebates 35.4 36.4
Deferred revenue 14.5 15.1
Taxes other than income taxes 12.6 21.5
Other 113.8 122.2
- -----------------------------------------------------------------------
Total other current liabilities $ 188.5 $ 228.8
Other Liabilities
Employee severance indemnities $ 2.4 $ 29.1
Pension 11.1 31.8
Other 30.5 45.4
- -----------------------------------------------------------------------
Total other liabilities $ 44.0 $ 106.3
=======================================================================
13
<PAGE>
NOTE 5 -- RESTRUCTURING CHARGES AND OTHER SPECIAL CHARGES
In 1997, the Company announced plans to 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 $189.9 million pre-tax charge
($152.8 million after taxes) to fourth quarter 1997 earnings. The charge
included approximately $160.0 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 included 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 majority of which were completed prior to
December 31, 1998.
In 1998, the Company recorded a $26.2 million benefit in the restructuring line
of the Statement of Operations as an adjustment of the restructuring charge
recorded in 1997. This benefit resulted primarily from three factors: a better
than expected result from the sale of the Company's CD-ROM business, lower than
expected costs from closing certain research and development facilities
(primarily the facility in the United Kingdom) and lower than expected costs
associated with employee terminations. This benefit was recorded as a result of
the Company's policy to evaluate its restructuring reserves quarterly and adjust
such reserves to reflect changes in estimates as information becomes available.
In addition, the Company approved and recorded an additional restructuring
charge of $13.0 million, primarily related to asset write-downs, reflecting
further portfolio rationalizations. The Company also recorded a $3.6 million
benefit in the restructuring line of the Statement of Operations reflecting
final adjustments of the restructuring reserves established in the fourth
quarter of 1995 in connection with its spin-off from 3M.
The following table represents the cumulative activity related to the Company's
1997 and 1998 restructuring programs, adjusted to exclude those activities
specifically related to discontinued operations:
<TABLE>
<CAPTION>
Program Cumulative Balance at
(In millions) Amounts (1) Usage December 31, 1999
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Severance $ 58.2 $ (46.0) $ 12.2
Asset impairments 55.3 (55.3) -
Other 33.3 (24.5) 8.8
- ------------------------------------------------------------------------------------------------
Total $ 146.8 $ (125.8) $ 21.0
================================================================================================
</TABLE>
(1) Amount includes the $160.0 million continuing operations restructuring
charge recorded in 1997, offset by the $26.2 million benefit and the
additional restructuring charge of $13.0 million recorded in 1998.
As part of this restructuring plan, the Company closed a research facility in
the United Kingdom, closed an optical manufacturing operation and sold its
CD-ROM business. The Company also exited its metal printing plates manufacturing
facility in Middleway, West Virginia. From the inception of the restructuring
plan through December 31, 1999, the Company has reduced its headcount relating
to continuing operations by approximately 1,800. During 1999 and 1998, the
Company made cash payments of $20.0 and $40.1 million, respectively, related to
the restructuring activities described above. The remaining activities are
expected to be completed in 2000.
14
<PAGE>
NOTE 6 -- INCOME TAXES
The components of income (loss) from continuing operations before income taxes
are as follows:
<TABLE>
<CAPTION>
(In millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. $ 47.7 $ 0.5 $ (72.5)
International 21.6 (22.5) (93.3)
- ---------------------------------------------------------------------------------------
Total $ 69.3 $ (22.0) $ (165.8)
=======================================================================================
</TABLE>
The income tax provision (benefit) from continuing operations is as follows:
<TABLE>
<CAPTION>
(In millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable (refundable)
Federal $ 52.0 $ (40.1) $ (3.8)
State 5.8 (4.5) (0.4)
International 2.3 (1.0) 8.3
Deferred
Federal (35.7) 35.9 (26.9)
State (4.0) 4.0 (3.0)
International 6.6 (3.6) (4.4)
- ---------------------------------------------------------------------------------------
Total $ 27.0 $ (9.3) $ (30.2)
=======================================================================================
</TABLE>
The components of net deferred tax assets and (liabilities) are as follows:
<TABLE>
<CAPTION>
(In millions) 1999 1998
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Receivables $ 0.3 $ (0.3)
Inventories 11.8 14.1
Capitalized software (15.5) (23.3)
Property, plant and equipment (7.9) (8.7)
Payroll and severance (3.3) 27.8
Foreign tax credit carryforwards 15.8 14.3
Net operating loss carryforwards 54.9 -
Accrued liabilities 35.3 39.9
Research and experimentation costs 29.3 -
Other, net 5.0 15.9
Valuation allowance (45.2) (14.3)
- ---------------------------------------------------------------------------------------
Net deferred tax assets $ 80.5 $ 65.4
=======================================================================================
</TABLE>
The valuation allowance was provided to account for uncertainties regarding the
recoverability of certain foreign net operating loss carryforwards and foreign
tax credit carryforwards. Of the aggregate net operating loss carryforwards,
$117.1 million expire at various times between 2004 and 2019, and $30.9 million
may be carried forward indefinitely. Certain foreign net operating loss
carryforwards are subject to adjustment by foreign tax authorities. The foreign
tax credit carryforwards expire by 2004.
The provision (benefit) for income taxes from continuing operations differs from
the amount computed by applying the statutory U.S. income tax rate (35 percent)
because of the following items:
<TABLE>
<CAPTION>
(In millions) 1999 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory U.S. tax rate $ 24.3 $ (7.7) $ (58.0)
State income taxes, net of federal benefit 1.8 0.6 (3.9)
Net effect of international taxes 0.6 (2.0) 31.8
Non-deductible expenses related to acquisitions - 0.8 0.9
Other 0.3 (1.0) (1.0)
- ---------------------------------------------------------------------------------------------
Income tax provision (benefit) $ 27.0 $ (9.3) $ (30.2)
=============================================================================================
</TABLE>
15
<PAGE>
As of December 31, 1999, approximately $186.4 million of earnings attributable
to 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, relating to both continuing and discontinued
operations, was $20.0 million in 1999, $26.5 million in 1998 and $10.9 million
in 1997.
NOTE 7 -- DEBT
The components of long-term debt as of December 31 are as follows:
(In millions) 1999 1998
- --------------------------------------------------------------------------------
Revolving credit facility $ - $ 31.0
Other 1.2 3.1
- --------------------------------------------------------------------------------
1.2 34.1
Less current portion (0.1) (1.4)
- --------------------------------------------------------------------------------
Total long-term debt $ 1.1 $ 32.7
================================================================================
On December 31, 1998, the Company entered into a new Loan and Security Agreement
(the Loan Agreement) with a group of banks. The Loan Agreement provides for
revolving credit, including letters of credit, with borrowing availability based
on eligible accounts receivable, inventory and manufacturing machinery and
equipment not to exceed $175.0 million. Borrowing availability at December 31,
1999 was $130.2 million. The Loan Agreement provides for, at the option of the
Company, borrowings at either a floating interest rate based on a defined prime
rate or a fixed rate related to the London Interbank Offering Rate (LIBOR), plus
a margin based on the Company's interest expense coverage. The margins over a
defined prime rate and LIBOR range from zero to 0.75 percent and 1.25 to 2.25
percent, respectively. Letter of credit fees are equal to the LIBOR margins and
a commitment fee of 0.375 percent per annum is payable on the unused line. The
Loan Agreement is collateralized by substantially all the domestic assets of the
Company, excluding the corporate campus land and buildings, and a pledge of 65
percent of the stock of certain of the Company's foreign subsidiaries. Covenants
include maintenance of a minimum tangible net worth and borrowing base
availability, with certain restrictions on the incurrence of additional
indebtedness, sale of assets, mergers and consolidation, transactions with
affiliates, creation of liens, and certain other matters.
No borrowings were outstanding under the Loan Agreement at December 31, 1999. As
of December 31, 1998, $31.0 million of borrowings at an interest rate of 8.75
percent was outstanding under the Company's prior $350 million revolving credit
facility with a syndicate of banks (the Credit Agreement). On January 4, 1999,
the Company repaid the amounts outstanding and terminated the Credit Agreement.
As of December 31, 1999, the Company had outstanding letters of credit of $3.6
million in the U.S.
Long-term debt maturities as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
(In millions) 2000 2001 2002 2003 2004 Thereafter Total
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term debt maturities $0.1 $0.1 $0.1 $0.1 $0.1 $0.7 $1.2
========================================================================================
</TABLE>
Short-term debt, excluding the current portion of long-term debt, as of December
31, 1999 and 1998, was $27.2 million and $23.8 million, respectively, which
consisted primarily of local borrowings by international subsidiaries. These
borrowings have original maturities of one year or less and have a weighted
average interest rate of 5.2 and 5.8 percent as of December 31, 1999 and 1998,
respectively. As of December 31, 1999, the Company had an additional $34.9
million available under credit facilities held by various subsidiaries outside
the U.S.
16
<PAGE>
The Company estimates that the fair value of short-term and long-term debt
approximates the carrying amount of debt as of December 31, 1999 and 1998.
The Company's interest expense for 1999, 1998 and 1997 was $2.1 million, $11.7
million (net of $1.0 million capitalized) and $9.6 million (net of $1.5 million
capitalized), respectively. Cash paid for interest in these periods, relating to
both continuing and discontinued operations, was $2.8 million, $24.3 million and
$13.2 million, respectively.
NOTE 8 -- FINANCIAL INSTRUMENTS
To manage risks associated with foreign currency transaction exposures, the
Company utilizes foreign currency forward and option contracts. These contracts
generally have maturities of less than six months. As of December 31, 1999 and
1998, the Company had foreign currency forward contracts outstanding, and the
notional amount and fair value adjustment are as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------------- ---------------------------
Notional Fair Notional Fair
(In millions) Amount Value Adjustment Amount Value Adjustment
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Foreign currency forward contracts $220.6 $(2.3) $218.7 $(0.4)
================================================================================================
</TABLE>
The estimated fair market values were determined using available market
information or other appropriate valuation methodologies.
To manage interest rate risk, in March 1997, the Company entered into a
three-year interest rate swap agreement for a notional amount of $100.0 million.
The swap agreement provided for the Company to pay a fixed rate of 6.63 percent
and receive a variable rate of three-month LIBOR. This interest rate swap was
terminated in the fourth quarter of 1998 in connection with repayment of the
Credit Agreement.
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 research and development facility at the
Company's headquarters site. The facility was completed in May 1998 and lease
payments commenced at that time. In December 1998, the Company acquired the
building, at which time all future lease obligations were terminated.
Rent expense under operating leases, which primarily relate to equipment and
office space, amounted to $12.1 million, $14.6 million and $16.5 million in
1999, 1998 and 1997, 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, 1999:
<TABLE>
<CAPTION>
(In millions) 2000 2001 2002 2003 2004 Thereafter Total
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Minimum lease payments $14.3 $9.0 $5.5 $1.7 $1.0 $2.0 $33.5
=======================================================================================
</TABLE>
17
<PAGE>
NOTE 10 -- SHAREHOLDERS' EQUITY
The Company maintains a shareholder rights plan (Rights Plan) under which the
Company has issued one preferred share purchase right (Right) for each common
share of the Company. If they become exercisable, 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 (Acquiring Person) acquires beneficial
ownership of 15 percent or more of the Company's outstanding common stock,
except that the Rights Plan excludes acquisitions by any Acquiring Person who
becomes the beneficial owner of 15 percent or more of the shares of common stock
then outstanding as a result of a reduction in the number of shares of common
stock outstanding due to the repurchase of common stock by the Company unless
and until such person, after becoming aware of such, acquires beneficial
ownership of any additional shares of common stock. The Rights expire on July 1,
2006 and may be redeemed earlier by the Board of Directors for $0.01 per Right.
During the first quarter of 1997, the Company's Board of Directors authorized
the repurchase of up to 6 million shares of the Company's common stock. During
the first and second quarters of 1997, approximately 2.5 million shares were
repurchased. On January 26, 1999, the Company announced an incremental increase
of 6.5 million shares to the remaining open share repurchase authorization; to
bring the total to 10 million shares. During 1999, the Company repurchased
approximately 4.4 million shares. As of December 31, 1999, the Company held 5.7
million shares of treasury stock acquired at an average price of $20.74 per
share.
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
had an exercise price of $20.77 and became exercisable upon the acquisition of
Cemax by the Company. In January 1999, the Company entered into an agreement
which terminated these warrants.
18
<PAGE>
NOTE 11 -- BUSINESS SEGMENT INFORMATION
The Company's current businesses are organized, managed and internally reported
as three segments differentiated primarily by their products and services, but
also by the markets they serve. These segments, whose results are shown below,
are Data Storage and Information Management, providing removable data storage
media, services and solutions for use in the mobile and desktop, network and
enterprise data center markets; Color Technologies (formerly Product
Technologies), whose principal products include printing and color proofing
systems, printing films and plates for the graphic arts marketplace, and
carbonless paper, such as multi-part business forms; and Digital Solutions and
Services, which provides 24-hour technical service and support for equipment
sold by the Company as well as by other third party equipment vendors,
professional services, and document imaging products for large format
engineering documentation.
<TABLE>
<CAPTION>
Data Digital
Business Segment Storage and Solutions Corporate,
Information Information Color and Other and
(In millions) Management Technologies Services Unallocated Total
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues (1) 1999 $ 952.1 $ 339.8 $ 114.1 $ 6.6 $ 1,412.6
1998 714.2 410.0 143.5 61.2 1,328.9
1997 776.6 479.1 168.1 78.3 1,502.1
- -------------------------------------------------------------------------------------------------
Operating 1999 $ 31.9 $ 37.8 $ (2.0) $ (4.3) $ 63.4
income (loss) (1) 1998 (30.5) 35.5 (3.3) (12.7) (11.0)
1997 22.7 40.6 5.3 (209.8) (141.2)
- -------------------------------------------------------------------------------------------------
Assets (2) 1999 $ 460.6 $ 147.4 $ 47.2 $ 472.4 $ 1,127.6
1998 367.7 174.0 55.5 716.1 1,313.3
1997 392.0 181.8 72.0 1,019.7 1,665.5
- -------------------------------------------------------------------------------------------------
Depreciation 1999 $ 55.2 $ 25.0 $ 3.5 $ 4.0 $ 87.7
and 1998 48.3 24.4 6.5 50.2 129.4
Amortization (2) 1997 69.9 20.3 4.0 53.3 147.5
- -------------------------------------------------------------------------------------------------
Capital 1999 $ 47.9 $ 8.6 $ 1.0 $ 6.6 $ 64.1
Expenditures (2) 1998 33.0 9.4 1.0 89.0 132.4
1997 41.5 20.5 2.0 52.3 116.3
- -------------------------------------------------------------------------------------------------
</TABLE>
(1) The Corporate, Other and Unallocated amounts for net revenues and operating
income (loss) primarily include the results for certain businesses not
included in the Company's disclosable business segments, general overhead
which was previously allocated to the Medical Imaging Systems and Photo
Color Systems businesses, as well as restructuring-related charges and
credits.
(2) Segment assets primarily include accounts receivable, inventory, and net
property, plant and equipment associated with the Company's disclosable
business segments. Assets included in Corporate, Other and Unallocated are
cash and equivalents, deferred income taxes, certain unallocated net
property, plant and equipment, assets of divested and discontinued
businesses and other miscellaneous assets. Depreciation and amortization
and capital expenditure amounts include amounts associated with these
assets.
The following table presents information about the company by geographic area.
<TABLE>
<CAPTION>
United Total
(In millions) States International Company
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues (1) 1999 $ 783.4 $ 629.2 $ 1,412.6
1998 755.9 573.0 1,328.9
1997 848.7 653.4 1,502.1
- --------------------------------------------------------------------------------------
Long-lived 1999 $ 255.9 $ 54.1 $ 310.0
assets (2) 1998 299.3 88.3 387.6
1997 383.4 158.3 541.7
======================================================================================
</TABLE>
(1) Net revenues are classified into geographic areas based on destination.
(2) Includes net property, plant and equipment, intangible and other
non-current assets excluding deferred income taxes.
19
<PAGE>
NOTE 12 -- RETIREMENT PLANS
The Company has various non-contributory defined benefit employee pension plans
covering substantially all U.S. employees and certain employees outside the U.S.
Total pension expense was $15.5 million, $14.8 million and $22.6 million in
1999, 1998 and 1997 respectively. Net pension cost is reported on a continuing
operations basis, whereas the funded status of the pension plans includes both
continuing and discontinued operations.
The following provides a reconciliation of benefit obligations, plan assets and
funded status of the plans.
<TABLE>
<CAPTION>
U.S. PLAN
(In millions) 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation, beginning of year $ 69.5 $ 32.1
Service cost 14.3 16.4
Interest cost 4.1 2.4
Actuarial (gain) loss (12.8) 3.7
Benefits paid (6.8) (2.0)
Special termination benefits (1) 1.2 16.9
- -------------------------------------------------------------------------------------
Projected benefit obligation, end of year $ 69.5 $ 69.5
CHANGE IN PLAN ASSETS
Plan assets at fair value, beginning of year $ 38.9 $ 7.0
Actual return on plan assets 9.3 4.5
Company contributions 38.1 29.4
Benefits paid (6.8) (2.0)
- -------------------------------------------------------------------------------------
Plan assets at fair value, end of year $ 79.5 $ 38.9
ACCRUED PENSION COST
Funded status of the plan $ 10.0 $ (30.6)
Unrecognized actuarial (gain) loss (15.8) 1.9
- -------------------------------------------------------------------------------------
Total accrued pension cost $ (5.8) $ (28.7)
</TABLE>
<TABLE>
<CAPTION>
ASSUMPTIONS, END OF YEAR 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.25% 6.50% 7.25%
Expected return on plan assets (for following year) 7.50% 8.00% 9.00%
Rate of compensation increase 4.75% 4.75% 4.75%
</TABLE>
Net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
(In millions) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL COST
Service cost $ 14.3 $ 16.4 $ 16.7
Interest cost 4.1 2.4 0.6
Expected return on plan assets (4.4) (1.5) (0.2)
Special termination benefits (1) 1.2 16.9 6.5
Discontinued operations (1.6) (20.8) (3.5)
- --------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 13.6 $ 13.4 $ 20.1
========================================================================================================
</TABLE>
(1) In 1999, $1.2 million was recognized for curtailment and other benefits for
employees transferred to Schroder Ventures as part of the sale of the Photo
Color Systems business (see Note 3). In 1998, $16.9 million was recognized
for curtailment and other benefits for employees transferred to Kodak as
part of the sale of the Medical Imaging Systems business (see Note 3). In
1997, $6.5 million was recognized for restructuring charges.
20
<PAGE>
<TABLE>
<CAPTION>
INTERNATIONAL PLANS
(In millions) 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation, beginning of year $ 55.1 $ 59.3
Service cost 1.1 1.4
Interest cost 3.0 2.8
Foreign exchange rate changes (2.0) 0.9
Actuarial (gain) loss (1.6) 5.9
Benefits paid (0.5) (0.6)
Amendments - 0.9
Transfer of obligations (2) 2.4 (15.5)
- -------------------------------------------------------------------------------------
Projected benefit obligation, end of year $ 57.5 $ 55.1
CHANGE IN PLAN ASSETS
Plan assets at fair value, beginning of year $ 49.3 $ 57.9
Actual return on plan assets 3.4 7.1
Foreign exchange rate changes (2.1) 0.7
Company contributions 2.3 1.3
Benefits paid (0.5) (0.6)
Transfer of assets (2) (1.3) (17.1)
- -------------------------------------------------------------------------------------
Plan assets at fair value, end of year $ 51.1 $ 49.3
ACCRUED PENSION COST
Funded status of plan $ (6.4) $ (5.8)
Unrecognized items 3.4 5.2
- -------------------------------------------------------------------------------------
Total accrued pension cost $ (3.0) $ (0.6)
AMOUNT RECOGNIZED IN FINANCIAL STATEMENTS
Prepaid pension cost $ 2.3 $ 2.5
Accrued pension liability (5.3) (3.1)
- -------------------------------------------------------------------------------------
Total recognized $ (3.0) $ (0.6)
</TABLE>
<TABLE>
<CAPTION>
ASSUMPTIONS, END OF YEAR 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 5.00% 5.60% 6.70%
Expected return on plan assets (for following year) 6.75% 7.00% 7.80%
Rate of compensation increase 3.75% 3.20% 4.60%
</TABLE>
Net periodic pension cost includes the following components:
<TABLE>
<CAPTION>
(In millions) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOTAL COST
Service cost $ 1.1 $ 1.4 $ 2.6
Interest cost 3.0 2.8 4.2
Expected return on plan assets (3.2) (2.3) (5.9)
Amortization of unrecognized items 1.0 0.5 2.0
Settlements and curtailments - (0.7) -
Discontinued operations - (0.3) (0.4)
- -------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 1.9 $ 1.4 $ 2.5
=======================================================================================================
</TABLE>
(2) 1998 includes certain benefit obligations and related plan assets
transferred to 3M and other defined contribution plans. 1999 includes the
transfer of certain benefit obligations and related plan assets from 3M,
offset by transfers to Kodak.
21
<PAGE>
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 $2.4 million
and $29.1 million as of December 31, 1999 and 1998, 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
$0.4 million, $0.4 million and $0.6 million in 1999, 1998 and 1997,
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 percent of eligible compensation on a
pre-tax basis, subject to certain IRS limitations. The Company matches employee
contributions 100 percent on the first three percent of eligible compensation
and 25 percent 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 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.
The ESOP shares as of December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Released and allocated shares 1,297,333 1,035,484
Unreleased shares 878,554 1,140,403
- -----------------------------------------------------------------------------------------
Total original ESOP shares 2,175,887 2,175,887
- -----------------------------------------------------------------------------------------
Fair value of unreleased shares as of December 31 $29,486,000 $19,957,000
=========================================================================================
</TABLE>
Total expense related to the ESOP was $5.9 million, $6.4 million and $6.8
million in 1999, 1998 and 1997, respectively.
NOTE 14 -- EMPLOYEE STOCK PLANS
The Company currently has stock options outstanding under the Imation 1996
Employee Stock Incentive Program (the Employee Plan) and the Imation 1996
Directors Stock Compensation Program (the Directors 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. The total
number of shares of common stock that may be issued or awarded under the
Employee Plan may not exceed 6,000,000. All shares subject to awards under the
Employee Plan that are canceled or terminated will be available again for
issuance pursuant to awards under the Employee Plan. Grant prices are generally
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, 1999 and 1998, there
were 1,307,722 and 2,321,470 shares available for grant under the Employee Plan,
respectively.
22
<PAGE>
The Directors Plan was also approved and adopted by 3M, 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 generally equal to the fair market value of the Company's common
stock at the date of grant. As of December 31, 1999 and 1998, there were 490,857
and 584,177 shares available for grant under the Directors Plan, respectively.
The following table summarizes stock option activity for 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Year Ended December 31, Year Ended December 31, Year Ended December 31,
1999 1998 1997
---------------------------- -------------------------- --------------------------
Stock Weighted Stock Weighted Stock Weighted
Options Average Options Average Options Average
Exercise Price Exercise Price Exercise Price
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning of
year 3,695,310 $22.49 5,184,676 $21.47 2,648,157 $21.31
Granted 1,502,291 19.11 583,053 16.86 2,903,244 21.11
Exercised (582,092) 21.26 (416,732) 6.54 (190,120) 11.50
Canceled (295,828) 25.68 (1,655,687) 17.38 (176,605) 23.84
- -------------------------------------------------------------------------------------------------------------
Outstanding, end of
year 4,319,681 21.43 3,695,310 22.49 5,184,676 21.47
Exercisable, end of
year 1,905,531 22.87 1,882,800 22.47 2,121,243 19.95
</TABLE>
The following table summarizes information about stock options outstanding as of
December 31, 1999:
<TABLE>
<CAPTION>
Options Options
Weighted Outstanding- Exercisable-
Average Weighted Weighted
Range of Exercise Options Remaining Average Exercise Options Average Exercise
Prices Outstanding Contractual Life Price Exercisable Price
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 0.73 to $10.39 10,096 4.4 years $ 0.98 10,096 $ 0.98
$14.15 to $19.20 1,674,514 9.1 years $17.42 186,414 $17.66
$22.38 to $23.95 1,319,936 6.8 years $22.71 1,064,186 $22.66
$24.41 to $27.65 1,184,501 7.5 years $24.91 641,301 $25.04
$28.15 to $32.75 130,634 9.8 years $30.13 3,534 $28.60
- ------------------------------------------------------------------------------------------------------------
$0.73 to $32.75 4,319,681 8.0 years $21.43 1,905,531 $22.87
</TABLE>
The Company has adopted the disclosure only provisions of SFAS No. 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 No. 123, pro
forma pre-tax income would have been $5.8 million lower ($3.6 million after
taxes or $0.10 per basic and diluted share) for 1999, $8.3 million lower ($5.0
million after taxes or $0.13 per basic and diluted share) for 1998 and pro forma
pre-tax loss would have been $12.7 million higher ($7.8 million after taxes or
$0.20 per basic and diluted share) for 1997.
23
<PAGE>
The weighted average fair values at date of grant for options granted by the
Company in 1999, 1998 and 1997 are as follows:
1999 1998 1997
---- ---- ----
Exercise price equals market price on grant date: $8.16 $7.33 $ 9.55
Exercise price less than market price on grant date: - $8.10 $17.71
The fair values at date of grant were estimated using the Black-Scholes option
pricing model with the following weighted average assumptions:
1999 1998 1997
--------------------------------------------------------------------
Volatility 41% 40% 40%
Risk free interest rate 5.33% 5.35% 6.47%
Expected life (months) 59 51 52
Dividend growth Zero Zero Zero
NOTE 15 -- SUPPLEMENTAL NON-CASH ITEMS
In connection with the November 30, 1998 sale of the Medical Imaging Systems
business to Kodak (see Note 3), the Company received cash of $143.0 million that
was restricted until the medical imaging businesses in Europe were legally
transferred to Kodak in the first quarter of 1999. The restricted cash is
classified as part of other current assets in the December 31, 1998 Consolidated
Balance Sheet and, as a result, is excluded from the proceeds of the sale
reflected in the 1998 Consolidated Statement of Cash Flows. The proceeds are
reflected as an investing activity in the 1999 Consolidated Statement of Cash
Flows.
NOTE 16 -- COMMITMENTS AND CONTINGENCIES
The Company is the subject of various pending or threatened legal actions in the
ordinary course of its business. All such matters are subject to many
uncertainties and outcomes that are not predictable with assurance.
Consequently, as of December 31, 1999, the Company is unable to ascertain the
ultimate aggregate amount of any monetary liability or financial impact that may
be incurred by the Company with respect to these matters. While these matters,
including the Jazz Photo Corp. (Jazz Photo) matter described below, 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, 1999 would not be material to the
Company's financial position or annual results of operations or cash flows.
On May 10, 1999, Jazz Photo served the Company and its affiliate, Imation
S.p.A., with a civil complaint filed in New Jersey Superior Court. The complaint
charges breach of contract, breach of warranty, fraud, and racketeering activity
in connection with the Company's sale of allegedly defective film to Jazz Photo.
In the complaint, Jazz Photo seeks unspecified compensatory damages, treble
damages, punitive damages and equitable relief. The Company disputes any
liability to Jazz Photo and is vigorously defending the action.
24
<PAGE>
NOTE 17 -- QUARTERLY DATA (UNAUDITED)
<TABLE>
<CAPTION>
(In millions,
except per share amounts) First Second Third Fourth Total
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Net revenues $ 341.2 $ 354.2 $ 346.0 $ 371.2 $ 1,412.6
Gross profit 102.9 107.7 110.9 112.1 433.6
Operating income 4.7 16.7 22.7 19.3 63.4
Income from continuing operations 3.5 10.7 13.8 14.3 42.3
Discontinued operations 2.6 2.0 (3.0) - 1.6
Net income 6.1 12.7 10.8 14.3 43.9
Earnings per common share, continuing
operations:
Basic $ 0.09 $ 0.29 $ 0.38 $ 0.39 $ 1.13
Diluted 0.09 0.29 0.37 0.39 1.12
Earnings (loss) per common share,
discontinued operations:
Basic $ 0.07 $ 0.05 $ (0.09) - $ 0.05
Diluted 0.07 0.05 (0.08) - 0.05
Earnings per share, net income:
Basic $ 0.16 $ 0.34 $ 0.29 $ 0.39 $ 1.18
Diluted 0.16 0.34 0.29 0.39 1.17
- -------------------------------------------------------------------------------------------------------------
1998 (1)
Net revenues $ 349.1 $ 311.8 $ 331.7 $ 336.3 $ 1,328.9
Gross profit 110.3 96.7 115.4 104.4 426.8
Operating (loss) income (6.7) (7.8) 11.8 (8.3) (11.0)
(Loss) income from continuing operations (6.5) (7.0) 5.6 (4.8) (12.7)
Discontinued operations 8.5 11.8 7.8 41.7 69.8
Net income 2.0 4.8 13.4 36.9 57.1
Basic and diluted (loss) earnings per
common share:
Continuing operations $ (0.17) $ (0.18) $ 0.14 $ (0.12) $ (0.33)
Discontinued operations 0.22 0.30 0.20 1.06 1.78
Net income 0.05 0.12 0.34 0.94 1.45
=============================================================================================================
</TABLE>
(1) Includes $2.6 million of costs, recorded in non-operating expenses, related
to the change in the company's credit facility in the fourth quarter, a net
adjustment in restructuring of $13.2 million in the third quarter and a
$3.6 million benefit in restructuring in the second quarter.
25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Imation Corp.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity and comprehensive
income and cash flows present fairly, in all material respects, the financial
position of Imation Corp. and its subsidiaries as of December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. 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 of these statements in accordance with auditing standards
generally accepted in the United States, which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
January 27, 2000
26
Consent of Independent Accountants
We hereby consent to the inccorporation by reference in the Registration
Statements of Imation Corp. on Form S-8 (Registration Nos. 333-152723,
333-15275, 333-15277 and 333-35591), of our report dated January 27, 2000, on
our audits of the consolidated financial statements of Imation Corp. and
subsidiaries as of December 31, 1999 and 1998, and for each of the three years
in the period ended December 31, 1999, which report is included in this Current
Report on Form 8-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
February 16, 2000
