SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(MARK ONE)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO________
COMMISSION FILE NUMBER: 1-14310
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IMATION CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 41-1838504
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1 IMATION PLACE 55128
OAKDALE, MINNESOTA (Zip Code)
(Address of principal executive offices)
(651) 704-4000
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Name of each exchange
Title of each class on which registered
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Common Stock, $.01 per share New York Stock Exchange, Inc.;
Chicago Stock Exchange, Incorporated
Preferred Stock Purchase Rights New York Stock Exchange, Inc.;
Chicago Stock Exchange, Incorporated
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or Section 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes _X_ No___
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by Reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of voting stock of Imation Corp. held by
non-affiliates of the Registrant, based on the closing price of $30.9375 as
reported on the New York Stock Exchange on February 29, 2000: $1.1 billion.
The number of shares outstanding of the Registrant's common stock on
February 29, 2000 was 36,274,128.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of Registrant's Proxy Statement for Registrant's 2000
Annual Meeting are incorporated by reference into Part III.
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Imation Corp., together with its subsidiaries, (Imation or the
Company) was incorporated as a Delaware corporation in March 1996. The Company's
principal executive offices are located at 1 Imation Place, Oakdale, Minnesota
55128 (telephone number (651) 704-4000).
The Company was created by the spin-off of substantially all of the
businesses previously operated within Minnesota Mining and Manufacturing
Company's (3M) data storage and imaging systems groups. To effectuate the
transaction, 3M paid a stock dividend 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 for every ten shares of 3M common stock owned on the record date.
Effective July 1, 1996 (the Distribution Date), all of the outstanding shares of
the Company's common stock were distributed to 3M stockholders.
Imation is a global technology company and a worldwide leader in the
data storage and information management, color management and imaging
industries. The Company offers premier data storage media to enterprise data
centers, server-based networks, and the mobile and desktop environments, while
also providing industry-leading color proofing, color management, and color
software products. Global teams of service and consulting professionals bring
technical support and workflow consulting to end-customers and third party
Original Equipment Manufacturers (OEMs).
As of December 31, 1999, the Company had approximately 4,850
employees, approximately 3,500 in the United States and 1,350 internationally.
BUSINESS DESCRIPTION
The Company develops, manufactures and markets worldwide a wide
variety of products and services for color management, imaging and data storage
applications. The Company's product and service offerings are used to capture,
process, store, enhance, manipulate, reproduce and distribute information and
images in a wide range of commercial and consumer markets, including enterprise
data center computing, network computing, mobile and desktop computing,
commercial printing and proofing, marketing communications and graphic arts. A
number of the Company's products and services are market leaders in the
recording, manipulation and storage of data and images and color management in
specific commercial and consumer applications. While established products and
services generate a substantial portion of the Company's revenues today, the
Company is seeking to expand its revenues by leveraging its existing market
positions to increase the use of its current products and services as well as
developing new digital-based products and more complete work flow solutions in
specific targeted markets.
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 in Note 11 to the Consolidated Financial
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Statements, are Data Storage and Information Management, Color Technologies, and
Digital Solutions and Services.
The Company's products and services are sold in more than 60
countries and nearly half of the Company's revenues are derived internationally.
Financial information by geographic area can be found in Note 11 to the
Consolidated Financial Statements.
DATA STORAGE AND INFORMATION MANAGEMENT BUSINESS
The Company develops, manufactures and markets removable media and
solutions, as well as marketing hardware, across three major customer markets -
mobile and desktop, network and enterprise data center.
MOBILE AND DESKTOP - Major products include: Diskettes, SuperDisk(TM) Diskettes
and Drives, CD-Recordable Discs (CD-R), CD-Rewritable Discs (CD-RW) and Drives,
Travan minicartridges, and Imation 1/4-inch cartridges.
The Company is a worldwide leader in diskette technology, with a
leading market position for 1.44MB floppy disks. The Company's 120 MB
SuperDisk(TM) diskettes and drives provide a high-capacity, floppy-compatible
solution for removable desktop and notebook storage. SuperDisk technology is now
available built into personal computers from more than 100 OEMs, and as a
peripheral drive with USB, SCSI, IDE or parallel port interface. In the optical
media market, the Company offers a full line of CD-R and CD-RW discs.
NETWORK - Major products include: Travan(TM) and Travan NS(TM) (Network Series)
minicartridges, Scalable Linear Technology (SLR) cartridges, 4mm and 8mm data
tapes, DLT tape cartridges, and 5 1/4" magneto-optical disks.
In the network computing market, the Company's Travan(TM) and Travan
NS(TM) (Network Series) 8 GB and 20 GB cartridges offer affordable, reliable
tape storage for the entry-level server market. Imation's 5 1/4" magneto-optical
disks store up to 5 gigabytes for multimedia, CAD, and other high-performance
optical applications. The Company offers a full line of DLT tape cartridges -
storage solutions targeted for mid-to-high end server backup.
Extending its line of SLR media, the Company offers SLR100 tape
media, which holds up to 100 GB of compressed data. Imation also offers 4mm and
8mm data tapes, including the newest DDS150, to round out its line of
entry-level to mid-range server backup options.
ENTERPRISE DATA CENTER - Major products include: half-inch tape cartridges and
tape, Imation Professional Services and Imation Media Services.
The Company is a leading media supplier to the enterprise data
center market, where organizations store, manage and protect mission-critical
data. As a technology co-developer, the Company maintains relationships with
leading manufacturers such as International Business Machines Corporation (IBM),
Quantum Corporation and Storage Technology Corp., in order to develop new
leading-edge storage technologies.
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Used for near-line data storage and retrieval, mass storage, and
archival storage of mission-critical data, Blackwatch(TM) and Royal Guard(TM)
1/2 inch tape cartridges are manufactured to high quality standards to ensure
data integrity. The Company's enterprises storage media - 9840, 9490EE, 3490,
3480, 3590, and SD-3 - are marketed based on performance, capacity, reliability,
scalability and compatibility.
In 1999, the Company leveraged its technical service history and
expertise to develop solutions and services to meet the information management
needs of global businesses. In the area of professional services, the Company
works with operations and data centers to help solve challenges, plan for
technology transitions, and address event-driven issues such as data recovery.
As part of these professional services, the Company has established a SAN
(Storage Area Network) Solutions Lab at its worldwide headquarters in Oakdale,
Minn., to test new technologies and work with customers to determine the best
solutions for their needs.
COLOR TECHNOLOGIES BUSINESS
The Company manufactures and markets products and provides service
and technical support for a broad range of applications in the capture,
enhancement, management and transmission of images in selected markets for the
printing, publishing, packaging and graphic imaging markets. Products include
conventional color proofing systems, digital color proofing systems and
software, pre-press software, laser films and image setting materials, metal
printing plates, graphic arts films, photographic chemicals, miscellaneous
supplies and Matchprint Laser proofing systems.
The Company has strong market and brand positions in certain product
areas. The Matchprint(TM) color proofing system has been a recognized industry
standard for more than 20 years. The Matchprint proofing product line covers
both categories of proofing, conventional film based systems, and digital
proofing systems which provide color proofs from digital data prior to output
for printing. The digital systems include key technologies of inkjet,
electrophotography, thermal laser and dye sublimination. Imation Rainbow models
2740, 2730 and 4700 continue as components of the product line. The Company also
develops and markets a variety of software products for use in the prepress
workflow of color print production. These include asset management products such
as Media Manager; color management products, including the Imation Color
Fidelity Module; and other color profiling tools used in quality assurance in
the print industry.
The Company also produces photo quality inkjet paper, which allows
desktop computer users to print photo-quality images on color ink jet printers.
This product is believed to provide superior image quality and color
reproduction, and significantly faster drying time than competitive products.
This product, which was designed for use with a variety of color ink jet
printers, is available through mass retail and photo stores. The Company also
markets carbonless paper products, such as multi-part business forms.
DIGITAL SOLUTIONS AND SERVICES BUSINESS
The Digital Solutions and Services business is a global service
organization, currently servicing the Company, 3M and targeted OEM end-user
customers' hardware systems. In addition, the Company also resells analog and
digital equipment and related services directly to the document imaging market.
The Company's operational service infrastructure includes field
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technicians, phone support, help desk, logistics and spare parts. The Company
also offers enhancement services, such as training, service engineering and
technical documentation. In addition, the Company is expanding into customized
solutions, with professional services offerings for very specific vertical
markets, such as Brand Asset Management for the packaging production workflow,
with close ties to the Company's core businesses. The Company intends to expand
its overall offerings in both solutions and services to support and complement
the Company's core strategic focus in data storage and color management.
DIVESTED BUSINESSES
PHOTO COLOR SYSTEMS
The Company sold its worldwide Photo Color Systems business
effective August 2, 1999, to Schroder Ventures, through its wholly owned
affiliate, Ferrania Lux, S.A.R.L. The Company's Photo Color Systems business was
one of the world's leading suppliers of private label film for the amateur
photography retail market. At the time of the sale, the Company's color print
film could be found in more than 125 private label brands. The Company also
marketed single use cameras, which were sold pre-loaded with the Company's film.
INDUSTRY BACKGROUND
The imaging and information industries in which the Company operates
are concerned with the management and storage of data on removable media and
with the creation, capture, manipulation, storage, production and distribution
of images and color. Advancements in digital technologies have profoundly
affected imaging applications by providing capabilities to accomplish those
tasks more efficiently, with greater accuracy and at lower cost. These
industries are also being profoundly impacted by the availability of new methods
of accessing, transporting and manipulating data and images through software,
networking and the Internet.
Removable data storage solutions are used across all computing
platforms, including enterprise data centers, network servers, desktop systems
and mobile computing and in a wide variety of commercial, industrial and
consumer applications. Overall, the data storage media market is a growth
market, and is characterized by rapid changes in technology, significant price
competition and a variety of competing media formats. Demand for storage
capacity is increasing at an accelerating pace due to several factors, including
increases in both the number of software applications in use and the amount of
data being captured and stored. In addition, enhanced software capabilities
create larger databases that are critical business applications and therefore
create an increasing need to back up and store larger amounts of data. As the
size and price of computing devices continues to shrink and as people gain
access to information of all types from many sources, including the Internet,
the demand for portable, cost-effective and convenient data storage solutions is
also accelerating. This is true in both commercial and consumer markets.
Color and image management technologies also have been profoundly
impacted by advancements in digital technologies as many users begin to convert
their conventional/analog processes to proprietary digital processes to capture,
create, manipulate, enhance, process, transmit and store still and moving images
that incorporate color. Conventional/analog technologies rely upon chemical or
electrical processes which capture information onto paper, film or other media
by reacting to external stimuli. Digital technologies have significantly
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increased the amount of information that can be used, managed and stored and
have reduced the need for film and chemicals in the color management and imaging
process. Many work processes in use today are hybrid systems in which users
continue to use conventional materials for certain processes in their work flows
while utilizing the speed of digital processing.
COMPETITION
The Company competes in several highly competitive markets to
various degrees on the basis of quality, performance, reliability, price,
breadth of product line, customer service, and availability of systems
solutions. Imation is engaged in advancing technology fields for data storage
and color management where its ability to compete depends upon its ability to
improve its products and manufacturing processes, develop and introduce new
products and to reduce costs. Price declines are a continual factor in the data
storage industry as storage capacity of media increases, as competition develops
and as production experience is accumulated. Many companies compete with Imation
in various market segments, including both foreign and domestic, and are
primarily large multinationals but may also include smaller, more specialized
companies.
SALES, MARKETS AND DISTRIBUTION METHODS
The Company's products and services are sold directly to users
through the Company's field sales organizations and through numerous channels of
distribution including wholesalers, retailers, jobbers, distributors and dealers
in over 60 countries. No one customer individually accounts for a material
amount of the Company's total sales.
RAW MATERIALS
The principal raw materials used by the Company are polyester film,
paper, resins and specialty chemicals. The Company makes significant purchases
of these and other materials and components used in the Company's manufacturing
operations from many domestic and foreign sources. The Company has been able to
obtain sufficient materials and components from sources around the world to meet
its needs. 3M continues to be a major supplier to the Company of certain raw
materials and specialty chemicals.
RESEARCH AND PATENTS
Research and product development have historically played an
important role in the Company's activities. The Company has research
laboratories for the improvement of its existing products and for the
development of new products. The Company's research and development expenses for
continuing operations were $76.0 million, $87.8 million and $97.1 million for
1999, 1998 and 1997, respectively. The Company expects its research and
development expenses, as a percent of total revenues, to be in the 5-7 percent
range during the next several years.
Approximately 61, 64 and 63 United States patents, owned by either
3M or the Company, were issued in 1999, 1998 and 1997, respectively, for which
the Company receives rights in its business fields and which are attributable to
continuing operations.
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In connection with the spin-off from 3M in 1996, the Company was
granted rights, on both exclusive and non-exclusive terms, from 3M and others
which enable it to continue to use the intellectual property previously utilized
by the Company when it was part of 3M. The Company does not consider that its
business as a whole is materially dependent upon any one patent, license or
trade secret or any group of related patents, licenses or trade secrets, except
with respect to those rights granted from 3M.
MANUFACTURING
The core manufacturing competencies of the Company include precision
coating, servowriting and state-of-the-art molding capabilities. These
competencies, combined with the Company's reputation for quality, competency
related to unit cost reduction and research and development competencies of
materials science, color management, hard copy imaging, and magnetic and optical
recording, give the Company a strong technological base to take advantage of the
opportunities in color, data storage and image management.
ENVIRONMENTAL MATTERS
The Company's operations are subject to a wide range of
environmental protection laws. The Company has remedial and investigatory
activities underway at some of its current facilities. It is the Company's
policy to accrue environmental remediation costs if it is probable that a
liability has been incurred and the amount of such liability is reasonably
estimable. As assessments and remediations proceed, these accruals are reviewed
periodically and adjusted, if necessary, as additional information becomes
available. The accruals for these liabilities can change due to such factors as
additional information on the nature or extent of contamination, methods of
remediation required, the allocated share of responsibility among other parties,
if applicable, and other actions by governmental agencies or private parties.
However, it is often difficult to estimate the future impact of environmental
matters, including potential liabilities.
As of December 31, 1999, the Company had reserved approximately $4.1 million
with respect to environmental liabilities. Although the Company believes that
its reserves are adequate, there can be no assurance that the amount of expenses
relating to remedial actions and compliance with applicable environmental laws
will not exceed the amounts reflected in the Company's reserves.
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EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company on March 10, 2000, together
with their ages and business experience, are set forth below.
WILLIAM T. MONAHAN, age 52, is Chairman of the Board, President and
Chief Executive Officer, positions he has held since the Company spun-off from
3M on July 1, 1996. 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.
BRADLEY D. ALLEN, age 49, is Vice President, Corporate
Communications and Investor Relations. He has led the Company's investor
relations function since spin-off. From October of 1994 to May of 1996, he held
the senior investor relations position at Cray Research, which was acquired by
Silicon Graphics. Prior to Cray Research, he headed the investor relations
function at Digital Equipment Corporation.
BARBARA M. CEDERBERG, age 46, is Vice President and President, Color
Technologies. Prior to her appointment in October 1998, she was General Manager
of Printing and Proofing Products for the Company. Prior to joining the Company
at spin-off on July 1, 1996, she held various positions at 3M.
JACQUELINE A. CHASE, age 46, is Vice President, Human Resources. She
has been with the Company since the spin-off. From 1991 to 1996, she held the
position of Senior Counsel in 3M's legal department. Prior to joining 3M, she
was an associate attorney at the law firm of Oppenheimer, Wolff and Donnelly.
ROBERT L. EDWARDS, age 44, is Senior Vice President, Chief Financial
Officer and Chief Administrative Officer. He joined the Company in April 1998
after twenty years of experience in the transportation and energy industries
with Santa Fe Industries affiliated or predecessor companies. From 1991 to 1995,
he was Senior Vice President, Treasurer and Chief Financial Officer, and from
1995 to 1998, he was Senior Vice President, Business Development of Santa Fe
Pacific Pipelines, Inc.
MICHAEL A. HOWARD, age 50, is Vice President and President, Digital
Solutions and Services. He joined the Company in June 1998 from Digital
Equipment Corporation, where he held several executive sales positions over the
previous twenty-two years, the most recent of which was Vice President,
Microsoft/Digital Alliance.
GALEN K. JOHNSON, age 45, is Vice President, Treasurer. He joined
the Company in August 1998 from Alliant Techsystems where he was Vice President
and Treasurer. Prior to joining Alliant with the company's spin-off from
Honeywell, he held several treasury and financial control positions at Honeywell
and spent five years in public accounting with Arthur Andersen.
STEVEN D. LADWIG, age 42, is Senior Vice President and President,
Data Storage and Information Management. He joined the Company in July 1998
after nineteen years with IBM. Most recently he was General Manager for Network
Computing and Software for Global Small
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and Medium Businesses from October 1996 to June 1998. From 1994 to October 1996,
he was Vice President of Development, AS/400 Division.
JOHN L. SULLIVAN, age 45, is Vice President, General Counsel and
Secretary. He joined the Company in August 1998 from Silicon Graphics, Inc.,
where he held several legal counsel positions and most recently was Vice
President-General Counsel. Prior to joining Silicon Graphics, he held several
positions with Cray Research, Inc. from 1989 to 1997, including the positions of
General Counsel and Corporate Secretary from 1995 to 1997. Cray Research, Inc.
became part of Silicon Graphics in 1996.
DAVID H. WENCK, age 56, is Vice President, International, a position
he has held since March 1998. Prior to assuming his current responsibilities, he
was Vice President, Asia, Latin America and Canada, assuming that role at
spin-off. From May 1995 to July 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.
PAUL R. ZELLER, age 39, is Vice President, Corporate Controller. He
was elected to his position as Vice President in February 2000, and has held the
Corporate Controller position since May 1998. He joined the Company at spin-off
and held accounting manager and division controller positions with the Company
prior to assuming his current responsibilities. Prior to joining the Company, he
held several accounting management positions with 3M prior to spin-off and spent
four years in public accounting with Coopers & Lybrand.
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ITEM 2. PROPERTIES.
The Company's headquarters are located in Oakdale, Minnesota. The
Company's major facilities (all of which are owned by the Company, except where
noted), and the products manufactured at such facilities are listed below. The
Company's facilities are in good operating condition suitable for their
respective uses and adequate for the Company's current needs.
FACILITY PRODUCTS
United States
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Camarillo, California Data tape
Menomonie, Wisconsin (leased) Laserdisc
Nekoosa, Wisconsin Carbonless paper
Oakdale, Minnesota Headquarters/laboratory facility
Pine City, Minnesota Micrographic cards
Tucson, Arizona Data tape
Wahpeton, North Dakota Diskettes/molding
Weatherford, Oklahoma Diskettes/conventional proofing
International
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Bracknell, United Kingdom (leased) Administrative
Segrate, Italy (leased) Administrative
Schiphol-rijk, Netherlands (leased) Administrative
Ommoord, Netherlands (leased) Administrative
Madrid, Spain (leased) Administrative
Neuss, Germany (leased) Administrative
Cergy, France (leased) Administrative
London, Ontario, Canada (leased) Administrative
Pennant Hills, Australia (leased) Administrative
Tokyo, Japan (leased) Administrative
North Point, Hong Kong (leased) Administrative
Singapore (leased) Administrative
The Company is in the process of liquidating certain properties in Florida,
Argentina where manufacturing operations ceased in 1998.
ITEM 3. LEGAL PROCEEDINGS.
The Company is the subject of various pending or threatened legal
actions in the ordinary course of its business. All such matters are subject to
many uncertainties and outcomes that are not predictable with assurance.
Consequently, the Company is unable to ascertain as of December 31, 1999 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, 1999 would not be material to
the Company's financial position or annual results of operations or cash flows.
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On May 10, 1999, Jazz Photo Corp. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of February 29, 2000, there were 36,274,128 shares of the
Company's common stock, $.01 par value (Common Stock), outstanding held by
approximately 43,363 shareholders of record. The Company's Common Stock is
listed on the New York and Chicago Stock Exchanges under the symbol of IMN. The
Company did not pay any dividends during 1999. 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.
1999 SALES PRICES 1998 SALES PRICES
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HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter $17.13 $15.13 $19.00 $13.56
Second Quarter $26.31 $15.06 $19.69 $15.94
Third Quarter $31.00 $23.00 $19.25 $14.94
Fourth Quarter $34.25 $26.69 $19.00 $14.56
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ITEM 6. SELECTED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL DATA*
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
(Dollars in millions, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net revenues $ 1,412.6 $ 1,328.9 $ 1,502.1 $ 1,604.9 $ 1,637.4
Gross profit 433.6 426.8 501.8 541.7 500.7
Selling, general and administrative 294.2 366.8 385.9 379.6 363.8
Research and development 76.0 87.8 97.1 124.8 157.5
Restructuring -- (16.8) 160.0 37.6 85.0
Operating income (loss) 63.4 (11.0) (141.2) (0.3) (105.6)
Income (loss) from continuing
operations before tax and
minority interest 69.3 (22.0) (165.8) (5.4) (116.3)
Income (loss) from continuing
operations (1) 42.3 (12.7) (135.6) (7.6) (56.6)
Earnings (loss) per common share
from continuing operations:
Basic 1.13 (0.33) (3.42) (0.18) (1.35)
Diluted 1.12 (0.33) (3.42) (0.18) (1.35)
Balance Sheet Data:
Working capital $ 414.2 $ 506.7 $ 538.9 $ 607.3 $ 658.4
Property, plant and equipment, net 212.8 233.8 381.6 480.1 513.2
Total assets 1,127.6 1,313.3 1,665.5 1,573.3 1,541.5
Long-term debt 1.1 32.7 319.7 123.1 --
Total liabilities 402.3 552.2 983.3 643.0 392.8
Total shareholders' equity 725.3 761.1 682.2 930.3 1,148.7
Other Information:
Current ratio 2.2 2.2 2.0 2.5 3.2
Days sales outstanding (2) 62 80 76 77 78
Days of inventory supply (2) 76 97 103 97 103
Assets/equity 1.6 1.7 2.4 1.7 1.3
Return on average assets (3) 3.6% n/m 1.5% 3.7% 0.9%
Return on average equity (3) 5.7% n/m 2.1% 3.8% 0.8%
Capital expenditures (4) $ 64.1 $ 132.4 $ 116.3 $ 167.4 $ 180.2
Number of employees (5) 4,850 6,400 9,800 9,400 12,300
</TABLE>
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* See Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General Overview" for a description of the basis of
presentation of the financial information presented in this table.
(1) Income (loss) from continuing operations, excluding restructuring and
other special charges, in 1998, 1997, 1996 and 1995 was $(18.9) million,
$17.2 million, $39.4 million and $9.9 million, respectively (see Note 5 of
the Notes to Consolidated Financial Statements).
(2) 1998 excludes impact of the medical imaging business which was sold on
November 30, 1998. 1999 excludes the impact of the Photo Color business
which was sold on August 2, 1999.
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(3) Return percentages are calculated using income (loss) from continuing
operations, excluding restructuring and other special charges noted in (1)
above for 1998, 1997, 1996 and 1995. Average assets are calculated using
continuing operations.
(4) Capital expenditures in 1998 include $67.5 million for the purchase of the
Company's research and development facility previously under a synthetic
lease.
(5) Years prior to 1999 include employees of subsequently discontinued
operations.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL OVERVIEW
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. Unless otherwise noted, the following discussion of results of
operations refers to continuing operations only. The discussion of financial
condition and liquidity refers to the total company, which includes continuing
and discontinued operations.
The following table displays the Company's results of operations for
1999, 1998 and 1997. The 1998 and 1997 results are presented below as reported
and adjusted. The adjusted results exclude restructuring and other special
charges, and other year-end adjustments, as applicable.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
1998 1997
(In millions, ----------------------- ------------------------
except per share data) 1999 Reported Adjusted Reported Adjusted
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 1,412.6 $ 1,328.9 $ 1,328.9 $ 1,502.1 $ 1,502.1
- --------------------------------------------------------------------------------------------------------------
Gross profit 433.6 426.8 426.8 501.8 516.8
- --------------------------------------------------------------------------------------------------------------
Selling, general and administrative 294.2 366.8 366.8 385.9 376.4
- --------------------------------------------------------------------------------------------------------------
Research and development 76.0 87.8 87.8 97.1 97.1
- --------------------------------------------------------------------------------------------------------------
Restructuring -- (16.8) -- 160.0 --
- --------------------------------------------------------------------------------------------------------------
Operating income (loss) 63.4 (11.0) (27.8) (141.2) 43.3
- --------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations 42.3 (12.7) (18.9) (135.6) 17.2
- --------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share,
continuing operations $ 1.12 $ (0.33) $ (0.48) $ (3.42) $ 0.43
- --------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
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 increase
Percentage of revenue (decrease)
- -----------------------------------------------------------------------------------------------------------------
1999 1998 1997 1999 vs 1998 1998 vs 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
100.0% 100.0% 100.0% Net revenues 6.3% (11.5)%
- -----------------------------------------------------------------------------------------------------------------
30.7 32.1 33.4 Gross profit 1.6 (14.9)
- -----------------------------------------------------------------------------------------------------------------
20.8 27.6 25.7 Selling, general and administrative (19.8) (4.9)
- -----------------------------------------------------------------------------------------------------------------
5.4 6.6 6.5 Research and development (13.4) (9.6)
- -----------------------------------------------------------------------------------------------------------------
-- (1.3) 10.6 Restructuring n/m n/m
- -----------------------------------------------------------------------------------------------------------------
4.5 (0.8) (9.4) Operating income (loss) n/m n/m
- -----------------------------------------------------------------------------------------------------------------
(0.4) 0.9 1.6 Non-operating (income) expense, net n/m n/m
- -----------------------------------------------------------------------------------------------------------------
1.9 (0.7) (2.0) Income tax provision (benefit) n/m n/m
- -----------------------------------------------------------------------------------------------------------------
3.0 (1.0) (9.0) Income (loss) from continuing operations n/m n/m
- -----------------------------------------------------------------------------------------------------------------
n/m: not meaningful
</TABLE>
The following table includes the same information as above, but
excludes the impact of restructuring and other special charges as discussed in
"General Overview".
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
Percentage of revenue (excluding Percentage of dollar increase
restructuring and other special charges) (decrease)
- -----------------------------------------------------------------------------------------------------------------
1999 1998 1997 1999 vs 1998 1998 vs 1997
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
100.0% 100.0% 100.0% Net revenues 6.3% (11.5)%
- -----------------------------------------------------------------------------------------------------------------
30.7 32.1 34.4 Gross profit 1.6 (17.4)
- -----------------------------------------------------------------------------------------------------------------
20.8 27.6 25.1 Selling, general and administrative (19.8) (2.6)
- -----------------------------------------------------------------------------------------------------------------
5.4 6.6 6.4 Research and development (13.4) (9.6)
- -----------------------------------------------------------------------------------------------------------------
4.5 (2.1) 2.9 Operating income (loss) n/m n/m
- -----------------------------------------------------------------------------------------------------------------
(0.4) 0.6 1.3 Non-operating (income) expense, net n/m n/m
- -----------------------------------------------------------------------------------------------------------------
1.9 (1.3) 0.5 Income tax provision (benefit) n/m n/m
- -----------------------------------------------------------------------------------------------------------------
3.0 (1.4) 1.1 Income (loss) from continuing operations n/m n/m
- -----------------------------------------------------------------------------------------------------------------
n/m: not meaningful
</TABLE>
NET REVENUES
Net revenues in 1999, 1998 and 1997 were $1,412.6 million, $1,328.9
million and $1,502.1 million, respectively. Net revenues increased 6.3 percent
in 1999 compared to a decrease of 11.5 percent in 1998. The revenue increase in
1999 is due to solid volume increases,
13
<PAGE>
partially offset by price declines and a slight negative effect of changes in
currency exchange rates. Volume increases were across all geographic regions.
Revenues declined in 1998 primarily due to price erosion and, to a lesser
extent, unfavorable changes in currency exchange rates. Approximately 45 percent
of the Company's net revenues in 1999 were from sales outside the United States
compared to 43 percent in 1998 and 1997.
GROSS PROFIT
Gross profit for 1999 and 1998 was $433.6 million and $426.8
million, respectively. Gross profit for 1997 was $501.8 million, which includes
the impact of $15.0 million in special charges primarily related to the
write-down of inventory. Gross profit was 30.7 percent of revenue in 1999
compared to 32.1 percent in 1998. Excluding the impact of special charges, gross
profit in 1997 would have been $516.8 million, or 34.4 percent of revenues.
During 1999 volume growth and productivity improvements were offset by price
reductions and changes in product mix. The decline in 1998 was driven by the
effects of price erosion and product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
In 1999, 1998 and 1997, selling, general and administrative (SG&A)
expenses were $294.2 million, $366.8 million and $385.9 million, respectively.
SG&A expenses were 20.8 percent and 27.6 percent of revenues in 1999 and 1998,
respectively. Excluding special charges of $9.5 million in 1997, SG&A expenses
would have been $376.4 million, or 25.1 percent of revenues. The decrease in
SG&A in 1999 results from a number of factors including headcount reductions,
reduced information technology spending, reimbursement of transition services
related to the Company's discontinued operations and the reduction in
SuperDisk(TM) promotional costs. SG&A expenses, as a percentage of revenue, may
be negatively impacted by 1 to 1.5 percentage points over the next 12 months due
to declining demand for transition services associated with the divestiture of
the Medical Imaging and Photo Color Systems businesses. In addition, 1999
included a $3.5 million gain on the sale of a facility in Bracknell, U. K., and
a $21.0 million gain from the settlement of a business dispute, partially offset
by an $18.0 million write-off of certain capitalized software costs. The 1998
increase in SG&A expenses as a percentage of revenues compared to 1997 was
primarily due to the decline in revenues. The 1998 decline in spending compared
to 1997 was due to benefits resulting from the Company's 1997 restructuring
program, partially offset by the Company's investment in its SuperDisk(TM)
program and costs attributable to the Company's IT infrastructure development.
The 1997 SG&A expenses include $15.3 million of start-up costs related to
designing and implementing more efficient business processes and developing the
Company's brand identity. In 1998, the Company began amortizing capitalized
software development costs associated with the design, testing and
implementation of the Company's new IT systems.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses in 1999, 1998 and 1997 were $76.0
million, $87.8 million and $97.1 million, respectively. The decline primarily
reflects the impact of more focused research and development spending and the
Company's 1997 restructuring program.
RESTRUCTURING
In 1998, the Company recorded a $16.8 million net benefit in the
restructuring line of the
14
<PAGE>
Statement of Operations, consisting of a $3.6 million benefit reflecting final
adjustments of the restructuring reserves established in the fourth quarter of
1995, and a $26.2 million reversal of restructuring reserves established in the
fourth quarter of 1997, offset by $13.0 million of new charges, primarily
related to asset write-downs. The $26.2 million adjustment to the 1997
restructuring charge resulted primarily from three factors: a better than
expected result from the sale of the Company's CD-ROM business, lower than
expected costs from closing certain research and development facilities
(primarily the facility in the United Kingdom) and lower than expected costs
associated with employee terminations.
The Company recorded restructuring charges of $160.0 million in
1997. 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.
OPERATING INCOME (LOSS)
Operating income for 1999 was $63.4 million. Operating losses for
1998 and 1997 were $11.0 million and $141.2 million, respectively. Excluding
restructuring and special charges, the operating loss would have been $27.8
million in 1998 and operating income would have been $43.3 million in 1997. As a
percent of revenues, operating income (loss) excluding restructuring and special
charges for 1999, 1998 and 1997 represented 4.5 percent, (2.1) percent and 2.9
percent of revenues, respectively.
For 2000, the Company anticipates operating income growth of 20
percent over reported 1999 operating income, on continued revenue growth. While
it is anticipated that operating income will show an increase in first quarter
2000 as compared to first quarter 1999, the Company does not expect to reach the
same level of operating income it has achieved in the last two quarters of 1999,
as the Company will be investing in new product and service offerings.
NON-OPERATING INCOME/EXPENSE
Non-operating income was $5.9 million in 1999. Non-operating expense
was $11.0 million and $24.6 million for 1998 and 1997, respectively. 1999
reflects lower interest costs, higher interest income and gains on certain
investments. The decrease in non-operating expense in 1998 compared to 1997 was
due to increased investment income and reduced currency transaction losses,
offset by the increase in interest expense on outstanding borrowings. Also, in
connection with the termination of the Company's revolving credit agreement, the
Company incurred $2.6 million of costs in 1998 primarily related to an interest
swap agreement. The Company utilizes certain financial instruments to manage
risks associated with interest rate and foreign currency risks. See Note 8 to
the Consolidated Financial Statements.
INCOME TAX
Excluding restructuring and other special charges, the Company's
effective tax rate was 39 percent, 48 percent and 29 percent of pre-tax income
for 1999, 1998 and 1997, respectively. The decrease in the 1999 tax rate was due
primarily to continuing improvement in worldwide profitability, including
increasing profits in lower tax geographies. 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 certain amounts not considered recoverable. At
December 31, 1999, the
15
<PAGE>
Company had deferred tax assets and liabilities, net of valuation allowances, of
$80.5 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 it will generate sufficient future taxable
income to recover the Company's recorded net deferred tax assets.
INCOME (LOSS) FROM CONTINUING OPERATIONS
Income from continuing operations for 1999 was $42.3 million, or
$1.12 per diluted share, compared with a loss for 1998 of $12.7 million, or
$0.33 per diluted share, and a loss of $135.6 million or $3.42 per diluted share
in 1997. Excluding restructuring and other special charges, the loss from
continuing operations would have been $18.9 million or $0.48 per diluted share
in 1998; income from continuing operations would have been $17.2 million or
$0.43 per diluted share in 1997. The reduction in shares outstanding resulting
from the Company's share repurchase program, discussed in the Liquidity section
of Management's Discussion and Analysis, has had a positive impact on earnings
per share amounts.
PERFORMANCE BY GEOGRAPHIC AREA
Approximately 45 percent of the Company's net revenues in 1999 were
from sales outside the United States compared to 43 percent in both 1998 and
1997. United States revenues totaled $783.4 million, $755.9 million and $848.7
million in 1999, 1998 and 1997, respectively. International revenues were $629.2
million, $573.0 million and $653.4 million in 1999, 1998 and 1997, respectively.
The Company experienced volume increases across all geographic regions in 1999.
Strong volume gains were somewhat offset by price erosion in 1999.
Internationally, unfavorable currency translation effects also partially offset
volume gains. In 1998, domestic revenues were down due to price erosion.
International revenues were down due to price erosion and unfavorable currency
translation, offset slightly by volume increases.
PERFORMANCE BY SEGMENTS
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 discussed below, are Data Storage and Information Management, Color
Technologies and Digital Solutions and Services.
DATA STORAGE AND INFORMATION MANAGEMENT
Data Storage and Information Management net revenues of $952.1
million for 1999, increased $237.9 million from 1998, which had declined $62.4
million from 1997. The increase in 1999 was across substantially all major
customer markets. The enterprise and network businesses led sales growth in this
segment. The decrease in 1998 was driven by declines in the Company's more
mature mobile and desktop product sales including standard diskettes and desktop
tape cartridges, offset partially by increases in net revenues from
SuperDisk(TM) drives and diskettes and certain network and enterprise data
center products. Operating income in 1999 of $31.9 million represented a
profitability increase of $62.4 million from an operating loss of $30.5 million
in 1998. Operating income was $22.7 million in 1997. The improvement in 1999 was
primarily driven by volume increases in higher-margin new products in the
enterprise and network markets and a reduction in SuperDisk(TM) program
spending. The decline in 1998 was
16
<PAGE>
driven primarily by the Company's investment in SuperDisk(TM) and other Data
Storage technologies and, to a lesser extent, by declines in other mobile and
desktop products.
COLOR TECHNOLOGIES
Color Technologies net revenues declined $70.2 million to $339.8
million in 1999 compared to 1998. Net revenues in 1998 decreased $69.1 million
to $410.0 million from the prior year. The declines in both years were driven
primarily by planned reductions in the plates and film businesses. Operating
income of $37.8 million increased $2.3 million from 1998, which was down $5.1
million from 1997. The increase in operating income in 1999 resulted from
manufacturing cost improvements in the proofing business.
DIGITAL SOLUTIONS AND SERVICES
Digital Solutions and Services 1999 net revenues of $114.1 million
declined $29.4 million from 1998, which declined $24.6 million from 1997. The
declines were driven primarily by the anticipated slowing of the Company's more
mature Document Imaging business. 1999 operating loss was $2.0 million versus an
operating loss of $3.3 million in 1998 and operating income of $5.3 million in
1997. The improvement in 1999 is the result of improved cost control and
operational efficiency. The decline in 1998 from 1997 reflects investments in
new business opportunities.
FINANCIAL POSITION
In general, most balance sheet accounts as of December 31, 1999
decreased as a result of the sale of the Photo Color Systems business in August
(see Note 3 to the Consolidated Financial Statements). The accounts receivable
days sales outstanding (DSO) was 62 days at December 31, 1999, down from 80 days
at December 31, 1998. The reduction is due to operational improvements. The
Company had 76 days of inventory supply on hand at December 31, 1999 compared to
97 days at December 31, 1998. This decrease is primarily related to improved
inventory management as well as by strong demand in the later part of the fourth
quarter. Other current assets were $133.1 million at December 31, 1999 compared
to $265.7 million at December 31, 1998. This decrease is primarily due to the
release of restricted cash from the sale of the Medical Imaging Systems business
(see Note 3 to the Consolidated Financial Statements). The $62.3 million
reduction in other liabilities is primarily due to the sale of the Photo Color
Systems business and funding of the Company's defined benefit pension plans.
The net book value of property, plant and equipment at December 31,
1999 was $212.8 million, a decrease of $21.0 million from $233.8 million at
December 31, 1998. This decrease is due primarily to the sale of the Photo Color
Systems business and the Bracknell, U.K. facility.
LIQUIDITY
Cash provided by operating activities was $84.7 million in 1999 and
$133.5 million in 1997, while cash used in operating activities was $6.4 million
in 1998. The adjustments to net income included depreciation and amortization of
$87.7 million, $129.4 million and $147.5 million in 1999, 1998 and 1997,
respectively, and a net restructuring benefit of $16.8 million in 1998.
Restructuring and other special charges totaled $241.6 million in 1997.
Adjustments also include a $65.0 million gain in 1998 associated with the sale
of the Medical Imaging Systems
17
<PAGE>
business. Working capital was positively impacted in 1999 by the reduction in
days of inventory supply and accounts receivable DSO. During 1999 and 1998, the
Company made net cash payments related to restructuring charges of approximately
$23 million and $45 million, respectively, related to both continuing and
discontinued operations. In addition, other operating activities included
approximately $40 million used to fund defined benefit pension plans in 1999.
Cash provided by investing activities was $142.8 million and $247.6
million in 1999 and 1998, respectively, with $240.6 million used in 1997.
Proceeds from the sale of the Photo Color and Medical Imaging Systems businesses
provided $201.9 million and $389.2 million in 1999 and 1998, respectively. In
addition, proceeds from the sale of other businesses were $38.0 million in 1998.
Capital spending totaled $64.1 million, $132.4 million and $116.3 million in
1999, 1998 and 1997, respectively. Capital expenditures by business segment are
shown in Note 11 to the Consolidated Financial Statements. Capital expenditures
in 1998 included $67.5 million for the purchase of the Company's research and
development facility previously under a synthetic lease structure. The Company
expects capital spending in 2000 to be approximately $85 million primarily
related to planned investments in manufacturing technology for new data storage
products. The Company capitalized $59.3 million and $97.8 million of software
expenditures in 1998 and 1997, respectively, primarily related to the
development, testing and implementation of the Company's new IT systems. Net
cash paid in 1997 related to business acquisitions totaled $29.0 million.
The Company has a 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.
In addition, certain subsidiaries have arranged borrowings locally
outside of the agreements discussed above. As of December 31, 1999, $27.3
million of short-term and $1.1 million of long-term borrowings were outstanding
under such arrangements.
As of December 31, 1999, the Company's ratio of debt to total
capital was 3.8 percent as compared with 7.1 percent at December 31, 1998. The
Company expects that cash and equivalents, together with cash flow from
operations and availability of borrowings under its current and future sources
of financing, will provide liquidity sufficient to operate the Company for the
foreseeable future.
18
<PAGE>
The Company's Board of Directors has authorized the repurchase of up
to 10 million shares of the Company's common stock. As of December 31, 1999, the
Company had repurchased 4.4 million shares under this authorization and held, in
total, 5.7 million shares of treasury stock acquired at an average price of
$20.74 per share.
EURO CONVERSION STATUS
On January 1, 1999, 11 of the 15 member countries of the European
Union adopted the Euro as their new common currency. The Euro is trading on
currency exchanges and can be used for noncash transactions. Local currencies
will remain legal tender until December 31, 2001. By no later than December 31,
2001, participating countries will issue new Euro-denominated bills for use in
cash transactions. By no later than July 1, 2002, participating countries will
begin using the Euro as the legal tender and will withdraw all legacy
currencies.
The Euro conversion may lead to increased competition between
countries and potential erosion of margins as prices in different countries are
more transparent. The Company is reviewing its marketing strategies to address
possible increased competition and is also reviewing and testing its software
compatibility with the Euro conversion. The Company will continue to review the
impact of the conversion to the Euro; however, the Company does not expect that
the Euro conversion will have a material impact on the Company's results of
operations and financial position.
SALE OF MEDICAL IMAGING AND PHOTO COLOR SYSTEMS BUSINESSES
As discussed in Note 3 to the Consolidated Financial Statements, on
November 30, 1998, the Company sold its worldwide Medical Imaging Systems
business to Eastman Kodak Company (Kodak). The Company, however, retained its
manufacturing facility in Ferrania, Italy, (the Ferrania Facility) from which
the Company agreed to manufacture x-ray and wet laser medical imaging film for
Kodak for a minimum of two years under a supply agreement which became effective
on November 30, 1998.
On August 2, 1999, the Company sold its Photo Color Systems business
and the Ferrania Facility to Schroder Ventures (see Note 3 to the Consolidated
Financial Statements).
Associated with the Company's sale of its Medical Imaging and Photo
Color Systems businesses, the Company receives reimbursement for certain
transition services that the Company has agreed to provide to the respective
purchasers as they integrate those businesses into their organizations. Kodak
and Schroder Ventures, at their option, may terminate their respective
transition services agreements with respect to individual categories of service
upon prior notice, the length of which varies according to the nature of the
service. While the Company can not project with certainty the duration of and
expected cost reimbursements associated with the transition services, or the
potential impact if the transition services agreements are terminated, SG&A
expenses, as a percentage of revenue, may be negatively impacted by 1 to 1.5
percentage points over the next 12 months due to the declining need for
transition services.
19
<PAGE>
MARKET RISKS
The Company is exposed to various market risks, including volatility
in foreign currency exchange rates and interest rates. These exposures primarily
relate to the sale of products to foreign customers, purchases from foreign
suppliers, acquisition of raw materials from both domestic and foreign
suppliers, and changes in interest rates. The Company utilizes derivative
financial instruments, including forward exchange contracts, options and swap
agreements to manage certain of these exposures when it is considered practical
to do so in accordance with established policies and procedures. The Company
does not hold or issue derivative financial instruments for speculative purposes
and is not a party to leveraged derivative transactions.
As a global company, changes in the exchange rates of foreign
currencies relative to the U.S. dollar affect the Company's financial results.
The Company, from time-to-time, enters into forward foreign exchange contracts
principally to hedge booked receivables and payables denominated in foreign
currencies that, when remeasured according to generally accepted accounting
principles, impact the income statement. For certain markets, particularly Latin
America, where forward exchange contracts are not available or determined not to
be cost effective, the Company attempts to minimize currency exposure risk
through pricing and working capital management. There can be no assurances that
such an approach will be successful, especially in the event of a significant
and sudden decline in the value of local currencies. Factors that could impact
the effectiveness of the Company's hedging include accuracy of sales forecasts,
volatility of the currency markets and availability of hedging instruments.
Although the Company attempts to utilize transaction hedging to reduce the
impact of changes in currency exchange rates on booked transactions, when the
U.S. dollar sustains a strengthening position against currencies in which the
Company sells products or a weakening exchange rate against currencies in which
the Company incurs costs, the Company's sales or costs are adversely impacted.
At December 31, 1999, the Company had $220.6 million notional amount
of foreign currency forward contracts of which $202.4 million hedged recorded
balance sheet exposures. A hypothetical adverse change of 10 percent in year-end
foreign currency exchange rates would reduce the fair value of foreign currency
contracts outstanding at December 31, 1999 by $7.9 million; however, less than
$1.5 million of this change would impact earnings since the gain (loss) on the
majority of these contracts would be offset by an equal gain (loss) on the
underlying exposures being hedged.
To manage interest rate risk on a portion of the variable rate
borrowings under its revolving credit agreement, the Company has utilized, and
in the future may utilize, interest rate swaps. These interest rate swap hedging
instruments have the effect of locking in, for a specified period, the base
interest rate (excluding credit margin) the Company will pay on the notional
principal amount established in the swap. As a result, while these hedging
arrangements are structured to reduce the Company's exposure to interest rate
increases, they also limit the benefit the Company might otherwise have received
from any interest rate decreases. These swaps are usually cash settled
quarterly, with interest expense adjusted for amounts paid or received. The
Company did not utilize any interest rate swaps during 1999.
20
<PAGE>
YEAR 2000 COMPLIANCE
The Company created a Year 2000 (Y2K) Operating Team to oversee and
ensure the Company's Y2K readiness through the assessment, testing, and
remediation or replacement of its internal IT systems, non-IT systems (including
plants, facilities, process control and building control equipment,
communications systems, laboratory and test equipment, etc.), and products. In
addition, the team assessed the readiness of third parties with whom the Company
had critical external business relationships.
The Company also prepared contingency plans to address potential Y2K
related failures that could affect critical Company operations. These
contingency plans identified and prioritized risks, assessed the impact to the
business of the identified risks, and developed strategies for addressing those
failures which could pose the greatest risk to the Company.
The Company estimates the total costs associated with its Y2K
program to be $4.5 million, excluding costs related to the completion of the
Company's new IT system. Costs were incurred primarily in the non-IT systems
area. The Company does not anticipate significant future expenditures relating
to its Y2K efforts.
From December 30, 1999 to January 3, 2000, the Company implemented a
Y2K transition plan, under which the Company's facilities and operations were
monitored. No material problems were reported during the period. As of the date
of this filing, the Company has not experienced any material Y2K problems with
its IT or non-IT systems or products, nor has the Company experienced any
material problems associated with any of its critical external business
relationships. The Company does not anticipate significant future problems.
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 are current 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 forward-looking opinions or statements expressed with
respect to future periods are the following:
THE COMPANY'S ABILITY TO ESTABLISH A NEW BRAND AND IDENTITY - As a
result of the Company's spin-off from Minnesota Mining and Manufacturing Company
(3M) in July, 1996, it retained the right to use certain 3M trademarks in
marketing the Company's products. The Company's right to use 3M trademarks
expired on June 30, 1999. The Company has made and continues to make significant
investments in the development of the Company's independent identity and brand.
However, there can be no assurance that the Company will be successful in this
regard.
21
<PAGE>
COMPETITIVE INDUSTRY CONDITIONS - The Company operates in highly
competitive environments. 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, a variety of distribution channels,
relatively large and aggressive marketing efforts, evolving customer needs away
from product purchases and towards increasing integrated business solutions, and
declining prices in certain product lines.
Driving demand in the data storage industry is a greatly expanding
need to access, manage and store information more rapidly and at lower cost,
with greater accuracy and reliability. Similarly, the demand for image
management and color management products, services and work flow solutions
continues to grow as the use of images and color continues to expand in both
commercial and consumer applications. These offerings are characterized by
increasing use of digital technologies, including software and services,
replacing analog-based products where the Company currently has a strong market
position in several areas.
In particular, the data storage industry is undergoing rapid
technology and market changes, and the varieties of data storage media formats
available for customers is increasing. 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. Success
in introducing and gaining acceptance of new data storage media is dependent on
the ability to develop relationships with distributors and Original Equipment
Manufacturers (OEM's).
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, services and customer
solutions cost effectively and on a timely basis. The success of the Company's
offerings is dependent on several factors including competitive technology
capabilities, differentiation from competitive offerings, effectiveness of
marketing programs and low 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.
There can be no assurance that the Company will be able to continue
to introduce new products or maintain competitive technology competencies, that
the markets will be receptive to its new products, that the Company's marketing
programs will be successful, 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 products. 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 executing any
of the above described risks, the Company may incur a material adverse impact on
its business and financial results.
22
<PAGE>
AVAILABILITY OF RAW MATERIALS AND PURCHASED PRODUCTS - The Company
makes significant purchases of raw materials and certain purchased products from
many domestic and foreign sources for use in its manufacturing operations and
for resale to customers. While the Company is presently able to obtain
sufficient raw materials and purchased products to meet its needs, no assurances
can be given that such availability at acceptable pricing levels will continue.
If the Company is unable to continue to obtain critical raw materials and
purchased products, the Company may incur a material adverse impact on its
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 45 percent of the Company's revenues
in 1999, may be subject to various risks which are not present in domestic
operations, including political instability, the possibility of expropriation,
restrictions on royalties, dividends and currency remittances, local government
involvement required for operational changes within the Company, requirements
for governmental approvals for new ventures and local participation in
operations such as local equity ownership and workers' councils. In addition,
the Company's business and financial results are affected by fluctuations in
world financial markets, including foreign currency exchange rates. The
Company's foreign currency hedging policy attempts to mitigate some of these
risks over near term periods on booked transactions; however, these risk
management activities can not assure that these programs will offset more than a
portion of the adverse financial impact resulting from unfavorable movements in
foreign exchange rates or that medium and longer term effects of exchange rates
will not be significant.
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. 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 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.
SALE OF MEDICAL IMAGING BUSINESS -- As discussed in Note 3 to the
Consolidated Financial Statements, on November 30, 1998, the Company sold
substantially all of its worldwide Medical Imaging Systems business to Kodak.
Excluded from this sale was the Ferrania Facility, at which certain x-ray and
wet laser medical imaging products and photographic film are manufactured. As
also discussed in Note 3 to the Consolidated Financial Statements, on August 2,
1999, the Company closed on the sale of its worldwide Photo Color Systems
business, including the Ferrania Facility, to Ferrania Lux. The (Kodak) Asset
Purchase Agreement obligates Kodak to pay to the Company up to $25 million under
certain conditions upon the sale of the Ferrania Facility. Kodak has challenged
the Company's claim for the full
23
<PAGE>
$25 million as well as claims for other amounts which the Company believes are
due from Kodak in connection with the sale of the Medical Imaging Systems
business. While the Company believes that the applicable contractual terms
support its position, it cannot predict with certainty the ultimate outcome of
these disputed items.
TRANSITION SERVICES -- In connection with the sales of both the
Medical Imaging and Photo Color Systems businesses, the Company receives
reimbursement for certain transition services that the Company has agreed to
provide to the respective purchasers as they integrate those businesses into
their organizations. Kodak and Schroder Ventures, respectively, may terminate
the transition services agreements with respect to individual categories of
service upon prior notice, the length of which varies according to the nature of
the service. As a result, the Company cannot project with certainty the duration
of and expected cost reimbursements associated with such transition services.
RESTRUCTURING CHARGES - While the Company's 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, 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 - On December 31, 1998, the Company
entered into a three-year $175.0 million 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 Company expects that
cash and equivalents, together with cash flow from operations and availability
of borrowing under its current and future sources of financing, will provide
liquidity sufficient to operate the Company.
RETENTION OF KEY TALENT AND EMPLOYEES - The Company operates in a
highly competitive market for key talent and employees. While the Company is
presently able to retain key talent and employees, no assurances can be given
that this situation will continue. If the Company is unable to retain its key
talent and employees, the Company may incur a material adverse impact on its
business and financial results.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's Consolidated Financial Statements, accompanying Notes
to Consolidated Financial Statements and Report of Independent Accountants that
are filed as part of this Report are listed under Item 14. "Exhibits, Financial
Statement Schedules, and reports on Form 8-K" and are set forth on pages FS-1
through FS-24 immediately following the signature pages of this Report.
Selected quarterly financial data for 1999 and 1998 is in Note 17 to
the Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
The information required by Items 10 through 13 is incorporated by
reference from the Company's definitive proxy statement pursuant to general
instruction G(3), with the exception of the executive officers section of Item
10, which is included in Item 1 of this Form 10-K. The Company will file its
definitive proxy statement pursuant to Regulation 14A by April 30, 2000.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
25
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
1. FINANCIAL STATEMENTS
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Shareholders' Equity and Comprehensive
Income for the Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Report of Independent Accountants
The Consolidated Financial Statements, Notes to Consolidated
Financial Statements and Report of Independent Accountants listed above are
filed as part of this Report and are set forth on pages FS-1 through FS-24
immediately following the signature pages of this Report.
2. FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted because of the absence
of the conditions under which they are required or because the required
information is included in the Consolidated Financial Statements or the notes
thereto.
3. EXHIBITS
The following Exhibits are filed as part of, or incorporated by
reference into, this Report:
Exhibit
Number Description of Exhibit
------ ----------------------
2.1 An agreement between the Company and Ferrania Lux
S.A.R.L. for the sale of the Company's Photo Color
Systems business and its manufacturing facility in
Ferrania, Italy (incorporated by reference to Exhibit
2.1 to the Company's Form 10-Q for the quarter ended
June 30, 1999)
3.1 Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to
Registration Statement on Form 10, No. 1-14310)
3.2 Amended and Restated Bylaws of the Company (incorporated
by reference to Exhibit 3.2 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1996)
26
<PAGE>
4.1 Rights Agreement, dated as of June 18, 1996 between the
Company and Norwest Bank Minnesota, N.A., as Rights
Agent (incorporated by reference to Exhibit 4.1 to
Registration Statement on Form 10, No. 1-14310)
4.2 Amendment No. 1 to the Rights Agreement dated as of
January 12, 1999 between the Company and Norwest Bank
Minnesota, N.A., as Rights Agent (incorporated by
reference to Exhibit 4.2 to the Company's Form 8-K
Current Report dated February 8, 1999)
4.3 Certificate of Designations, Preferences and Rights of
Series A Junior Participating Preferred Stock of the
Company (incorporated by reference to Exhibit 4.2 to
Registration Statement on Form 10, No. 1-14310)
4.4 Loan and Security Agreement dated as of December 31,
1998 by and among the Company and Imation Enterprises
Corp., the Lenders named therein, Bankamerica Business
Credit, Inc. as Agent and Collateral Agent, and
BankBoston, N.A. and NBD Bank and Syndicatin Agents and
Co-Agents (incorporated by reference to Exhibit 4.3 to
the Company's Form 8-K Current Report dated February 8,
1999)
10.1* Employment Agreement, dated as of July 1, 1996, between
William T. Monahan and the Company (incorporated by
reference to Exhibit 10.7 to Registration Statement on
Form 10, No. 1-14310)
10.2* Imation 1996 Employee Stock Incentive Program
(incorporated by reference to Exhibit 10.8 to
Registration Statement on Form 10, No. 1-14310)
10.3* Imation Excess Benefit Plan (incorporated by reference
to Exhibit 10.10 to Registration Statement on Form 10,
No. 1-14310)
10.4* Imation 1996 Retirement Investment Plan (incorporated by
reference to Exhibit 10.11 to Registration Statement on
Form 10, No. 1-14310)
10.5* Imation 1996 Directors Stock Compensation Program, as
Amended (incorporated by reference to Exhibit 10.12 to
Annual Report on Form 10-K for the year ended December
31, 1996)
10.6* Imation 1998 Success Sharing Program (incorporated by
reference to Exhibit 10.13 to Annual Report on Form 10-K
for year ended December 31, 1997)
10.7* Form of Indemnity Agreement between the Company and each
of its directors (incorporated by reference to Exhibit
10.13 to Annual Report on Form 10-K for the year ended
December 31, 1996)
10.8* Employment Agreement dated as of April 1, 1998, between
Robert L. Edwards and the Company (incorporated by
reference to Exhibit 10.1 of the Company's Form 10-Q for
the quarter ended March 31, 1998).
10.9* Letter dated July 6, 1998 to Steven D. Ladwig regarding
executive compensation (incorporated by reference to
Exhibit 10.1 of the Company's Form 10-Q for the quarter
ended September 30,1998).
10.10* Form of severance agreement between the Company and its
executive officers (incorporated by reference to Exhibit
10.1 of the Company's Form 10-Q for the quarter ended
June 30, 1999)
27
<PAGE>
21.1 Subsidiaries of Imation Corp.
23.1 Consent of Independent Accountants
24.1 Power of Attorney
27.1 Financial Data Schedule
- ---------------
*Items that are management contracts or compensatory plans or arrangements
required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
(b) REPORTS ON FORM 8-K
The Company did not file any Reports on Form 8-K during the quarter
ended December 31, 1999.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
IMATION CORP.
By: /s/ WILLIAM T. MONAHAN
------------------------
William T. Monahan
CHAIRMAN, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Date: March 23, 2000
29
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ WILLIAM T. MONAHAN Chairman, President, Chief March 23, 2000
- ---------------------- Executive Officer and Director
William T. Monahan
/s/ ROBERT L. EDWARDS Sr. Vice President, Chief Financial March 23, 2000
- ---------------------- Officer and Chief Administrative
Robert L. Edwards Officer
/s/ PAUL R. ZELLER Vice President, Corporate Controller March 23, 2000
- ----------------------
Paul R. Zeller
* Director March 23, 2000
- ----------------------
Richard E. Belluzzo
* Director March 23, 2000
- ----------------------
Lawrence E. Eaton
* Director March 23, 2000
- ----------------------
Michael S. Fields
* Director March 23, 2000
- ----------------------
Linda W. Hart
* Director March 23, 2000
- ----------------------
William W. George
* Director March 23, 2000
- ----------------------
Ronald T. LeMay
* Director March 23, 2000
- ----------------------
Marvin L. Mann
* Director March 23, 2000
- ----------------------
Daryl J. White
* By: /s/ JOHN L. SULLIVAN
--------------------
John L. Sullivan Attorney-in-fact
30
<PAGE>
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.
FS-1
<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.
FS-2
<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.
FS-3
<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.
FS-4
<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.
FS-5
<PAGE>
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.
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
FS-6
<PAGE>
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.
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
FS-7
<PAGE>
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:
Years ended December 31,
(In millions) 1999 1998 1997
- --------------------------------------------------------------------------------
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
================================================================================
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.
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.
FS-8
<PAGE>
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.
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
FS-9
<PAGE>
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:
Years Ended December 31, 1999 1998 1997
- --------------------------------------------------------------------------------
(In millions)
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)
================================================================================
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.
FS-10
<PAGE>
NOTE 4 -- SUPPLEMENTAL BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
(In millions) 1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
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
=========================================================================================
</TABLE>
FS-11
<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:
Program Cumulative Balance at
(In millions) Amounts(1) Usage December 31, 1999
- --------------------------------------------------------------------------------
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
================================================================================
(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 related 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
FS-12
<PAGE>
the restructuring activities described above. The remaining activities are
expected to be completed in 2000.
NOTE 6 -- INCOME TAXES
The components of income (loss) from continuing operations before
income taxes are as follows:
(In millions) 1999 1998 1997
- --------------------------------------------------------------------------------
U.S. $ 47.7 $ 0.5 $ (72.5)
International 21.6 (22.5) (93.3)
- --------------------------------------------------------------------------------
Total $ 69.3 $ (22.0) $ (165.8)
================================================================================
The income tax provision (benefit) from continuing operations is as
follows:
(In millions) 1999 1998 1997
- --------------------------------------------------------------------------------
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)
================================================================================
The components of net deferred tax assets and (liabilities) are as
follows:
(In millions) 1999 1998
- --------------------------------------------------------------------------------
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
================================================================================
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:
FS-13
<PAGE>
(In millions) 1999 1998 1997
- --------------------------------------------------------------------------------
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)
================================================================================
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.
FS-14
<PAGE>
Long-term debt maturities as of December 31, 1999 are as follows:
(In millions) 2000 2001 2002 2003 2004 Thereafter Total
- --------------------------------------------------------------------------------
Long-term debt maturities $0.1 $0.1 $0.1 $0.1 $0.1 $0.7 $1.2
================================================================================
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.
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.
FS-15
<PAGE>
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:
(In millions) 2000 2001 2002 2003 2004 Thereafter Total
- --------------------------------------------------------------------------------
Minimum lease payments $14.3 $9.0 $5.5 $1.7 $1.0 $2.0 $33.5
================================================================================
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.
FS-16
<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.
FS-17
<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> <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)
<CAPTION>
ASSUMPTIONS, END OF YEAR 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
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
FS-18
<PAGE>
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.
<TABLE>
<CAPTION>
INTERNATIONAL PLANS
(In millions) 1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <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)
<CAPTION>
ASSUMPTIONS, END OF YEAR 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------
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>
FS-19
<PAGE>
(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.
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:
1999 1998
- --------------------------------------------------------------------------------
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
================================================================================
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).
FS-20
<PAGE>
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.
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, 1999 Year Ended December 31, 1998 Year Ended December 31, 1998
----------------------------- ---------------------------- -----------------------------
Stock Weighted Average Stock Weighted Average Stock Weighted Average
Options Exercise Price Options Exercise Price Options 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 Options Remaining Average Options Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------
<S> <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
FS-21
<PAGE>
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.
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.
FS-22
<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.
FS-23
<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
FS-24
Exhibit 21.1
SUBSIDIARIES OF IMATION CORP. AS OF MARCH 10, 2000
<TABLE>
<CAPTION>
Country or State In Percentage of
Which Subsidiary Was Ownership
Organized (Note 1)
<S> <C> <C>
Imation Club of the United States, Inc. Minnesota 100
Imation Enterprises Corp. Delaware 100
Imation Funding Corp. Delaware 100
Imation Greece S.A. Greece 100
Imation Insurance Ltd. Bermuda 100
Imation Argentina S.A.C.I.F.I.A. Argentina 100
Imation do Brasil Ltda Brazil 100
Imation Chile S.A. Chile 100
Imation Colombia S.A. Colombia 100
Imation Dominicana, S.A. Dominican Republic 100
Imation Ecuador S.A. Ecuador 100
Imation de Guatemala S.A. Guatemala 100
Imation Mexico S.A. de C.V. Mexico 100
Imation Panama, S.A. Panama 100
Imation Peru S.A. Peru 100
Imation Caribbean Inc. Puerto Rico 100
Imation Venezuela, S.A. Venezuela 100
Imation Canada Inc. Canada 100
Imation (Barbados) Corp. Barbados 100
Imation (Thailand) Ltd. Thailand 100
Imation Holdings Pte Ltd. Singapore 100
Imation Asia Pacific Pte Ltd Singapore 100
Imation ANZ Pty Ltd Australia 100
Imation (Shanghai) Co. Ltd. China 100
Imation (Guangzhou) International
Co. Ltd. China 100
Imation (Tianjin) International Co. Ltd. China 100
Imation Hong Kong Limited Hong Kong 100
Imation India Private Limited India 100
Imation Corporation Japan Japan 60*
Imation Korea, Inc. Korea 100
Imation (Malaysia) SDN.BHD. Malaysia 100
Imation Singapore Pte. Ltd. Singapore 100
Imation Taiwan Ltd. Taiwan 100
Imation Europe B.V. Netherlands 100
Imation France S.A. France 100
Imation Deutschland GmbH Germany 100
Imation Finanziaria S.p.A. Italy 100
Imation Ricerche S.p.A. Italy 100
Imation S.p.A. Italy 100
Imation International B.V. Netherlands 100
Imation So. Africa (Proprietary) Ltd. South Africa 100
Imation Iberia, S.A. Spain 100
Imation Middle East FZE U.A.E. 100
Imation U.K. Limited United Kingdom 100
Imation Research Ltd. United Kingdom 100
</TABLE>
Note 1 - Except where noted, the percentage of ownership refers to the total
ownership by the indicated parent corporation.
* Japan is a Joint Venture
EXIBIT 23.1
IMATION CORP.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements of Imation Corp. on Form S-8 (Registration Nos. 333-15273, 333-15275,
333-15277 and 333-35591), 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 Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Minneapolis, Minnesota
March 22, 2000
EXIBIT 24.1
IMATION CORP.
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints William T. Monahan, Robert L.
Edwards and John L. Sullivan, and each of them, his or her true and lawful
attorneys-in-fact and agents, each acting alone, with full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities, to sign the 1999 Annual Report on Form 10-K of Imation
Corp., and any and all amendments thereto, and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, each acting alone, full power and authority to do and perform to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, each acting alone, or
the substitutes for such attorneys-in-fact and agents, may lawfully do or cause
to be done by virtue hereof.
NAME TITLE DATE
---- ----- ----
William T. Monahan Chairman, President, Chief
- ------------------------- Executive Officer and Director
William T. Monahan February 10, 2000
Robert L. Edwards Sr. Vice President, Chief
- ------------------------- Financial Officer and Chief
Robert L. Edwards Administrative Officer February 10, 2000
Paul R. Zeller
- -------------------------
Paul R. Zeller Corporate Controller February 10, 2000
Richard E. Belluzzo
- -------------------------
Richard E. Belluzzo Director February 10, 2000
Lawrence E. Eaton
- -------------------------
Lawrence E. Eaton Director February 10, 2000
Michael S. Fields
- -------------------------
Michael S. Fields Director February 10, 2000
William W. George
- -------------------------
William W. George Director February 10, 2000
Linda W. Hart
- -------------------------
Linda W. Hart Director February 10, 2000
Ronald T. LeMay
- -------------------------
Ronald T. LeMay Director February 10, 2000
Marvin L. Mann
- -------------------------
Marvin L. Mann Director February 10, 2000
Daryl J. White
- -------------------------
Daryl J. White Director February 10, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 28,052
<SECURITIES> 166,567
<RECEIVABLES> 267,971
<ALLOWANCES> (15,568)
<INVENTORY> 191,266
<CURRENT-ASSETS> 771,345
<PP&E> 981,163
<DEPRECIATION> (768,350)
<TOTAL-ASSETS> 1,127,573
<CURRENT-LIABILITIES> 357,246
<BONDS> 0
0
0
<COMMON> 429
<OTHER-SE> 724,883
<TOTAL-LIABILITY-AND-EQUITY> 1,127,573
<SALES> 1,412,638
<TOTAL-REVENUES> 1,412,638
<CGS> 979,072
<TOTAL-COSTS> 979,072
<OTHER-EXPENSES> 370,153
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,116
<INCOME-PRETAX> 69,332
<INCOME-TAX> 27,027
<INCOME-CONTINUING> 42,305
<DISCONTINUED> 1,631
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,936
<EPS-BASIC> 1.18
<EPS-DILUTED> 1.17
</TABLE>
