Selected Consolidated Financial Data
1996 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------
(In Millions, Except per Share Data)
Statement of Operations Data:
Net revenues $2,278.2 $2,245.6 $2,280.5 $2,307.8 $2,350.0 $2,319.0
Gross profit 795.4 724.7 838.5 886.2 885.0 911.0
Selling, general and administrative 563.0 539.4 531.5 529.0 542.0 525.0
Research and development 183.1 222.4 211.2 216.7 181.0 174.0
Operating income (loss) (4.6) (148.9) 95.8 140.5 162.0 212.0
Income (loss) before tax and
minority interest (15.0) (166.8) 81.3 127.4 142.0 187.0
Net income (loss) (20.5) (85.0) 54.3 75.3 94.0 119.0
Earnings (loss) per common share (0.49) (2.02) 1.28 n/a n/a n/a
Balance Sheet Data:
Total working capital $ 607.3 $ 658.4 $ 714.0 $ 618.4 $ 608.1 $ 606.7
Property, plant and equipment, net 480.1 513.2 654.9 642.2 618.5 607.6
Total assets 1,561.3 1,541.5 1,671.7 1,545.6 1,533.9 1,514.7
Long-term debt 123.1 -- -- -- -- --
Total liabilities 631.0 392.8 371.7 345.8 361.7 341.4
Total shareholders' equity 930.3 1,148.7 1,300.0 1,199.8 1,172.2 1,173.3
Other Information:
Net income excluding
one-time charges(1) $ 40.1 $ 3.3 $ 54.3 $ 75.3 $ 94.0 $ 119.0
Current ratio 2.5 3.2 3.5 3.4 3.3 3.4
Days sales outstanding 74.9 77.9 76.3 70.2 65.4 65.3
Months in inventory 3.2 3.4 4.0 3.2 3.4 3.4
Assets/equity 1.7 1.3 1.3 1.3 1.3 1.3
Return on assets(2) 2.6% 0.2% 3.4% 4.9% 6.2% 7.9%
Return on equity(2) 3.9% 0.3% 4.3% 6.3% 8.0% 10.2%
Capital expenditures $ 167.4 $ 180.2 $ 182.7 $ 211.4 n/a n/a
Number of employees 9,400 12,300 13,000 13,500 13,900 14,000
(1) Excludes restructuring and other one-time charges in 1996 and 1995 (see
Note 5 of Notes to Consolidated Financial Statements).
(2) Return percentages are calculated using net income excluding one-time
charges noted in (1) above for 1996 and 1995.
PAGE 1
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL OVERVIEW
On June 18, 1996, the Board of Directors of Minnesota Mining and Manufacturing
Company ("3M") approved the Distribution of Imation Corp., a Delaware
corporation (the "Company"), which is comprised of substantially all of the
businesses previously operated within 3M's data storage and imaging systems
groups. To effectuate the transaction, the Board of Directors of 3M declared a
dividend payable to the holders of record of 3M common stock as of June 28,
1996, based upon a ratio of one share of the Company's common stock, par value
$0.01 per share (the "Common Stock") for every ten shares of 3M common stock
owned on the record date. Effective July 1, 1996, all of the outstanding shares
of Common Stock were distributed to 3M stockholders (the "Distribution").
Following the Distribution, the Company began operations as an independent,
publicly held company. Prior to July 1, 1996, the financial statements reflect
the results of operations, financial position and cash flows of the businesses
transferred to the Company from 3M as they operated within 3M. As a result, the
financial statements of the Company prior to July 1, 1996 have been carved out
from the financial statements of 3M using the historical results of operations
and historical basis of the assets and liabilities of such businesses. The
Company's statements of operations prior to July 1, 1996 include all of the
related costs of doing business, including charges for the use of facilities and
for employee benefits, and include an allocation of certain general corporate
expenses of 3M which were not directly related to these businesses, including
costs for corporate logistics, corporate research and development, information
technologies, finance, legal and corporate executives. Management believes these
allocations were made on a reasonable basis. The financial information for
periods prior to July 1, 1996 included herein, however, may not necessarily be
indicative of the results of operations, financial position and cash flows of
the Company in the future or what the results of operations, financial position
and cash flows would have been had the Company been a separate, independent
company during the periods presented.
In late 1995, the Company developed a reorganization plan to rationalize its
manufacturing operations, streamline its organizational structure and write off
impaired assets. The Company has made significant progress in implementing this
plan, including the closure or consolidation of five factory locations and the
consolidation of the Company's laboratories from fourteen to seven. As part of
the reorganization, the number of reported employees of the Company was reduced
from approximately 12,300 at December 31, 1995 to 9,400 at December 31, 1996
through voluntary and involuntary separation programs offered to employees of
the Company prior to the Distribution, as well as the retention by 3M of staff
services positions which had been allocated to the Company as part of 3M. The
Company continues, however, to obtain certain staff services functions from 3M
pursuant to an agreement entered into between 3M and the Company in connection
with the Distribution.
During 1995 and 1996, the Company recorded one-time pre-tax charges of $254.7
million based upon the timing criteria required for the recognition of such
charges. The Company recorded $166.3 million of these charges in its 1995
statement of operations, primarily for the write-down of assets associated with
its manufacturing rationalization programs and $76.4 million in the first six
months of 1996, primarily related to employee separations for direct employees
of the Company and one-time charges associated with start-up activities. In
addition, in the fourth quarter of 1996, the Company recognized a non-deductible
write-off of $12.0 million for the in-process research and development related
to its acquisition of Luminous Corporation (see Note 3 to Consolidated Financial
Statements).
At the time of the Distribution, the Company established an overall financial
goal of improving the Company's economic profit (measured as operating income
after taxes in excess of a charge for the use of capital) by $150 million by the
end of 1998. This goal is based on anticipated cost reductions and the Company's
objectives for improved revenue growth and increased asset utilization.
PAGE 2
During 1996, the Company's economic profit improved by $65 million over 1995,
with all three components contributing to the improvement. Cost reductions
contributed $30 million to the increased economic profit, revenue growth
contributed $5 million and improved asset management contributed $30 million.
The improvement in economic profit due to cost reductions was driven by the
Company's lower cost structure following the Distribution, including more than a
20 percent reduction in headcount from the levels prior to the Distribution. In
addition, improved factory performance and lower material costs contributed to
the cost improvement. These cost reductions were partially offset by recurring
start-up costs for establishing the Imation brand and identity, and activities
to design and implement more efficient business processes. The improvement in
economic profit from revenue growth was driven by sales of the Company's newly
introduced product platforms, primarily Travan data cartridges and DryView laser
imagers. The economic profit improvement from better asset utilization was
driven by working capital reductions in accounts receivable and inventory and
lower levels of fixed assets due to the asset write-offs at the end of 1995.
OPERATING RESULTS
The following table sets forth the components of net revenue changes for 1996
and 1995.
1996 1995
U.S. INTL. WORLDWIDE U.S. INTL. WORLDWIDE
- ---------------------------------------------------------------------------------------------------------
Volume 5.6% 10.1% 7.9% (0.5)% 6.3% 2.7%
Price (2.9) (7.0) (4.9) (5.4) (7.3) (6.3)
Translation -- (2.9) (1.5) -- 4.3 2.0
-----------------------------------------------------------------------------
Total 2.7% 0.2% 1.5% (5.9)% 3.3% (1.6)%
The following table sets forth the Company's consolidated statements of
operations, restructuring and other one-time charges and resulting adjusted
balances for the years ending December 31, 1996 and 1995. The adjusted balances
are also presented as a percentage of net revenues.
Year ended December 31, 1996 Year ended December 31, 1995
------------------------------------------------ ----------------------------------------------
One-Time Percent of One-Time Percent of
Reported Charges Adjusted Revenues Reported Charges Adjusted Revenues
------------------------------------------------ ----------------------------------------------
Net revenues $ 2,278.2 $ -- $ 2,278.2 100.0% $ 2,245.6 $ -- $ 2,245.6 100.0%
Cost of goods sold 1,482.8 (7.9) 1,474.9 64.7 1,520.9 (50.2) 1,470.7 65.5
------------------------------------------------ ---------------------------------------------
Gross profit 795.4 7.9 803.3 35.3 724.7 50.2 774.9 34.5
Operating expenses:
Selling, general and
administrative 563.0 (14.6) 548.4 24.1 539.4 -- 539.4 24.0
Research and development 183.1 (12.0) 171.1 7.5 222.4 (4.3) 218.1 9.7
Restructuring charges 53.9 (53.9) -- -- 111.8 (111.8) -- --
------------------------------------------------ ---------------------------------------------
Total operating expenses 800.0 (80.5) 719.5 31.6 873.6 (116.1) 757.5 33.7
Operating income (loss) (4.6) 88.4 83.8 3.7 (148.9) 166.3 17.4 0.8
Interest expense and other 10.4 -- 10.4 0.5 17.9 -- 17.9 0.8
------------------------------------------------ ---------------------------------------------
Income (loss) before tax
and minority interest (15.0) 88.4 73.4 3.2 (166.8) 166.3 (0.5) 0.0
Income tax provision (benefit) 5.9 27.8 33.7 1.4 (70.5) 70.3 (0.2) 0.0
Minority interest (0.4) -- (0.4) 0.0 (11.3) 7.7 (3.6) (0.1)
------------------------------------------------ ---------------------------------------------
Net income (loss) $ (20.5) $ 60.6 $ 40.1 1.8% $ (85.0) $ 88.3 $ 3.3 0.1%
Earnings (loss) per share $ (0.49) $ 1.46 $ 0.97 $ (2.02) $ 2.10 $ 0.08
PAGE 3
COMPARISON OF YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Net revenues increased 1.5 percent in 1996 compared to a decline of 1.6 percent
in 1995. Volume growth was 7.9 percent in 1996 compared to 2.7 percent in 1995.
Volume growth in 1996 was driven by increased sales of newly introduced product
platforms (principally Travan data cartridges and DryView laser imagers) and
greater international market penetration. Price declines were 4.9 percent in
1996 compared to 6.3 percent in 1995. Price erosion lessened in 1996 compared to
1995 due to product mix and greater pricing discipline. Changes in currency
exchange rates negatively impacted net revenues 1.5 percent in 1996 while
positively impacting net revenues 2.0 percent in 1995. The 1.6 percent decline
in net revenues in 1995 as compared to 1994 was primarily due to the effects of
downward pricing pressures which exceeded the Company's volume growth. The
Company's planning assumption is for price erosion to continue in the same
general range in the near term.
Approximately 49 percent of the Company's net revenues in 1996 were from sales
outside the United States compared to 50 percent in 1995, with this decrease due
to the impact of currency exchange rates. In 1994, 47 percent of the Company's
net revenues were from outside the United States. In the Company's international
operations, volume rose 10.1 percent in 1996 and 6.3 percent in 1995. The
increase in volume growth in 1996 was due to greater market penetration. Price
declines of 7.0 percent and 7.3 percent occurred in 1996 and 1995, respectively.
The net result of the volume and price changes was a 3.1 percent growth in local
currencies in 1996 while local currency revenue decreased 1.0 percent in 1995.
Changes in currency exchange rates negatively impacted international net
revenues by 2.9 percent in 1996 and positively impacted international net
revenues by 4.3 percent in 1995. Based on the strengthening of the U.S. dollar
during the first part of 1997, changes in currency exchange rates are likely to
negatively impact 1997 revenues and earnings.
United States net revenues increased by 2.7 percent in 1996 compared to a
decline of 5.9 percent in 1995. The increase in 1996 was driven by sales of the
newly introduced product platforms mentioned above. Volume growth was 5.6
percent in 1996 while volume declined slightly in 1995. Price declines were 2.9
percent in 1996 compared to 5.4 percent in 1995, with price erosion lessening
due to product mix and greater pricing discipline.
Gross profit for 1996 was $795.4 million, which includes the impact of $7.9
million in one-time charges primarily related to the write-off of certain
packaging materials in connection with the Distribution. Gross profit in 1995
was $724.7 million, which includes the impact of $50.2 million in one-time
charges primarily related to asset write-offs. Excluding the impact of one-time
charges, gross profit in 1996 would have been $803.3 million or 35.3 percent of
revenues compared to $774.9 million or 34.5 percent of revenues in 1995. This
margin improvement was primarily due to volume increases, productivity
improvements, and lower raw material costs, partially offset by lower selling
prices. In 1994, gross profit was 36.8 percent of revenues. The decrease from
1994 to 1995 was primarily due to the effect of lower selling prices.
In 1996, selling, general and administrative expenses were $563.0 million.
Excluding special one-time charges of $14.6 million related to activities in
connection with the Distribution, selling, general and administrative expenses
would have been $548.4 million, or 24.1 percent of revenues. This is essentially
unchanged from 1995, when selling, general and administrative expenses were 24.0
percent of revenues. The full year 1996 selling, general and administrative
expenses include $41.8 million of start-up costs related to designing and
implementing more efficient business processes and developing the Company's
brand identity, offset by reduced sales related costs. It is expected that these
start-up costs will continue in 1997. In 1994, selling, general and
administrative expenses were 23.3 percent of revenues. The increase in selling,
general and administrative expenses as a percentage of revenues in 1995 over
1994 was primarily due to the decline in the revenue base. The Company's goal is
to lower the level of selling, general and administrative expenses as a
percentage of revenues as a part of achieving its economic profit goal discussed
in "General Overview".
PAGE 4
Research and development expenses in 1996 were $183.1 million, which includes a
non-deductible charge of $12.0 million for the acquired in-process research and
development related to the Company's acquisition of Luminous Corporation.
Research and development expenses in 1995 were $222.4 million, which includes
$4.3 million in one-time charges related to asset write-offs. Excluding the
impact of one-time charges, research and development expenses in 1996 would have
been $171.1 million or 7.5 percent of revenues compared to $218.1 million or 9.7
percent of revenues in 1995. This decrease is due to a consolidation of
laboratories from fourteen to seven, the implementation of a more efficient
research and development cost structure and higher than normal spending in 1995
reflecting investments made in a number of the Company's new products which came
to market during 1995 and early 1996. In 1997, the Company will continue to gain
the benefits of this restructuring. In 1994, research and development expenses
were 9.3 percent of revenues. The increase in 1995 over 1994 was due to higher
than normal spending in 1995 on new products as noted above.
The Company recorded restructuring charges of $53.9 million in 1996. These
charges primarily relate to employee separation programs. In 1995, the Company
recorded restructuring charges of $111.8 million related to world-wide
manufacturing rationalization programs to exit less profitable manufacturing
locations and to centralize manufacturing in the United States and in Italy, and
consists principally of write-offs of property, plant and equipment.
The operating loss for 1996 totaled $4.6 million while the operating loss for
1995 was $148.9 million. Losses in both years were the result of the
restructuring and other one-time charges discussed above. Excluding these
charges, operating income would have been $83.8 million in 1996 and $17.4
million in 1995, an improvement of $66.4 million. This improvement is primarily
a result of higher gross profit, lower research and development spending and
sales growth as discussed above. Operating income in 1995, excluding special
charges, would have been $17.4 million, or $78.4 million lower than 1994
operating income of $95.8 million. This decline primarily reflects the factors
affecting the lower gross profit as discussed above, and to a lesser extent the
increase in research and development spending.
Non-operating expense (primarily interest expense) for 1996 totaled $10.4
million, down $7.5 million from 1995. This decrease is due to an increase in
other income of $2.9 million, primarily related to investment gains prior to the
Distribution, and to lower interest expense due to lower outstanding debt levels
and a lower effective interest rate. Interest expense prior to the Distribution
was based on an assumed $250 million in outstanding debt and 3M's effective
interest rate during the period. The allocation of interest prior to the
Distribution is more fully discussed in Note 7 to the Consolidated Financial
Statements. Non-operating expense in 1995 was $17.9 million, up from $14.5
million in 1994. This increase is due to 3M's rising effective interest rate in
1995 over 1994.
Excluding restructuring and one-time charges, the Company's effective tax rate
was 45.9, 42.3 and 36.0 percent of pre-tax income for 1996, 1995 and 1994,
respectively. Although a new, tax effective structure was implemented in 1996,
the Company continues to earn profits in high tax jurisdictions. Benefits from
the new structure will be realized over time, with an expected decrease in
future rates. Management believes the Company will generate sufficient income in
future periods to fully recover the Company's deferred tax assets.
Minority interest was $0.4 million, $11.3 million and $2.3 million in 1996, 1995
and 1994, respectively. The 1995 minority interest includes $7.7 million of
restructuring charges related to the Company's operations in Japan.
The net loss for 1996 totaled $20.5 million compared to a net loss of $85.0
million in 1995. Excluding restructuring and one-time charges, net income would
have been $40.1 million ($0.97 per share) in 1996 and $3.3 million ($0.08 per
share) in 1995, an improvement of $36.8 million or $0.89 per share. Net income
in 1994 was $54.3 million or $1.28 per share. All per share amounts prior to the
Distribution are based on an average number of shares outstanding equal to
one-tenth the weighted average number of 3M shares outstanding based on the
distribution ratio of one share of the Company's stock for ten shares of 3M
stock.
PAGE 5
PERFORMANCE BY GEOGRAPHIC AREA
UNITED STATES In 1996, United States net revenues totaled $1,159.5 million, up
2.7 percent from $1,128.8 million in 1995. Volume increased 5.6 percent while
selling prices decreased 2.9 percent. Operating loss was $95.3 million in 1996
compared to $169.0 in 1995. Excluding restructuring and one-time charges of
$77.1 million in 1996 and $99.8 million in 1995, the operating loss would have
been $18.2 million in 1996 and $69.2 million in 1995, an improvement of $51.0
million. The improvement in the United States results was primarily due to
increased volume growth, reduced spending and the lessening of price erosion.
EUROPE, MIDDLE EAST AND AFRICA Net revenues totaled $816.2 million in 1996, up
1.0 percent from $808.4 million in 1995. Excluding restructuring and one-time
charges in Europe of $9.8 million in 1996 and $20.4 million in 1995, operating
income would have been $88.6 million in 1996 and $76.2 million in 1995, an
increase of $12.4 million. In 1996, volume increased 7.6 percent, selling prices
declined 5.3 percent, and changes in currency exchange rates negatively impacted
revenues by 1.3 percent.
LATIN AMERICA, ASIA AND CANADA Net revenues declined by 1.9 percent in 1996 to
$302.5 million. Changes in currency exchange rates caused revenues to decrease
by 7.1 percent. In local currencies, revenues were up 5.2 percent due to volume
increases of 16.7 percent offset by selling price declines of 11.5 percent.
Operating income increased by $3.0 million, after excluding special charges of
$1.5 million in 1996 and $46.1 million in 1995.
FINANCIAL POSITION
The Company had 3.2 months of inventory on hand at December 31, 1996, compared
to 3.4 months at December 31, 1995. The accounts receivable days sales
outstanding was 75 days at December 31, 1996, down from 78 days at December 31,
1995. Improved asset management related to the Company's focus on supply chain
management contributed to these decreases. Other current assets were $94.5
million at December 31, 1996, an increase of $45.7 million over the 1995
balance. This increase is primarily due to an increase in current deferred tax
assets of $14.9 million, an increase in prepaid value added taxes in Europe of
$11.9 million and an increase in other prepaid expenses of $5.8 million.
The net book value of property, plant and equipment at December 31, 1996 was
$480.1 million, a decrease of $33.1 million from $513.2 million at December 31,
1995. This decrease is due to capital spending being lower than depreciation and
the sale of the Company's Sulmona, Italy facility. The decrease in machinery and
equipment cost of $143.6 million is primarily due to the disposal in 1996 of
machinery and equipment that was fully reserved for in 1995 as part of the
restructuring and other one-time charges.
Accounts payable at December 31, 1996 increased $56.2 million from December 31,
1995. This increase is primarily due to establishing the normal third party
payables to 3M for products and transitional services that were previously
eliminated as intercompany balances. The balance in other current liabilities at
December 31, 1996 was $151.2 million, an increase of $25.3 million over 1995.
This increase is primarily due to an increase in the accrual for value added
taxes in Europe and an increase in self insurance reserves.
LIQUIDITY
Prior to July 1, 1996, cash and equivalents and debt were not allocated to the
Company from 3M since 3M uses a centralized approach to cash management and the
financing of its operations. The Company's financing requirements prior to July
1, 1996 are represented by cash transactions with 3M and are reflected in "Net
cash (paid to) received from 3M" in the consolidated statements of cash flows.
This financial support was discontinued following the Distribution.
PAGE 6
Cash provided by operating activities was $306.0 million in 1996, $256.8 million
in 1995 and $170.1 million in 1994. The adjustments to net income include
depreciation, which ranged from $181.1 million to $189.5 million per year during
these periods, and restructuring and other one-time charges which were $88.4
million in 1996 and $166.3 million in 1995. Working capital and related cash
requirements decreased $40.3 million in 1996 and $30.7 million in 1995, while in
1994 working capital and related cash requirements increased $91.8 million.
Investing activities, mainly capital expenditures, utilized cash of $184.6
million in 1996, $187.5 million in 1995 and $179.7 million in 1994. It is
expected that capital expenditures in 1997 will be similar to the expenditures
made in 1996 of $167.4 million. In addition to capital expenditures in 1996, the
Company capitalized $13.5 million of software expenditures related to the
development and implementation of independent Imation-supported systems to
replace those provided by 3M through service contracts.
During 1996, the Company established a $350 million credit facility with a
syndicate of banks. At the time of the Distribution, the Company borrowed
approximately $155.0 million to purchase from 3M certain assets located outside
the United States and to repay intercompany indebtedness assumed by the Company
in connection with the Distribution. During the third quarter, the Company
borrowed an additional $50 million to loan to the ESOP for the purchase of the
Company's common stock to satisfy the Company's obligation to make matching
contributions with respect to employee salary deferrals and other performance
based contributions. Additional funds were borrowed and repaid from time to time
for funding working capital needs. At year-end, the Company had borrowed $120.0
million under the credit facility. In addition, certain international
subsidiaries have arranged borrowings locally outside the credit facility. As of
year end, $29.6 million of borrowings were outstanding, primarily short term,
under these arangements. As of December 31, 1996, the Company had a ratio of
total debt to total capital of approximately 13.9 percent. The Company believes
this ratio will increase over time due to the cash requirements for funding
future growth oportunities. The Company believes it has the financial resources
needed to meet its business requirements in the foreseeable future.
In connection with the Company's acquisition of Luminous Corporation in October
1996, the Company issued 922,845 shares of common stock.
On February 4, 1997, the Company announced a stock repurchase plan, authorizing
the Company to repurchase up to two million shares of the Company's common
stock. On March 13, 1997, the Company's Board of Directors increased the stock
repurchase authorization to a total of six million shares of the Company's
common stock.
FORWARD LOOKING STATEMENTS
Certain information contained in this Report which does not relate to historical
financial information may be deemed to constitute forward looking statements.
The words or phrases "will likely result", "are expected to", "will continue",
"is anticipated", "estimate", "project", "believe" or similar expressions
identify "forward looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results and those presently anticipated or projected. The
Company wishes to caution readers not to place undue reliance on any such
forward looking statements, which speak only as of the date made. Among the
factors that could cause the Company's actual results in the future to differ
materially from any opinions or statements expressed with respect to future
periods are market acceptance of newly introduced products, competitive industry
conditions including historical price erosion in certain product categories,
technological developments in the markets served by the Company, foreign
currency fluctuations, the Company's ability to establish its operations as an
independent company, as well as various factors set forth in the Company's 1996
Annual Report on Form 10-K and other interim reports filed with the Securities
and Exchange Commission.
PAGE 7
IMATION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 1996 1995 1994
- ---------------------------------------------------------------------------------------
(In Millions, Except Per Share Amounts)
Net revenues $ 2,278.2 $ 2,245.6 $ 2,280.5
Cost of goods sold 1,482.8 1,520.9 1,442.0
----------------------------------------------
Gross profit 795.4 724.7 838.5
Operating expenses:
Selling, general and administrative 563.0 539.4 531.5
Research and development 183.1 222.4 211.2
Restructuring charges 53.9 111.8 --
----------------------------------------------
Total operating expenses 800.0 873.6 742.7
Operating income (loss) (4.6) (148.9) 95.8
Interest expense and other 10.4 17.9 14.5
----------------------------------------------
Income (loss) before tax
and minority interest (15.0) (166.8) 81.3
Income tax provision (benefit) 5.9 (70.5) 29.3
Minority interest (0.4) (11.3) (2.3)
----------------------------------------------
Net income (loss) $ (20.5) $ (85.0) $ 54.3
----------------------------------------------
Earnings (loss) per common share $ (0.49) $ (2.02) $ 1.28
----------------------------------------------
Average shares outstanding 41.3 42.0 42.3
----------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
PAGE 8
IMATION CORP.
CONSOLIDATED BALANCE SHEETS
As of December 31, 1996 1995
- ----------------------------------------------------------------------------------------------
(In Millions, Except Share Amounts)
ASSETS
Current Assets
Cash and equivalents $ 61.7 $ --
Accounts receivable, net 467.6 479.5
Inventories 392.8 426.3
Other current assets 94.5 48.8
--------------------------------------
Total current assets 1,016.6 954.6
Property, Plant and Equipment, Net 480.1 513.2
Other Assets 64.6 73.7
--------------------------------------
Total Assets $ 1,561.3 $ 1,541.5
--------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 182.1 $ 125.9
Accrued payroll 41.9 44.4
Income taxes payable 7.6 --
Short-term debt 26.5 --
Other current liabilities 151.2 125.9
--------------------------------------
Total current liabilities 409.3 296.2
Other Liabilities 98.6 96.6
Long-term Debt 123.1 --
Commitments and Contingencies
Shareholders' Equity
Preferred stock, $.01 par value, authorized 25,000,000 shares,
none issued and outstanding -- --
Common stock, $.01 par value, authorized 100,000,000 shares,
issued and outstanding 42,879,880 as of December 31, 1996 .4 --
Additional paid-in capital 1,011.5 --
Retained earnings 11.2 --
Unearned ESOP shares (46.6) --
Cumulative translation adjustment (46.2) (39.1)
Net investment by 3M -- 1,187.8
--------------------------------------
Total shareholders' equity 930.3 1,148.7
--------------------------------------
Total Liabilities and Shareholders' Equity $ 1,561.3 $ 1,541.5
--------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
PAGE 9
IMATION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1996 1995 1994
- ----------------------------------------------------------------------------------------
(In Millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (20.5) $ (85.0) $ 54.3
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 181.1 189.5 185.9
Deferred income taxes 12.6 (68.1) 14.0
Restructuring and other one-time charges 88.4 166.3 --
Accounts receivable 12.0 (0.6) (16.8)
Inventories 22.3 25.4 (87.8)
Other current assets (29.8) 1.1 (1.1)
Accounts payable 73.7 (4.5) 11.7
Accrued payroll and other current liabilities (37.9) 9.3 2.2
Other 4.1 23.4 7.7
--------------------------------
Net cash provided by operating activities 306.0 256.8 170.1
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (167.4) (180.2) (182.7)
Capitalized software (13.5) -- --
Other (3.7) (7.3) 3.0
--------------------------------
Net cash used in investing activities (184.6) (187.5) (179.7)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in short-term debt 25.4 -- --
Borrowings on long-term debt 270.3 -- --
Repayment of long-term debt (146.3) -- --
Loan to ESOP (50.0) -- --
Decrease in unearned ESOP shares 3.4 -- --
Net cash (paid to) received from 3M (155.9) (72.9) 18.5
--------------------------------
Net cash (used in) provided by
financing activities (53.1) (72.9) 18.5
Effect of exchange rate changes on cash (6.6) 3.6 (8.9)
--------------------------------
Change in cash and equivalents 61.7 -- --
Cash and equivalents - beginning of year -- -- --
Cash and equivalents - end of year $ 61.7 $ -- $ --
--------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
PAGE 10
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BACKGROUND AND BASIS OF PRESENTATION
BACKGROUND
Imation Corp. (the "Company") became an independent, publicly held company as of
July 1, 1996 (the "Distribution Date"), when Minnesota Mining and Manufacturing
Company ("3M") spun off its data storage and imaging systems businesses as an
independent, publicly owned company ("the Distribution"). One share of the
Company's common stock was issued for every ten shares of 3M stock outstanding
to stockholders of record on June 18, 1996.
BASIS OF PRESENTATION
SUBSEQUENT TO THE DISTRIBUTION The consolidated financial statements include the
accounts and operations of the Company on a stand-alone basis. 3M and the
Company have entered into a number of agreements to facilitate the transition of
the Company to an independent business enterprise.
PRIOR TO THE DISTRIBUTION The consolidated financial statements reflect the
assets, liabilities, revenues and expenses that were directly related to the
Company as they were operated within 3M. Where assets and liabilities were not
specifically identifiable to any particular business of 3M, only those assets
and liabilities transferred to the Company are included in the Company's
consolidated balance sheets. Regardless of the allocation of these assets and
liabilities, however, the Company's consolidated statements of operations
include all of the related costs of doing business including an allocation of
certain general corporate expenses of 3M which were not directly related to the
Company including costs for corporate logistics, corporate research and
development, information technologies, finance, legal and corporate executives.
These allocations were based on a variety of factors including, for example,
personnel, space, time and effort, and sales volume. Management believes these
allocations were made on a reasonable basis
Cash and equivalents and debt were not allocated to the Company in the financial
statements as 3M uses a centralized approach to cash management and the
financing of its operations. The consolidated statements of operations include
an allocation of 3M's interest expense (see Note 7). The Company's financing
requirements are represented by cash transactions with 3M and are reflected in
the "Net Investment by 3M" account (see Note 9). Certain assets and liabilities
of 3M such as certain employee benefit and income tax-related balances have not
been allocated to the Company and are included in the Net Investment by 3M
account. Activity in the Net Investment by 3M equity account relates to net cash
flows of the Company as well as changes in the assets and liabilities not
allocated to the Company.
The Company also participated in 3M's centralized interest rate risk management
function. As part of this activity, derivative financial instruments were
utilized to manage risks generally associated with interest rate market
volatility. 3M did not hold or issue derivative financial instruments for
trading purposes. 3M was not a party to leveraged derivatives. The consolidated
balance sheets of the Company do not reflect any of the associated asset or
liability positions resulting from this activity because the Company did not
assume any of 3M's derivative financial instruments in connection with the
Distribution. The consolidated statements of operations and statements of cash
flows, however, do reflect an allocation of the related gains and losses. Such
gains and losses were recognized by 3M as interest expense over the borrowing
period and, as a result, are reflected in the effective interest rates utilized
by the Company in deriving its interest expense.
The minority interest within the consolidated statements of operations gives
recognition to the Company's share of net income (loss) of certain majority
owned subsidiaries of 3M. The minority shareholders' proportionate interests in
the Company's net assets of majority owned subsidiaries have not been presented
in the consolidated balance sheets as the Company obtained 100 percent ownership
of the assets and liabilities of these subsidiaries in connection with the
Distribution.
The financial information included herein for periods prior to the Distribution
may not necessarily be indicative of the financial position, results of
operations or cash flows of Company if it had been a separate, independent
company during the periods prior to the Distribution.
PAGE 11
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION Commencing with the Distribution, the consolidated financial
statements include the accounts of the Company and its wholly-owned
subsidiaries. Prior to the Distribution, the consolidated financial statements
include the accounts of the Company as described in Note 1. All significant
intercompany transactions and balances have been eliminated.
FOREIGN CURRENCY Local currencies are considered the functional currencies
outside the U.S. except for Imation Europe B.V., the Company's European holding
company, and subsidiaries located in highly inflationary economies. For
operations in local currency environments, assets and liabilities are translated
at year-end exchange rates with cumulative translation adjustments included as a
component of shareholders' equity. Income and expense items are translated at
average rates of exchange prevailing during the year. For operations in which
the U.S. dollar is considered the functional currency, certain financial
statement amounts are translated at historical exchange rates, with all other
assets and liabilities translated at year-end exchange rates. These translation
adjustments are reflected in the results of operations.
The Company enters into foreign currency forward exchange and derivative
contracts to hedge foreign currency transaction exposures. Gains and losses
arising from foreign currency contracts offset gains and losses resulting from
the underlying hedged transactions. The Company's policy is to selectively hedge
anticipated transaction exposures. Aggregated transaction gains and losses
included in the determination of net income (loss) are not material for any
period presented. As of December 31, 1996, the notional amount of outstanding
forward contracts was not material.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Principal
areas requiring the use of estimates include: the allocation of financial
statement amounts between the Company and 3M for periods prior to the
Distribution, determination of allowances for uncollectible accounts receivable
and obsolete/excess inventories, and assessments of the recoverability of
deferred tax assets and certain long-lived assets.
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. Plant and equipment are generally depreciated on a straight-line basis
over their estimated useful lives. Maintenance and repairs are expensed as
incurred. Periodic reviews for impairment of the carrying value of property,
plant and equipment are made based on undiscounted expected future cash flows.
OTHER ASSETS Other assets consist primarily of deferred taxes, goodwill,
capitalized software and investments. Intangible assets are amortized over their
useful lives, which currently range from five to seven years. The carrying value
of intangible assets are periodically reviewed to assess recoverability based on
undiscounted expected future cash flows.
EMPLOYEE SEVERANCE INDEMNITIES Employee severance indemnities consist of
termination indemnities and are accrued for each employee in accordance with
labor legislation in each applicable country.
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.
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.
PAGE 12
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 $73 million, $52 million and $52 million in 1996, 1995 and 1994
respectively. Advertising costs in 1996 include $22 million related to start-up
costs for identity development.
INCOME TAXES Upon the Distribution, the Company became responsible for its
income taxes and will file its own income tax returns. Prior to the
Distribution, the Company did not file separate tax returns but rather was
included in the income tax returns filed by 3M and its subsidiaries in various
domestic and foreign jurisdictions. For purposes of the Company's consolidated
financial statements prior to the Distribution, the Company's allocated share of
3M's income tax provision was based on the "separate return" method, except that
the tax benefit of the Company's tax losses in certain jurisdictions was
allocated to the Company on a current basis if such losses could be utilized by
3M in its tax returns and an assessment of realizability of certain deferred tax
assets was made assuming the availability of future 3M taxable income. Had the
Company's 1996 provision for income taxes been calculated on a purely "separate
return" method, the impact on the Company's 1996 results of operations would not
have been material. Prior to the Distribution, the balance of accrued current
income taxes for the Company's operations is included in the Net Investment by
3M equity account because 3M paid all taxes and received all tax refunds on the
Company's behalf.
STOCK-BASED COMPENSATION The Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", in 1996. This
standard gives entities the choice of recognizing stock-based compensation by
adopting the new fair value method or to continue to measure compensation
expense using the intrinsic value approach under Accounting Principles Board
Opinion (APB) No. 25, "Accounting for Stock Issued to Employees". The Company
has chosen to account for stock-based compensation under APB No. 25.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the Company's common stock at the date of the
grant over the amount an employee must pay to acquire the stock.
EARNINGS PER SHARE For periods after the Distribution, earnings per share are
computed using the weighted average shares outstanding during the period, net of
unallocated shares held by the Company's ESOP. Common share equivalents were not
material. For periods prior to the Distribution, the number of weighted average
shares outstanding used in the earnings per share calculation is one-tenth of
the weighted average number of 3M shares outstanding based on the distribution
of one share of the Company for ten shares of 3M pursuant to the Distribution.
NOTE 3 -- ACQUISITION
In October 1996, the Company acquired all of the outstanding common and
preferred shares of Luminous Corporation (Luminous) for cash, 922,845 shares of
the Company's common stock and assumption of Luminous' obligations under
outstanding employee stock options, which, after conversion to options to
purchase the Company's common stock, represent options to purchase 317,062
shares of the Company's common stock. Luminous is a developer and marketer of
desktop software to the prepress, print production, printing and graphic arts
industries. The acquisition was accounted for using the purchase method of
accounting. The Company allocated a portion of the purchase price to in-process
research and development projects that had not yet reached technological
feasibility and had no probable alternative future uses, which resulted in a
one-time non-deductible charge of $12.0 million. The Company has allocated the
remaining excess purchase price over net assets acquired to goodwill which is
being amortized over seven years. Operating results for Luminous are included in
results of operations since the date of acquisition. The pro forma effect on
prior periods' results of operations is not material.
PAGE 13
NOTE 4 -- SUPPLEMENTAL BALANCE SHEET INFORMATION
(In Millions) 1996 1995
- ---------------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE
Accounts receivable $ 490.9 $ 497.0
Less allowances (23.3) (17.5)
----------------------------
Accounts receivable, net $ 467.6 $ 479.5
INVENTORIES
Finished goods $ 248.1 $ 244.0
Work in process 57.3 81.2
Raw materials and supplies 87.4 101.1
----------------------------
Total inventories $ 392.8 $ 426.3
OTHER CURRENT ASSETS
Deferred taxes $ 38.3 $ 23.4
Other 56.2 25.4
----------------------------
Total other current assets $ 94.5 $ 48.8
PROPERTY, PLANT AND EQUIPMENT
Land $ 8.3 $ 7.7
Buildings and leasehold improvements 185.0 180.9
Machinery and equipment 1,472.6 1,616.2
Construction in progress 44.0 63.5
----------------------------
Total 1,709.9 1,868.3
Less accumulated depreciation 1,229.8 1,355.1
----------------------------
Property, plant and equipment, net $ 480.1 $ 513.2
OTHER ASSETS
Deferred taxes $ 8.1 $ 60.6
Other 56.5 13.1
----------------------------
Total other assets $ 64.6 $ 73.7
OTHER CURRENT LIABILITIES
Accrued rebates $ 42.9 $ 44.6
Deferred income 26.1 35.8
Taxes other than income taxes 23.2 11.7
Other 59.0 33.8
----------------------------
Total other current liabilities $ 151.2 $ 125.9
OTHER LIABILITIES
Employee severance indemnities $ 49.3 $ 59.2
Other 49.3 37.4
----------------------------
Total other liabilities $ 98.6 $ 96.6
NOTE 5 -- RESTRUCTURING CHARGES AND OTHER ONE-TIME COSTS
In late 1995, the Company initiated a review of all of its operations, including
its organizational structure, manufacturing operations, products and markets. In
connection with this review, the Company adopted a reorganization plan to
rationalize its manufacturing operations, streamline its organizational
structure and write-off impaired assets.
PAGE 14
The Company has reflected restructuring and other one-time charges of $254.7
million in its financial statements, partially in 1995 and partially in 1996
based upon the timing recognition criteria required for the restructuring
charges. The Company recorded $166.3 million of these charges ($88.3 million
after taxes and minority interest) in its 1995 financial statements and an
additional $88.4 million ($60.6 million after taxes) in 1996.
The 1995 special charges of $166.3 million includes $111.8 million related to
world-wide manufacturing rationalization programs to exit less profitable
manufacturing locations and to centralize manufacturing in the U.S. and in
Italy, and consists principally of write-offs of property, plant and equipment.
This $111.8 million charge is included as a separate restructuring charge in the
statement of operations. The remaining 1995 special charges of $54.5 million
relates primarily to asset write-offs included in cost of goods sold.
In 1996, special charges of $88.4 million were recorded. These charges include
$53.9 million in restructuring charges primarily for employee separation
programs resulting in the reduction of approximately 1,600 employees and $22.5
million of one-time charges associated with start-up activities which are
included in costs of goods sold and selling, general and administrative
expenses. The unpaid restructuring charges for the employee separation programs
as of June 30, 1996, were retained by 3M pursuant to the Distribution. In
addition to the above charges, the Company also recognized a non-deductible
write-off of $12.0 million for the in-process research and development related
to the Luminous acquisition (see Note 3).
NOTE 6 -- INCOME TAXES
The components of income (loss) before tax and minority interest are as follows:
(In Millions) 1996 1995 1994
- ------------------------------------------------------------------------------------
U.S. $ (16.9) $ (136.1) $ 63.2
International 1.9 (30.7) 18.1
-------------------------------------------
Total $ (15.0) $ (166.8) $ 81.3
The income tax provision (benefit) is as follows:
(In Millions) 1996 1995 1994
- -------------------------------------------------------------------------------------
Currently payable (refundable)
Federal $ (9.9) $ (14.0) $ 8.3
State (0.4) (4.3) 1.7
International 3.9 15.6 4.6
Deferred
Federal 3.3 (34.9) 9.4
State (0.4) (3.1) 0.8
International 9.4 (29.8) 4.5
-------------------------------------------
Total $ 5.9 $ (70.5) $ 29.3
PAGE 15
The components of net deferred tax assets and liabilities are as follows:
(In Millions) 1996 1995
- ---------------------------------------------------------------------------------------
Receivables $ 7.8 $ 4.0
Inventories 15.4 5.9
Property, plant and equipment (0.4) 44.5
Payroll 3.2 19.2
Other, net 17.9 9.5
----------------------------
Net deferred tax assets and liabilities $ 43.9 $ 83.1
Management believes the Company, or in certain cases 3M prior to the
Distribution, will generate sufficient taxable income in future periods to fully
recover the Company's deferred tax assets.
The provision (benefit) for income taxes differs from the amount computed by
applying the statutory U.S. income tax rate (35%) because of the following
items:
(In Millions) 1996 1995 1994
- --------------------------------------------------------------------------------------
Tax at statutory U.S. tax rate $ (5.3) $ (58.4) $ 28.5
State income taxes, net of federal benefit (1.2) (5.4) 2.9
International taxes in excess of
statutory U.S. tax rate 7.1 (7.7) (3.0)
Non-deductible expense related to acquisition 4.9 -- --
Other 0.4 1.0 0.9
---------------------------------
Income tax provision (benefit) $ 5.9 $ (70.5) $ 29.3
As of December 31, 1996, approximately $151 million of earnings attributable to
international subsidiaries (inclusive of earnings prior to the Distribution for
certain international subsidiaries) were considered to be permanently invested.
No provision has been made for taxes that might be payable if these earnings
were remitted to the U.S. It is not practical to determine the amount of
incremental tax that might arise if these earnings were to be remitted.
Cash paid for income taxes in the period from July 1, 1996 to December 31, 1996
was not material. Prior to July 1, 1996, 3M paid all taxes and received all tax
refunds on the Company's behalf.
NOTE 7 -- DEBT
The components of long-term debt as of December 31, 1996, are as follows:
(In Millions)
- ----------------------------------------------------------
Revolving credit facility $ 120.0
Other 4.0
---------
124.0
Less current portion (0.9)
---------
Total long-term debt $ 123.1
The Company maintains a $350 million revolving credit facility with a syndicate
of banks which expires on June 30, 2001. The commitment fee for the credit
facility is based on the Company's interest coverage ratio, and as of December
31, 1996, was .15 of one percent on the total amount of the credit facility.
Borrowings under the credit facility bear interest based on the London interbank
offered rate (LIBOR) or the administrative agent bank's base rate, plus an
applicable margin based on the Company's interest coverage ratio. As of December
31, 1996, $120 million in borrowings under this credit facility were outstanding
at interest rates ranging from 5.80% to 5.86%. The agreement contains financial
covenants that include a maximum debt to capital ratio, a minimum interest
coverage ratio, and a minimum tangible net worth. As of December 31, 1996, the
Company was in compliance with these covenants.
PAGE 16
Long-term debt maturities are as follows:
(In Millions) 1997 1998 1999 2000 2001
- -----------------------------------------------------------------------------
Long-term debt maturities $ 0.9 $1.0 $1.0 $ 1.1 $120.0
Short-term debt as of December 31, 1996, consisted of $25.6 million of
uncollateralized borrowings primarily held by international subsidiaries. These
borrowings have original maturities of one year or less and have a weighted
average interest rate of 2.9% as of December 31, 1996. As of December 31, 1996,
the Company had an additional $53 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.
The Company's interest expense for the period from July 1, 1996 through December
31, 1996 was $6.8 million and cash paid for interest was $6.2 million. Prior to
the Distribution, the Company's financial statements include allocations of 3M's
interest expense totaling $7.4 million for the period from January 1, 1996 to
June 30, 1996, $18.8 million for 1995 and $16.3 million for 1994. Total 1996
interest expense was $14.2 million. Allocations prior to the Distribution were
based on an assumed non-ESOP debt level of $250 million. The interest rates used
were 6.4%, 7.5% and 6.5% in 1996, 1995 and 1994, respectively, which reflect
3M's weighted average effective interest rates on non-ESOP debt during these
periods. The consolidated balance sheet of the Company prior to the Distribution
does not include this debt as the total capitalization of the Company was
reflected in Net Investment by 3M.
NOTE 8 -- LEASES
Rent expense under operating leases, which primarily relate to equipment and
office space, amounted to $15.1 million, $9.0 million and $9.0 million in 1996,
1995 and 1994, 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, 1996:
After
(In Millions) 1997 1998 1999 2000 2001 2001 Total
- -----------------------------------------------------------------------------
Minimum Lease Payments $ 9.5 $6.5 $3.5 $ 2.1 $0.9 $0.2 $22.7
PAGE 17
NOTE 9 -- SHAREHOLDERS' EQUITY
The Company's authorized stock consists of 100,000,000 shares of common stock,
par value $0.01, and 25,000,000 shares of preferred stock, par value $0.01.
Common shares issued as of December 31, 1996 were 42,879,880 shares. There were
no preferred shares issued as of December 31, 1996.
The Company maintains a stockholder rights plan under which the Company has
issued one preferred share purchase right (Right) for each common share of the
Company. Each Right will entitle its holder to purchase one one-hundredth of a
share of Series A Junior Participating Preferred Stock at an exercise price of
$125, subject to adjustment. The Rights are exercisable only if a person or
group acquires beneficial ownership of 15 percent or more of the Company's
outstanding common stock. The Rights expire on July 1, 2006 and may be redeemed
earlier by the Board of Directors for $0.01 per Right.
The following table summarizes the changes in the components of shareholders'
equity:
Additional Unearned Cumulative Net Total
Common Paid-In Retained ESOP Translation Investment Shareholders'
(In Millions) Stock Capital Earnings Shares Adjustment by 3M Equity
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 $(73.1) $1,272.9 $1,199.8
Net income 54.3 54.3
Net amount
received from 3M 18.5 18.5
Net change in
cumulative translation 27.4 27.4
------------------------------------------------------------------------------
Balance at December 31, 1994 -- -- -- -- (45.7) 1,345.7 1,300.0
Net loss (85.0) (85.0)
Net amount paid
to 3M (72.9) (72.9)
Net change in
cumulative translation 6.6 6.6
------------------------------------------------------------------------------
Balance at December 31, 1995 -- -- -- -- (39.1) 1,187.8 1,148.7
Net equity
transactions with 3M (164.0) (164.0)
Issuance of common
stock to 3M shareholders
(41,930,187 shares) $0.4 $ 991.7 (992.1) --
Loan to ESOP $(50.0) (50.0)
Amortization of
unearned ESOP shares -- 0.4 3.4 3.8
Issuance of common
stock (922,845 shares)
in connection
with acquisition -- 14.6 14.6
Value of stock options
issued in connection
with acquisition -- 4.8 4.8
Exercise of stock
options (26,848 shares) -- -- --
Net income (loss) $11.2 (31.7) (20.5)
Net change in
cumulative translation (7.1) (7.1)
------------------------------------------------------------------------------
Balance at December 31, 1996 $0.4 $1,011.5 $11.2 $(46.6) (46.2) -- $930.3
PAGE 18
NOTE 10 -- SEGMENT INFORMATION
The Company operates in one industry segment, the imaging and information
industry, supplying products and services to meet the information processing
needs for a variety of customer applications. Geographic information in the
table below is presented on the same basis utilized by the Company to manage its
business. Export sales and certain income and expense items are reported in the
geographic area where the final sale to customers is made, rather than where the
transaction originates.
OTHER
UNITED INTERNATIONAL ELIMINATIONS TOTAL
(In Millions) STATES EUROPE(1) AREAS(2) AND OTHER COMPANY
- ---------------------------------------------------------------------------------------------------------------------------
Net revenues 1996 $ 1,159.5 $ 816.2 $ 302.5 $ 2,278.2
to customers 1995 1,128.8 808.4 308.4 2,245.6
1994 1,199.9 764.1 316.5 2,280.5
Transfers between 1996 $ 351.1 $ 92.5 $ 6.8 $ (450.4)
geographic areas 1995 290.9 76.2 4.0 (371.1)
1994 341.2 89.4 0.1 (430.7)
Operating 1996(3) $ (95.3) $ 78.8 $ 11.9 $ (4.6)
income (loss) 1995(4) (169.0) 55.8 (35.7) (148.9)
1994 1.5 72.9 21.4 95.8
Identifiable 1996 $ 777.1 $ 618.1 $ 166.1 -- $ 1,561.3
assets 1995 816.4 575.7 149.7 $ (0.3) 1,541.5
1994 894.9 582.9 194.7 (0.8) 1,671.7
(1) Includes operations in the Middle East and Africa since such regions are
managed together with Europe. These operations are not material to the overall
financial results of the Company.
(2) Includes Latin America, Asia and Canada.
(3) Includes restructuring and one-time charges of $77.1 million in the United
States, $9.8 million in Europe and $1.5 million in Other International Areas.
(4) Includes restructuring and one-time charges of $99.8 million in the United
States, $20.4 million in Europe and $46.1 million in Other International Areas.
NOTE 11 -- RETIREMENT PLANS
The Company has various non-contributory defined benefit employee pension plans
covering substantially all U.S. employees and certain employees outside the U.S.
For the U.S. plan, employees are eligible to participate at date of hire and are
fully vested after five years of service, including pension service time while
employed by 3M. Benefits are based primarily on employees' annual salary and
annual interest credits. For plans outside the U.S., benefits are based
principally on years of service and compensation near retirement. The Company's
funding policy is to deposit with a Trustee amounts at least equal to those
required by law. Pension investments consist primarily of common stocks and
fixed-income securities. The Company has not made any contributions to the U.S.
plan as of December 31, 1996, as such funding is not required until 1997.
Prior to the Distribution, employees of the Company participated in various
3M-sponsored retirement plans. For U.S. employees, 3M has retained
responsibility for the benefits earned under the plan. For plans outside the
U.S., the Company generally has assumed the assets and related liabilities. For
periods prior to the Distribution, pension expense was allocated to the Company
as part of 3M. Allocated pension expense was $12 million in the period January
1, 1996 to June 30, 1996, $24 million in 1995 and $25 million in 1994. Total
pension expense in 1996 was $21.3 million.
PAGE 19
The following table details net pension cost for period July 1, 1996 to December
31, 1996:
INTERNATIONAL
(Millions) U.S. PLAN PLANS
- --------------------------------------------------------------------------------------
Service cost $ 7.5 $ 1.5
Interest cost -- 2.0
Return on plan assets--actual -- (2.0)
Net amortization and deferral -- 0.3
------------------------------
Net pension cost $ 7.5 $ 1.8
The following table details the funded status of the pension plans as of
December 31, 1996:
INTERNATIONAL
(Millions) U.S. PLAN PLANS
- --------------------------------------------------------------------------------------
Actuarial present value of:
Vested benefit obligation $ 6.9 $ 36.2
Non-vested benefit obligation 0.6 5.6
------------------------------
Accumulated benefit obligation $ 7.5 $ 41.8
Projected benefit obligation $ 7.5 $ 60.3
Plan assets at fair value -- $ 52.5
Plan assets less than the projected benefit obligation $ (7.5) $ (7.8)
Unrecognized net transition obligation -- 0.9
Other unrecognized items -- 5.6
------------------------------
Accrued pension cost $ (7.5) $ (1.3)
The assumptions at year end are as follows:
INTERNATIONAL
U.S. PLAN PLANS
- --------------------------------------------------------------------------------------
Discount rate 8.00% 8.00%
Compensation rate increase 4.75% 6.20%
Long-term rate of return on assets 9.00% 8.30%
Net pension cost was determined using assumptions as of July 1, 1996
(Distribution Date), which were the same as the December 31, 1996 assumptions
used to determine the funded status.
In addition to the above, the Company's Italian subsidiary sponsors an employee
severance indemnity as required by law. The accrued liability for this severance
indemnity is included in other liabilities and was $49.3 million and $59.2
million as of December 31, 1996 and 1995, 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 $5.0 million,
$7.8 million and $6.3 million in 1996, 1995 and 1994, respectively.
NOTE 12 -- EMPLOYEE SAVINGS AND STOCK OWNERSHIP PLANS
The Company sponsors a 401(k) retirement savings plan under which eligible U.S.
employees may choose to save up to 15% of eligible compensation on a pre-tax
basis, subject to certain IRS limitations. The Company matches employee
contributions 100% on the first three percent of eligible compensation and 25%
on the next three percent of eligible compensation. The Company also sponsors a
variable compensation program, in which the Company will contribute up to three
percent of eligible employee compensation to employees' 401(k) retirement
accounts, depending upon Company performance.
PAGE 20
The Company established an Employee Stock Ownership Plan (ESOP) during 1996 as a
cost-effective way of funding the employee retirement savings benefits noted
above. The ESOP borrowed $50.0 million from the Company 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. Compensation expense
related to the ESOP was $3.8 million in the period from July 1, 1996 to December
31, 1996.
The ESOP shares as of December 31, 1996 are as follows:
Released and allocated shares 146,149
Unreleased shares 2,029,738
Total ESOP shares 2,175,887
------------
Fair value of unreleased shares as of December 31, 1996 $57,086,000
Prior to the July 1, 1996, U.S. employees of the Company participated in a
3M-sponsored employee savings plan under Section 401(k) of the Internal Revenue
Code. 3M matched employee contributions of up to six percent of compensation at
rates ranging from 35 to 85 percent depending upon financial performance. The
Company's allocation of the expense related to the 3M employee savings plan was
$2.3 million in the period from January 1, 1996 to June 30, 1996, $4.5 million
in 1995 and $4.6 million in 1994. Total expense for 1996 was $6.1 million.
NOTE 13 -- EMPLOYEE STOCK PLANS
The Company currently has stock options outstanding under the Imation 1996
Employee Stock Incentive Program (the "Employee Plan"), the Imation 1996
Directors Stock Compensation Program (the "Directors Plan") and the Imation
Stock Option Plan for Employees of Luminous Technology Corporation (the
"Luminous Plan").
The Employee Plan was approved and adopted by 3M on June 18, 1996, as the sole
stockholder of the Company, and became effective on July 1, 1996, the
Distribution Date. The total number of shares of common stock that may be issued
or awarded under the Employee Plan may not exceed 6,000,000. All shares subject
to awards under the Employee Plan that are forfeited or terminated will be
available again for issuance pursuant to awards under the Employee Plan.
Generally, grant prices are equal to the fair market value of the Company's
common stock at date of grant. The options normally have a term of ten years and
become exercisable from one to five years after grant date. At December 31,
1996, there were 3,677,532 shares available for grant under the Employee Plan.
The Directors Plan was also approved and adopted by 3M prior to the Distribution
Date, 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. Grant prices are equal to the fair market value of the
Company's common stock at date of grant. As of December 31, 1996, there were
740,000 shares available for grant under the Directors Plan.
The Luminous Plan was approved and adopted by the shareholders of Luminous
Corporation (Luminous) prior to the acquisition of Luminous by the Company (see
Note 3). In connection with the acquisition, the Company assumed certain
outstanding stock options held by Luminous employees and agreed to convert such
options into 317,062 options to purchase the Company's common stock. The
outstanding options were amended to accelerate the dates on which the options
become exercisable. No additional grants may be made pursuant to the Luminous
Plan.
PAGE 21
The following table summarizes stock option activity for 1996:
Stock Weighted Average
Options Exercise Price
- ------------------------------------------------------------------------
Granted 2,699,530 $ 21.14
Exercised 26,848 2.16
Forfeited 24,525 22.54
-----------------------------------
Outstanding, End of Year 2,648,157 $ 21.31
Exercisable, End of Year 131,857 $ 10.58
The following table summarizes information about stock options outstanding as of
December 31, 1996:
Weighted Average Options Outstanding- Options Exercisable-
Range of Options Remaining Weighted Average Options Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------
$ 0.31 171,754 9 years $ 0.31 74,219 $ 0.31
22.38 to 26.80 2,476,403 9 years 22.76 57,638 23.81
--------- ------
$ 0.31 to $26.80 2,648,157 131,857
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standard No. 123 (SFAS 123), "Accounting for Stock-Based
Compensation". Accordingly, no compensation expense has been recognized for the
stock option plans. If the fair value of options granted had been recognized as
compensation expense on a straight-line basis over the vesting periods in
accordance with the provisions of SFAS 123, pro forma pretax loss would have
been $9.4 million higher ($5.1 million after tax or $0.12 per share) in 1996 and
$3.4 million higher ($1.9 million after tax or $0.05 per share) in 1995. The pro
forma effects on net income (loss) for 1996 and 1995 are not representative of
the pro forma effects on net income (loss) in future years due to differences
between the Company's and 3M's option plans, including vesting periods, and the
exclusion of compensation expense related to the vesting of grants made prior to
1995.
The weighted average fair value at date of grant for options granted in 1996 was
as follows:
Exercise price equals market price on grant date: $ 8.96
Exercise price less than market price on grant date: $ 21.97
As part of 3M, certain employees of the Company were granted stock options prior
to the Distribution to purchase 3M stock. Options granted to the Company's
employees under 3M's General Employees' Stock Purchase Plan (GESPP) were 72,522
from January 1, 1996 to June 30, 1996 and 144,366 in 1995. The weighted average
fair value per option granted under the GESPP was $10.37 in 1996 and $8.60 in
1995. Options granted to the Company's employees under 3M's Management Stock
Option Plan (MSOP) were 271,200 in 1995 with a weighted average fair value of
$12.48 per option. No options were issued to the Company's employees under the
MSOP in 1996. Pursuant to the Distribution, options granted to the Company's
employees while part of 3M have not been converted into options to purchase
shares of the Company's stock.
The fair values at date of grant were estimated using the Black-Scholes option
pricing model with the following weighted average assumptions (1995 grants
reflect 3M assumptions):
1996 1995
- -------------------------------------------------------------------------
Volatility 40.0% 14.4%
Risk free interest rate 6.38% 5.90%
Expected life (months) 49 66
Dividend growth Zero 5.2%
PAGE 22
NOTE 14 -- SUPPLEMENTAL NON-CASH ITEMS
Pursuant to the Distribution on July 1, 1996, certain assets and liabilities
with a net value of $8.1 million were retained by 3M, primarily comprised of
certain deferred tax assets of $26.9 million and severance obligations of $23.9
million. Pursuant to the acquisition of Luminous (see Note 3), the Company
issued $14.6 million of common stock and $4.8 million of stock options.
NOTE 15 -- COMMITMENTS AND CONTINGENCIES
In connection with the Distribution, the Company assumed substantially all
liabilities for legal proceedings relating to the Company's businesses as
conducted prior to the Distribution.
In addition, in the normal course of business, the Company is subject to
proceedings, lawsuits and other claims, including proceedings under laws and
regulations related to environmental and other matters. All such matters are
subject to many uncertainties and outcomes that are not predictable with
assurance. Consequently, the Company is unable to ascertain the ultimate
aggregate amount of monetary liability or financial impact with respect to these
matters at December 31, 1996. 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, 1996 would not be material to the Company's financial
position, or annual results of operations or cash flows.
NOTE 16 -- QUARTERLY DATA (UNAUDITED)
(In Millions,
except per share amounts) First Second Third Fourth Total
- --------------------------------------------------------------------------------------------------------------
1996
Net revenues $ 576.1 $ 561.2 $ 559.3 $ 581.6 $ 2,278.2
Gross profit 202.3 192.7 196.6 203.8 795.4
Operating income (loss) 13.3 (55.6) 24.5 13.2 (4.6)
Net income (loss) 6.1 (37.8) 11.8 (0.6) (20.5)
Earnings (loss) per common share 0.14 (0.90) 0.29 (0.02) (0.49)
1995
Net revenues $ 576.7 $ 565.0 $ 546.2 $ 557.7 $ 2,245.6
Gross profit 212.5 194.6 181.7 135.9 724.7
Operating income 18.2 (1.9) (1.3) (163.9) (148.9)
Net income (loss) 7.5 (3.2) (1.8) (87.5) (85.0)
Earnings (loss) per common share 0.18 (0.08) (0.04) (2.08) (2.02)
PAGE 23
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
Management is responsible for the integrity and objectivity of the financial
information included in this report. The financial statements have been prepared
in accordance with generally accepted accounting principles. Where necessary,
they reflect estimates based on management judgement.
Established accounting procedures and related systems of internal control
provide reasonable assurance that assets are safeguarded, that the books and
records properly reflect all transactions, and that policies and procedures are
implemented by qualified personnel. Internal auditors review the accounting and
control systems.
The Audit Committee, comprised of four members of the Board of Directors who are
not employees of the Company, meets regularly with representatives of
management, the independent accountants and the Company's internal auditors to
monitor the functioning of the accounting control systems and to review the
results of the auditing activities. The Audit Committee recommends independent
accountants for appointment by the Board, subject to shareholder ratification.
The independent accountants and the internal auditors have full and free access
to the Audit Committee.
The independent accountants conduct an objective, independent audit of the
financial statements. Their report follows.
/s/ William T. Monahan /s/ Jill D. Burchill
William T. Monahan Jill D. Burchill
Chairman and Chief Executive Officer Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS, IMATION CORP.:
We have audited the accompanying consolidated balance sheets of Imation Corp.
and subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations and cash flows for each of the three years in the
period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Imation Corp. and
subsidiaries as of December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
Minneapolis, Minnesota
February 14, 1997
PAGE 25