-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NZoaoaQh/7MqYrKBMEMwvzs5sPcyIBYiSFQeyA0cyHfgnPrPrCywSd1WYDlGAAl2 nCYEzD120qmmjQHV2U0DkQ== 0000897101-97-000930.txt : 19970815 0000897101-97-000930.hdr.sgml : 19970815 ACCESSION NUMBER: 0000897101-97-000930 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: IMATION CORP CENTRAL INDEX KEY: 0001014111 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROCESSING & DATA PREPARATION [7374] IRS NUMBER: 411838504 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-14310 FILM NUMBER: 97661493 BUSINESS ADDRESS: STREET 1: 1 IMATION PL CITY: OAKDALE STATE: MN ZIP: 55128 BUSINESS PHONE: 6127331250 MAIL ADDRESS: STREET 1: 1 IMATION PLACE CITY: OAKDALE STATE: MN ZIP: 55128 FORMER COMPANY: FORMER CONFORMED NAME: 3M INFORMATION PROCESSING INC DATE OF NAME CHANGE: 19960619 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO _____________ . COMMISSION FILE NUMBER: 1-14310 --------------- IMATION CORP. (Exact name of registrant as specified in its charter) DELAWARE 41-1838504 (State of incorporation) (I.R.S. Employer Identification No.) 1 IMATION PLACE OAKDALE, MINNESOTA 55128 (Address of principal executive offices) (612) 704-4000 (Registrant's telephone number, including area code) -------------------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X_. No ___. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 40,771,586 shares of Common Stock, par value $0.01 per share, were outstanding on July 31, 1997. IMATION CORP. INDEX PAGE(S) ------- PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Operations for the three and six month periods ended June 30, 1997 and 1996 3 Condensed Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996 4 Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 1997 and 1996 5 Notes to Consolidated Financial Statements 6-9 Report of Independent Accountants 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 11-20 PART II. OTHER INFORMATION 21-22 SIGNATURE 23 EXHIBITS 24-26 PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS IMATION CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (In Millions, Except Per Share Amounts) (Unaudited)
Three months ended Six months ended June 30, June 30, ----------------- ------------------- 1997 1996 1997 1996 ------ ------ -------- -------- Net revenues $554.8 $561.2 $1,102.5 $1,137.3 Cost of goods sold 361.8 368.5 710.5 742.3 ------ ------ -------- -------- Gross profit 193.0 192.7 392.0 395.0 Operating expenses: Selling, general and administrative 142.6 159.2 275.6 289.9 Research and development 40.4 45.6 78.2 93.5 Restructuring charges - 43.5 - 53.9 ------ ------ -------- -------- Total 183.0 248.3 353.8 437.3 Operating income (loss) 10.0 (55.6) 38.2 (42.3) Other income and expense: Interest expense 3.8 3.7 6.2 7.4 Other, net (1.8) (1.5) 2.2 (2.0) ------- ------- -------- --------- Total 2.0 2.2 8.4 5.4 Income (loss) before tax and minority interest 8.0 (57.8) 29.8 (47.7) Income tax provision (benefit) 3.6 (19.7) 13.4 (15.6) Minority interest - (0.3) - (0.4) ------- ------- --------- --------- Net income (loss) $ 4.4 $(37.8) $ 16.4 $ (31.7) ======= ======= ========= ========= Earnings (loss) per share $ 0.11 $(0.90) $ 0.41 $ (0.76) ======= ======= ========= ========= Weighted average shares outstanding 39.8 41.9 40.3 41.9 ======= ======= ========= ========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. IMATION CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (In Millions, Except Share Amounts) June 30, 1997 December 31, (Unaudited) 1996 --------- -------- ASSETS Current Assets Cash and equivalents $ 66.4 $ 61.7 Accounts receivable - net 485.8 479.6 Inventories 403.1 392.8 Other current assets 104.3 94.5 --------- -------- Total current assets 1,059.6 1,028.6 Property, Plant and Equipment - net 455.0 480.1 Other Assets 97.5 64.6 --------- -------- Total Assets $1,612.1 $1,573.3 ========= ======== LIABILITIES AND EQUITY Current Liabilities Accounts payable $ 169.5 $ 194.1 Accrued payroll 42.5 41.9 Income taxes payable 9.5 7.6 Short-term debt 27.3 26.5 Other current liabilities 149.2 151.2 --------- -------- Total current liabilities 398.0 421.3 Other Liabilities 111.0 98.6 Long-Term Debt 233.8 123.1 Commitments and Contingencies Shareholders' Equity - net 869.3 930.3 Shares issued: June 30, 1997: 42,924,909 December 31, 1996: 42,879,880 --------- -------- Total Liabilities and Shareholders' Equity $1,612.1 $1,573.3 ======== ======== THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. IMATION CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Millions) (Unaudited) Six months ended June 30, ------------------- 1997 1996 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 16.4 $(31.7) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 74.3 94.5 Deferred income taxes (0.3) 5.3 Restructuring and other one-time charges - 76.4 Working capital changes (60.5) (44.3) Other 15.0 (15.3) ------- ------- Net cash provided by operating activities 44.9 84.9 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (62.8) (79.1) Capitalized software (33.3) - Other 0.4 (0.2) ------- ------- Net cash used in investing activities (95.7) (79.3) CASH FLOWS FROM FINANCING ACTIVITIES: Net change in short-term debt 0.8 - Borrowings of long-term debt 649.0 - Repayment of long-term debt (538.2) - Purchases of treasury shares (61.0) - Decrease in unearned ESOP shares 4.9 - Employee stock plans and other 0.2 - Net cash paid to 3M - (0.9) ------- ------- Net cash provided by (used in) financing activities 55.7 (0.9) Effect of exchange rate changes on cash (0.2) (4.7) ------- ------- Net change in cash and equivalents 4.7 - Cash and equivalents - beginning of period 61.7 - ------- ------- Cash and equivalents - end of period $ 66.4 $ - ======= ======= THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. IMATION CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. FINANCIAL STATEMENTS - BASIS OF PRESENTATION Imation Corp. (the "Company") became an independent, publicly held company as of July 1, 1996 (the "Distribution Date"), when Minnesota Mining and Manufacturing ("3M") spun off its data storage and imaging businesses as an independent, publicly held 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. 3M and the Company have entered into a number of agreements to facilitate the transition of the Company to an independent business enterprise. Descriptions of the various agreements are set forth under the caption "Relationship Between 3M and the Company" contained in the Company's 1996 Annual Report on Form 10-K filed with the Securities and Exchange Commission. The consolidated financial statements for periods prior to July 1, 1996 reflect the assets, liabilities, revenues, and expenses that were directly related to the Company as it was operated within 3M. The Company's consolidated statements of operations for periods prior to July 1, 1996 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 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. All material inter-company transactions and balances between the Company's businesses have been eliminated. The financial information included herein for periods prior to July 1, 1996 may not necessarily be indicative of the results of operations or cash flows of the Company if it had been a separate, independent company during the periods prior to July 1, 1996. The interim consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented. These adjustments, except for the restructuring charges recorded in 1996, consist of normal, recurring items. The results of operations for any interim period are not necessarily indicative of results for the full year. The consolidated financial statements and notes are presented as permitted by the requirements for Form 10-Q and do not contain certain information included in the Company's annual consolidated financial statements and notes. The year end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. This Form 10-Q should be read in conjunction with the Company's consolidated financial statements and notes included in its 1996 Annual Report on Form 10-K. 2. SUPPLEMENTAL BALANCE SHEET INFORMATION June 30, 1997 December 31, (Unaudited) 1996 ---------- --------- (In millions, except share amounts) Inventories Finished goods $ 271.0 $ 248.1 Work in process 61.2 57.3 Raw materials and supplies 70.9 87.4 ---------- --------- Total inventories $ 403.1 $ 392.8 ========== ========== Property, Plant and Equipment Property, plant and equipment $ 1,710.3 $ 1,709.9 Less accumulated depreciation (1,255.3) (1,229.8) ---------- ---------- Property, plant and equipment - net $ 455.0 $ 480.1 ========== ========== Shareholders' Equity Common stock $ 0.4 $ 0.4 Additional paid-in capital 1,012.5 1,011.5 Retained earnings 27.6 11.2 Unearned ESOP shares (41.8) (46.6) Cumulative translation adjustment (68.4) (46.2) Treasury stock, at cost June 30, 1997: 2,480,641 shares (61.0) - ---------- ---------- Total shareholders' equity $ 869.3 $ 930.3 ========== ========== 3. COMMITMENTS AND CONTINGENCIES Discussion of legal matters is cross-referenced to this Form 10-Q, Part II, Item 1, Legal Proceedings, and should be considered an integral part of the Consolidated Financial Statements and Notes. 4. MASTER LEASE AND SECURITY AGREEMENT In March 1997, the Company entered into a Master Lease and Security Agreement in connection with the construction of a new research and development facility at the Company's headquarters site. Construction is expected to be completed in June 1998, at which time the lease payments will commence. The Company has the option to purchase the facility at the end of the lease term, March 2002. In the event the Company chooses not to exercise this purchase option, the Company is obligated to arrange for the sale of the facility and has guaranteed the lessor a sale price of $58.5 million. 5. INTEREST RATE SWAP AGREEMENT Effective March 25, 1997, the Company entered into an interest rate swap agreement with a financial institution. The notional amount of the interest rate swap agreement is $100 million with the Company paying fixed rate and receiving variable rate. The agreement expires March 31, 2000. Net payments or receipts under the agreement are recorded as adjustments to interest expense. As of June 30, 1997, the effective interest rate on the $231.0 million in debt outstanding under the Company's revolving credit facility was 6.43%, including the effect of the interest rate swap agreement. 6. EARNINGS PER SHARE The number of weighted average shares outstanding used in the computation of earnings per share (EPS) for periods prior to July 1, 1996 is equal to one-tenth the weighted average number of 3M shares outstanding based on the distribution ratio of one share of Imation Corp. for every ten shares of 3M pursuant to the spin-off on July 1, 1996. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, "Earnings Per Share". This statement establishes standards for computing and presenting basic and diluted earnings per share for financial statements issued for periods ending after December 15, 1997. The adoption of this statement is not expected to have a material effect on the Company's reported EPS. 7. DERIVATIVE ACCOUNTING POLICY The Company uses, or may use, interest rate swaps and foreign currency and commodity forward and option contracts to manage risks generally associated with interest rate, exchange rate and commodity market volatility. All hedging instruments are designated as, and effective as, hedges and are fully correlated as required by generally accepted accounting principles. Instruments that do not qualify for hedge accounting are marked to market with changes recognized in current earnings. 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 in stockholders' equity for hedges of net investments in international companies. Cash flows attributable to these financial instruments are included with cash flows of the associated hedged items. 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 interest rate swaps are amortized and reflected in interest expense over the remaining term of the underlying debt. 8. RECLASSIFICATIONS Certain reclassifications have been made to the prior year's financial statements to conform with the current year presentation. ***** Coopers & Lybrand L.L.P., the Company's independent accountants, have performed a review of the unaudited interim consolidated financial statements included herein and their report thereon accompanies this filing. REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Imation Corp.: We have reviewed the accompanying condensed consolidated balance sheet of Imation Corp. (the "Company") as of June 30, 1997, and the related consolidated statements of operations for the three and six month periods ended June 30, 1997 and 1996, and condensed consolidated statements of cash flows for the six month periods ended June 30, 1997 and 1996. These consolidated financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to the consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet as of December 31, 1996, and the related consolidated statements of operations and cash flows for the year then ended (not presented herein); and in our report dated February 14, 1997, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1996, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/ COOPERS & LYBRAND L.L.P. COOPERS & LYBRAND L.L.P. Minneapolis, Minnesota July 30, 1997 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL OVERVIEW On June 18, 1996, the Board of Directors of Minnesota Mining and Manufacturing Company ("3M") approved the spin-off 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 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 included herein for periods prior to July 1, 1996 may not necessarily be indicative of the results of operations or cash flows of the Company had the Company been a separate, independent company during the periods prior to July 1, 1996. At the time of the Distribution, the Company established an overall financial goal of improving the Company's economic profit (measured as after-tax operating income in excess of a charge for the use of capital) by $150 million over a three year period ending December 31, 1998, from the base year ended December 31, 1995. This goal is based on anticipated cost reductions and the Company's objectives for improved revenue growth and improved asset utilization. During the second quarter of 1997, the Company improved economic profit by $2.9 million over the second quarter of 1996. Cost reductions and improved asset management generated approximately $1.2 million and $2.9 million, respectively, of this improvement, partially offset by a decline in revenues. Since December 31, 1995, economic profit has improved by approximately $75.2 million, with $37.0 million of the improvement coming from cost reductions and $38.6 million from improved asset management, partially offset by a decline in revenues. RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED JUNE 30, 1997 AND 1996 The following table displays the components of the Company's consolidated statements of operations as a percentage of total revenues. The adjusted 1996 percentages exclude the impact of $66.0 million of pretax special one-time charges recorded in the second quarter of 1996. Of these charges, $7.9 million were recorded as cost of goods sold, $14.6 million as selling, general and administrative expenses and $43.5 million as restructuring charges. On an after-tax basis, these charges totaled $42.5 million. Three Months Ended June 30, -------------------- Adjusted 1997 1996 ---- ---- Net revenues 100.0% 100.0% Cost of goods sold 65.2% 64.3% ------ ------ Gross profit 34.8% 35.7% Operating expenses: Selling, general and administrative 25.7% 25.8% Research and development 7.3% 8.1% ------ ------ Total 33.0% 33.9% Operating income 1.8% 1.8% Other income and expense: Interest expense 0.7% 0.7% Other, net (0.3%) (0.3%) ------- ------- Total 0.4% 0.4% Income before tax and minority interest 1.4% 1.4% Income tax provision 0.6% 0.7% Minority interest - (0.1%) ------ ------- Net income 0.8% 0.8% ====== ====== Net revenues for the second quarter of 1997 were $554.8 million, a decrease of $6.4 million or 1.1 percent from the same period in 1996. Volume increases of 7.9 percent were more than offset by price declines of 4.6 percent and the negative effect of changes in currency exchange rates of 4.4 percent. Volume growth of 7.9 percent was consistent with volume growth experienced for the full year 1996 and was more than twice the volume growth in the first quarter of 1997. Strong sales growth of digital imaging products (including DryView(TM) laser imagers) and high-end data storage products were partially offset by weaker than expected demand for certain lower-capacity data storage products. The Company's growth portfolio (primarily Travan(TM) data cartridges, DryView laser imagers, Rainbow(TM) color proofers, 120 megabyte SuperDisk(TM) and Luminous pre-press software) represented approximately 15 percent of revenues for the quarter, up from approximately 10 percent of revenues in the second quarter of 1996 and down from approximately 16 percent of revenues in the first quarter of 1997. Price erosion of 4.6 percent improved from the price erosion experienced in the second quarter of 1996 of 4.9 percent and is consistent with the Company's expectation of of overall price declines of approximately 5 percent. Net revenues in the United States decreased 1.3 percent with volume increases of 1.5 percent more than offset by pricing declines of 2.8 percent. Internationally, net revenues decreased 1.0 percent. International volume growth was the highest in more than two years at 14.6 percent which was partially offset by price declines of 6.7 percent, resulting in local currency growth of 7.9 percent. The negative effect of changes in currency exchange rates impacted international revenues by 8.9 percent. International revenues accounted for 49.4 percent of second quarter 1997 revenues, compared to 49.3 percent for the second quarter of 1996. Based on the currency exchange rates as of June 30, 1997, changes in currency exchange rates from the previous year will continue to negatively impact revenues and earnings for the remainder of 1997. The Company expects revenues in the second half of 1997 to exceed revenues from the same period of 1996, inclusive of the negative impact of changes in currency rates. The Company has a stated goal of achieving 20 percent of its 1997 revenues from its growth portfolio, as defined above. Both the Company's expectation for the second half of 1997 and its goal for the key growth platforms are contingent substantially upon the continued momentum of DryView sales and the success of SuperDisk drive placement in the second half of 1997. Gross profit in the second quarter of 1997 was $193.0 million or 34.8 percent of revenues. Excluding the special one-time charges of $7.9 million recorded in the second quarter of 1996, gross profit in that period would have been $200.6 million or 35.7 percent of revenues. The decrease in gross profit margin of 0.9 percentage points was due to lower than expected demand in the desk-top tape back-up segment which resulted in under-utilization of the tape production facility and the combined mix impact of lower sales of desk-top tape and increased sales of DryView laser imagers, which have a higher and lower than average gross margin, respectively. Selling, general and administrative (SG&A) expenses were $142.6 million or 25.7 percent of revenues. Excluding the $14.6 million of special one-time costs recorded in the second quarter of 1996, SG&A expenses in that period would have been $144.6 million or 25.8 percent of revenues. SG&A expenses in both periods include recurring start-up costs associated with the Company's development of business processes independent of 3M and it is expected that these start-up costs will continue throughout 1997. Research and development expenses totaled $40.4 million or 7.3 percent of revenues in the first quarter of 1997, a decrease of $5.2 million or 0.8 percentage points from the same period in 1996. This decrease reflects the efficiencies and productivity the Company has obtained by the consolidation of laboratories, partially offset by investment in key future technology programs. The Company recorded restructuring charges of $43.5 million in the second quarter of 1996 reflecting costs for certain voluntary employee separation programs. No such charges were recorded in the second quarter of 1997. Operating income for the second quarter of 1997 was $10.0 million, or 1.8 percent of revenues. This represents a $0.4 million decrease in operating income from the second quarter of 1996, after excluding the second quarter 1996 special one-time charges of $66.0 million. Second quarter 1997 interest expense was $3.8 million, up $0.1 million from the same quarter last year. Average debt outstanding was lower in the second quarter of 1997 as compared to the same period of 1996, more than offset by a higher effective interest rate. Interest expense prior to July 1, 1996 was based on an assumed $250 million in outstanding debt and 3M's effective interest rate during the period. The allocation of interest expense for periods prior to July 1, 1996 is more fully discussed in Note 7 of the Notes to Consolidated Financial Statements included in the Company's 1996 Annual Report on Form 10-K. The net other income and expense in the second quarter of 1997 totaled $1.8 million of income, compared to $1.5 million of income in the comparable period of 1996. The Company's effective tax rate in the second quarter of 1997 was 45.0 percent, compared to 46.3 percent in the second quarter of 1996, excluding the special one-time charges. Net income in the second quarter of 1997 was $4.4 million, or $0.11 per share. Net loss in the comparable period of 1996 was $(37.8) million, or $(0.90) per share. Excluding the special one-time charges of $42.5 million after tax, second quarter 1996 net income would have been $4.7 million, or $0.11 per share. COMPARISON OF SIX MONTHS ENDED JUNE 30, 1997 AND 1996 The following table displays the components of the Company's consolidated statements of operations as a percentage of total revenues. The 1996 percentages exclude the impact of $76.4 million of pretax special one-time charges recorded in the six months ended June 30, 1996. Of these charges, $7.9 million were recorded as cost of goods sold, $14.6 million as selling, general and administrative expenses and $53.9 million as restructuring charges. On an after-tax basis, these charges totaled $48.6 million. Six Months Ended June 30, -------------------- Adjusted 1997 1996 ---- ---- Net revenues 100.0% 100.0% Cost of goods sold 64.4% 64.6% ------ ------ Gross profit 35.6% 35.4% Operating expenses: Selling, general and administrative 25.0% 24.2% Research and development 7.1% 8.2% ------ ------ Total 32.1% 32.4% Operating income 3.5% 3.0% Other income and expense: Interest expense 0.6% 0.7% Other, net 0.2% (0.2%) ------ ------ Total 0.8% 0.5% Income before tax and minority interest 2.7% 2.5% Income tax provision 1.2% 1.0% Minority interest - - ------ ------ Net income 1.5% 1.5% ====== ====== On a year to date basis, net revenues were $1,102.5 million, a decrease of $34.8 million or 3.1 percent from the same period in 1996. Volume increases of 5.7 percent were more than offset by price declines of 4.8 percent and the negative effect of changes in currency exchange rates of 4.0 percent. Volume growth benefited from strong sales growth of digital imaging products (including DryView medical imagers) and high-end data storage products, partially offset by the Company's decision to reduce sales in certain low margin product lines in which the Company is operating under a harvest strategy and by weaker than expected demand for certain lower-capacity data storage products. Price erosion of 4.8 percent in the six months ended June 30, 1997 improved from the price erosion experienced in the same period of 1996 of 5.3 percent and is consistent with the Company's expectations. Net revenues in the United States decreased 1.5 percent with volume increases of 1.4 percent more than offset by pricing declines of 2.9 percent. Internationally, net revenues decreased 4.6 percent. International volume growth of 9.9 percent was partially offset by price declines of 6.7 percent, resulting in local currency growth of 3.2 percent. The negative effect of changes in currency exchange rates impacted international revenues by 7.8 percent. International revenues accounted for 49.5 percent of total revenues compared with 50.3 percent in the same period of 1996. Gross profit for the first six months of 1997 was $392.0 million or 35.6 percent of revenues. Excluding the special one-time charges of $7.9 million recorded in the first six months of 1996, gross profit in that period would have been $402.9 million or 35.4 percent of revenues. The gross profit margin in the first six months of 1997 was impacted positively by unit cost reductions, raw material price declines and the reduction of sales in certain lower margin product lines, offset by lower than expected demand in the desk-top tape back-up segment which resulted in under-utilization of the tape production facility and the combined mix impact of lower sales of desk-top tape and increased sales of DryView laser imagers, which have a higher and lower than average gross margin, respectively. Selling, general and administrative (SG&A) expenses were $275.6 million or 25.0 percent of revenues. Excluding the $14.6 million of special one-time costs recorded in the first six months of 1996, SG&A expenses in that period would have been $275.3 million or 24.2 percent of revenues. The increase in SG&A expenses as a percentage of revenues in the first six months of 1997 is due to the decline in revenues. Research and development costs totaled $78.2 million or 7.1 percent of revenues in the first six months of 1997, down $15.3 million or 1.1 percentage points from the same period in 1996. This decrease reflects the efficiencies and productivity the Company has obtained by the consolidation of laboratories, partially offset by investment in key future technology programs. The Company recorded restructuring charges of $53.9 million in the first six months of 1996 reflecting costs for certain voluntary employee separation programs. No such charges were recorded in the first six months of 1997. Operating income for the first six months of 1997 was $38.2 million, or 3.5 percent of revenues. This represents a $4.1 million improvement over operating income in the same period of 1996 of $34.1 million, after excluding the special one-time charges of $76.4 million that were recorded in the first six months of 1996. Interest expense for the first six months of 1997 was $6.2 million, down $1.2 million from the same period of 1996. This decrease is due to lower average debt outstanding in the first six months of 1997 as compared to the same period in 1996. Interest expense prior to July 1, 1996 was based on an assumed $250 million in outstanding debt and 3M's effective interest rate during the period. The allocation of interest expense for periods prior to July 1, 1996 is more fully discussed in Note 7 of the Notes to Consolidated Financial Statements included in the Company's 1996 Annual Report on Form 10-K. The net other income and expense in the first six months of 1997 totaled $2.2 million of expense, compared to $2.0 million of income in the comparable period of 1996. The 1997 expense is primarily due to transaction losses on foreign currency exposures partially offset by interest income. The Company's effective tax rate for the first six months of 1997 was 45.0 percent, compared to 42.5 percent in the same period in 1996, excluding the special one-time charges. Year to date net income in 1997 was $16.4 million, or $0.41 per share. Net loss in the comparable period of 1996 was $(31.7) million, or $(0.76) per share. Excluding the special one-time charges of $48.6 million after tax, net income in the first six months of 1996 would have been $16.9 million, or $0.40 per share. FINANCIAL POSITION The Company had 3.4 months of inventory on hand at June 30, 1997, up from 3.2 months at December 31, 1996. This increase is due to the ongoing implementation of plant consolidations, the start-up of outsourcing certain product lines and the ongoing transition from 65 3M warehouses globally towards the Company's goal of 29 warehouses. The accounts receivable days sales outstanding was 79 days at June 30, 1997, up from 77 days at December 31, 1996. Other current assets increased approximately $9.8 million from December 31, 1996 due to an increase in deferred taxes. The book value of property, plant and equipment at June 30, 1997 was $455.0, a decrease of $25.1 million from the December 31, 1996 balance of $480.1 million. This decrease is primarily due to depreciation in excess of capital spending and due to the effect of changes in currency rates. Other assets increased $32.9 million from December 31, 1996 due to capitalization of software costs related to developing business processes independent of 3M. 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 3M" in the consolidated statements of cash flows. This financial support was discontinued following the Distribution. Cash provided by operating activities was $44.9 million during the six months ended June 30, 1997, compared to $84.9 million during the same period in 1996. Working capital increased $60.5 million in the first six months of 1997, while working capital increased only $44.3 million in the comparable period of 1996. Depreciation was $74.3 million in the first six months on 1997 while it was $94.5 million in the comparable period in 1996. Restructuring and other one-time charges of $76.4 million reported in the first six months of 1996 were partially offset by the net loss of $31.7 million reported in that period. Cash used in investing activities was $95.7 million for the first six months of 1997 compared to $79.3 million in the comparable period of 1996. Investing activities included capital expenditures of $62.8 million for the first six months of 1997 compared to $79.1 million during the same period of 1996. It is expected that capital expenditures will be slightly lower than depreciation for all of 1997. Capitalized software was $33.3 million in the first six months of 1997, primarily related to establishing information technology systems independent of 3M. It is expected that capitalized software costs related to establishing independent systems will continue through the remainder of 1997 and into 1998. Amortization of these costs will begin when the systems are implemented, currently expected to be early 1998. Financing activities during the first six months of 1997 provided cash of $55.7 million. Financing activities primarily related to the net borrowing of $111.6 million and the payment of $61.0 million to repurchase approximately 2,481,000 of the Company's common shares. In March 1997, the Company's Board of Directors authorized the Company to repurchase up to six million shares of the Company's common stock. At June 30, 1997, the Company's ratio of total debt to total capital was 23.1%. The Company believes this ratio will increase over time due to the cash requirements for funding future growth opportunities. The Company also believes it has the financial resources needed to meet its business requirements in the foreseeable future. FORWARD-LOOKING STATEMENTS Certain information contained in this report which does not relate to historical financial information may be deemed to constitute forward looking statements. The words or phrases "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project", "believe" or similar expressions identify "forward looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from historical results and those presently anticipated or projected. The Company wishes to caution readers not to place undue reliance on any such forward looking statements, which speak only as of the date made. Among the factors that could cause the Company's actual results in the future to differ materially from any opinions or statements expressed with respect to future periods are market acceptance of newly introduced products, competitive industry conditions including historical price erosion in certain product categories, product mix, technological developments in the markets served by the Company, foreign currency fluctuations, the Company's ability to establish its operations as an independent company, and the various factors set forth in the Company's 1996 Annual Report on Form 10-K. PART II. OTHER INFORMATION Item 1. Legal Proceedings The Company, in the ordinary course of its business, is the subject of various pending or threatened legal actions. 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. 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 condensed consolidated balance sheet would not be material to the Company's financial position or annual results of operations or cash flows. Items 2 & 3. Not Applicable Item 4. Submission of Matters to a Vote of Security Holders At the Company's 1997 Annual Meeting of Shareholders held on May 14, 1997, the shareholders approved the following: (a) A proposal to elect two Class I directors of the Company to serve for three-year terms ending in 2000, as follows: Directors Votes For Votes Withheld - --------- --------- -------------- Lawrence E. Eaton 34,324,327 252,010 Ronald T. LeMay 34,324,854 251,483 There were no broker non-votes. In addition, the terms of the following directors continued after the meeting: Class II directors for a term ending in 1998 - William W. George, Marvin L. Mann and Daryl J. White; and Class III directors for a term ending in 1999 - Linda W. Hart, William T. Monahan and Mark A. Pulido. (b) A proposal to ratify the appointment of Coopers & Lybrand L.L.P. to serve as independent certified public accountants of the Company for the year ending December 31, 1997. The proposal received 34,338,399 votes for, and 127,704 against, ratification. There were 110,234 abstentions and no broker non-votes. (c) A proposal to approve the Company's 1996 Employee Stock Incentive Program. The proposal received 22,717,318 votes for, and 6,169,626 against, ratification. There were 219,269 abstentions and 5,470,124 broker non-votes. Item 5. Not Applicable Item 6. Exhibits and Reports on Form 8-K (a) The following documents are filed as exhibits to this Report. (11) A statement regarding the computation of common shares and common share equivalents. Page 25. (15) An awareness letter from the Company's independent accountants regarding unaudited interim financial statements. Page 26. (27) Financial data schedule (EDGAR filing only). (b) No reports on Form 8-K were filed during the quarter ended June 30, 1997. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized. Imation Corp. ------------- (REGISTRANT) Date: August 14, 1997 By: /s/ Jill D. Burchill ------------------------- Jill D. Burchill Chief Financial Officer (and principal financial officer) EXHIBIT INDEX Exhibit Number Description - ------ ------------------------------------------------------ 11 A statement regarding the computation of common shares and common share equivalents. Page 25. 15 An awareness letter from the Company's independent accountants regarding unaudited interim financial statements. Page 26. 27 Financial data schedule (EDGAR filing only). EX-11 2 COMPUTATION OF COMMON SHARES EXHIBIT 11 IMATION CORP. COMPUTATION OF COMMON SHARES AND COMMON SHARE EQUIVALENTS (IN MILLIONS) (UNAUDITED) Three months ended Six months ended June 30, June 30, ----------------- ---------------- 1997 1996 1997 1996 ------- ------ ------- ------ Weighted average number of shares outstanding during the period (a) 41.7 41.9 42.2 41.9 Weighted average number of shares held by the ESOP not committed to be released (1.9) -- (1.9) -- Common share equivalents resulting from the assumed exercise of stock options (b) 0.5 -- 0.5 -- ------- ------ ------- ------ Total common shares and common share equivalents 40.3 (c) 41.9 40.8 (c) 41.9 (a) The number of shares used to compute earnings per share for the periods prior to July 1, 1996 are based on one-tenth of the average 3M shares outstanding based on the distribution ratio of one share of the Company's common stock for every ten shares of 3M common stock held on the record date. (b) Common share equivalents for the three and six months ended June 30, 1997 are computed by the "treasury stock" method. This method first determines the number of shares issuable under stock options that have an option price below the average market price for the period, and then deducts the number of shares that could be repurchased with the proceeds of options exercised. Common share equivalents for primary and fully diluted earnings per share were essentially equivalent. (c) Common share equivalents for the three and six months ended June 30, 1997 are not material. As a result, earnings per share have been computed using the weighted average number of shares outstanding less the weighted average number of shares held by the ESOP not committed to be released, or 40.3 million weighted average shares outstanding for the six months ended June 30, 1997 and 39.8 million weighted average shares outstanding for the three months ended June 30, 1997. EX-15 3 REGISTRATIONS ON FORM S-8 AND S-4 EXHIBIT 15 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Imation Corp. Registrations on Form S-8 and Form S-4 We are aware that our report dated July 30, 1997 on our reviews of the interim consolidated financial information of Imation Corp. (the "Company") for the three and six month periods ended June 30, 1997 and 1996, and included in the Company's Form 10-Q for the quarter ended June 30, 1997, is incorporated by reference in the Company's Registration Statements on Form S-8 (Registration Nos. 333-15273, 333-15275 and 333-15277) and on Form S-4 (Registration No. 333-28837). Pursuant to Rule 436(c), under the Securities Act of 1933, this report should not be considered a part of the Registration Statements prepared or certified by us within the meaning of Sections 7 and 11 of that Act. /s/ COOPERS & LYBRAND L.L.P. COOPERS & LYBRAND L.L.P. Minneapolis, Minnesota August 14, 1997 EX-27 4 ARTICLE 5 FDS FOR SECOND QUARTER 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS AND NOTES. 1,000 6-MOS DEC-31-1997 JUN-30-1997 66,400 0 507,200 (21,400) 403,100 1,059,600 1,710,300 (1,255,300) 1,612,100 398,000 233,800 400 0 0 868,900 1,612,100 1,102,500 1,102,500 710,500 710,500 0 0 6,200 29,800 13,400 16,400 0 0 0 16,400 0.41 0.41
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