-----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, QzL/DhrUhDRl8PpR29ImfzuQxPMU5un5SDYSabNBpvd3fGeAQ8w1eUG+L8PDCkjA 8lHoYUW86jnzKP/AlZHkow== 0000897101-99-001045.txt : 19991115 0000897101-99-001045.hdr.sgml : 19991115 ACCESSION NUMBER: 0000897101-99-001045 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: SEC FILE NUMBER: 001-14310 FILM NUMBER: 99746470 BUSINESS ADDRESS: STREET 1: 1 IMATION PL CITY: OAKDALE STATE: MN ZIP: 55128 BUSINESS PHONE: 6517044000 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 SEPTEMBER 30, 1999 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 or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1 IMATION PLACE OAKDALE, MINNESOTA 55128 (Address of principal executive offices) (651) 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: 36,453,071 shares of Common Stock, par value $0.01 per share, were outstanding at October 29, 1999. ================================================================================ IMATION CORP. INDEX PAGE(S) ------- PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS Consolidated Statements of Operations for the three and nine months ended September 30, 1999 and 1998 3 Condensed Consolidated Balance Sheets as of September 30, 1999 and December 31, 1998 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998 5 Notes to Consolidated Financial Statements 6-11 Report of Independent Accountants 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 13-21 PART II. OTHER INFORMATION 21-22 SIGNATURE 23 EXHIBIT INDEX 24 2 PART I. FINANCIAL INFORMATION IMATION CORP. CONSOLIDATED STATEMENTS OF OPERATIONS (In millions, except per share amounts) (Unaudited)
Three months ended Nine months ended September 30, September 30, ----------------------- ----------------------- 1999 1998 1999 1998 --------- --------- --------- --------- Net revenues $ 346.0 $ 331.7 $ 1,041.4 $ 992.6 Cost of goods sold 235.1 216.3 719.9 670.2 --------- --------- --------- --------- Gross profit 110.9 115.4 321.5 322.4 Operating expenses: Selling, general and administrative 69.1 94.2 220.2 276.8 Research and development 19.1 22.6 57.2 65.1 Restructuring -- (13.2) -- (16.8) --------- --------- --------- --------- Total 88.2 103.6 277.4 325.1 Operating income (loss) 22.7 11.8 44.1 (2.7) Other income and expense: Interest expense 0.5 3.1 1.4 9.3 Other, net (0.8) (0.9) (3.9) 1.7 --------- --------- --------- --------- Total (0.3) 2.2 (2.5) 11.0 Income (loss) from continuing operations before taxes 23.0 9.6 46.6 (13.7) Income tax provision (benefit) 9.2 4.0 18.6 (5.8) --------- --------- --------- --------- Income (loss) from continuing operations 13.8 5.6 28.0 (7.9) Discontinued operations: Income from operations of discontinued businesses, net of taxes -- 7.8 4.6 28.1 Loss on disposal of discontinued businesses, net of taxes (3.0) -- (3.0) -- --------- --------- --------- --------- Net income $ 10.8 $ 13.4 $ 29.6 $ 20.2 ========= ========= ========= ========= Earnings(loss) per common share- basic: Continuing operations $ 0.38 $ 0.14 $ 0.74 $ (0.20) Net income $ 0.29 $ 0.34 $ 0.79 $ 0.51 Earnings(loss) per common share- diluted: Continuing operations $ 0.37 $ 0.14 $ 0.74 $ (0.20) Net income $ 0.29 $ 0.34 $ 0.78 $ 0.51 Weighted average basic shares outstanding 36.5 39.5 37.6 39.3 ========= ========= ========= ========= Weighted average diluted shares outstanding 37.1 39.6 37.8 39.4 ========= ========= ========= =========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 3 IMATION CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (In Millions, Except Per Share Amounts)
September 30, 1999 December 31, (Unaudited) 1998 ------------- ------------ ASSETS Current assets Cash and equivalents $ 167.2 $ 64.2 Accounts receivable - net 257.1 326.3 Inventories 215.9 263.7 Other current assets 134.9 265.7 --------- --------- Total current assets 775.1 919.9 Property, plant and equipment - net 211.0 233.8 Other assets 155.6 159.6 --------- --------- Total assets $ 1,141.7 $ 1,313.3 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts payable $ 115.6 $ 128.9 Accrued payroll 40.5 30.3 Short-term debt 12.1 25.2 Other current liabilities 200.9 228.8 --------- --------- Total current liabilities 369.1 413.2 Other liabilities 51.4 106.3 Long-term debt 1.2 32.7 Shareholders' equity Preferred stock, $0.01 par value, authorized 25 million shares, none issued and outstanding -- -- Common stock, $0.01 par value, authorized 100 million shares, 42.9 million issued 0.4 0.4 Additional paid-in capital 1,028.4 1,027.7 Accumulated deficit (97.0) (123.9) Unearned ESOP shares (22.3) (27.6) Cumulative translation adjustments (76.2) (68.5) Treasury stock, at cost, 5.6 million and 1.9 million shares as of September 30, 1999 and December 31, 1998, respectively (113.3) (47.0) --------- --------- Total shareholders' equity 720.0 761.1 --------- --------- Total liabilities and shareholders' equity $ 1,141.7 $ 1,313.3 ========= =========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 4 IMATION CORP. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Millions) (Unaudited)
Nine months ended September 30, --------------------- 1999 1998 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 29.6 $ 20.2 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 68.9 96.2 Deferred income taxes (14.7) 21.4 Restructuring -- (16.8) Inventory, accounts receivable and payable changes 8.7 6.7 Other working capital changes (23.0) (33.4) Other (14.4) (48.6) -------- -------- Net cash provided by operating activities 55.1 45.7 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (46.5) (49.6) Capitalized software -- (56.5) Proceeds from sale of businesses 201.9 38.0 Other 3.1 4.7 -------- -------- Net cash provided by (used in) investing activities 158.5 (63.4) CASH FLOWS FROM FINANCING ACTIVITIES: Net change in short-term debt (10.6) 0.3 Other borrowings of debt -- 95.6 Other repayments of debt (31.8) (150.2) Purchases of treasury stock (76.3) -- Decrease in unearned ESOP shares 5.0 8.4 Exercise of stock options and other 8.2 1.3 -------- -------- Net cash used in financing activities (105.5) (44.6) Effect of exchange rate changes on cash (5.1) (3.6) -------- -------- Net change in cash and equivalents 103.0 (65.9) Cash and equivalents - beginning of period 64.2 103.5 -------- -------- Cash and equivalents - end of period $ 167.2 $ 37.6 ======== ========
THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THESE STATEMENTS. 5 IMATION CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. FINANCIAL STATEMENTS 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. Except as otherwise disclosed herein; these adjustments 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. This Form 10-Q should be read in conjunction with the Company's consolidated financial statements and notes included in its 1998 Annual Report on Form 10-K. Certain balance sheet amounts in the prior year's financial statements have been reclassified to be consistent with the current period's presentation. 2. EARNINGS PER SHARE Basic earnings per share is calculated using the weighted average number of shares outstanding during the period adjusted for ESOP shares not committed. Diluted earnings per share is computed on the basis of the weighted average basic shares outstanding plus the dilutive effect of outstanding stock options using the "treasury stock" method. The following table sets forth the computation of the weighted average basic and diluted shares outstanding: Three Months Ended Nine Months Ended September 30, September 30, (In millions) 1999 1998 1999 1998 ------ ------ ------ ------ Weighted average shares outstanding 37.4 40.8 38.6 40.7 Weighted average ESOP shares not committed (0.9) (1.3) (1.0) (1.4) ------ ------ ------ ------ Weighted average basic shares outstanding 36.5 39.5 37.6 39.3 Dilutive effect of employee stock options 0.6 0.1 0.2 0.1 ------ ------ ------ ------ Weighted average diluted shares outstanding 37.1 39.6 37.8 39.4 ====== ====== ====== ====== 6 3. SUPPLEMENTAL BALANCE SHEET INFORMATION September 30, 1999 December 31, (In millions) (Unaudited) 1998 ------------ ------------ Inventories Finished goods $ 148.0 $ 166.4 Work in process 22.3 48.8 Raw materials and supplies 45.6 48.5 ------------ ------------ Total inventories $ 215.9 $ 263.7 ============ ============ Property, plant and equipment Property, plant and equipment $ 975.4 $ 1,354.6 Less accumulated depreciation (764.4) (1,120.8) ------------ ------------ Property, plant and equipment - net $ 211.0 $ 233.8 ============ ============ The September 30, 1999 amounts exclude the Photo Color Systems business assets, which were sold August 2, 1999. (See Note 6 to the Consolidated Financial Statements.) 4. 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. 5. RESTRUCTURING In the fourth quarter of 1997 and in 1998, the Company recorded charges for the restructuring of its worldwide operations in order to improve the Company's competitive position, to focus resources on areas of strength and on growth opportunities, and to reduce costs and eliminate unnecessary structure. The following table represents the cumulative activity related to the Company's 1997 and 1998 restructuring programs: (In millions) Program Cumulative September 30, 1999 Amounts Usage Balance ------- ------- ------- Severance $ 62.6 $ (46.4) $ 16.2 Asset impairments 55.3 (55.3) -- Other 38.9 (31.9) 7.0 ------- -------- ------- Total $ 156.8 $(133.6) $ 23.2 ======= ======== ======= During the nine months ended September 30, 1999 the Company made cash payments of $20.3 million related to the restructuring programs, compared to $28.7 million paid in the same period of 1998. Remaining severance payments related to employee separations are expected to be made throughout the remainder of 1999 and early 2000. Since initiation of the programs, total headcount has been reduced by approximately 2,050. During the third quarter of 1998, the Company recorded a $26.2 million benefit in the restructuring line of the Statement of Operations as an adjustment of restructuring charges recorded in the fourth quarter of 1997. Also in the 7 third quarter of 1998, the Company approved and recorded an additional restructuring charge of $13 million. 6. DISPOSAL OF MEDICAL IMAGING AND PHOTO COLOR SYSTEMS SEGMENT On November 30, 1998, the Company sold its worldwide Medical Imaging Systems businesses (the "Medical Imaging Sale") to Eastman Kodak Company ("Kodak"). Excluded from the Medical Imaging Sale was the Company's medical imaging/photo color manufacturing facility in Ferrania, Italy (the "Ferrania Facility"), at which the Company agreed to manufacture wet laser x-ray film and hardware pursuant to an exclusive supply agreement (the "Ferrania Supply Agreement") with Kodak. In exchange for retaining the Ferrania Facility, Kodak agreed to pay the Company up to $25 million at such time as it was sold. On August 2, 1999, the Company closed on the sale of its worldwide Photo Color Systems business, together with the Ferrania Facility, the Ferrania Supply Agreement and certain other associated businesses, to Schroder Ventures, through its wholly owned affiliate, Ferrania Lux, S.A.R.L. The Company will lease certain manufacturing space to the purchaser and provide administrative services during a transition period. In connection with this transaction, the Company recorded a loss of $3.0 million, net of taxes, in the Company's third quarter Statement of Operations. The transaction is expected to be finalized by early 2000, when audits of the closing balance sheet will be completed, and is ultimately expected to generate after-tax cash of approximately $50 million, $25 million of which arises out of the Medical Imaging Sale as described above. Kodak has challenged the Company's claim for the full $25 million as well as claims for other amounts which the Company believes are due from Kodak in connection with the Medical Imaging Sale. The Company has retained cash, as reflected in its financial statements, which it collected on behalf of Kodak in an amount approximately equal to the disputed items. While the Company cannot predict with certainty the ultimate outcome of these disputed items, it believes its positions are supported by the applicable contractual terms. As a result of the sale of the Photo Color Systems business and the manufacturing facility in Ferrania, Italy, the Company has completed the disposition of its Medical Imaging and Photo Color Systems segment. As such, the Company's Consolidated Statements of Operations present Photo Color Systems and the Medical Imaging Systems businesses as discontinued operations. 8 The results of discontinued operations for the three and nine month periods ended September 30, 1999 and 1998 were as follows:
Three months ended Nine months ended September 30, September 30, 1999 1998 1999 1998 -------- -------- -------- -------- Net revenues $ -- $ 189.1 $ 124.7 $ 564.7 Income before taxes -- 19.0 9.3 56.7 Income tax provision -- 11.2 4.7 28.6 -------- -------- -------- -------- Income from discontinued operations, net of taxes -- 7.8 4.6 28.1 Loss on disposal of discontinued businesses, including operating losses of $4.9 million during phase-out period (less applicable income tax benefits of $7.1 million) (3.0) -- (3.0) -- -------- -------- -------- -------- Total discontinued operations $ (3.0) $ 7.8 $ 1.6 $ 28.1 ======== ======== ======== ======== Earnings(loss) per common share- basic $ (0.09) $ 0.20 $ 0.05 $ 0.71 Earnings(loss) per common share- diluted $ (0.08) $ 0.20 $ 0.04 $ 0.71
7. COMPREHENSIVE INCOME Comprehensive income for the three and nine month periods ended September 30, 1999 and 1998 were as follows:
Three months ended Nine months ended September 30, September 30, (In millions) 1999 1998 1999 1998 -------- -------- -------- -------- Net income $ 10.8 $ 13.4 $ 29.6 $ 20.2 Changes in cumulative translation adjustments 7.9 12.9 (7.7) 11.3 -------- -------- -------- -------- Comprehensive income $ 18.7 $ 26.3 $ 21.9 $ 31.5 ======== ======== ======== ========
8. SEGMENT INFORMATION The Company's continuing businesses are organized, managed and internally reported as three segments differentiated primarily by their products and services, but also by the markets they serve. These segments, whose results are shown below, are Data Storage and Information Management, providing removable data storage media, services and solutions for use in the mobile and desktop, network and enterprise data center markets; Color Technologies (formerly Product Technologies), whose principle products include printing and color proofing systems, printing films and plates for the graphic arts 9 marketplace, and carbonless paper, such as multi-part business forms; and Digital Solutions and Services, which provides 24-hour technical service and support for equipment sold by the Company as well as by other third party equipment vendors, digital workflow solutions principally in the areas of color and data management, and document imaging products for large format engineering documentation.
(1)Divested Business Data Digital Businesses, Segment Storage and Solutions Corporate, Information Third Information Color and Other and (In millions) Quarter Management Technologies Services Unallocated Total - ------------------------------------------------------------------------------------------------------------- Net revenues 1999 $235.7 $81.2 $27.4 $1.7 $346.0 1998 172.8 105.7 35.8 17.4 331.7 - ------------------------------------------------------------------------------------------------------------- Operating 1999 $16.0 $8.4 $(0.5) $(1.2) $22.7 income(loss) 1998 (6.3) 12.2 1.7 4.2 11.8 - ------------------------------------------------------------------------------------------------------------- (1)Divested Business Nine Data Digital Businesses, Segment Months Storage and Solutions Corporate, Information to Information Color and Other and (In millions) Date Management Technologies Services Unallocated Total - ------------------------------------------------------------------------------------------------------------- Net revenues 1999 $693.3 $255.9 $87.9 $4.3 $1,041.4 1998 506.3 316.0 110.8 59.5 992.6 - ------------------------------------------------------------------------------------------------------------- Operating 1999 $22.4 $27.5 $(1.8) $(4.0) $44.1 income(loss) 1998 (25.4) 32.3 (2.4) (7.2) (2.7) - -------------------------------------------------------------------------------------------------------------
(1) Includes results for the CD ROM business until divested in quarter 3, 1998, restructuring adjustments ($13.2 million and $16.8 million of income in the third quarter of 1998, and the nine months ended September 30, 1998, respectively), general overhead which was previously allocated to the Medical Imaging and Photo Color businesses, and certain other costs not allocated to business segments. Intersegment revenues are not material. Except for asset reductions in Color Technologies as a result of the Photo Color Systems business sale, total assets by segment have not changed materially from December 31, 1998. See Note 6 to the consolidated financial statements regarding the sale of the Photo Color Systems business and related discontinued operations Financial Statement presentation. 9. DERIVATIVES AND HEDGING In September of 1998, the Financial Accounting Standards Board(FASB) issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This standard establishes accounting and reporting standards for derivative instruments and hedging activities. In July 1999, the FASB issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133, which defers the effective date of SFAS No. 133 one year. Accordingly, the Company must adopt SFAS No. 133 no later than January 1, 2001. Adoption of this standard is not expected to have a material impact on the financial statements of the Company. 10 **** PricewaterhouseCoopers LLP, the Company's independent accountants, has performed a review of the unaudited interim consolidated financial statements included herein and their report thereon accompanies this filing. This report is not a "report" within the meaning of Sections 7 and 11 of the 1933 Act and the independent accountants liability under Section 11 does not extend to it. 11 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 September 30, 1999, and the related consolidated statements of operations for the three and nine months ended September 30, 1999 and 1998 and condensed consolidated statements of cash flows for the nine months ended September 30, 1999 and 1998. 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 accompanying consolidated financial statements 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, 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended (not presented herein); and in our report dated February 8, 1999, 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, 1998, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Minneapolis, Minnesota October 28, 1999 12 IMATION CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL OVERVIEW Imation Corp. (the Company) began operations as an independent, publicly held company on July 1, 1996 when Minnesota Mining and Manufacturing Company (3M) spun off substantially all of the businesses previously operated within its data storage and imaging systems groups. With the sale of the Photo Color Systems business and the Ferrania, Italy, manufacturing facility, the Company has completed the disposition of its Medical Imaging and Photo Color Systems segment and therefore, these operations are presented in the Company's Statements of Operations as discontinued operations. Management's discussion and analysis of the results of operations focuses on the Company's continuing operations. RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 Net revenues from continuing operations for the third quarter of 1999 were $346.0 million, an increase of $14.3 million, or 4.3 percent, from the same period in 1998. Solid volume increases were partially offset by price declines and a slight negative effect of changes in currency exchange rates. Data Storage and Information Management revenues grew 36 percent, with growth in all three of its major customer markets: mobile and desktop, network and enterprise data center. Color Technologies revenues declined 23 percent driven primarily by the plates and film business. Digital Solutions and Services revenues declined by $8.4 million driven primarily by the anticipated slowing of the Company's more mature Document Imaging business. Gross profit from continuing operations in the third quarter of 1999 was $110.9 million, or 32.1 percent of revenues, compared with the third quarter of 1998 which was $115.4 million, or 34.8 percent of revenues. Improved volume growth and productivity improvements were off-set by the negative effects of continuing price erosion and changes in product mix. Selling, general and administrative (SG&A) expenses from continuing operations in the third quarter of 1999 were $69.1 million, or 20 percent of revenues. Comparable SG&A expenses in the third quarter of 1998 were $94.2 million, or 28.4 percent of revenues. SG&A expenses declined 27 percent, or $25.1 million, reflecting the combined impact of a number of items: the Company's restructuring program reduced headcount from continuing operations; the Company's investment in SuperDisk sales promotions peaked in the second quarter of 1998 and has subsequently declined; the Company's information technology (IT) spending has declined; and Kodak and Schroder Ventures transitional services payments in 1999 offset certain SG&A costs. The Company anticipates that the amount of transitional services provided in future quarters will decline which will negatively impact SG&A expenses. Actions 13 will be taken to offset this situation; however, the Company does not anticipate being able to fully offset the financial impact of the loss of this source of funding. While the Company cannot currently predict with certainty the timing or dollar impact, SG&A expenses, as a percentage of revenues, may be negatively impacted by 1 to 2 percentage points over the next 12 to 15 months due to reduced transitional services. Research and development (R&D) costs from continuing operations totaled $19.1 million, or 5.5 percent of revenues in the third quarter of 1999, compared with $22.6 million, or 6.8 percent in the same period in 1998. This decrease reflects the impact of the Company's restructuring programs. Management continues to expect ongoing R&D investment as a percent of total revenues to range from 5-7 percent during the next several years. During the third quarter of 1998, the Company recorded a $26.2 million benefit in the restructuring line of the Statement of Operations as an adjustment of the restructuring charge in 1997. Also, in the third quarter of 1998, the Company approved and recorded an additional restructuring charge of $13 million, primarily related to asset write-downs, reflecting further portfolio rationalizations. Operating income from continuing operations for the third quarter of 1999 was $22.7 million compared to $11.8 million for the same period last year. This improvement is due to the factors discussed above. Third quarter 1999 interest expense from continuing operations was $0.5 million, compared to $3.1 million in the same quarter last year. This decrease was driven by the use of proceeds from the sale of the Medical Imaging Systems business in the fourth quarter of 1998 to reduce debt. Net other income and expense in the third quarter of 1999 totaled $0.8 million of income, primarily related to $2.1 million of interest earned on cash invested and offset by the negative impacts of foreign currency transactions. In the same period of 1998, net other income and expense was $0.9 million of income, primarily related to $0.4 million of interest income. The continuing operations tax rate for the quarter was approximately 40 percent, an improvement of 8 percentage points from 1998's full-year tax rate of approximately 48 percent from all operations. The continuing operations tax rate for the quarter reflects the benefit of the divestiture of the Photo Color Systems business and Ferrania, Italy, manufacturing plant. The Company's current estimate of the full year's tax rate from continuing operations is 40 percent. Income from continuing operations in the third quarter of 1999 was $13.8 million, or $0.38 per basic share and $0.37 per diluted share, compared with income from continuing operations of $5.6 million, or $0.14 per basic and diluted share, for the same period in 1998 for the reasons discussed above. COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 On a year to date basis, net revenues from continuing operations were $1,041.4 million, an increase of $48.8 million or 4.9 percent from the same period in 1998. Solid volume increases were partially offset by price declines and a slight negative effect of changes in currency exchange rates. 14 Data Storage and Information Management revenues grew 37 percent, with growth in all three of its major customer markets. Color Technologies revenues declined 19 percent driven primarily by the plates and film business. Digital Solutions and Services revenues declined by $22.9 million driven primarily by the anticipated slowing of the Company's more mature Document Imaging business. Gross profit from continuing operations for the first nine months of 1999 was $321.5 million or 30.9 percent of revenues. This compares with $322.4 million, or 32.5 percent of revenues in 1998. Volume growth and productivity improvements were offset by price reductions and changes in product mix. Selling, general and administrative (SG&A) expenses for the first nine months of 1999 were $220.2 million, or 21.1 percent of revenues. This compares with $276.8 million, or 27.9 percent of revenues in the first nine months of 1998. As discussed in the comparison of three month results above, the reduction in SG&A expenses results from a number of factors including a reduction in SuperDisk promotional costs, headcount reductions, reduced IT spending, and transitional services payments. Additionally, the first nine months of 1999 benefited from a first quarter $3.5 million gain on the sale of a facility in Bracknell, United Kingdom, and a second quarter $21 million gain from the settlement of a business dispute, offset by an $18 million write-off of certain capitalized software costs. Research and development costs totaled $57.2 million, or 5.6 percent of revenues, in the first nine months of 1999, down from $65.1 million, or 6.6 percent of revenues in the same period in 1998. This decrease reflects the impact of the Company's restructuring programs. The Company recorded a $16.8 million benefit in the restructuring line of the Statement of Operations in the first nine months of 1998. The Company recorded a $3.6 million benefit in the second quarter of 1998 reflecting final adjustments of the restructuring reserves established in the fourth quarter of 1995 in connection with the Company's spin-off from 3M. In addition, the company also recorded a $13.2 million net benefit in the third quarter of 1998 reflecting a $26.2 million adjustment to the reserve established in the fourth quarter of 1997, offset by a $13.0 million additional restructuring charge. Operating income from continuing operations for the first nine months of 1999 was $44.1 million, or 4.2 percent of revenues. This represents a $46.8 million improvement over the operating loss of $2.7 million in the same period of 1998. This improvement is due to the factors discussed above. Year to date interest expense from continuing operations was $1.4 million, compared to $9.3 million in the same period last year. This decrease was driven by the use of proceeds from the sale of the Medical Imaging Systems business to reduce debt. Net other income and expense in the first nine months of 1999 totaled $3.9 million of income, primarily related to $6.9 million in interest income. This compares to $1.7 million of expense in the comparable period of 1998. Interest income of $3.1 million in the first nine months of 1998 was offset by the negative impact of foreign currency transactions. 15 The continuing operations tax rate for the first nine months of 1999 was approximately 40 percent, an improvement of 8 percentage points from 1998's full-year tax rate of approximately 48 percent from all operations. The year to date rate reflects the benefit of the divestiture of the Photo Color Systems business and Ferrania, Italy, manufacturing plant. The Company's current estimate of the full year tax rate from continuing operations is 40 percent. Year to date income from continuing operations in 1999 was $28.0 million, or $0.74 per basic and dilutive share. The loss from continuing operations in the comparable period of 1998 was $7.9 million, or ($0.20) per basic and dilutive share for the reasons discussed above. FINANCIAL POSITION The Company had 2.9 months of inventory on hand at September 30, 1999, down from 3.2 months as of December 31, 1998 due to both operational improvements and the disposal of the Photo Color Systems business. Similarly, the accounts receivable days sales outstanding (DSO) was 68 days as of September 30, 1999, down from 80 days as of December 31, 1998 due to operational improvements and the disposal of the Photo Color Systems business. The book value of property, plant and equipment as of September 30, 1999 was $211.0, a decrease of $22.8 million from December 31, 1998. Approximately $10 million of this decline related to the sale of the Photo Color Systems business, $6 million to the sale of land and building in Bracknell, U.K., and the remainder of the decline due to normal operating activity. LIQUIDITY Cash provided by operating activities was $55.1 million during the nine months ended September 30, 1999, compared with $45.7 million during the same period in 1998. Depreciation and amortization was $68.9 million in the first nine months of 1999, down from $96.2 million in 1998 primarily because of the sale of Medical Imaging Systems and Photo Color Systems assets (see note 6 to the Consolidated Financial Statements). Changes in inventory, accounts receivable, and accounts payable provided $8.7 million in cash during the first nine months of 1999 compared to $6.7 million in the comparable period of 1998. Other working capital changes used $23.0 million of cash, in part due to payments related to restructuring and income taxes. Cash provided by investing activities was $158.5 million for the nine months ended September 30, 1999 compared with cash used of $63.4 million in the comparable period of 1998. Capital expenditures of $46.5 million for the first nine months of 1999 included approximately $7 million related to the purchase of an administrative building previously leased under a synthetic lease. Capital spending decreased from the same period in 1998 which totaled $49.6 million, reflecting the sale of the Medical Imaging Systems business. Capitalized software was $56.5 million in the first nine months of 1998. These costs related primarily to the development of the Company's new IT systems, which was completed in 1998. Proceeds from the sale of businesses 16 include $143 million from the removal of cash restrictions related to the sale of the medical imaging business during the first quarter of 1999. In addition, cash proceeds from the sale of the Photo Color Systems business amounted to $58.9 million in the third quarter of 1999. (See Note 6 to the Consolidated Financial Statements) Cash proceeds from the sale of other businesses was $38.0 million in the same period in 1998. Net financing activities during the first nine months of 1999 used cash of $105.5 million compared with a $44.6 million use of cash in the comparable 1998 period. The 1999 amount includes $76.3 million in expenditures for the repurchase of approximately 4.1 million shares of the Company's common stock and the repayment of $42.4 million of debt. On December 31, 1998, the Company entered into a three-year $175.0 million Loan and Security Agreement (the Loan Agreement) with a group of banks. The Loan Agreement provides for revolving credit, including letters of credit, with borrowing availability based on eligible accounts receivable, inventories and manufacturing machinery and equipment not to exceed $175.0 million. Borrowing availability as of September 30, 1999 was $151.8 million. The Loan Agreement is collateralized by substantially all the domestic assets of the Company, excluding the land and buildings at the Company's headquarters in Oakdale, Minnesota, and a pledge of 65 percent of the stock of certain of the Company's foreign subsidiaries. Covenants include maintenance of a minimum tangible net worth and borrowing base availability, with certain restrictions on the incurrence of additional indebtedness, sale of assets, mergers and consolidation, transactions with affiliates, creation of liens, and certain other matters. As of September 30, 1999, the Company's ratio of total debt to total capital was 1.8% as compared to 7.1% as of December 31, 1998. The Company expects that cash and equivalents, together with cash flow from operations and availability of borrowings under its current credit facility will provide sufficient liquidity to operate the Company. YEAR 2000 COMPLIANCE Introduction (Phases) In preparation for the change in the millennium, the Company's Year 2000 (Y2K) Operating Team has instituted a seven-phase plan to address the Company's Y2K readiness in the following areas: internal IT systems, non-IT systems (including plants, facilities, process control and building control equipment, communications systems, laboratory and test equipment, etc.), the Company's products, and external business relationships. The seven phases of the plan are: (1) perform inventory of all items potentially subject to Y2K effect and prioritize on the basis of business criticality; (2) develop a plan for assessing Y2K compliance of all inventoried items; (3) determine whether inventoried items are Y2K compliant; (4) design a remediation strategy (e.g., remediate, replace, retire, etc.) for non-compliant inventoried items and develop contingency plans; (5) develop and test remediation solutions; (6) implement remediation solutions; and (7) document verification of compliance of remediated solutions. Inventories of each area have been completed and determinations have been made regarding Y2K impact. Inventoried items have been prioritized, 17 assessment plans have been completed and remediation solutions have been developed. Field implementation and verification of compliance of remediation solutions were completed by the end of September 1999. Contingency plans have been developed to address potential Y2K related failures that could affect critical Company operations. IT System A significant portion of the Company's global IT infrastructure has been replaced with the remaining portion remediated and tested by September 1999. The Company required a new IT system after the Company's spin-off from 3M and a significant factor in the Company's selection of this system was its Y2K compliance status. The Company believes that the new system has significantly reduced the likelihood of Y2K-related interruptions to normal operations. In addition, the Company has completed system testing of software applications and custom code written for the system, as well as other systems not replaced by the new global IT infrastructure, for Y2K compliance. Non-IT Systems The Company has assessed its non-IT systems in its plants and facilities on a world-wide basis for issues of Y2K compliance. This assessment included reviewing not only the Company's manufacturing process control equipment, but also systems that control temperature, utility equipment, telephone systems, and security systems. Laboratory and test equipment have also been evaluated. While the Company does not believe that it is likely to experience material adverse effects related to Y2K in the area of non-IT systems, failure to identify all Y2K vulnerable controls or equipment could result in the inability of a particular plant or facility to manufacture or test product or conduct business in the ordinary course. Products The majority of Company products do not have electronic date functionality. Those products that do have electronic date functionality have been assessed and remediation strategies have been implemented to address any issues of Y2K non-compliance. The Company believes it has sufficient resources dedicated to product compliance activities and it does not foresee any material adverse impact on the Company's business, results of operations, or financial position due to Y2K product issues. However, there remains the possibility that the Company could fail to identify all susceptible products or be unable to complete all field remediations for which it is responsible prior to January 1, 2000. External Business Relationships Y2K preparedness of third parties with whom the Company does business could impact the Company's ability to deliver products and services in the new millennium. This constitutes an area of potentially significant risk to the Company's business, results of operations, and financial position. Suppliers of critical raw materials and providers of utility and communication services could particularly impair the Company's ability to conduct business in the ordinary course if those third parties fail to successfully assess and remediate their own products and internal operations. While third party risk related to the Y2K problem is difficult to quantify or control, the Company is taking steps in an effort to try to minimize the potential adverse effect of Y2K problems that could arise based on Company's external business relationships. 18 Y2K surveys have been sent to the Company's suppliers asking them for the Y2K compliance status of their products and internal operations. The Company has re-contacted its critical and significant suppliers and conducted Y2K phone surveys with them. The feedback received from the phone surveys has been favorable. A re-check of critical suppliers is now in progress to obtain assurance that their programs remain on schedule. The Company is developing contingency plans as it identifies third parties posing a significant risk to business continuity. Contingency plans may include plans to accumulate extra inventory and/or establish alternative sources of supply and channels of distribution. However, even with diligent planning, third party providers pose an uncertain risk which cannot be entirely eliminated. Expenditures Based on current information and resources, the Company estimates that the total cost of its Y2K program could approach $6 million, excluding costs related to the completion of the Company's new IT system. These costs are primarily in the non-IT systems area. Through September 30, 1999, approximately $4 million of this total has been spent, and an additional $1 million is expected to be spent for final testing and verification in 1999. Contingency response activities through June 30, 2000 are expected to require the balance of the $6 million. This estimate is subject to change as the Company moves through final phases of its Y2K plan. While the Company's management does not believe that the Company's Y2K costs will have a material adverse effect on the Company's business, results of operations, or financial position, Y2K costs could increase if currently unknown Y2K deficiencies are discovered in Company IT systems, non-IT systems or products, or with external business partners. Summary Due to the uncertain nature of the Y2K problem, the Company's management cannot state with certainty whether Y2K issues will have a material adverse effect on the Company's business, results of operations, or financial position. The Company believes it is taking reasonable steps to address the Y2K problem, but the Y2K problem is a very complex one. If several of Company's external business partners should fail to implement successful Y2K programs, or if the Company should fail to identify Y2K deficiencies in critical IT and non-IT systems, or if Company's product remediations should fail to be implemented in the field by January 1, 2000, Y2K problems could have a material adverse effect on the Company's business, results of operations, or financial position. The projected expenditures and dates contained in this discussion are based on the Company's best estimates and are derived from assumptions about future events, including the availability of resources and other factors. The Company does not guarantee that these estimates will be achieved and results may vary due to uncertainties. The forward-looking statements contained in this section under the heading "Year 2000 Compliance" should be read in conjunction with the Company's disclosure below under the heading "Forward-Looking Statements." 19 EURO CONVERSION STATUS On January 1, 1999, eleven of the fifteen member countries of the European Union adopted the Euro as their new common currency. The Euro trades on currency exchanges and is used for non-cash transactions. Effective January 1, 2002 and through July 1, 2002 the participating countries will begin using the Euro as the legal tender and will withdraw all legacy currencies. The Euro conversion may involve transparency of the market (i.e. with a common currency, the prices in different countries are more readily comparable) which may lead to increased competition between countries and potential erosion of margins. The Company is reviewing its marketing strategies to address possible increased competition and is also reviewing and testing its software compatibility with the Euro conversion. The Company will continue to review the impact of the conversion to the Euro, however, the Company does not expect that the Euro conversion will have a material impact on the Company's financial position and results of operations. SALE OF MEDICAL IMAGING AND PHOTO COLOR SYSTEMS BUSINESSES As discussed in Note 6 of the Notes to Consolidated Financial Statements, on November 30, 1998, the Company sold its worldwide Medical Imaging Systems business to Kodak. The Company, however, retained its manufacturing facility in Ferrania, Italy, from which the Company agreed to manufacture x-ray and wet laser medical imaging film for Kodak for a minimum of two years under a supply agreement which became effective on November 30, 1998. The Company is also prohibited from selling medical imaging products to third parties other than Kodak during the term of and after the termination of the supply agreement. On August 2, 1999, the Company sold its Photo Color Systems business and the manufacturing facility in Ferrania, Italy, to Schroder Ventures (see Note 6 to the Consolidated Financial Statements). Under the terms of that sale, Schroder Ventures will assume responsibility for fullfilment of the supply agreement with Kodak. Associated with the Company's sale of its Medical Imaging and Photo Color Systems businesses, the Company receives reimbursement for certain transition services and distribution agreements that the Company has agreed to provide Kodak for a period of up to two years, and Schroder Ventures while it integrates accounting and information systems. Kodak and Schroder Ventures, at their option, may terminate the transition services agreement with respect to individual categories of service upon prior notice, the length of which varies according to the nature of the service. While the Company can not project with certainty the duration of and expected cost reimbursements associated with the transition services and distribution agreements, or the potential impact if the transition services agreement is terminated, SG&A expenses, as a percentage of revenue, may be negatively impacted by 1 to 2 percentage points over the next 12 to 15 months due to the declining need for transition services. RECENTLY ISSUED ACCOUNTING STANDARDS 20 In September 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This standard establishes accounting and reporting standards for derivative instruments and hedging activities. In July 1999, the FASB issued SFAS No. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES - DEFERRAL OF THE EFFECTIVE DATE OF FASB STATEMENT NO. 133, which defers the effective date of SFAS No. 133 one year. Accordingly, the Company must adopt SFAS No. 133 no later than January 1, 2001. Adoption of this standard is not expected to have a material impact on the financial statements of the company. 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 the Company's ability to meet its cost reduction and revenue growth targets, lower SG&A reimbursements from Kodak and Schroder as the Company provides fewer transitional services associated with the sale of the Medical Imaging and Photo Color Systems businesses, the resolution of disputes associated with the sale of the Medical Imaging and Photo Color Systems businesses, certain seasonal factors, the competitive pricing environment, foreign currency fluctuations, the ability of Imation to secure an adequate supply of certain high demand products, the market acceptance of newly introduced product and service offerings, the rate of decline for certain existing products as well as various factors set forth in the Company's filings with the Securities and Exchange Commission, including its 1998 Annual Report on Form 10-K and subsequent 10Q filings. PART II. OTHER INFORMATION Item 1. Legal Proceedings Reference is made to Item 3. "Legal Proceedings" included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998. The following legal proceedings had significant developments during the third quarter of 1999: On May 10, 1999, Jazz Photo Corp. served the Company and its affiliate, Imation S.p.A., with a civil complaint filed in New Jersey Superior Court. The complaint charges breach of contract, breach of warranty, fraud, and racketeering activity in connection with the Company's sale of allegedly defective film to Jazz Photo. In the complaint Jazz Photo seeks unspecified compensatory damages, treble damages, punitive damages and equitable relief. 21 The Company disputes any liability to Jazz Photo and is vigorously defending the action. The Company is also the subject of various pending or threatened legal actions in the ordinary course of its business. All such matters are subject to many uncertainties and outcomes that are not predictable with assurance. Consequently, the Company is unable to ascertain the ultimate aggregate amount of any monetary liability or financial impact that may be incurred by the Company with respect to these matters. While these matters could materially affect operating results of any one quarter when resolved in future periods, it is management's opinion that after final disposition, any monetary liability or financial impact to the Company beyond that provided in the consolidated balance sheet as of September 30, 1999 would not be material to the Company's financial position or annual results of operations or cash flows. Items 2-5. Not Applicable Item 6(a). Exhibits The following documents are filed as exhibits to this Report. 15.1 An awareness letter from the Company's independent accountants regarding unaudited interim financial statements. Page 24. 27.1 Financial data schedule (b) No reports on Form 8-K were filed during the quarter ended September 30, 1999. 22 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: November 10, 1999 By: /s/ Robert L. Edwards ------------------------------------- Robert L. Edwards Senior Vice President, Chief Financial Officer and Chief Administrative Officer 23 EXHIBIT INDEX Exhibit Number Description - ------- -------------------------------------------------------------- 15.1 An awareness letter from the Company's independent accountants regarding unaudited interim financial statements. 27.1 Financial data schedule. 24 EX-15.1 2 LETTER RE: UNAUDITED INTERIM FINANCIAL INFORMATION EXHIBIT 15.1 (PricewaterhouseCoopers LLP Letterhead) (Minneapolis, MN) November 10, 1999 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 Commissioners: We are aware that our report dated October 28, 1999 on our reviews of the interim consolidated financial statements of Imation Corp. (the Company) for the three and nine months ended September 30, 1999 and 1998, and included in the Company's Form 10-Q for the three and nine months ended September 30, 1999, is incorporated by reference in the Company's Registration Statements on Form S-8 (Registration Nos. 333-15273, 333-15275, 333-15277 and 333-35591). Yours very truly, /s/PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP 25 EX-27.1 3 ARTICLE 5 FDS FOR THIRD 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 9-MOS DEC-31-1999 SEP-30-1999 46,521 120,691 275,916 (18,807) 215,907 775,166 975,385 (764,411) 1,141,684 369,137 1,207 0 0 419 719,544 1,141,684 1,041,433 1,041,433 719,908 719,908 277,412 0 1,413 46,554 18,600 27,954 1,630 0 0 29,584 0.79 0.78
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