10-Q

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, 2002

OR

o    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
(State or other jurisdiction of
incorporation or organization) 41-1838504
(I.R.S. Employer
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.   o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 35,263,243 shares of Common Stock, par value $0.01 per share, were outstanding at November 6, 2002.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
		REPORT OF INDEPENDENT ACCOUNTANTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
SIGNATURE
Certifications
EXHIBIT INDEX
EX-10.1 Severance Agreement dated August 7, 2002
EX-15.1 Awareness letter
EX-99.1 Certification Pursuant to 18 USC Sec. 1350
EX-99.2 Certification Pursuant to 18 USC Sec. 1350

IMATION CORP.
INDEX

			PAGE(S)
PART I.          FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		Consolidated Statements of Operations for the three and nine months ended September 30, 2002 and 2001		3
		Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001		5
		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001		6
		Notes to Consolidated Financial Statements		7-16
		Report of Independent Accountants		17
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF              OPERATIONS			18-27
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			28
	ITEM 4. CONTROLS AND PROCEDURES			29
PART II.          OTHER INFORMATION				30-32
SIGNATURE				33
CERTIFICATIONS				34-37
EXHIBIT INDEX				38

PART I.   FINANCIAL INFORMATION

Item 1.   Financial Statements

CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share amounts)
(Unaudited)

			Three months ended						Nine months ended
			September 30,						September 30,
			2002			2001			2002			2001
Net revenues			$	263.8		$	265.6		$	795.8		$	819.5
Cost of goods sold				178.6			183.8			553.5			570.6
	Gross profit			85.2			81.8			242.3			248.9
Operating expenses (income):
	Selling, general and administrative (1)			44.3			54.6			133.6			173.0
	Research and development			13.3			15.5			36.8			48.1
	Litigation settlements — net			—			—			(6.4	)		—
	Restructuring			0.1			—			(2.0	)		—
		Total		57.7			70.1			162.0			221.1
Operating income				27.5			11.7			80.3			27.8
Other (income) and expense:
	Interest income			(2.3	)		(2.8	)		(6.2	)		(10.4	)
	Interest expense			0.3			0.4			0.9			1.0
	Other, net			4.1			1.0			5.3			5.3
		Total		2.1			(1.4	)		—			(4.1	)
Income from continuing operations before taxes				25.4			13.1			80.3			31.9
Income tax provision				9.0			4.0			28.1			9.8
Income from continuing operations				16.4			9.1			52.2			22.1
Discontinued operations:
	Income from operations of discontinued business, net of taxes			0.5			1.0			3.0			2.8
Gain on disposal of discontinued business, net of taxes				1.6			—			1.6			—
Net income			$	18.5		$	10.1		$	56.8		$	24.9
Basic earnings per common share:
	Continuing operations		$	0.47		$	0.26		$	1.50		$	0.64
	Discontinued operations		$	0.06		$	0.03		$	0.13		$	0.08
	Net income		$	0.53		$	0.29		$	1.63		$	0.72

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		Three months ended				Nine months ended
		September 30,				September 30,
		2002		2001		2002		2001
Diluted earnings per common share:
	Continuing operations	$	0.46	$	0.26	$	1.47	$	0.63
	Discontinued operations	$	0.06	$	0.03	$	0.13	$	0.08
	Net income	$	0.52	$	0.29	$	1.60	$	0.71
Weighted average basic shares outstanding			35.0		34.9		35.0		34.8
Weighted average diluted shares outstanding			35.7		35.1		35.6		34.9

(1)   Selling, general and administrative expenses for the nine month period ended September 30, 2001 include $5.7 million of amortization from first quarter related to abandoned computer software (see Note 10 to Consolidated Financial Statements).

The accompanying notes to consolidated financial statements are an integral part of these statements.

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CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)

			September 30,		December 31,
			2002		2001
			(Unaudited)
ASSETS
Current assets
	Cash and equivalents		$	440.5	$	389.8
	Accounts receivable - net			142.9		150.3
	Inventories			131.3		130.3
	Other current assets			93.0		86.5
		Total current assets		807.7		756.9
Property, plant and equipment - net				177.7		171.2
Other assets				93.0		125.6
		Total assets	$	1,078.4	$	1,053.7
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
	Accounts payable		$	94.1	$	81.8
	Accrued payroll			21.6		29.2
	Short-term debt			5.6		12.8
	Other current liabilities			186.1		223.4
		Total current liabilities		307.4		347.2
Other liabilities				51.4		50.8
Shareholders’ equity				719.6		655.7
		Total liabilities and shareholders’ equity	$	1,078.4	$	1,053.7

The accompanying notes to consolidated financial statements are an integral part of these statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)

			Nine months ended
			September 30,
			2002			2001
Cash Flows from Operating Activities:
Net income			$	56.8		$	24.9
Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization		29.2			41.6
		Deferred income taxes		30.2			(3.1	)
		Restructuring and litigation settlements - net		(8.4	)		—
		Accounts receivable		12.9			2.3
		Inventories		(1.9	)		(27.5	)
		Other current assets		(2.3	)		15.3
		Accounts payable		11.1			7.5
		Accrued payroll and other current liabilities		(50.1	)		23.7
	Working capital changes			(30.3	)		21.3
		Other		4.3			6.3
Net cash provided by operating activities				81.8			91.0
Cash Flows from Investing Activities:
		Capital expenditures		(29.6	)		(31.2	)
		Proceeds from sale of business		4.7			—
		Other		(5.0	)		(3.4	)
Net cash used in investing activities				(29.9	)		(34.6	)
Cash Flows from Financing Activities:
		Net change in short-term debt		(7.4	)		(8.6	)
		Purchases of treasury stock		(9.9	)		—
		Exercise of stock options and other		7.1			1.7
		Decrease in unearned ESOP shares		3.3			4.7
Net cash used in financing activities				(6.9	)		(2.2	)
Effect of exchange rate changes on cash				5.7			(1.3	)
Net change in cash and equivalents				50.7			52.9
Cash and equivalents - beginning of period				389.8			269.7
Cash and equivalents - end of period			$	440.5		$	322.6

The accompanying notes to consolidated financial statements are an integral part of these statements.

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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 2001 Annual Report on Form 10-K.

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 allocated to employee accounts. Under the applicable accounting rules, unallocated shares held in the Company’s ESOP trust, which was established in 1996 as a way of funding certain employee retirement savings benefits, are not considered outstanding for purposes of calculating earnings per share. 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)	2002			2001			2002			2001
Weighted average shares outstanding		35.2			35.3			35.2			35.2
Weighted average ESOP shares not yet allocated		(0.2	)		(0.4	)		(0.2	)		(0.4	)
Weighted average basic shares outstanding		35.0			34.9			35.0			34.8
Dilutive effect of employee stock options		0.7			0.2			0.6			0.1
Weighted average diluted shares outstanding		35.7			35.1			35.6			34.9

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As of September 30, 2002 and 2001, certain options to purchase approximately 0.5 million and 3.4 million shares, respectively, of the Company’s common stock were outstanding that were not included in the computation of potential common shares because the effect of the options would be antidilutive.

3. SUPPLEMENTAL BALANCE SHEET INFORMATION

(In millions, unaudited)

			September 30,			December 31,
			2002			2001
Accounts Receivable
	Accounts receivable		$	160.0		$	163.9
	Less allowances			(17.1	)		(13.6	)
		Accounts receivable, net	$	142.9		$	150.3
Inventories
	Finished goods		$	85.5		$	86.1
	Work in process			16.8			14.5
	Raw materials and supplies			29.0			29.7
		Total inventories	$	131.3		$	130.3
Other Current Assets
	Deferred income taxes		$	31.1		$	35.6
	Restricted cash			10.0			10.0
	Other			51.9			40.9
		Total other current assets	$	93.0		$	86.5
Property, Plant and Equipment
	Property, plant and equipment		$	721.3		$	773.7
	Less accumulated depreciation			(543.6	)		(602.5	)
		Property, plant and equipment — net	$	177.7		$	171.2
Other Assets
	Deferred income taxes		$	65.6		$	91.3
	Capitalized software			9.6			15.8
	Other			17.8			18.5
		Total other assets	$	93.0		$	125.6
Other Current Liabilities
	Employee separation costs		$	12.3		$	27.3
	Rebates			34.8			35.7
	Income taxes			28.5			37.2
	Other accruals and various liabilities			110.5			123.2
		Total other current liabilities	$	186.1		$	223.4
Other Liabilities
	Pension		$	33.8		$	32.8
	Other			17.6			18.0
		Total other liabilities	$	51.4		$	50.8

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4. LITIGATION, COMMITMENTS AND CONTINGENCIES

In May of 2002, the Company recorded a $6.4 million net litigation benefit. This consisted of a $7.4 million litigation benefit from Quantum Corporation (Quantum) and Hitachi Maxell, Ltd. (Maxell) legal settlements, net of associated legal expenses, and a $1.0 million charge for an unrelated litigation matter related to optical disk royalties in Spain. Discussion of these and other legal matters are 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. Also, see information on claims related to divestitures in Note 6 to the Consolidated Financial Statements.

5. RESTRUCTURING

The $0.1 million net restructuring charge recorded in the third quarter of 2002 reflected a new charge of $1.8 million, offset by adjustments to previously recorded restructuring reserves of $1.3 million (related to the 2001 restructuring program) and $0.4 million (related to the 2000 restructuring program). The $2.0 million net restructuring benefit recorded in the nine months ended September 30, 2002 reflects adjustments made to previously recorded restructuring reserves in the second quarter 2002 of $0.8 million (related to the 2001 restructuring program) and $1.3 million (related to the 2000 restructuring program), as well as the $0.1 million third quarter 2002 net restructuring charge. These adjustments, in accordance with applicable accounting standards, were made as part of the Company’s regular practice of reviewing its recorded restructuring reserves quarterly and making adjustments as necessary to reflect management’s best estimate of costs remaining for each restructuring program. Each of the restructuring programs is discussed in more detail below.

2002 and 2001 Restructuring Programs

In the third quarter of 2002, the Company recorded $1.8 million of restructuring charges to realign the Storage Professional Services organization within the Company’s Data Storage and Information Management business segment. The charges included asset impairments, exit costs, and $0.4 million for employee separation programs related to a headcount reduction of approximately 15 employees. As of September 30, 2002, the Company had not made any cash payments related to this program. This program is expected to be substantially completed in 2003.

In the fourth quarter of 2001, the Company recorded $54.5 million of restructuring and other charges to reduce its administrative structure in light of planned divestitures of the Company’s Color Technologies business and Digital Solutions and Services business outside of North America, improve the profitability of the remaining non-data storage businesses, and rationalize its data storage manufacturing. The charges included $29.0 million for employee separation programs related to a headcount reduction of approximately 500 employees, of which approximately 40 percent related to administrative structure and 55 percent related to the non-data storage businesses.

9

The cost per employee for this program was higher than the Company’s previous restructuring programs because it involved employees with higher average pay. From the inception of this program through September 30, 2002, the Company has reduced its headcount by approximately 400 employees related to this program. During the first nine months of 2002, the Company made cash payments of $15.2 million related to this program, bringing the cumulative cash payments since the inception of the program to $17.6 million. In the second and third quarters of 2002, the Company adjusted the restructuring reserve by $0.8 million and $1.3 million, respectively, for lower than expected costs in severance and other areas. Approximately $10.0 million in severance and other payments associated with this restructuring program are expected to be made in the fourth quarter of 2002. The program is expected to be substantially completed by the end of the first quarter of 2003.

The following tables represents the activity related to the 2002 and 2001 restructuring programs:

									Balance as of
	Program		Cumulative						September 30,
(In millions)	Amounts		Usage			Adjustments			2002
Severance	$	29.4	$	(15.6	)	$	(1.5	)	$	12.3
Asset impairments		19.2		(19.2	)					—
Other		7.7		(3.5	)	$	(0.6	)		3.6
Total	$	56.3	$	(38.3	)	$	(2.1	)	$	15.9

					Balance as of
	Program		Cumulative		September 30,
(Approximate Headcount)	Amounts		Reduction		2002
Headcount		515		400		115

2000 Restructuring Program

In 2000, the Company recorded a $24.6 million restructuring charge to rationalize its manufacturing operations, streamline its organizational structure, and write-down impaired assets. The charges included $15.9 million for employee separation programs related to a headcount reduction of approximately 430 employees.

During 2002, the Company made cash payments of $2.4 million related to the 2000 restructuring program. In the second and third quarters of 2002, the Company made restructuring related adjustments of $1.3 million and $0.4 million, respectively, primarily due to lower than expected costs to streamline the international organizational structure.

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With the third quarter adjustment, the program is now complete. Since the inception of this restructuring program through September 30, 2002, the Company has reduced its headcount by approximately 400 employees, which includes both voluntary and involuntary employee reductions, related to this program.

6. DIVESTITURES

On August 30, 2002, the Company consummated the sale of its North America Digital Solutions and Services business to DecisionOne Corporation. These operations are presented in the Company’s Consolidated Statements of Operations as discontinued operations. Under the terms of the agreement, DecisionOne paid the Company $4.7 million in cash on August 30, 2002. The Company recognized a $1.6 million after-tax gain on the disposal of the discontinued business. In addition, the terms of the sale include the potential for additional future payments to the Company in 2004, of up to $5.0 million, based upon revenue targets achieved by DecisionOne associated with the DSS business.

The results of discontinued operations for the three and nine month periods ended September 30, 2002 and 2001 were as follows:

	Three months ended				Nine months ended
	September 30,				September 30,
	2002		2001		2002		2001
Net revenues	$	8.9	$	13.7	$	34.9	$	43.1
Income before taxes		0.8		1.7		4.9		4.6
Income tax provision		0.3		0.7		1.9		1.8
Income from operations of discontinued business, net of taxes		0.5		1.0		3.0		2.8
Gain on disposal of discontinued business, net of taxes of $1.0 million		1.6		—		1.6		—
Total discontinued operations	$	2.1	$	1.0	$	4.6	$	2.8
Basic earnings per common share	$	0.06	$	0.03	$	0.13	$	0.08
Diluted earnings per common share	$	0.06	$	0.03	$	0.13	$	0.08

Also in the third quarter of 2002, the Company completed the process of closing or selling the Digital Solutions and Services business outside of North America as part of the Company’s 2001 restructuring program. The divestitures outside of North America had no material impact on cash flows or net income after consideration of costs accrued for in the Company’s 2001 restructuring program.

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On December 31, 2001, the Company consummated the sale of its worldwide color proofing and color software business to Kodak Polychrome Graphics LLC and Kodak Polychrome Graphics Company LTD (collectively referred to as KPG). KPG acquired substantially all the assets and assumed substantially all the liabilities associated with this business. Under the terms of the agreement, KPG paid the Company $50 million in cash on December 31, 2001. The Company recorded a pre-tax gain of $1.9 million ($1.3 million after taxes), net of related costs in the fourth quarter of 2001.

On November 30, 1998, the Company sold its worldwide Medical Imaging Systems business (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 and x-ray film and hardware pursuant to an exclusive supply agreement (the Ferrania Supply Agreement) with Kodak. In exchange for retaining the Ferrania Facility and pursuant to certain conditions, Kodak agreed to pay the Company up to $25.0 million at such time as it was sold or closed.

On August 2, 1999, the Company closed on the sale of its worldwide Photo Color Systems business, together with the Ferrania Facility, the Ferrania Supply Agreement and certain other associated businesses, to Schroder Ventures, through Schroder Ventures’ wholly owned affiliate, Ferrania Lux, S.A.R.L.

Kodak has challenged the Company’s claim for the full $25.0 million as well as claims for other amounts, which the Company believes are due from Kodak in connection with the Medical Imaging Sale. The Company has retained cash, as reflected in its financial statements in both cash and equivalents and restricted cash, which it collected on behalf of Kodak in an amount approximately equal to the disputed items. While the Company cannot predict with certainty the outcome of these disputes, it believes its positions are supported by the applicable contractual terms.

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7. COMPREHENSIVE (LOSS) INCOME

Accumulated other comprehensive (loss) income represents certain items which, according to the respective accounting rules, are required to be recorded directly to equity accounts and consists of the following:

							Minimum			Accumulated
	Cumulative			Cash			Pension			Other
	Translation			Flow			Liability			Comprehensive
	Adjustment			Hedging			Adjustment			(Loss) Income
Balance, December 31, 2001	$	(98.8	)	$	0.8		$	(6.3	)	$	(104.3	)
First quarter 2002 change		(1.4	)		(0.1	)		—			(1.5	)
Balance, March 31, 2002	$	(100.2	)	$	0.7		$	(6.3	)	$	(105.8	)
Second quarter 2002 change		10.8			(1.1	)		—			9.7
Balance, June 30, 2002	$	(89.4	)	$	(0.4	)	$	(6.3	)	$	(96.1	)
Third quarter 2002 change		(2.1	)		—			—			(2.1	)
Balance, September 30, 2002	$	(91.5	)	$	(0.4	)	$	(6.3	)	$	(98.2	)

Comprehensive income for the three and nine months ended September 30, 2002 and 2001 consists of the following:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(In millions)	2002			2001			2002			2001
Net income	$	18.5		$	10.1		$	56.8		$	24.9
Changes in cumulative translation adjustments		(2.1	)		8.3			7.3			(4.3	)
Cash flow hedging - net		—			(0.4	)		(1.2	)		0.5
Unrealized loss on available-for-sale securities - net		—			(0.2	)		—			0.1
Comprehensive income	$	16.4		$	17.8		$	62.9		$	21.2

8. BUSINESS SEGMENT INFORMATION

The Company’s current businesses are organized, managed and internally reported as segments differentiated primarily by their products and services and the markets they serve. These segments, whose results are shown below, are Data Storage and Information Management, providing removable data storage media and services for use in the mobile and desktop, network and enterprise data center markets; Digital Solutions and Services, which provided technical service and support for equipment sold by the Company as well as by other third party equipment vendors, and document imaging products for large format engineering documentation (all businesses within

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the Digital Services and Solutions segment have been sold or closed as of September 30, 2002 — see footnote 1 to the table below); Specialty Paper, which includes carbonless paper, such as multi-part business forms, and videodisc replication (videodisc replication was closed at the end of the first quarter of 2002). Color Technologies, whose principal products included printing and color proofing systems, printing films and plates for the graphic arts marketplace, was sold to KPG on December 31, 2001. In 2001, Specialty Paper and Color Technologies were combined and presented as a single segment. Beginning in 2002, they have been separated and the prior period presentation has been restated to conform to the new presentation as a result of the sale of the color proofing and color software business to KPG.

Business				Data		Digital
Segment				Storage and		Solutions								Corporate,
Information		Third		Information		and			Specialty		Color			Other and			Total
(In millions)		Quarter		Management		Services(1)			Paper		Technologies			Unallocated(2)			Company
Net revenues			2002	$	249.5	$	0.9		$	13.3	$	—		$	0.1		$	263.8
			2001		206.6		7.3			14.0		37.9			(0.2	)		265.6
Operating			2002	$	26.7	$	(0.3	)	$	2.1	$	—		$	(1.0	)	$	27.5
	income (loss)		2001		14.3		(2.2	)		1.4		(0.1	)		(1.7	)		11.7

Business		Nine		Data		Digital
Segment		Months		Storage and		Solutions							Corporate,
Information		to		Information		and			Specialty		Color		Other and			Total
(In millions)		Date		Management		Services(1)			Paper		Technologies		Unallocated(2)			Company
Net revenues			2002	$	747.0	$	9.5		$	39.1	$	—	$	0.2		$	795.8
			2001		632.5		21.7			38.7		124.8		1.8			819.5
Operating			2002	$	72.0	$	(4.0	)	$	5.5	$	—	$	6.8		$	80.3
	income (loss)		2001		35.9		(6.0	)		1.1		8.1		(11.3	)		27.8

(1)  In the third quarter of 2002, the Company sold its North America Digital Solutions and Services business and reclassified it to discontinued operations, as discussed in Note 6 to the Consolidated Financial Statements. Also in the third quarter of 2002, the Company completed the process of closing the Digital Solutions and Services business outside of North America as part of the Company’s 2001 restructuring program. Amounts in this table represent net revenues and operating income (loss) of the Digital Solutions and Services business outside of North America.

(2)  The operating loss for the nine months ended September 30, 2001, includes $5.7 million of accelerated software amortization discussed in Note 10 to the Consolidated Financial Statements. The operating income for the nine months ended September 30, 2002, includes $8.4 million of special items, consisting of income from net legal settlements discussed in Note 4 to the Consolidated Financial Statements and net restructuring charges and adjustments discussed in Note 5 to the Consolidated Financial Statements. In addition, both the three and nine month periods of 2002 and 2001 include overhead no longer allocable to operations that were discontinued.

Intersegment revenues are not material. The proportion of total assets by segment has not changed materially from December 31, 2001.

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9. DERIVATIVES AND HEDGING ACTIVITIES

The Company maintains a foreign currency exposure management policy that allows for the use of derivative instruments, principally foreign currency forward and option contracts, to manage risks associated with exchange rate volatility. These contracts are entered into to fix the U.S. dollar amount of the eventual cash flows resulting from such transactions. The Company documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge items. This process includes linking all derivatives to booked or forecasted transactions. The Company also assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge or that it has ceased to be highly effective as a hedge, the Company discontinues hedge accounting prospectively, with gains and losses that were accumulated in other comprehensive income (loss) recognized in current period operations. The Company does not hold or issue derivative financial instruments for trading purposes and is not a party to leveraged derivatives.

The Company enters into foreign currency forward-exchange contracts to hedge foreign currency exposure of its firm commitments to purchase and sell goods that qualify as fair-value hedges. These forward-exchange contracts mature in twelve months or less.

Beginning January 1, 2001, substantially all of the Company’s intercompany sales to Europe are denominated in Euros. The Company purchased options as hedges of a portion of the anticipated 2002 and 2001 sales that qualify as cash-flow hedges. As of September 30, 2002, these option contracts range in duration from one to three months and totaled $15.9 million. Hedge costs, representing the premium paid on expired options net of hedge gains, of $0.7 million were reclassified into operations for the quarter ended September 30, 2002. Amounts reclassified into operations for the quarter ended September 30, 2001 totaled $0.6 million.

The amount of net deferred losses on foreign currency cash flow hedges included in accumulated other comprehensive loss in shareholders’ equity as of September 30, 2002 was $0.4 million, net of tax, all of which is expected to reverse in 2002.

As of September 30, 2002, the fair value of the Company’s foreign currency forward and option contracts outstanding was negative $0.2 million. The estimated fair market values were determined using available market information or other appropriate valuation methodologies.

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The Company is exposed to credit loss in the event of nonperformance by counter-parties in foreign currency forward and option contracts, but does not anticipate nonperformance by any of these counter-parties. The Company actively monitors its exposure to credit risk through the use of credit approvals and credit limits, and by selecting major international banks and financial institutions as counter-parties.

10. CAPITALIZED SOFTWARE AMORTIZATION

During the last half of 2000, the Company determined that it would abandon certain components of its computer software system. Accordingly, the Company shortened the estimated useful life of a large portion of capitalized software such that this portion of the software would be fully amortized by the end of the first quarter of 2001. The Company recorded the remaining $5.7 million of non-cash, pre-tax charges in first quarter 2001 for amortization related to software being abandoned.

****

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.

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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, 2002 and the related consolidated statements of operations for each of the three-month and nine-month periods ended September 30, 2002 and 2001 and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2002 and 2001. These 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 auditing standards generally accepted in the United States of America, 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 interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of December 31, 2001, and the related consolidated statements of operations, shareholders’ equity and comprehensive income, and of cash flows for the year then ended (not presented herein), and in our report dated January 29, 2002, 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, 2001, 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 22, 2002

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

General Overview

The Company’s primary business is the development, manufacture and distribution of removable data storage products, categorized under the Standard Industrial Classification (SIC) code as “3695; Magnetic and Optical Recording Media” or the North American Industry Classification System (NAICS) code as “334613; Magnetic and Optical Recording Media Manufacturing.”

On August 30, 2002, the Company consummated the sale of its North America Digital Solutions and Services business to DecisionOne Corporation. These operations are presented in the Company’s Consolidated Statements of Operations as discontinued operations. Management’s discussion and analysis of financial condition and results of operations generally focuses on the Company’s continuing operations.

On December 31, 2001, the Company consummated the sale of its worldwide color proofing and color software business to Kodak Polychrome Graphics LLC and Kodak Polychrome Graphics Company LTD (collectively referred to as KPG). KPG acquired substantially all the assets and assumed substantially all the liabilities associated with this business. The financial results for the three months and nine months ended September 30, 2001 include the color proofing and color software business.

The following table displays the Company’s results of continuing operations for the nine months ended September 30, 2002 and 2001. The 2002 and 2001 results are as reported and as adjusted to exclude special items. The 2002 adjusted results exclude restructuring and net litigation benefits (see Notes 4 and 5 to the Consolidated Financial Statements) while the 2001 adjusted results exclude amortization related to abandoned software that was included in sales, general and administrative (see Note 10 to the Consolidated Financial Statements).

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(In millions, except per share amounts)
(Unaudited)

	Nine months ended September 30,
	2002					2001
				Excluding				Excluding
	As			Special		As		Special
	Reported			Items		Reported		Items
Net revenues	$	795.8		$	795.8	$	819.5	$	819.5
Gross profit		242.3			242.3		248.9		248.9
Selling, general and administrative		133.6			133.6		173.0		167.3
Research and development		36.8			36.8		48.1		48.1
Litigation settlements — net		(6.4	)		—		—		—
Restructuring		(2.0	)		—		—		—
Operating income		80.3			71.9		27.8		33.5
Income from continuing operations		52.2			46.8		22.1		26.0
Diluted earnings per common share, continuing operations	$	1.47		$	1.32	$	0.63	$	0.74

Results of Operations

Comparison of Three Months Ended September 30, 2002 and 2001

Net revenues of $263.8 million declined 0.7 percent from last year’s revenues of $265.6 million. Excluding the color proofing and color software business from prior year’s revenues, net revenues increased 15.9 percent from last year’s adjusted revenues of $227.7 million, driven by the strength of revenues in the Company’s Data Storage and Information Management segment (DS&IM).

DS&IM third quarter revenues increased $42.9 million, or 20.8 percent, to $249.5 million from $206.6 million a year ago. This increase was driven by volume increases of approximately 30 percent. Effects of currency exchange rates also increased net revenues by approximately 3 percent. The volume and currency rate increases were partially offset by price declines of approximately 12 percent.

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For the period, revenue grew across all customer sectors and all geographic regions with particular strength in the business to business tape products. For the period, growth was especially strong in Ultrium, DLT, 3590E, 9840 and 9940 tape cartridges as well as optical products. Retail consumer sales grew, but more slowly, than in previous quarters. The revenue increase also was driven by the Company’s distribution program with IBM in which IBM branded media products are sold through the Company’s distribution channels. The IBM branded business, which spans across multiple product lines, began in the third quarter of 2001.

Digital Solutions and Services (DSS) third quarter 2002 revenues were $0.9 million as compared with $7.3 million a year ago. Due to the presentation of the North America DSS operations as discontinued operations, these net revenues relate only to DSS operations outside of North America. The decline is due to the planned discontinuation of DSS operations in regions outside North America. As of the end of the third quarter, all DSS operations outside of North America had been closed or sold.

Specialty Paper revenues were $13.3 million in third quarter 2002 as compared with $14.0 million in third quarter 2001. Specialty Paper includes carbonless paper, such as multi-part business forms, and videodisc replication. Revenues for 2001 include $0.8 million for videodisc replication, which was closed at the end of the first quarter of 2002.

Gross profit in third quarter 2002 was $85.2 million or 32.3 percent of revenues, compared to $81.8 million, or 30.8 percent of revenues in the year earlier quarter. The increase of 1.5 percentage points was primarily due to improved manufacturing costs due to volume growth as well as sourcing savings, the impact of favorable currency exchange rates and the ongoing benefit from settlement of litigation with Quantum and Maxell in the DLT tape business. These improvements more than offset the negative impact of approximately 2.7 percentage points related to the divestiture of the relatively higher gross margin color proofing and color software business.

Selling, general and administrative (SG&A) expenses in third quarter 2002 were $44.3 million or 16.8 percent of revenues, compared to $54.6 million or 20.6 percent of revenues in the year earlier quarter. The quarter over quarter 3.8 percentage point decrease in SG&A as a percent of revenues was driven primarily by a 2.3 percentage point impact from divesting the relatively higher SG&A color proofing and color software business, the benefit received from the Company’s 2001 restructuring program, and increased DS&IM revenue in third quarter of 2002. In addition, transition services fees from divested businesses, which totaled approximately $1.1 million in third quarter 2002, offset certain costs previously allocated to the divested businesses. However, the level of transition services payments is expected to decline in the fourth quarter of 2002, putting upward pressure on SG&A expenses as reflected in the Company’s SG&A guidance discussed in the Forward-Looking Statements section.

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Research and development (R&D) costs were $13.3 million, or 5.0 percent of revenues, as compared to $15.5 million, or 5.8 percent of revenues for the prior year quarter. The decrease in both amount and percentage points is due primarily to the divestiture of the color proofing and color software business which had carried a higher R&D percentage of revenues.

In the third quarter of 2002, the Company recorded a net restructuring charge of $0.1 million. The charge consisted of a new restructuring program of $1.8 million to realign the Storage Professional Services organization, which is part of the Company’s DS&IM business segment, offset by $1.7 million of restructuring reserve adjustments due primarily to lower than expected costs in the Company’s previous restructuring programs (see Note 5 to the Consolidated Financial Statements).

Operating income in the third quarter of 2002 was $27.5 million, compared with operating income of $11.7 million for the same period last year. The quarter over quarter increase in operating income is due to the factors discussed above.

Other expense for the third quarter of 2002 was $2.1 million, comprised of a write-off of the Company’s $3.0 million equity investment in DataPlay, Inc., $2.3 million in interest income, and $1.4 million of other expenses. This compares with other income of $1.4 million a year ago.

The tax rate for continuing operations for the third quarter of 2002 was approximately 35 percent. The Company’s 2001 full-year tax rate was approximately 32 percent from all operations. The higher 2002 rate is driven by increased profits earned domestically.

Income from continuing operations in the third quarter of 2002 was $16.4 million, or $0.47 per basic share and $0.46 per diluted share, compared with income from continuing operations of $9.1 million, or $0.26 per basic and diluted share, in the third quarter 2001. The increase of $0.21 per basic and $0.20 per diluted share resulted from higher operating income as discussed above.

Comparison of Nine Months Ended September 30, 2002 and 2001

On a year to date basis, net revenues of $795.8 million declined 2.9 percent from last year’s $819.5 million. Excluding the color proofing and color software business from prior year’s revenues, net revenues increased 14.6 percent from last year’s adjusted revenues of $694.7 million, driven by the strength of revenues in the Company’s DS&IM segment.

DS&IM revenues increased 18.1 percent to $747.0 million from $632.5 million a year ago. This increase was driven by volume increases of approximately 28 percent. Volume increases were offset by price declines of approximately 10 percent. Effects of changes in currency

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exchange rates were insignificant. Significant volume increases occurred in all major product categories and across all geographic areas, while pricing pressures were less than in 2001. For the period, growth was especially strong in Ultrium tape cartridges, optical products, and 9840 and 9940 cartridges. The revenue increase also was driven by the Company’s distribution program with IBM in which IBM branded media products are sold through the Company’s distribution channels. The IBM branded business, which spans across multiple product lines, began in the third quarter of 2001.

DSS 2002 revenues were $9.5 million as compared with $21.7 million a year ago. Due to the presentation of the North America DSS operations as discontinued operations, these net revenues relate only to DSS operations outside of North America. The decline is due to the planned discontinuation of DSS operations in regions outside North America. As of the end of the third quarter, all DSS operations outside of North America had been closed or sold.

Specialty Paper revenues were $39.1 million as compared with $38.7 million a year ago. Revenues in 2001 included $2.5 million for videodisc replication, which was closed at the end of the first quarter of 2002.

Gross profit was $242.3 million, or 30.4 percent of revenues, for the first nine months of 2002. This compared with $248.9 million, or 30.4 percent of revenues, a year ago. In 2002, strong volume growth, which helped lower unit costs, as well as improved product mix in DS&IM offset the negative impact of approximately 3.6 percentage points related to the divestiture of the relatively higher gross margin color proofing and color software business

In the first quarter of 2001, the Company recorded special charges related to accelerated amortization associated with the abandonment of certain capitalized software (see Note 10 to Consolidated Financial Statements). The $5.7 million charge for this amortization is recorded in selling, general and administrative expenses.

Selling, general and administrative expenses for the first nine months of 2002 were $133.6 million or 16.8 percent of revenue, compared to $173.0 million or 21.1 percent of revenue for the same period a year ago. Excluding special items in 2001, SG&A declined $33.7 million in 2002 from $167.3 million last year. The year over year 3.6 percentage point decrease in SG&A (excluding special items) as a percent of revenues was driven primarily by a 2.0 percentage point impact from divesting the relatively higher SG&A color proofing and color software business, the benefit received from the Company’s 2001 restructuring program, and increased DS&IM revenue in first nine months of 2002. In addition, transition services fees from divested businesses, which totaled approximately $6.4 million during the first nine months of 2002, offset certain costs previously allocated to the divested businesses. However, the level of transition services payments is expected to decline in the fourth quarter of 2002, putting upward pressure on SG&A expenses as reflected in the Company’s SG&A guidance discussed in the Forward-Looking Statements section.

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Research and development costs for the first nine months of 2002 were $36.8 million, or 4.6 percent of revenues, as compared to $48.1 million, or 5.9 percent of revenues for the prior year. The decrease in both amount and percentage points is due to the divestiture of the color proofing and color software business which had carried a higher R&D percentage of revenues.

In the second quarter of 2002, the Company recorded a benefit of $8.5 million of special items, consisting of $7.4 million in a litigation benefit from the May 29, 2002 legal settlements with Quantum and Maxell, net of associated legal expenses, a $1.0 million charge for an unrelated litigation matter related to optical disk royalties in Spain and $2.1 million in restructuring reserve adjustments due primarily to lower than expected costs in the Company’s restructuring programs. The Quantum and Maxell litigation settlement also contained provisions which are expected to benefit the Company’s ongoing business results.

Operating income for the first nine months of 2002 was $80.3 million as compared to $27.8 million for the same period last year. Excluding special items from second and third quarter 2002 and first quarter 2001, operating income for the first nine months of 2002 was $71.9 million as compared to $33.5 million for the same period last year. This increase is due to the factors discussed above.

Other income for the first nine months of 2002 was zero, as compared with $4.1 million for the same period last year. The year over year decrease was due to a decline in interest income in 2002 due to lower short-term interest rates and a write-off of the Company’s $3.0 million equity investment in DataPlay, Inc.

The tax rate for continuing operations for the first nine months was approximately 35 percent. The Company’s 2001 full-year tax rate was approximately 32 percent from all operations. The higher 2002 rate is driven by increased profits earned domestically.

Income from continuing operations for the first nine months of 2002 was $52.2 million, or $1.50 per basic share and $1.47 per diluted share, as compared to $22.1 million, or $0.64 per basic share and $0.63 per diluted share, for the first nine months of 2001. Excluding special items from second and third quarter 2002 and first quarter 2001, income from continuing operations for the first nine months of 2002 was $46.8 million, or $1.34 per basic share and $1.32 per diluted share. This compares with income from continuing operations of $26.0 million, or $0.75 per basic share and $0.74 per diluted share, for the same period in 2001. The increase of $0.59 per basic share and $0.58 per diluted share resulted from higher operating income as discussed above.

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Financial Position

Accounts receivable days sales outstanding was 46 days as of September 30, 2002, a decrease of two days from 48 days as of December 31, 2001. The Company had 66 days of inventory supply on hand as of September 30, 2002 compared to 67 days as of December 31, 2001. Total current assets increased by $50.8 million, driven by an increase of $50.7 million in cash and equivalents. Other assets decreased by $32.6 million, primarily as a result of a decrease in deferred income taxes due to the realization of certain tax asset items. Other current liabilities decreased by $37.3 million, primarily due to a decrease in restructuring reserves.

Critical Accounting Policies and Estimates

For further discussion, see the “Critical Accounting Policies and Estimates” section in Item 7 in the Company’s 2001 Annual Report on Form 10-K.

Liquidity and Capital Resources

Cash provided by operating activities was $81.8 million in the first nine months of 2002. The major driver was net income as adjusted for non-cash items of $107.8 million, offset by working capital usages of $30.3 million. Net income as adjusted for significant non-cash items includes net income of $56.8 million adjusted for depreciation and amortization of $29.2 million and deferred income taxes of $30.2 million, less restructuring and other special items of $8.4 million (see Notes 4 and 5 to the Consolidated Financial Statements). Cash used in the first nine months of 2002 related to total working capital increases was $30.3 million. The cash used in 2002 was due largely to payments related to restructuring programs of $17.6 million, payments related to employee incentive compensation of $13.8 million, offset by a cash inflow of $12.9 million due to a decrease in accounts receivable and a cash inflow of $11.1 million due to an increase in accounts payable.

For the first nine months of 2001, cash provided by operating activities was $91.0 million. This consisted of $63.4 million of net income as adjusted for non-cash items, $21.3 million from net working capital decreases, and $6.3 million from other sources. Net income as adjusted for significant non-cash items includes net income of $24.9 million adjusted for deprecation and amortization of $41.6 million, less deferred income taxes of $3.1 million as a use of cash. Depreciation and amortization include $5.7 million of accelerated amortization in 2001 (see Note 10 to the Consolidated Financial Statements) and $2.7 million of depreciation in 2001 related to the color proofing and color software business which was sold at the end of 2001. Depreciation and amortization also included depreciation in 2001 for assets that were written off as part of the fourth quarter 2001 restructuring. Cash provided by working capital of $21.3 million

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in 2001 included a $7.5 million increase in accounts payable, a $15.1 million income tax refund, and the reclassification of $11.0 million of restricted cash from other current assets to cash and equivalents, which was previously used as collateral for local borrowings of debt in an international subsidiary. Cash was used to increase inventories $27.5 million primarily due to higher optical media inventory in DS&IM as well as a planned build-up of tape products at one manufacturing plant in anticipation of the relocation of some of the work to another facility. Cash of $11.4 million was used in restructuring programs.

Cash used by investing activities was $29.9 million in first nine months of 2002 and $34.6 million in first nine months of 2001. Substantially all investing activities relate to capital spending except for the $4.7 million of proceeds from the sale of the North America DSS business in 2002.

The Company has a Loan and Security Agreement (the Loan Agreement) with a group of banks. The Loan Agreement provides for revolving credit, including letters of credit, with borrowing availability based on eligible accounts receivable, inventory, and manufacturing machinery and equipment, not to exceed $100 million. Borrowing availability as of September 30, 2002 was $69.8 million under the Company’s existing Loan Agreement. No borrowings were outstanding under the Loan Agreement as of September 30, 2002. The Loan Agreement expires December 31, 2003.

In addition, certain international subsidiaries have arranged borrowings locally outside of the agreement discussed above. As of September 30, 2002, $5.6 million of short-term borrowings were outstanding under such arrangements. As of September 30, 2002, the Company’s ratio of debt to total capital was 0.8 percent as compared with 1.9 percent as of December 31, 2001.

The Company’s Board of Directors has authorized the repurchase of up to 10 million shares of the Company’s common stock. The Company repurchased 0.4 million shares during the first nine months of 2002. As of September 30, 2002, the Company had repurchased 7.2 million shares under this authorization and held, in total, 7.7 million shares of treasury stock acquired at an average price of $22.39 per share.

The Company’s Board of Directors has authorized an additional $49.0 million in capital expenditures to develop advanced media coating capabilities in the Company’s Weatherford, Oklahoma, facility, expected to be completed in 2004. The capital expenditures will start in the fourth quarter of 2002, with the majority of the expenditures occurring in 2003, and concluding in 2004. The 2002 portion of the investment is reflected in the Company’s outlook for 2002 capital spending.

The Company’s liquidity needs include: capital expenditures in 2002 targeted to be in the range of $45 million; pension funding expected to approximate $8 million in the fourth quarter of 2002; cash payments related to restructuring of approximately $15.9 million;

25

short-term debt of $5.6 million; certain operating leases as discussed in the Company’s 2001 Annual Report on Form 10-K; and any amounts associated with the repurchase of common stock under the authorization discussed above. Other than the operating lease commitments, the Company is not using off-balance sheet arrangements, including the use of special purpose entities. The Company does not have any contractual obligations or commercial commitments with terms greater than one year that would significantly impact its liquidity. The Company expects that cash and equivalents, together with cash flow from operations and availability of borrowings under its current and future sources of financing, will provide liquidity sufficient to meet these needs and operate the Company.

As of December 31, 2001, the Company’s defined benefit pension plans had an aggregate unfunded status of $38.7 million representing an excess of projected benefit obligations over plan assets. Based on the relationship of this unfunded status to amounts accrued in the financial statements, the applicable accounting rules required the recording of a minimum pension liability with an offsetting reduction of shareholder’s equity which totaled $6.3 million net of tax as of December 31, 2001, as reflected in the Company’s 2001 financial statements. Due to the impacts of financial market performance on plan assets as well as lower interest rates in 2002, the Company now estimates that the unfunded status of these plans could be in the range of $45 to $50 million at December 31, 2002. In accordance with Generally Accepted Accounting Principles, this would require the Company to increase its minimum pension liability, which would further reduce shareholder’s equity in the range of $10 to $12 million, net of tax, over the amount at December 31, 2001. These estimates are based upon an assumed $8 million of additional funding expected in the fourth quarter of 2002, which would bring the full year’s funding to approximately $20 million. Although not specifically required statutorily, it is likely that the Company will fund its pension plans in 2003 at a higher level than in 2002.

Forward-Looking Statements

The following statements are based on the Company’s current outlook subject to the risks and uncertainties outlined below.

• Fourth quarter of 2002 DS&IM segment revenues are expected to be in the range of $255 to $265 million;

• Gross margin for fourth quarter of 2002 is targeted to be in the range of 31 to 32 percent of revenues;

• Research and Development spending is targeted in the range of five percent of revenues;

• Selling, General, and Administrative spending is targeted in the range of 17 to 17.5 percent of revenues for the fourth quarter of 2002, which is up in anticipation of the impact of declining transition services as well as other factors;

• The Company is estimating operating income for the fourth quarter of 2002 to be in the range of $25 to $28 million;

• Net non-operating income is targeted to be approximately $750,000 for the fourth quarter of 2002;

• Tax rate is estimated to be approximately 35 percent;

• Based on achieving the above targets, earnings per share is anticipated to be in the range of $0.47 to $0.52 for the fourth quarter of 2002;

• Capital expenditures are estimated to be in the range of $15 million for the fourth quarter and $45 million for the full year of 2002;

• Depreciation and amortization expense is targeted to be in the range of $40 million for the full year of 2002;

• The Company is in the process of finalizing its operating plans for 2003 and expects to provide its guidance for 2003 before year end; and

• Longer range, the Company has established goals of revenue growth in the range of 10 percent and operating margin in the range of 10 percent.

Certain information contained in this report which does not relate to historical financial information, including the 2002 Outlook, may be deemed to constitute forward-looking statements.

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The words or phrases “is targeted to,” “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 investors 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 continuing uncertainty in global economic conditions that make it particularly difficult to predict product demand, the Company’s ability to meet its cost reduction and revenue growth targets, its ability to implement its restructuring programs for the estimated costs on a timely basis and to achieve the projected benefits, its ability to introduce new offerings in a timely manner either independently or in association with OEMs or other third parties, the amount and timing of transition service payments received, the competitive pricing environment, foreign currency fluctuations, the outcome of litigation, the ability of the Company to secure adequate supply of certain high demand products, the ready availability and price of energy, 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.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

There has been no material change since the Company’s last Form 10-K. For further information, see Item 7(a) “Market Risks” included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001. Also, see information on derivatives and hedging activities in Note 9 to the Consolidated Financial Statements of this Form 10-Q.

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Item 4.  Controls and Procedures

(a)  Evaluation of Disclosure Controls and Procedures

Based on an evaluation of the disclosure controls and procedures conducted within 90 days of filing this quarterly report, the Chairman of the Board and Chief Executive Officer, William T. Monahan, and the Senior Vice President, Chief Financial Officer and Chief Administrative Officer, Robert L. Edwards, have concluded that the disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) are effective.

(b)  Changes in Internal Controls

There were no significant changes in the internal controls or in other factors that could significantly affect those controls subsequent to the date of their most recent evaluation thereof.

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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, 2001.

The Company is the subject of various pending or threatened legal actions in the ordinary course of its business. All such matters are subject to many uncertainties and outcomes that are not predictable with assurance. Consequently, as of September 30, 2002, 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, certain of which are described below, could materially affect operating results when resolved in future periods, it is management’s opinion that after final disposition, any monetary liability to the Company beyond that provided in the Consolidated Balance Sheet as of September 30, 2002 would not be material to the Company’s financial position.

On May 10, 1999, Jazz Photo Corp. (Jazz Photo) served the Company and its affiliate, Imation S.p.A., with a civil complaint filed in New Jersey Superior Court. The complaint charges breach of contract, breach of warranty, fraud, and racketeering activity in connection with the Company’s sale of allegedly defective film to Jazz Photo by its Photo Color Systems business which was sold in 1999 (see Note 6 to the Consolidated Financial Statements). In the complaint, Jazz Photo seeks unspecified compensatory damages, treble damages, punitive damages, and equitable relief. The Company disputes any liability to Jazz Photo and is vigorously defending the action. In 2002, the parties continue to litigate the scope of document production and discovery that will be required in the action. Depositions began in the third quarter of 2002.

On October 1, 2001, the Company filed a lawsuit in the Federal District Court in St. Paul, Minnesota, charging Quantum Corporation with violations of Sections 1 and 2 of the Sherman Antitrust Act, including price fixing and conspiracy to monopolize the production and sale of data storage tape compatible with Quantum’s digital linear tape (DLT) tape drives. The Company amended the complaint to include Hitachi Maxell, Ltd. as an additional defendant and to add Quantum’s attempt to monopolize the production and sale of data storage tape compatible with Quantum’s S-DLT tape drives. The lawsuit specifically charged that Quantum had fixed prices on DLT-compatible tape, invited Imation to join an illegal tape cartel, inappropriately extended patents on licensed DLT tape drives to tape media as a way to enforce its monopoly hold on the tape market, and misrepresented DLT-compatible tape as an open standard with competitive pricing. The complaint sought an injunction barring Quantum from further violations of antitrust law in this market and recovery of damages of at least $150 million.

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On October 3, 2001, Quantum Corporation filed a lawsuit in the Superior State Court in California in Santa Clara County seeking to prohibit the Company from selling its digital linear tape for use on Quantum DLT tape drives. The lawsuit accused the Company of misappropriation of trade secrets, deceptive and misleading advertising, and unfair business practices. Quantum also filed a motion for a preliminary injunction to block the Company from selling Black Watch™ Digital Linear Tape IV cartridges. The court issued a preliminary injunction that allowed the Company to sell its Black Watch Digital Linear Tape IV cartridges but required that the Company pay Quantum a 30 percent royalty on those revenues (as set forth in the license agreement between the parties) during the interim until the claims are resolved.

On May 29, 2002, the Company, Quantum, and Maxell settled all legal claims between the companies over the qualification, production, and sale of DLT tape media products. Quantum and the Company also committed to completing the qualification process of the Company as a manufacturer of DLT tape media, which was completed in August 2002. The antitrust lawsuit and all counterclaims have been withdrawn.

The Company is a defendant in a lawsuit filed by a Spanish collecting society demanding copyright levies for recording artists to be paid on all CDR-Data discs that have been sold during 1998 and 1999. Presently, there is an agreed upon levy that is assessed on all CDR-Audio discs sold but no agreement has been reached regarding CDR-Data discs. The Spanish collecting society has sued the Company and at least three other companies alleging that consumers are using CDR-Data discs to make copies of music for private use and, therefore, the same levy that applies to CDR-Audio discs sales should also apply to CDR-Data discs sales. The Company continues to defend the action vigorously.

Items 2-5. Not Applicable

Item 6(a). Exhibits

         The following documents are filed as exhibits to this Report.

10.1	Severance Agreement dated August 7, 2002 between the Company and William T. Monahan, replacing the Employment Agreement dated as of July 1, 1996 which was included as exhibit 10.7 in the Company’s Registration Statement on Form 10 (No. 1-14310)
15.1	An awareness letter from the Company’s independent accountants regarding unaudited interim financial statements
99.1	Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002

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99.2 Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002

         (b)  Reports on Form 8-K.

There were no reports on Form 8-K filed during the quarter ended September 30, 2002.

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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 12, 2002	By:	/s/ Robert L. Edwards
		Robert L. Edwards Senior Vice President, Chief Financial Officer and Chief Administrative Officer

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Certifications

I, William T. Monahan, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Imation Corp.;

2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

         a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the quarterly report is being prepared;

         b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

         c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

         a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

         b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

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6.     The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002

By: /s/ William T. Monahan       
William T. Monahan
Chairman and Chief Executive Officer

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I, Robert L. Edwards, certify that:

1.     I have reviewed this quarterly report on Form 10-Q of Imation Corp.;

2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

         a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the quarterly report is being prepared;

         b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

         c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

         a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

         b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

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6.     The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002

By: /s/ Robert L. Edwards          
Robert L. Edwards
Senior Vice President,
Chief Financial Officer and
Chief Administrative Officer

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EXHIBIT INDEX

Exhibit
Number	Description
10.1	Severance Agreement dated August 7, 2002 between the Company and William T. Monahan, replacing the Employment Agreement dated as of July 1, 1996 which was included as exhibit 10.7 in the Company’s Registration Statement on Form 10 (No. 1-14310)
15.1	An awareness letter from the Company’s independent accountants regarding unaudited interim financial statements
99.1	Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002
99.2	Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 of the Sarbanes-Oxley Act of 2002

38 EX-10.1 3 c72827exv10w1.htm EX-10.1 SEVERANCE AGREEMENT DATED AUGUST 7, 2002

Exhibit 10.1

SEVERANCE AGREEMENT

         THIS SEVERANCE AGREEMENT (this “Agreement”) is made as of the 7th day of August, 2002, between Imation Corp., a Delaware corporation, with its principal offices at One Imation Place, Oakdale, Minnesota 55128 (the “Company”), and William T. Monahan, an individual residing at 11930 Isleton Avenue North, Stillwater, Minnesota 55082 (“you”).

         WHEREAS, you have served as Chief Executive Officer of the Company and a member of its Board of Directors since July 1, 1996; and

         WHEREAS, you and the Company have entered into a certain Employment Agreement, dated June 25, 1996, as amended by letters between you and the Company dated March 20, 2002 and May 23, 2002 (such agreement as so amended, the “Employment Agreement”); and

         WHEREAS, this Agreement is intended to replace the Employment Agreement and specify the term and conditions of your employment with the Company and the financial arrangements that the Company will provide to you upon your separation from employment with the Company under any of the circumstances described herein; and

         WHEREAS, this Agreement is entered into by the Company in the belief that it is in the best interests of the Company and its shareholders to help assure that the Company will have your continued dedication during your employment with the Company, by providing for certain severance benefits under certain circumstances in connection with your employment with the Company, thereby enhancing the Company’s ability to attract and retain highly qualified people;

         NOW THEREFORE, to assure the Company that it will have your continued dedication, and to induce you to remain in the employ of the Company, and for other good and valuable consideration, the Company and you agree as follows:

         1.     Term of Agreement.    The term of this Agreement shall commence on the date of this Agreement (the “Effective Date”) and shall continue in effect until the first anniversary of the Effective Date, and shall thereafter be automatically renewed for successive one-year terms provided that you are employed by the Company on each anniversary of the Effective Date (the “Covered Period”), unless the Company, upon authorization by its Board of Directors gives written notice to you that the Company does not wish to extend this Agreement, and provided further, that, notwithstanding any such notice by the Company not to extend, the Covered Period and this Agreement shall continue in effect for a period of 12 months from the date you receive such notice.

         2.     Definitions.     When the following terms are used in this Agreement with initial capital letters, they shall have the following meanings.

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         (i) “Cause” shall mean termination by the Company of your employment based upon:

         (a) the willful and continued failure by you to substantially perform your duties and obligations (other than any such failure resulting from your Incapacity or any such actual or anticipated failure resulting from your termination for Good Reason);

         (b) the willful engaging by you in misconduct which is materially injurious to the Company, monetarily or otherwise; or

         (c) your conviction of, or entering a plea of nolo contendere to, a crime that constitutes a felony.

For purposes of this Section 2(i), no action or failure to act on your part shall be considered “willful” unless done, or omitted to be done, by you in bad faith and without reasonable belief that your action or omission was in the best interests of the Company.

         (ii) “Code” shall mean the Internal Revenue Code of 1986, as amended.

         (iii) “Date of Termination” shall mean the date specified in the Notice of Termination (except in the case of your death, in which case Date of Termination shall be the date of death).

         (iv) “Disability” shall mean that you have suffered from Incapacity for a period of six consecutive months, as determined by a medical doctor mutually agreed to by you and the Company, and you have given Notice of Termination to the Company, or Notice of Termination is given to you by the Company and you shall not have returned to the performance of your duties hereunder on a full-time basis within 30 days after such Notice of Termination is given.

         (v) “Good Reason” shall mean the occurrence of any of the following events, except for occurrence of such an event in connection with the termination of your employment or reassignment by the Company for Cause, for Disability or for death:

         (a) the assignment to you of employment duties, functions or responsibilities that are significantly different from, and result in a substantial diminution of, your duties, functions or responsibilities as of the Effective Date, except during any period when you are suffering from Incapacity; or

         (b) a significant reduction by the Company in your base salary, annual bonus opportunity (specifically excluding any long-term incentive compensation for which you are eligible), or benefits as in effect as of the Effective Date (excluding any

40

reduction caused by a restructuring by management of benefits for the employees of the company as a whole that affects you in a manner comparable to other senior executives of the Company);

         (c) the failure of the Company to comply with Section 7(iii) of this Agreement.

         (vi) “Incapacity” shall mean your absence from your duties hereunder or your inability to substantially perform such duties on a full-time basis, in each case due to physical or mental illness.

         (vii) “Notice of Termination” shall mean a written notice which sets forth the Date of Termination and, in reasonable detail, the facts and circumstances claimed to provide a basis, if any, for termination of your employment.

         (viii)“Severance Period” shall mean the period of two years beginning on your Date of Termination.

         3.     Termination Procedures. Any purported termination of your employment by the Company or you (other than by reason of your death) during the Covered Period shall be communicated by a Notice of Termination in accordance with Section 8 hereof. No purported termination by the Company of your employment in the Covered Period shall be effective if it is not pursuant to a Notice of Termination. Failure by you to provide Notice of Termination shall not limit any of your rights under this Agreement except (a) that the Company shall be permitted to cure any purported event if specified in Section 2 (ii) and (b) to the extent the Company can demonstrate that it suffered actual damages by reason of such failure.

         4.     Qualification for Severance Benefits.

         (i) You shall be eligible for severance benefits pursuant to the terms of this Agreement if your employment is terminated and the Date of Termination occurs during the Covered Period in any of the following circumstances:

         (a) termination of your employment by you or by the Company because of Disability;

         (b) termination of your employment by the Company for any other reason other than Cause; or

         (c) termination of employment by you for Good Reason;

provided, however, that you shall not begin receiving any payments or benefits under this Agreement unless and until you execute a general release of all claims against the Company and its affiliates, including non-competition and non-solicitation covenants, in the form attached hereto as Exhibit A and you have not rescinded such release within the permitted time period for rescission under Section 3.J therein; and provided further, that in such case, failure to execute such release within 21 days of your Date of Termination shall result in the loss of any rights to receive payments or benefits under this Agreement.

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         (ii) In the event of termination of employment upon your death, no severance benefits shall be payable pursuant to this Agreement, but your estate or designated beneficiary shall be entitled to receive, as soon as practical after the Date of Termination, a death benefit no less than that provided on the Effective Date, under Split Dollar Insurance Policies Numbers 12807864, 14618388, and 14618472, plus any increases in that death benefit scheduled thereafter to occur under the terms of such policies as in effect on the Effective Date. Such death benefit shall be paid by the Company to the extent it is not paid directly by any insurance company.

         5.     Compensation Upon Termination.

         (i) Amounts. Upon qualification for severance benefits pursuant to this Agreement, you shall be entitled to the benefits, to be funded from the general assets of the Company, provided below:

         (a) The Company shall pay to you (1) the full base salary earned by you and unpaid through the Date of Termination, at the rate in effect on the date of the Notice of Termination, (2) any amount earned by you as a bonus with respect to the fiscal year of the Company immediately preceding the Date of Termination if such bonus has not theretofore been paid to you, and (3) an amount representing credit for any vacation earned or accrued by you but not taken during the current “vacation year,” in each case in a lump sum as soon as practicable after the Date of Termination;

         (b) In lieu of any further base salary payments to you for periods subsequent to the Date of Termination, the Company shall pay to you the sum of an amount equal to two (2) times the average of the sum of the actual annual bonuses paid to you for the three years prior to the fiscal year in which the Date of Termination occurs (specifically excluding any long-term incentive compensation for which you are eligible) (such average, the “Annual Bonus Amount”) plus an amount equal to two (2) times your annual base salary for the fiscal year in which the Date of Termination occurs (but disregarding any decrease thereof that constituted “Good Reason”) (the amount of such annual base salary, the “Annual Base Salary”), less, in the case of a termination for Disability, any amounts paid or payable to you under the Company’s disability benefits plans or under the Social Security disability insurance program.

42

         (c) During the Severance Period, the Company shall continue to provide to you all welfare benefits under the Company’s plans and programs and under individual arrangements that you are receiving immediately prior to the Date of Termination (but disregarding any diminution of such benefits that constituted “Good Reason”), on the same terms and conditions as if you had remained an active employee. In the event that your participation in any such plan or program is barred by the terms thereof or would have adverse tax consequences for you, any other participant therein or the Company, the Company shall arrange to provide you and your dependents with benefits substantially similar thereto or the cash equivalent thereof, grossed up by an additional cash payment to offset any effect of personal income tax imposed on such cash equivalent payments beyond such tax that would have been imposed, had you continued to participate in such plan or program as an active employee.

         (d) With respect to each defined benefit pension plan sponsored by the Company in which you participate immediately before the termination of your employment (whether or not such plan is qualified under Section 401(a) of the Code) (each, a “Pension Plan”), you shall receive additional payments (the “Supplemental Pension”) from the Company equal to the excess (if any) of (i) the amount that would be payable to you as a benefit from such Pension Plan, had you remained employed through the Severance Period with base salary paid at an annual rate equal to the Annual Base Salary and annual bonus compensation equal to the Annual Bonus Amount, over (ii) the amount actually payable to you as a benefit from such Pension Plan. The Supplemental Pension with respect to each Pension Plan shall be paid as and when your benefits from such Pension Plan are paid; provided, that if the benefits under such Pension Plan are paid, or begin to be paid, before the end of the Severance Period, the amount of the Supplemental Pension shall be appropriately discounted from the end of the Severance Period to reflect the earlier payment.

         (e) In addition, if Minnesota Mining and Manufacturing Company (“3M”) does not treat the Severance Period as a period of continued employment for purposes of determining your grandfathered benefits from your employment at 3M, then the Company shall pay you a single lump sum cash payment, as soon as reasonably practicable after the Date of Termination, equal to the actuarial present value of the additional grandfathered benefits to which you would have been entitled, had 3M treated the Severance Period as a period of continued employment for such purposes, grossed up by an additional cash payment to offset the personal income tax cost (if any) to you of having such payment made in an immediate lump sum by the Company rather than pursuant to the grandfathered benefits.

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         (f) Notwithstanding any other agreement in existence between the Company and you, if you are eligible for severance benefits under this Agreement, at the Date of Termination, (i) all shares of restricted stock owned or held by you or promised to you by the Company shall be immediately vested in you without further restriction and you shall be treated at that time as the unrestricted owner of such Company stock, subject to applicable constraints under federal and state securities laws, (ii) all stock options granted to you before the Effective Date that have not yet vested as of the Date of Termination shall vest in full and remain exercisable in accordance with their terms and the terms of the applicable plan, and (iii) all other stock options that you hold as of the Effective Date shall continue to vest and be exercisable during your Severance Period in accordance with their terms and the terms of the applicable plan, as if your employment had terminated on the last day of the Severance Period rather than on the actual Date of Termination.

         (ii) Time and Form of Cash Payments.

         (a) The cash payments provided for in Section 5(i)(b) above shall be paid at regular payroll intervals beginning forty-five (45) days after your Date of Termination (subject to the provisions of Section 4 of this Agreement relating to execution of a release in the form of Exhibit A) or, at the election of the Company, in a single lump sum payment thirty (30) days after the Date of Termination. If severance is paid at regular payroll periods, you shall receive the same amount of base salary each pay-day that you were receiving before termination, plus a pro-rata portion of the payment of two (2) times the Annual Bonus Amount, until the total amount of severance pay that is due under this agreement has been paid. All severance payments are subject to any required withholding.

         (iii) Effect of Reemployment. If you are re-employed by the Company after severance payments have been scheduled to be made but before the final severance payment is made, all remaining severance payments shall be suspended and shall automatically terminate as of the date of re-employment. If you have received severance payments in a single lump sum and are re-employed before the date the final severance payment would have been made if payments had been made at regular payroll intervals, you will be required to refund to the Company: (a) that portion of the lump sum payment representing severance payments you would have received after the date of re-employment minus (b) an amount equal to any taxes paid or payable on such portion of the lump sum payment.

         (iv) No Mitigation. You shall not be required to mitigate the amount of any payment provided for in this Section 5 by seeking other employment or otherwise, nor shall the amount of any payment provided for in this Section 5 be reduced by any compensation earned by you as the result of employment by another employer after the Date of Termination, or otherwise, except as set forth in Section 5(i)(b) and Section 5(iii) hereof.

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         (v) Disability Benefits. In the event your employment terminates as a result of your Disability, the Company shall ensure that from and after the end of the Severance Period, so long as you continue to suffer from Incapacity, your aggregate cash payments under the Company’s disability benefits plans, the Social Security disability insurance program and any supplemental payments by the Company under this Section 5(v) are, on an annualized basis, not less than 50% of your Annual Base Salary.

         6.     280G Provision.

         (i) In the event that any payment or benefit received or to be received by you (whether payable pursuant to the terms of this Agreement or otherwise (collectively, the “Total Payments”)) would be subject to the excise tax imposed by Section 4999 of the Code or any interest, penalties or additions to tax with respect to such excise tax (such excise tax, together with any such interest, penalties or additions to tax, are collectively referred to as the “Excise Tax”), then you shall be entitled to receive from the Company an additional cash payment (a “Gross-Up Payment”) within thirty business days of such determination in an amount such that after payment by you of all taxes (including such interest, penalties or additions to tax imposed with respect to such taxes), including any Excise Tax, imposed upon, the Gross-Up Payment, you retain an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Total Payments. Notwithstanding the foregoing provisions of this Section 6(a)(i), if it shall be determined that you are entitled to the Gross-Up Payment, but that the Parachute Value of all Payments do not exceed 110 % of the Safe Harbor Amount, then no Gross-Up Payment shall be made to you and the amounts payable under this Agreement shall be reduced so that the Parachute Value of all Payments, in the aggregate, equals the Safe Harbor Amount. The reduction of the amounts payable hereunder, if applicable, shall be made by first reducing the payments under Section 5(i)(b), unless you elect an alternative method of reduction, and in any event shall be made in such a manner as to maximize the Value of all Payments actually made to you. For purposes of reducing the Payments to the Safe Harbor Amount, only amounts payable under this Agreement (and no other Payments) shall be reduced. If the reduction of the amount payable under this Agreement would not result in a reduction of the Parachute Value of all Payments to the Safe Harbor Amount, no amounts payable under the Agreement shall be reduced pursuant to this Section 6(a). All determinations required to be made under this Section 6, including whether a Gross-Up Payment is required and the amount of such Gross-Up Payment, shall be made by an independent accounting firm retained by the Company (the “Accounting Firm” ), which shall provide detailed supporting calculations both to the Company and you within a reasonable period of time as requested by the Company. If the Accounting Firm determines that no Excise Tax is

45

payable by you, it shall furnish you with an opinion that you have substantial authority not to report any Excise Tax on your federal income tax return. For purposes of this Agreement, the following terms have the meanings set forth below:

         “Parachute Value” of a Payment shall mean the present value as of the date of the change of control for purposes of Section 280G of the Code of the portion of such Payment that constitutes a “parachute payment” under Section 280G(b)(2), as determined by the Accounting Firm for purposes of determining whether and to what extent the Excise Tax will apply to such Payment.

         “Payment” shall mean any payment or distribution in the nature of compensation (within the meaning of Section 280G(b)(2) of the Code) to or for your benefit, whether paid or payable pursuant to this Agreement or otherwise.

         “Safe Harbor Amount” means 2.99 times your “base amount,” within the meaning of Section 280G(b)(3) of the Code.

         “Value” of a Payment shall mean the economic present value of a Payment as of the date of the change of control for purposes of Section 280G of the Code, as determined by the Accounting Firm using the discount rate required by Section 280G(d)(4) of the Code.

         (ii) Any uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder shall be resolved in favor of you. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that at a later time there will be a determination that the Gross-Up Payments made by the Company were less than the Gross-Up Payments that should have been made by the Company (“Underpayment”), consistent with the calculations required to be made hereunder. In the event that you are required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment, if any, that has occurred and any such Underpayment shall be promptly paid by the Company to you or for your benefit. If, after you receive any Gross-Up Payment, you become entitled to receive any refund with respect to such claim, you shall promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto).

         (iii) Any determination by the Accounting Firm as to the amount of any Gross-Up Payment, including the amount of any Underpayment, shall be binding upon the Company and you.

         (iv) Notwithstanding any other provision of this Section 6, the Company may, in its sole discretion, withhold and pay over to the Internal Revenue Service or any other applicable taxing authority, for your benefit, all or any portion of any Gross-Up Payment, and you hereby consent to such withholding.

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         7.     Successors.

         (i) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns.

         (ii) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement, to your devisee, legatee or other designee or, if there is no such designee, to your estate or, if no estate, in accordance with applicable law.

         (iii) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company), by agreement in form and substance satisfactory to you (your acceptance of such agreement not to be unreasonably withheld), to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if you terminated your employment for Good Reason, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, “Company” shall mean the Company and any successor to its business and/or assets which executes and delivers the agreement provided for in this Section 7 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law.

         8.     Notice. All notices, requests, demands and all other communications required or permitted by either party to the other party by this Agreement (including, without limitation, any Notice of Termination) shall be in writing and shall be deemed to have been duly given when delivered personally or received by certified or registered mail, return receipt requested, postage prepaid, at the address of the other party as follows:

         If to the Company:

Imation Corp.
Attention: General Counsel
One Imation Place
Oakdale, Minnesota 55128

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         If to you:

William T. Monahan
11930 Isleton Avenue North
Stillwater, Minnesota 55082

Either party to this Agreement may change its address for purposes of this Section 8 by giving fifteen (15) days’ prior written notice to the other party hereto.

         9.     Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and the Company. The validity, interpretation, construction, and performance of this Agreement shall be governed by the laws of the State of Minnesota without regard to its conflicts of law principles.

         10.     Controversies. All controversies, claims or disputes arising out of or related to this Agreement shall be settled by arbitration, under the rules of the American Arbitration Association then in effect, in Saint Paul, Minnesota, as the sole and exclusive remedy of either party, and judgment upon such award rendered by such arbitration(s) may be entered in any court of competent jurisdiction. The Company shall reimburse the Executive for his reasonable attorney fees and other expenses incurred in connection with any such arbitration; provided, that the aggregate amount required to be reimbursed under this Section 10 shall in no event exceed $50,000.

         11.     Effect of Agreement; Entire Agreement. This agreement supersedes any and all other oral or written agreements or policies made relating to the subject matter hereof and constitutes the entire agreement of the parties relating to the subject matter hereof, including without limitation the Employment Agreement.

         12.     Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect.

         13.     Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument.

         14.     Employment. This Agreement does not constitute a contract of employment or impose on the Company any obligation to retain you as an employee, to continue your current employment status or to change any employment policies of the Company, including but not limited to the Company’s Employee Agreement.

48

         IN WITNESS WHEREOF, you have set your hand and, pursuant to the authorization from the Board, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written.

   IMATION CORP.:

   By:

   Its:

              William T. Monahan

49

EXHIBIT A

CONFIDENTIAL GENERAL RELEASE
OF ALL CLAIMS/COVENANT NOT TO SUE

         This Confidential General Release of All Claims/Covenant Not to Sue (“Agreement”) is made and entered into between _____________________ (“Employee”) and Imation Corp. (“Imation”). EMPLOYEE UNDERSTANDS THAT EMPLOYEE MAY CONSIDER THIS AGREEMENT FOR AT LEAST TWENTY-ONE (21) DAYS AFTER EMPLOYEE HAS RECEIVED THIS AGREEMENT, WHICH WAS ON ______________________ , UNLESS EMPLOYEE CHOOSES TO WAIVE THAT RIGHT BY EXECUTING THE AGREEMENT WITHIN THE TWENTY-ONE (21) DAY PERIOD.

1.      What Imation Agrees To Do

In return for this Agreement and for Employee’s termination from Imation as described herein and in full and final settlement, compromise, and release of all of Employee’s employment-related claims (as described in section 2 below), Imation agrees to pay Employee in accordance with the terms set forth in the Amended and Restated Severance Agreement.

2.      What Employee Agrees To Do

As a condition to receiving the payments and benefits set forth in Section 1, Employee agrees as follows:

A)	Employee must return all Imation property currently in Employee’s possession, including, but not limited to, all notes, memoranda, correspondence, files, notebooks, technical charts or diagrams, customer lists or information, sales and marketing information, computer recorded information, software, equipment, materials, keys and credit cards. Employee acknowledges that this obligation is continuing and agrees to promptly return to Imation any subsequently discovered property as described above.
B)	Employee also agrees to repay to Imation the amount of any permanent or temporary advances or other monies due and owing Imation, and to pay off the remaining balance on his/her corporate credit cards. If Employee fails to make such payments as of the date he/she signs this Agreement, Employee agrees that Imation may deduct any monies owed from the Agreement payments, if no other written arrangements are made for repayment by the date this Agreement is signed.
C)	Employee hereby irrevocably and unconditionally releases and forever discharges Imation from any and all federal, state or local charges, claims, controversies, causes of action, damages, costs, attorneys’ fees, or liabilities of any nature, both past and present, known and unknown, including but not limited to claims arising under federal, state, local, and common laws and under any regulations of any jurisdiction that in any way relate to employment and termination of employment existing at any time

50

up to and including the date of this Agreement, that Employee now may have or ever have had. This Agreement specifically includes, but is not limited to, ANY CLAIMS UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT of 1967, THE OLDER WORKERS BENEFIT PROTECTION ACT OF 1990, Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, any state or local human rights act, claims for wrongful termination, breach of contract, and tort claims (for example, defamation, emotional distress or any tort or negligence-based claim). Employee expressly acknowledges that this Agreement also is intended to include in its scope, without limitation, all claims that Employee does not know of or expect to exist in Employee’s favor at the time Employee signs this Agreement and that this Agreement contemplates the extinguishment of any such claim or claims except as expressly provided in this Section. THE EMPLOYEE IS NOT WAIVING ANY RIGHTS FOR EVENTS ARISING AFTER THE DATE OF THIS AGREEMENT.

D)

Employee agrees that, for a period of two years after termination of employment with Imation:

i.

Employee will inform any new employer, prior to accepting employment, of the existence of this provision of the Confidential General Release and provide such employer with a copy thereof.

ii.

Employee agrees not to directly or indirectly, render services to any Conflicting Organization in the United States or in any country in which Imation has a plant for manufacturing a product upon which Employee worked during employment by Imation, except that Employee may accept employment with a large Conflicting Organization whose business is diversified (and which has separate and distinct divisions), and which as to part of its business is not a Conflicting Organization, provided Imation, prior to Employee accepting such employment, shall receive separate written assurances satisfactory to Imation from such Conflicting Organization and from Employee that Employee will not render services directly or indirectly in connection with the development, manufacture, marketing, sale, merchandising, leasing, servicing or promotion of any Conflicting Product.

“Conflicting Product” means any product, process, system or service of any person or organization other than Imation, in existence or under development, which is the same as or similar to or competes with, or has a usage allied to, a product, process, system or service upon which Employee worked during the last three years of Employee’s employment by Imation or by 3M prior to Employee’s employment by Imation.

51

“Conflicting Organization” means any person or organization which is engaged in or about to become engaged in, research on or development, production, marketing, leasing, selling or services of a Conflicting Product.

E)	Employee also agrees that following Employee’s termination from Imation, Employee will not make disparaging remarks about Imation and will not interfere with Imation’s business relationships with its customers, vendors, or distributors.
F)	Employee further agrees that Employee will not solicit Imation employees, either on behalf of Employee or any third party, to resign from Imation to work for Employee or any third party.
G)	As further consideration for this Agreement, Employee agrees that if requested by Imation, Employee will make himself/herself available at reasonable times to assist and cooperate with Imation in the litigation of any lawsuits or claims, and agrees to be available to Imation to testify honestly with regard to such lawsuits or claims if Employee is determined by Imation to be a material witness. Similarly, Employee agrees that he/she will decline to voluntarily aid, assist, or cooperate with any parties who are involved in claims or lawsuits by or against Imation, or with their attorneys or agents; and will notify Imation when and if the Employee is contacted by other parties or their attorneys or agents involving claims or lawsuits by or against Imation. It is understood and intended that nothing in this paragraph shall prevent Employee from honestly testifying at a legal proceeding in response to a lawful and properly served subpoena in a proceeding involving Imation.
H)	Employee agrees that Imation shall be entitled to injunctive and other equitable relief to prevent a breach or threatened breach of the provisions of this Agreement, without the necessity of proving actual damages. Such injunctive relief shall be in addition to any other damages that may be available at law. Employee also acknowledges that if Imation is required to bring an action to enforce its rights under this Agreement, it shall be entitled to recover its attorney’s fees and costs associated with such an action, if Imation prevails.

3.      Other Understandings, Agreements, and Representations

A) Employee agrees that Employee’s Imation employment will terminate effective ____________________ and such termination will be deemed to be a termination. Employee further understands and agrees that Employee will not be eligible for and will not receive consideration, severance pay or benefits under any other group Income Assistance Pay Plan for which Employee might otherwise have been eligible.

52

B)	Employee understands that the term Imation, as used in this Agreement, includes: (1) its past, present, and future divisions, subsidiaries, affiliates successors and assigns, and their officers, directors, employees, agents, insurers and legal counsel; (2) any ERISA employee benefit plan sponsored by Imation, acting as plan administrator, fiduciary or party in interest with respect to such plan. Employee agrees that this Agreement binds Employee and also binds Employee’s heirs, executors, administrators, assigns, agents, partners and successors in interest.
C)	Employee agrees that this Agreement and the payment of money and benefits to Employee by Imation is not an admission by Imation of any violation of Employee’s rights or of any statutory or other legal obligation.
D)	Employee represents that no right, claim, or cause of action covered by this Agreement has been assigned or given to someone else.
E)	Employee represents that, except as provided in Section 5(iv) of the Amended and Restated Severance Agreement, Employee will not apply for or accept employment with Imation in any capacity
F)	Except as set forth in Section 2.D.i Employee represents that Employee will keep the terms of this Agreement strictly confidential, except that Employee may tell Employee’s spouse, legal counsel and tax advisor. In the event Employee chooses to communicate any information about the existence of the Agreement or any of its terms to Employee’s spouse, legal counsel and/or accountant or investment advisor, Employee shall instruct such persons that information about the existence of the Agreement and its terms are confidential and that the spouse, legal counsel or accountant is not to disclose, disseminate or publicize, or cause or permit to be disclosed, disseminated or publicized, the information to any other party, entity, person (including any current or former employee of Imation), company, government agency, publication judicial authority. Employee may also disclose information regarding the Agreement (1) to the extent necessary to report the sum awarded to appropriate taxing authorities or (2) in response to any subpoena issued by a state or federal governmental agency or court of competent jurisdiction; provided, however, that notice of receipt of such order or subpoena shall be promptly communicated to Imation by telephone and in writing David M. Wilk, Imation Legal Affairs, 1 Imation Place, Oakdale, Minnesota 55128, telephone (651) 704-4489 so that Imation shall have an opportunity to intervene and assert what rights it has to nondisclosure prior to any response to such order or subpoena. Any court reviewing a subpoena should be aware that part of the consideration for the Agreement is the agreement of Employee not to testify regarding the existence of the Agreement or any of its terms.

53

G)	This Agreement contains the entire understanding between Employee and Imation and supersedes all prior agreements and understandings relating to the subject matter of this Agreement. This Agreement shall not be modified, amended, or terminated except as provided in section 3.J. unless such modification, amendment, or termination is executed in writing by Employee and Imation.
H)	Employee agrees that Imation may use this Agreement to secure withdrawal of any federal, state, or local charge Employee might have filed or will file, that Employee will sign any document necessary to obtain the withdrawal of any such charge, and that Employee waives the right to receive monetary damages or other legal or equitable relief awarded by any governmental agency related to any such charge.
I)	Employee represents and certifies that Employee has twenty-one (21) days to consider whether to accept this Agreement and enter into this Release; review it before being asked to sign it; has read this Agreement carefully; has been given a fair opportunity to discuss and negotiate the terms of this Agreement; understands its provisions; has been advised to consult an attorney; has determined that it is in Employee’s best interest to enter into this Agreement; has not been influenced to sign this Agreement by any statement or representation by Imation not contained in this Agreement; and enters into this Agreement knowingly and voluntarily. If Employee chooses to sign this Agreement before twenty-one (21) days have passed, Employee understands that it is their decision to execute the Agreement early and that Imation has made the full twenty-one (21) day period available for Employee to consider the Agreement.
J)	Employee understands that pursuant to the provisions of Minnesota Statutes ‘ 363.031, subd. 2, Employee may rescind this Agreement by notifying Imation of Employee’s desire to do so in a writing delivered to Imation personally or by certified mail, return receipt requested, within fifteen (15) calendar days of Employee’s execution of this Agreement. To be effective, such notice of rescission, if mailed, must be postmarked within the fifteen (15) day period and addressed as follows:

Patty Meagher
Imation Corp.
Legal Affairs
1 Imation Place
Pioneer Building 1S-14
Oakdale, MN 55128

54

K)	In case any part of this Agreement is held invalid, illegal or otherwise unenforceable, the validity, legality and enforceability of the remaining provisions will not be affected in any way, it being intended that the provisions of this Agreement are severable, EXCEPT THAT, if paragraph 2 of this Agreement is held invalid, illegal, or unenforceable, this Agreement is voidable, and, if Employee seeks to void this Agreement, Employee understands and agrees that Employee will repay the total amount of consideration paid to Employee under this Agreement.
L)	Any dispute arising between Employee and Imation under this Agreement will be submitted to final and binding arbitration in accordance with the rules of the American Arbitration Association before an arbitrator mutually selected by the parties. In the event that the parties cannot agree on an arbitrator, the parties agree to submit the dispute before an arbitrator selected by the Chief Judge of Ramsey County Court. The Arbitration shall be conducted in St. Paul, Minnesota and shall be final and binding on both parties. The expenses of the neutral arbitrator(s) and any court reporter shall be equally divided between Employee and Imation.
M)	The agreement will be governed by and construed and interpreted according to the laws of the State of Minnesota.

ACCEPTED AND AGREED:	IMATION CORP.
By	By
Date:	Date:

55

WAIVER OF
CONSIDERATION PERIOD

I understand that under the law I have 21 days to consider the Confidential General Release of All Claims/Covenant Not to Sue. I knowingly and voluntarily waive this consideration period. The 15 day rescission period to revoke the acceptance of the Confidential General Release of All Claims/Covenant Not to Sue remains in effect.

Print Name

Signature

Date

56 EX-15.1 4 c72827exv15w1.htm EX-15.1 AWARENESS LETTER

Exhibit 15.1

(PricewaterhouseCoopers LLP Letterhead)
(Minneapolis, MN)

November 12, 2002

Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Commissioners:

We are aware that our report dated October 22, 2002 on our reviews of the interim consolidated financial statements of Imation Corp. (the Company) for the three and nine months ended September 30, 2002 and 2001, and included in the Company’s Form 10-Q for the quarter ended September 30, 2002, is incorporated by reference in the Company’s Registration Statements on Form S-8 (Registration Nos. 333-15273, 333-15275, 333-15277, 333-35591, 333-38196, and 333-66030).

Yours very truly,

/s/PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

57 EX-99.1 5 c72827exv99w1.htm EX-99.1 CERTIFICATION PURSUANT TO 18 USC SEC. 1350

Exhibit 99.1

Certification Pursuant To
18 U.S.C. Section 1350,
As Adopted Pursuant To
Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Imation Corp. (the “Company”) on Form 10-Q for the period ending September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, William T. Monahan, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ William T. Monahan

William T. Monahan
Chairman and
Chief Executive Officer

November 12, 2002

58 EX-99.2 6 c72827exv99w2.htm EX-99.2 CERTIFICATION PURSUANT TO 18 USC SEC. 1350

Exhibit 99.2

Certification Pursuant To
18 U.S.C. Section 1350,
As Adopted Pursuant To
Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Imation Corp. (the “Company”) on Form 10-Q for the period ending September 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Robert L. Edwards, Imation Senior Vice President, Chief Financial Officer, and Chief Administrative Officer, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)  The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Robert L. Edwards

Robert L. Edwards
Senior Vice President,
Chief Financial Officer and
Chief Administrative Officer

November 12, 2002

59 -----END PRIVACY-ENHANCED MESSAGE-----

EX-10.1

IMATION CORP.

EX-15.1

IMATION CORP.

EX-99.1

IMATION CORP.

EX-99.2

IMATION CORP.