e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
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For fiscal year ended
December 31, 2005 |
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
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For the transition period
from to |
Commission file number: 1-14310
IMATION CORP.
(Exact name of registrant as specified in its charter)
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Delaware |
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41-1838504 |
(State or other jurisdiction
of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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1 Imation Place
Oakdale, Minnesota |
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55128 |
(Address of principal executive
offices) |
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(Zip Code) |
(651) 704-4000
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class |
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Name of each exchange on which registered |
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Common Stock, $.01 per share
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New York Stock Exchange, Inc.;
Chicago Stock Exchange, Incorporated
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Preferred Stock Purchase Rights
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New York Stock Exchange, Inc.;
Chicago Stock Exchange, Incorporated
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Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act.
Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act.
Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past 90 days.
Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K is
not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any
amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2 of the
Exchange Act. Large accelerated filer
þ Accelerated filer
o Non accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2 of the
Act).
Yes o No þ
Aggregate market value of voting and non-voting stock of the
registrant held by non-affiliates of the registrant, based on
the closing price of $38.79 as reported on the New York Stock
Exchange on June 30, 2005 was $1,312.3 million.
The number of shares outstanding of the registrants common
stock on February 24, 2006 was 34,908,224.
DOCUMENTS INCORPORATED BY REFERENCE
Selected portions of registrants Proxy Statement for
registrants 2006 Annual Meeting are incorporated by
reference into Part III.
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This document (excluding exhibits)
contains 68 pages
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The table of contents is set forth
on page 1
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The exhibit index begins on
page 64
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IMATION CORP.
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
TABLE OF CONTENTS
1
PART I
General
Imation Corp. (Imation, the Company, we, us, or our) is a
Delaware corporation whose primary business is the development,
manufacture, sourcing, marketing, and distribution of removable
data storage media products for users of a broad array of
digital information technologies in approximately 100 countries
around the world. Recordable and rewritable magnetic and optical
media, which currently constitute the overwhelming majority of
our revenue, are 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. In
addition, we source, market, and distribute USB (Universal
Serial Bus) enabled solid state flash memory media and hard disk
drives in removable form factors for certain applications. All
of our storage media products are used in conjunction with
hardware devices, including tape libraries, disc drives, certain
consumer electronic devices, and desktop and laptop computers
developed and sold by other companies. In addition, we source,
market, and distribute select hardware and accessories for data
storage media.
Imation was created in July 1996 as a spin-off of the businesses
which comprised substantially all of the data storage and
imaging systems groups of 3M Company. Since the spin-off, we
divested all of the non-data storage businesses and structured
the Company, in terms of size, overhead cost structure, and
global organization, to be more suited to our industry. We
engaged in several divestitures within the last five years. The
Color Proofing and Color Software business that comprised most
of our Color Technologies segment was sold on December 31,
2001 to Kodak Polychrome Graphics LLC and Kodak Polychrome
Graphics Company LTD. The North America Digital Solutions and
Services (DSS) business that provided field service on the
hardware devices, manufactured microfilm aperture cards, and
document imaging consumables and hardware systems for Imation
and other Original Equipment Manufacturers (OEMs) was sold on
August 30, 2002 to DecisionOne Corporation and the
remaining DSS businesses outside North America were closed or
sold by September 30, 2002. The Specialty Papers business,
which manufactured and sold a wide variety of carbonless paper
products, was sold to Nekoosa Coated Products LLC on
June 30, 2005. See Note 3 to the Consolidated
Financial Statements.
Following these divestitures, we are now focused on the data
storage industry. We have a long history in this industry dating
from 1947, when this business was started by 3M Company,
resulting in the first commercialized data storage tape
introduced in 1952. Key elements of our strategy are as follows:
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Offer a Broad Portfolio of Data Storage Products: We seek
to provide a broad and comprehensive portfolio of data storage
recordable media products across different customer applications
and selectively expand into business areas closely adjacent to
removable media such as accessories, services, and hardware
products. |
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Transform into a Lean Enterprise: We have launched a
multi-year effort to implement Lean Enterprise principles
across manufacturing and key business processes. These
principles, derived from Toyota manufacturing systems, focus on
implementing operations characterized by speed, quality, and
competitive costs. As part of that operating philosophy, we also
seek to leverage our existing infrastructure to support growth
initiatives. |
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Leverage and Broaden Existing Market Presence: We seek to
build on our historically successful relationships with leading
OEMs, data center customers, and commercial distribution
channels, and we seek to increase market penetration in retail
channels globally and in U.S. government sales. In
addition, with well over half our revenue coming from outside
the U.S., we seek to leverage our global marketing and
distribution capability in bringing products to market across
multiple geographies. |
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Leverage Existing Technology and Deepen Key Technology
Capabilities: We seek to maintain and extend technology
capabilities in key areas, including precision thin film tape
coating, cartridge design and manufacturing, servo-writing,
chemistry and material science related to optical and magnetic
media coatings, and advanced optical storage technologies. |
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Expand and Grow: Building off what we believe are solid
business and financial platforms, we also seek to expand into
adjacent areas through continued new product development and
commercialization, strategic alliances and acquisitions,
development and introduction of offerings in markets adjacent to
our current core removable media markets, and development of
offerings in selected markets or regions, leveraging our core
technology competencies, brand recognition, distribution reach,
and product portfolio strengths. For example, we announced in
January 2006 that we are acquiring Memorex International Inc.
(Memorex) for $330.0 million plus earn-out consideration of
up to an aggregate of $45.0 million. |
We compete within the global information technology industry.
Specifically, Imation develops, manufactures, sources, markets,
and distributes removable data storage media products for
organizations and individuals that must store, retain and
protect vital digital information. Our primary products include
magnetic tape cartridges, recordable and rewritable optical
discs, USB-enabled removable flash drives, removable hard
drives, and floppy diskettes. According to various industry
analysts and our estimates, the total global data storage
market, including hardware and services, is estimated to be in
excess of $70 billion. Removable media provide certain
advantages due to their portability, low overall cost of
ownership, and scalability, which make the removable media
market an attractive market. In 2005, various industry sources
estimated the removable storage media market to be approximately
$8 billion.
The demand for data storage capacity is driven by several
factors. The rapid growth of information in digital form is a
trend that has accelerated as an increasing quantity and
diversity of information is created and managed digitally. As
data storage hardware, software, and transmission networks
continue to deliver improved cost/performance, new and expanded
applications have emerged that depend on larger, more complex
sets of data and larger databases to more efficiently support
critical business processes. Critical business data is created
and accessed across multiple locations, creating a need for
back-up and archiving.
Well-publicized catastrophic data losses due to natural
disasters and terrorist attacks have heightened the awareness of
data retention in business continuity planning. Increased
regulatory requirements for record retention have made data
security, archiving, and reliable
back-up critical
business processes. As pervasive use of the Internet becomes the
norm for both business and individuals, information important to
users is created and stored in digital formats with greater
frequency and in ever-larger amounts. As the size and price of
consumer electronics devices continue to shrink, the need to
store music, video, and photography on a variety of digital
media continues to grow rapidly.
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Application Areas and Products |
We develop, manufacture, source, market, and distribute
removable data storage media products in nearly every capacity
range a user may require from 1.44 megabytes
(MB) to hundreds of gigabytes (GB) per piece of media.
Our data storage media products are used across all major
application areas, including enterprise data centers, the
network server environment at both the mid-range and
entry-level, and personal storage applications for both consumer
electronics devices and desktop or laptop computers.
There are many diverse ways to store digital information,
depending on the application and the amount of information to be
retained. The removable data storage media products that we
offer allow the customer to easily expand capacity and provide
data transportability, data management, and data security at a
significantly lower relative cost than fixed disk storage. Fixed
disk storage generally provides faster transfer rates and
immediate access to data, which are advantages in some
applications. As a result, typical commercial installations
include a mixture of removable and fixed storage in
complementary configurations. Decisions about the kind of data
storage platforms to use depend on a multitude of considerations
including total storage capacity needs, data transfer rates
required, reliability, scalability, portability, permanency,
physical media size, compatibility with other components and
systems, and total cost of ownership. For example,
live data that is directly accessed and manipulated
typically will be treated differently than data that is copied
for back-up or
archiving.
In addition to organization-wide or department-level storage
solutions, there are many removable storage formats that meet
the diverse individual personal storage needs for both consumer
and business applications. Personal storage solutions generally
encompass CDs, DVDs, USB-enabled flash drives, hard drives, and
floppy diskettes. Criteria for personal storage applications
include many of the factors cited for commercial applications.
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Market researchers have generally estimated the installed base
of tape drives to range between 16 million and
25 million units globally. This substantial installed base
of tape drives presents a recurring revenue opportunity for many
of our tape products.
The application areas described below are overlapping with no
definitive boundaries. Our products are frequently used in more
than one environment, depending on the specific customer need
for functionality or capacity. In addition, the way these
application areas are defined frequently changes as storage
capacities and functionality needs increase.
Enterprise Our products are used in both
mainframe and open systems environments for back-up, business
and operational continuity planning, disaster recovery,
near-line data storage and retrieval, cost-effective mass
storage, and archival storage. We are a leading manufacturer of
tape cartridges that are predominantly used in high-end data
center-class applications characterized by the highest levels of
automation, the largest data capacity requirements and the most
demanding levels of data integrity in a wide variety of
industries, including financial services, geophysical
exploration, transportation, government, and telecommunications
around the world. Enterprise level tape cartridge storage
capacities range from a few GB up to 500 GB of data per
cartridge and are deployed in automated tape libraries ranging
from a few dozen to thousands of cartridges per library.
These products include
BlackWatchtm
9840 and 9940 cartridges, used with Sun Microsystems/ Storage
Tek (Sun/ STK) drives (Storage Tek was purchased by Sun
Microsystems in 2005) and BlackWatch 3590 and 3590E cartridges,
used with IBM Corp. (IBM) drives. In addition, we
manufacture and distribute data tape cartridges, which are sold
by several other manufacturers, for tape libraries in network
server, open systems environments. These products include our
BlackWatch
Ultriumtm
cartridges used in Linear Tape Open (LTO) libraries, a
format developed by IBM, Certance LLC (formerly Seagate and
subsequently purchased by Quantum Corp.) and Hewlett-Packard
Company (HP). BlackWatch DLTtape IV and BlackWatch Super
DLTtape cartridges, a format developed by Quantum Corp., are
used in Digital Linear Tape (DLT) and Super Digital Linear
Tape (SDLT) libraries. We have entered into a joint
development agreement with Sun/ STK for their next generation of
automated tape drives, the Sun/ STK
T10000tm
tape drive, expected to ship in 2006. In 2005, we introduced the
Ulyssestm
technology, which is a removable hard disk in a tape cartridge.
Ulysses is currently being evaluated by several OEMs for
inclusion in their tape libraries.
Small-Medium Business We manufacture, source
and distribute data tape cartridges for small to mid-sized
businesses. Our cartridges work with tape drive systems that
support the major operating environments including Unix, Linux,
and Microsoft
Windows®
NT. Our cartridges for this market include
Travantm
tape cartridges for use with Certance Travan drives and SLR tape
cartridges for use with drives sold by Tandberg Data ASA. We are
also the exclusive worldwide distributor of VXA and Mammoth tape
cartridges for use with Exabyte Corp. (Exabyte) tape drives.
Personal Storage Individual storage needs,
whether for business or consumer applications, are addressed by
our broad range of products providing storage capacities ranging
from 1.44MB diskettes to 650MB CD-R (recordable) and CD-RW
(rewritable) optical disks to 9.4GB DVD optical disks to
4GB USB-enabled flash and micro hard drives.
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As described above, our products are used by business customers
and by individual consumers. No one customer constituted
10 percent or more of our revenue in 2005, 2004, or 2003.
We work with OEMs that develop or market tape drives for
differing customer applications. Significant OEMs include Sun/
STK, IBM, HP, and Dell Inc. As described above, we are the sole
source of supply for certain tape cartridges for use with Sun/
STK and IBM drives used in the high-end data center. The
development of future formats with key OEMs, such as Sun/ STK
and IBM, is critical to our future success and the loss of such
a relationship could have a material adverse effect on our
business.
The global markets for our products are intensely competitive
and subject to frequent new product introductions, product
performance improvements, rapid technological change, a variety
of distribution channels, relatively large and aggressive
marketing efforts, and aggressive pricing practices, which
result in ongoing and variable price erosion. Competition is
based on a multitude of factors, including brand strength, cost,
breadth of product line, capacity, access speed and performance,
durability, reliability, distribution capability, geographic
availability, scalability, and compatibility.
Our primary competitors in the removable data storage market
include Fuji Photo Film Co., Ltd., Hitachi Maxell, Ltd.,
Verbatim Corporation, TDK Corp., and Sony Corp. In addition, we
have various agreements with several of these and other
companies such that it is possible to be, at various times, a
competitor of, supplier to, or customer of those companies.
While these companies compete in the removable media market,
they do not generally report financial results for these
businesses on a stand-alone basis. Therefore, it is difficult
for us to estimate our relative market share. However, we use a
variety of industry sources to estimate market size and share
and we estimate that in 2003, the latest period for which data
is available, we held between 15 and 18 percent of the
total market share in sectors in which we compete.
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Joint Ventures, Alliances, and Acquisitions |
We have engaged in a variety of transactions from time to time
with other companies, including acquisitions, licensing,
distribution, joint venture, and joint development agreements in
order to expand our presence in various market sectors. Some of
the transactions since the beginning of 2003 include the
following:
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We entered into an agreement in January 2006 to purchase Memorex
for $330.0 million, plus contingent payments up to
$45.0 million, based on financial performance of the
purchased business. The acquisition is expected to close during
the second quarter of 2006 (see Note 19 to the Consolidated
Financial Statements). |
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We entered into a joint development agreement with Sun/ STK in
January 2006 to develop and manufacture enterprise-class tape
storage media to support Sun/ STKs next generation tape
drives. |
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We entered into a series of agreements in 2003 with Moser Baer
India Ltd. (MBI) that established MBI as a significant,
non-exclusive source for our optical media products and created
a joint venture marketing company, Global Data Media (GDM), for
optical media products. We hold a 51 percent interest in
GDM and MBI holds a 49 percent interest. As the controlling
shareholder, we consolidate the results of the joint venture in
our financial statements (see Consolidation in
Note 2 to the Consolidated Financial Statements). |
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We entered into a distribution agreement with Exabyte in 2003
that establishes us as the exclusive worldwide distributor of
Exabyte brand media products. |
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We entered into an agreement in 2003 with IBM to manage and
deliver after-market data storage media distribution services
for IBM worldwide that establishes us as a key distributor of
IBM brand media products, providing sales, marketing,
distribution, and management services. |
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We acquired certain assets and intellectual property in 2003
relating to half-inch legacy tape products, such as 3480, 3490,
and 9490E tape cartridges, from EMTEC Magnetics GmbH, an
insolvent German-based manufacturing subsidiary of EMTEC
International Holding GmbH. |
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Marketing and Distribution |
Our data storage products are sold through a combination of
distributors and value-added resellers, OEMs, and retailers.
Worldwide, approximately 58 percent of our 2005 revenue
came from distributors, 23 percent came from OEMs and
19 percent came from the retail channel. We maintain a
sales force of approximately 225 representatives to service this
distribution network around the world.
Approximately 64 percent of our 2005 revenue came from
sales outside the United States, primarily through subsidiaries,
sales offices, distributors, and relationships with OEMs
throughout Europe, Asia, Latin America, and Canada. The storage
industry is at a different level of development and penetration
in different geographies. As a result, growth rates will
typically vary in different application areas and product
categories in different parts of the world.
We manufacture data storage products at our facilities located
in the U.S. at plants in Camarillo, California; Wahpeton,
North Dakota; and Weatherford, Oklahoma. All of these
manufacturing facilities are certified to ISO 9001:2000 quality
standards. We manufacture most of the components for our
magnetic data storage products, including magnetic tape and
plastic components, but source some material from outside
suppliers. We invested approximately $55 million in capital
to design and build a new facility, with
state-of-the-art tape
coating capability, at our Weatherford, Oklahoma plant. The new
coating facility began operation in the second half of 2004 and
is now fully operational. In the second quarter of 2004, we
announced our intention to shut down our Tucson, Arizona
manufacturing facility (see Note 6 to the Consolidated
Financial Statements) and completed that closure by the end of
2005. While we manufacture most of our own magnetic tape
products, we do not manufacture the vast majority of optical, or
any removable hard disk or solid state flash media products,
which are currently sourced from manufacturers outside the
United States.
The manufacture of high quality magnetic tape media requires
exacting manufacturing process steps with precise physical,
electrical, and chemical tolerances as well as significant
technical expertise in several areas including coating process,
servo-writing, media and component design, fine particle
dispersion, plastic injection molding, automated high
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volume assembly, and magnetic and optical physical and material
science. To manufacture magnetic tape media, a thin plastic film
material is coated precisely and uniformly with a magnetic
dispersion solution. To meet the market requirements for future
advanced tape media products with higher data transfer rates,
greater data density, and faster tape speeds, we must be capable
of coating thinner substrates with smaller particle sizes and
increasing uniformity, surface smoothness, and bit and track
density.
Servo-writing technology in linear tape and tape drives provides
precise positioning of read/write heads to achieve higher data
densities on tape and is a critical technology to achieve
increased storage capacities. Tape handling through the
cartridge is an increasingly critical element of system
robustness for the cartridge and the drive as tape transport
speeds in the drives increase and the distance between the
read/write head and the tape media decreases. Cartridge design
and manufacturing includes the manufacture and assembly of
plastic moldings and components, metal part stamping, and
modeling of the tape path and tape handling through the
cartridge. We believe our intellectual property assets
concerning servo-writing and cartridge design and manufacturing
capabilities are competitive strengths for us.
We rely upon the availability of experienced and skilled
personnel and invest in both research and development and
capital equipment in order to successfully develop, manufacture,
and source magnetic and optical media that meet market
requirements. We employ certain critical process technology,
intellectual property, and technical know-how in the manufacture
of our magnetic data storage media and invest to maintain
research and development facilities and pilot manufacturing
lines for potential future products in both magnetic and optical
media. We believe that the significant technical expertise and
industry experience within our manufacturing and engineering
organization and our application of key proprietary design and
manufacturing technologies provide us with a competitive
capability necessary to keep pace with industry requirements.
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Raw Materials and Other Purchased Products |
The principal raw materials we use for the manufacture of data
storage products include plastic resins, polyester films,
magnetic pigments, specialty chemicals, and solvents. We make
significant purchases of these and other materials and
components used in the manufacturing operations from domestic
and foreign sources. There are two sources of supply for the
base film and two for the metal particulate (MP) pigments
on which the industry relies. If supply were disrupted for any
of these key materials, our business and the business of our
competitors could be negatively impacted. We also rely on
certain partners as sole suppliers for components and raw
materials used in our manufacturing processes. The loss of these
certain suppliers could have a material adverse impact on the
business.
Except as noted above, we are not overly dependent on any single
supplier of raw materials. We also make significant purchases of
other finished and semi-finished products, including optical
media and certain finished tape and tape cartridges, primarily
from Asian suppliers. As noted above, during 2003, we entered
into a non-exclusive sourcing agreement with MBI for certain
optical products.
Research and Development
New product development is critical to our future success. We
maintain advanced research facilities and invest substantial
resources in developing new products, improving existing
products and researching potential new technologies for data
storage media. Our research and development expenses were
$51.3 million, $56.5 million, and $56.4 million
for 2005, 2004 and 2003, respectively, ranging between four and
five percent of revenue. The decrease in spending from 2004 to
2005 was due to more focused research and development programs
and the effects of restructuring actions taken at the end of
2004. Most of our research and development spending was focused
on the following areas: magnetic tape cartridges, optical discs,
flash storage, such as USB-enabled flash drives, and products
containing hard disk drives. Magnetic tape cartridge research
and development spending included development of high density MP
tape cartridges such as the LTO Ultrium and the Sun/ STK T10000
tape cartridges. These advanced formats are expected to deliver
increased storage capacity per cartridge by using more advanced
MP pigments with smaller particle size, by coating thinner
layers on thinner substrates and by handling advanced tape
characteristics within both manufacturing processes and in tape
cartridges.
During 2005, optical disc R&D spending was focused on
differentiated products and future disc formats. The
differentiated products included our
ForceFieldtm
scratch-resistant optical discs and
AquaGuardtmprintable
optical discs. Future disc formats included the next-generation
of optical storage media, Recordable Blu-ray and HD DVD discs.
Flash
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storage research and development spending was conducted in the
area of flash memory cards, as we designed several new USB flash
drives. We also developed two new products that incorporate hard
disc drives: (1) the portable Imation Micro Hard Disc
Drive, which incorporates the worlds smallest hard disc
drive (0.085) in a unique padlock-shaped housing, and
(2) the
Ulyssestmstorage
system, which incorporates hard disc drives into tape
cartridge-shaped housings that can be handled by existing tape
library automation. We are also engaged in certain programs both
on our own and in collaboration with other organizations that
are more research-focused in nature and do not yet have a
specific products or product sets in the market.
Our competitive capabilities are dependent upon development and
protection of intellectual property. Our proprietary rights are
protected through a combination of patents, copyrights,
trademarks, and trade secrets. Over the last several years, we
have had a focused effort to increase our patent portfolio,
creation of invention records and filing of patent applications.
During 2005, we were awarded 45 U.S. patents and at the end
of the year held over 350 patents in the United States relating
to our data storage business, including approximately 115
related to cartridge components, 100 related to optical, 60
related to magnetic tape coating and manufacturing, and 80
related to drive systems. We believe that no single patent is
material to our overall business. The chart below summarizes our
patent activity for the past five years:
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International Operations
Our products are sold in approximately 100 countries outside the
United States, primarily through subsidiaries, sales offices,
distributors, and relationships with OEMs in more than 60
countries. Approximately 64 percent of our total 2005
revenue comes from outside the United States. We do not
manufacture outside the United States. Note 12 to the
Consolidated Financial Statements shows financial information by
geographic region. The chart below breaks out our 2005 revenue
by area:
As discussed under Risk Factors in Item 1A of
this Form 10-K,
our international operations are subject to various risks and
uncertainties that are not present in our domestic operations.
Employees
As of December 31, 2005, we employed approximately 2,100
people worldwide.
Environmental Matters
Our operations are subject to a wide range of federal, state,
and local environmental protection laws. We have minor remedial
activities underway at one of our facilities. Environmental
remediation costs are accrued when a probable liability has been
determined and the amount of such liability has been reasonably
estimated. These accruals are reviewed periodically as
remediation and investigatory activities proceed and are
adjusted accordingly. Compliance with environmental regulations
has not had a material adverse effect on our financial results.
As of December 31, 2005, we had environmental related
accruals totaling approximately $0.6 million. We believe
that our accruals are adequate, though there can be no assurance
that the amount of expenses relating to remedial actions and
compliance with applicable environmental laws will not exceed
the amounts reflected in our accruals.
Executive Officers of the Registrant
Information regarding our executive officers as
February 28, 2006 is set forth below.
Bruce A. Henderson, age 56, is Chairman and
Chief Executive Officer of Imation and is currently a director
and chair of the Audit Committee of Universal Electronics, Inc.,
a publicly held company. Prior to joining Imation in May 2004,
he was Chief Executive Officer of Edgecombe Holdings, LLC, a
private investment company based in Richmond, VA, from November
2001 to May 2004. He is the former Chief Executive Officer of
Invensys Control Systems, a $3.5 billion operating unit of
London-based Invensys plc and a leader in home and commercial
automation. He also served as Chief Executive Officer of
Invensys Software Systems, a $2 billion provider of
mission-critical software for
e-enterprise and
industrial-control applications.
Bradley D. Allen, age 55, is Vice President,
Corporate Communications, and Investor Relations. He has led our
investor relations function since spin-off. From October 1994 to
May 1996, he held the senior investor relations position
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at Cray Research, which was acquired by Silicon Graphics in
1996. Prior to Cray Research, he headed the investor relations
function at Digital Equipment Corporation.
Jacqueline A. Chase, age 52, is Vice
President, Human Resources, a position she has held since
October 1998. Prior to assuming her current responsibilities,
she was Director of Human Resources. She has been with Imation
since spin-off. From 1991 to 1996, she held the position of
Senior Counsel in 3M Companys legal department. Prior to
joining 3M, she was an associate attorney at the law firm of
Oppenheimer, Wolff, and Donnelly.
Frank P. Russomanno, age 58, is Executive
Vice President and Chief Operating Officer, a position he has
held since November 2003. He has been with Imation since
spin-off. Prior to assuming his current responsibilities, he had
various leadership positions with Imation, including President
of Data Storage and Information Management, and General Manager
of Advanced Imaging Technologies. Prior to joining Imation, he
held multiple sales and marketing positions with 3M Company,
including European Business Director.
John L. Sullivan, age 51, is Senior Vice
President, General Counsel, and Corporate Secretary. He joined
Imation in August 1998 from Silicon Graphics, where he most
recently was Vice President-General Counsel. Prior to joining
Silicon Graphics, he held several positions with Cray Research
from 1989 to 1997, including the positions of General Counsel
and Corporate Secretary from 1995 to 1997. Cray Research became
part of Silicon Graphics in 1996.
Paul R. Zeller, age 45, is Vice President and
Chief Financial Officer, a position he has held since August
2004. He has been with Imation since spin-off and held the
position of Corporate Controller from May 1998 until taking his
current position. Prior to joining Imation, he held several
accounting management positions with 3M Company.
Peter A. Koehn, age 45, is Vice President and
Corporate Controller. He joined Imation in 2000 as Division
Controller for Data Storage and Information Management and was
named Corporate Controller in 2004 and Vice President in 2005.
Availability of SEC Reports
Our website address is www.imation.com. We make available free
of charge on or through our website, our Annual Reports on
Form 10-K,
Quarterly Reports on
Form 10-Q, Current
Reports on
Form 8-K and
amendments to these reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended (the Exchange Act) as soon as reasonably
practicable after we electronically file such material with or
furnish it to the SEC. Materials posted on our website are not
incorporated by reference into this Annual Report on
Form 10-K.
Our business faces many risks. Any of the risks discussed below,
or elsewhere in this
Form 10-K or our
other SEC filings, could have a material impact on our business,
financial condition or results of operations. Additional risks
and uncertainties not presently known to us or that we currently
believe to be immaterial may also impair our business operation.
Because of the rapid technology changes in our industry,
we may not be able to compete if we cannot quickly develop
differentiating and innovative products. We operate in a
highly competitive environment against competitors who are both
larger and smaller than we are in terms of resources and market
share. Our industry is generally characterized by rapid
technological change, frequent new product introductions, a
variety of distribution channels, relatively large and
aggressive marketing efforts, and aggressive pricing practices,
which result in ongoing and variable price erosion.
In these highly competitive markets, our success will depend to
a significant extent on our ability to continue to develop and
introduce differentiated and innovative products and services
cost effectively and on a timely basis. The success of our
offerings is dependent on several factors including our
differentiation from competitive offerings, timing of new
product introductions, effectiveness of marketing programs, and
maintaining low manufacturing and supply chain costs. No
assurance can be given with regard to our ability to take these
steps, the actions of competitors, some of which will have
greater resources than we do, or the pace of technological
changes.
Since price competition is a common factor in the data
storage removable media markets, we risk reducing profitability
if we cannot reduce costs in line with price declines.
We expect price pressures across our portfolio
10
of products, but it cannot be easily predicted since it can vary
in intensity by specific product and region and can fluctuate
from quarter to quarter. Our financial results in any quarter
can be impacted by the intensity of price pressure on a specific
product set, the size of the market in which intensified pricing
occurs, and the amount of impacted revenue relative to our
overall revenue mix. We cannot provide assurance that we will be
able to implement any cost reduction strategies in manufacturing
or sourcing or that they will be successful.
If we cannot obtain finished products or raw materials at
competitive prices, we may not be able to maintain expected
levels of profitability. We make significant purchases
of finished products, raw materials, and energy from many
domestic and foreign sources. No assurances can be given that
acceptable pricing levels will continue in the future. For
certain of our products, we must source and deliver finished
goods at competitive prices. In addition, some critical raw
materials have a limited number of suppliers.
If we cannot successfully integrate Memorex into our
company in a timely manner, it may negatively impact our
expected results for 2006. In January 2006, we entered
into a definitive agreement to acquire Memorex. No assurance can
be given that we will close this transaction. In addition, we
expect to incur some restructuring charges as we integrate the
two companies. The integration of any acquisition involves
numerous risks, including, among others, difficulties in
assimilating operations and products, diversion of
managements attention from other business concerns,
potential loss of our key employees or key employees of Memorex,
potential exposure to unknown liabilities and possible loss of
our significant customers or customers of Memorex.
We must make strategic decisions from time to time as to
the technologies in which we invest and if we choose the wrong
technology, our financial results could be adversely
impacted. Our operating results are dependent upon our
ability to successfully develop, manufacture, and market
innovative new products and services. New technological
innovations may require a substantial investment before any
assurance is available as to their commercial viability.
We may be dependent on third parties for new product
introductions or technologies in order to introduce our own new
products. We are dependent in some cases upon various
third parties, such as certain drive manufacturers, for new
product introductions, the timing of which is out of our
control. In addition, there can be no assurance that we will
maintain existing or create new OEM relationships, the lack
of which could cause a material adverse impact on our business
and financial results. There can be no assurance that we will
continue to have access to significant proprietary technologies
through internal development and licensing arrangements with
third parties, or that we will continue to have access to new
competitive technologies that may be required to introduce new
products. If we are not successful in maintaining and developing
new relationships with OEMs or obtaining rights to use
competitive technologies, we may incur a material adverse impact
on our business and financial results.
Our financial success depends upon our ability to
manufacture and deliver products to our customers at acceptable
quality, volume and cost levels. Our success in magnetic
tape depends on our ability to source, manufacture and deliver
products to our customers at acceptable quality, volume and cost
levels. The manufacture of our products involves complex and
precise processes requiring production in highly controlled and
clean environments. If we do not manage these processes
effectively, changes could significantly hurt our ability to
meet our customers product volume and quality needs at
acceptable costs. Even within a clean room environment, minor
equipment malfunctions in any one of the many manufacturing
process steps could halt production and lead to additional
costs. Further, existing manufacturing techniques may not
achieve our volume and cost targets. In these cases, new
manufacturing processes and techniques will need to be developed
to achieve those targets.
If we do not achieve the expected benefits of our joint
venture with MBI, our financial results may be negatively
impacted. In 2003, we entered into a series of
agreements with MBI that established MBI as a significant,
non-exclusive source for our optical media products and created
a joint venture marketing company, GDM, for optical media
products. We hold a 51 percent interest in GDM and MBI
holds a 49 percent interest. As the controlling
shareholder, we consolidate the results of the joint venture in
our financial statements. Our current outlook is dependent,
among other things, upon our ability to achieve the expected
benefits in a timely manner from the MBI relationships,
including the GDM joint venture.
Our financial results may be affected by the political
climate and laws in the countries in which we do business and by
fluctuations in world financial markets. Our products
are sold in approximately 100 countries
11
outside the United States. International operations, which
comprised approximately 64 percent of our revenue in 2005,
may be subject to various risks which are not present in
domestic operations, including political instability, the
possibility of expropriation, restrictions on royalties,
dividends and currency remittances, requirements for
governmental approvals for new ventures, and local participation
in operations such as local equity ownership and workers
councils. In addition, our business and financial results are
affected by fluctuations in world financial markets, including
foreign currency exchange rates.
Our success depends in part on our ability to obtain and
protect our intellectual property rights and to defend ourselves
against intellectual property infringement claims of
others. Claims may arise from time to time alleging that
we infringe on the intellectual property rights of others. If we
are not successful in defending ourselves against those claims,
we could incur substantial costs in implementing remediation
actions, such as redesigning our products or processes or paying
for license rights. The related costs or the disruption to our
operations could have a material adverse effect on us. In
addition, we utilize valuable non-patented technical know-how
and trade secrets in our product development and manufacturing
operations. There can be no assurance that confidentiality
agreements and other measures we utilize to protect such
proprietary information will be effective, that these agreements
will not be breached or that our competitors will not acquire
the information as a result or through independent development.
We enforce our intellectual property rights against others who
infringe those rights.
If we are unable to retain our employees and key talent,
we may incur a material adverse impact on our business and
financial results. We operate in a highly competitive
market for employees with specialized skill, experience and
industry knowledge. No assurance can be given that we will be
able to retain employees and key talent.
Significant litigation matters can result in large costs
and distraction to our business. We are subject to
various pending or threatened legal actions in the ordinary
course of our business. Litigation is always subject to many
uncertainties and outcomes that are not predictable. We cannot
ascertain the ultimate aggregate amount of any monetary
liability or financial impact that may be incurred by us in
litigation.
Our stock price may be subject to significant volatility
due to our own results or market trends. If revenue,
earnings or cash flows in any quarter fail to meet the
investment communitys expectations, there could be an
immediate negative impact on our stock price. Our stock price
may also be affected by broader market trends and world events
unrelated to our performance.
|
|
Item 1B. |
Unresolved Staff Comments. |
None.
12
Our worldwide headquarters is located in Oakdale, Minnesota. Our
major facilities, and the functions at such facilities, are
listed below. Our facilities are in good operating condition
suitable for their respective uses and are adequate for our
current needs.
|
|
|
Facility |
|
Function |
|
|
|
United States and
Canada
|
|
|
Camarillo, California
(owned/leased)*
|
|
Data tape manufacturing
|
London, Ontario, Canada (owned)
|
|
Sales/Administrative
|
Miami, Florida (leased)
|
|
Sales/Administrative
|
Oakdale, Minnesota (owned)
|
|
Worldwide headquarters/Laboratory
facility
|
Wahpeton, North Dakota
(owned/leased)*
|
|
Diskette/molding/CD-Rewritable
discs/data tape manufacturing
|
Weatherford, Oklahoma (owned)
|
|
Diskette manufacturing and data
tape manufacturing
|
|
Europe/Middle East
|
|
|
Bracknell, United Kingdom (leased)
|
|
Sales/Administrative
|
Cergy, France (leased)
|
|
Sales/Administrative
|
Dubai, UAE (leased)
|
|
Sales/Administrative
|
Madrid, Spain (leased)
|
|
Sales/Administrative
|
Neuss, Germany (leased)
|
|
Sales/Administrative
|
Schiphol-rijk, Netherlands (leased)
|
|
Sales/Administrative/European
regional headquarters
|
Segrate, Italy (leased)
|
|
Sales/Administrative
|
|
Latin America
|
|
|
Mexico City, Mexico (leased)
|
|
Sales/Administrative
|
Santiago, Chile (leased)
|
|
Sales/Administrative
|
Sao Paulo, Brazil (owned)
|
|
Sales/Administrative
|
|
Asia Pacific
|
|
|
Baulkham Hills, Australia (leased)
|
|
Sales/Administrative
|
Beijing, China (leased)
|
|
Sales/Administrative
|
Guangzhou, China (leased)
|
|
Sales/Administrative
|
New Delhi, India (leased)
|
|
Sales/Administrative
|
North Point, Hong Kong (leased)
|
|
Sales/Administrative
|
Seoul, Korea (leased)
|
|
Sales/Administrative
|
Shanghai, China (leased)
|
|
Sales/Administrative
|
Singapore (leased)
|
|
Sales/Administrative
|
Taipei, Taiwan (leased)
|
|
Sales/Administrative
|
Tokyo, Japan (leased)
|
|
Sales/Administrative/Asia-Pacific
regional headquarters
|
|
|
* |
In December 2003, we sold one of the buildings at our Camarillo,
California facility in a sale-leaseback transaction and are
leasing back a portion of the building. In 2002, we sold one of
the buildings at our Wahpeton, North Dakota facility in a
sale-leaseback transaction and are leasing the building back. |
13
|
|
Item 3. |
Legal Proceedings. |
We are subject to various pending or threatened legal actions in
the ordinary course of our business. All such matters are
subject to many uncertainties and outcomes that are not
predictable with assurance. Consequently, as of
December 31, 2005, we are unable to ascertain the ultimate
aggregate amount of any monetary liability or financial impact
that we may incur with respect to these matters. While these
matters could materially affect operating results when resolved
in future periods, it is our opinion that after final
disposition, any monetary liability to us beyond that provided
in the Consolidated Balance Sheet as of December 31, 2005
would not be material to our financial position.
|
|
Item 4. |
Submission of Matters to a Vote of Security
Holders. |
None.
PART II
|
|
Item 5. |
Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities. |
As of February 24, 2006, there were 34,908,224 shares
of our common stock, $0.01 par value (Common Stock),
outstanding held by approximately 27,400 shareholders of
record. Our Common Stock is listed on the New York and Chicago
Stock Exchanges under the symbol of IMN. The Board of Directors
declared a dividend of $0.10 per share of Common Stock in
February 2005 and dividends of $0.12 per share of Common
Stock in May, August and November 2005, as well as a dividend of
$0.08 per share of Common Stock in February 2004 and
dividends of $0.10 per share of Common Stock in May, August
and November 2004. We paid a total of $15.7 million and
$13.2 million in dividends to shareholders in 2005 and
2004, respectively.
The following table sets forth, for the periods indicated, the
high and low sales prices of Common Stock as reported on various
exchanges.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 Sales Prices | |
|
2004 Sales Prices | |
|
|
| |
|
| |
|
|
High | |
|
Low | |
|
High | |
|
Low | |
|
|
| |
|
| |
|
| |
|
| |
First Quarter
|
|
$ |
35.95 |
|
|
$ |
30.49 |
|
|
$ |
42.15 |
|
|
$ |
34.30 |
|
Second Quarter
|
|
$ |
39.36 |
|
|
$ |
31.90 |
|
|
$ |
44.20 |
|
|
$ |
37.05 |
|
Third Quarter
|
|
$ |
43.80 |
|
|
$ |
38.64 |
|
|
$ |
42.72 |
|
|
$ |
30.60 |
|
Fourth Quarter
|
|
$ |
46.94 |
|
|
$ |
39.36 |
|
|
$ |
38.00 |
|
|
$ |
28.46 |
|
14
|
|
Item 6. |
Selected Financial Data. |
Selected Consolidated Financial Data*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions, except employee and per share data) | |
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$ |
1,258.1 |
|
|
$ |
1,173.7 |
|
|
$ |
1,110.6 |
|
|
$ |
1,013.6 |
|
|
$ |
1,068.3 |
|
|
Gross profit
|
|
|
302.1 |
|
|
|
287.8 |
|
|
|
320.6 |
|
|
|
313.0 |
|
|
|
323.5 |
|
|
Selling, general and administrative
|
|
|
146.3 |
|
|
|
161.5 |
|
|
|
163.9 |
|
|
|
173.6 |
|
|
|
226.5 |
|
|
Research and development
|
|
|
51.3 |
|
|
|
56.5 |
|
|
|
56.4 |
|
|
|
50.5 |
|
|
|
61.8 |
|
|
Litigation
|
|
|
|
|
|
|
|
|
|
|
(1.0 |
) |
|
|
(6.4 |
) |
|
|
|
|
|
Restructuring and other
|
|
|
1.2 |
|
|
|
25.2 |
|
|
|
(0.7 |
) |
|
|
(4.0 |
) |
|
|
48.0 |
|
|
Gain on sale of Color Proofing and
Color Software business
|
|
|
|
|
|
|
|
|
|
|
(11.1 |
) |
|
|
|
|
|
|
(1.9 |
) |
|
Loan impairment
|
|
|
|
|
|
|
|
|
|
|
4.6 |
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
103.3 |
|
|
|
44.6 |
|
|
|
108.5 |
|
|
|
99.3 |
|
|
|
(10.9 |
) |
|
Income (loss) from continuing
operations
|
|
|
81.8 |
|
|
|
36.5 |
|
|
|
74.9 |
|
|
|
66.1 |
|
|
|
(4.6 |
) |
|
Net income (loss)
|
|
|
87.9 |
|
|
|
29.9 |
|
|
|
82.0 |
|
|
|
75.1 |
|
|
|
(1.7 |
) |
|
Earnings (loss) per common share
from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2.41 |
|
|
|
1.04 |
|
|
|
2.11 |
|
|
|
1.89 |
|
|
|
(0.13 |
) |
|
|
Diluted
|
|
|
2.36 |
|
|
|
1.03 |
|
|
|
2.06 |
|
|
|
1.86 |
|
|
|
(0.13 |
) |
|
Net earnings (loss) per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2.59 |
|
|
|
0.85 |
|
|
|
2.31 |
|
|
|
2.15 |
|
|
|
(0.05 |
) |
|
|
Diluted
|
|
|
2.54 |
|
|
|
0.84 |
|
|
|
2.26 |
|
|
|
2.11 |
|
|
|
(0.05 |
) |
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$ |
643.1 |
|
|
$ |
510.8 |
|
|
$ |
541.2 |
|
|
$ |
532.2 |
|
|
$ |
409.7 |
|
|
Cash and cash equivalents(1)
|
|
|
483.0 |
|
|
|
397.1 |
|
|
|
411.4 |
|
|
|
474.7 |
|
|
|
389.8 |
|
|
Inventories
|
|
|
134.9 |
|
|
|
131.3 |
|
|
|
159.4 |
|
|
|
139.0 |
|
|
|
130.3 |
|
|
Property, plant and equipment, net
|
|
|
195.0 |
|
|
|
214.4 |
|
|
|
226.5 |
|
|
|
181.5 |
|
|
|
171.2 |
|
|
Total assets
|
|
|
1,146.2 |
|
|
|
1,110.6 |
|
|
|
1,172.8 |
|
|
|
1,119.9 |
|
|
|
1,053.7 |
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
290.9 |
|
|
|
323.8 |
|
|
|
352.5 |
|
|
|
381.4 |
|
|
|
398.0 |
|
|
Total shareholders equity
|
|
|
855.3 |
|
|
|
786.8 |
|
|
|
820.3 |
|
|
|
738.5 |
|
|
|
655.7 |
|
Other Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current ratio
|
|
|
3.6 |
|
|
|
2.9 |
|
|
|
2.8 |
|
|
|
2.7 |
|
|
|
2.2 |
|
|
Days sales outstanding(2)
|
|
|
46 |
|
|
|
45 |
|
|
|
46 |
|
|
|
43 |
|
|
|
48 |
|
|
Days of inventory supply(2)
|
|
|
56 |
|
|
|
53 |
|
|
|
71 |
|
|
|
70 |
|
|
|
67 |
|
|
Return on average assets(3)
|
|
|
7.2 |
% |
|
|
3.2 |
% |
|
|
6.5 |
% |
|
|
6.1 |
% |
|
|
(0.5 |
)% |
|
Return on average equity(3)
|
|
|
10.0 |
% |
|
|
4.5 |
% |
|
|
9.6 |
% |
|
|
9.5 |
% |
|
|
(0.7 |
)% |
|
Dividends per common share
|
|
$ |
0.46 |
|
|
$ |
0.38 |
|
|
$ |
0.24 |
|
|
$ |
|
|
|
$ |
|
|
|
Capital expenditures
|
|
|
21.6 |
|
|
|
35.8 |
|
|
|
75.1 |
|
|
|
42.6 |
|
|
|
47.0 |
|
|
Number of employees
|
|
|
2,100 |
|
|
|
2,550 |
|
|
|
2,800 |
|
|
|
2,800 |
|
|
|
3,400 |
|
|
|
* |
See Item 7 Managements Discussion and Analysis
of Financial Condition and Results of Operations for
additional information regarding the financial information
presented in this table. |
15
|
|
(1) |
We invest certain funds in active cash management and classify
those investments in other current assets or other assets
depending on remaining maturity. These amounts represent
$24.6 million, $42.5 million, and $13.4 million
as of December 31, 2005, 2004 and 2003, respectively, in
addition to the above cash and equivalents. |
|
(2) |
These operational measures, which we regularly use, are provided
to assist in the investors further understanding of our
operations. Days sales outstanding is calculated using the
count-back method, which calculates the number of days of most
recent revenue that are reflected in the net accounts receivable
balance. Days of inventory supply is calculated using the
current period inventory balance divided by the average of the
inventoriable portion of cost of goods sold for the previous
12 months expressed in days. |
|
(3) |
Return percentages are calculated using income (loss) from
continuing operations. |
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations. |
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the related notes that
appear elsewhere in this Annual Report on
Form 10-K.
Overview
Imation is a leading provider of removable data storage media
products designed to help customers capture, create, protect,
preserve, and retrieve valuable digital assets. Our
business-to-business
customers range from managers of large data centers to
distributed network administrators to small business owners who
rely on our tape cartridges for data processing, security,
business continuity, backup and archiving applications. For
personal storage needs, our customers rely on our recordable
optical discs, USB-enabled flash and removable hard drives to
store, edit and manage business data, photos, video, images, and
music on professional and home desktops. Our products are sold
in the U.S. and in approximately 100 other countries.
Approximately 64 percent of our 2005 revenue came from
outside the U.S.
The data storage market presents attractive growth opportunities
as well as challenges. The market is highly competitive,
characterized by continuing changes in technology, ongoing and
variable price erosion, diverse distribution channels, and a
large variety of formats for tape, optical, flash, and removable
hard disk products.
We deliver a broad portfolio of products across diverse
distribution channels and geographies. Success in the market is
dependent on being early to market with new formats, having
efficient manufacturing, sourcing and supply chain operations,
maintaining competitive total delivered cost, working closely
with leading OEMs to develop new formats or enhancements to
existing formats, offering a broad assortment of products across
multiple competing drive technology platforms, and having broad
geographic and market coverage across diverse distribution
channels.
While the demand for data storage media continues to grow at a
modest rate, the highest revenue growth opportunities include
newer tape formats in open system environments, recordable
optical discs and removable flash memory. These higher revenue
growth opportunities provide revenue streams that are typically
at lower gross profit margins than our historical gross margins
on the magnetic media businesses.
Our strategy is to take advantage of these growth opportunities
by establishing strategic sourcing, brand distribution, and
licensing arrangements and by implementing a relatively flat and
efficient operating structure. For example, while we have
manufacturing operations, intellectual property, including
patents and know-how, across a broad range of storage-related
media technologies, we also source some products from third
party manufacturers. As a result, our business is a combination
of a manufacturer and a brand distributor. We believe this
strategy can support higher revenue without the need to add
substantial infrastructure or overhead costs, thus delivering
increased gross margin dollars and operating profit growth on
increased revenue. We launched various restructuring activities
in 2004 to lower overall operating costs, simplify structure,
and improve decision-making speed. In addition, we are
implementing lean enterprise principles throughout our
organization. The emphasis of lean enterprise principles is
speed, quality, and competitive cost across all key functions
and processes.
16
Sale of Specialty Papers
On June 30, 2005, we closed on the sale of our Specialty
Papers business to Nekoosa Coated Products, LLC for
$17.0 million, with the potential for up to an additional
$4.0 million in consideration over the next three years,
contingent on performance of the business. At closing, we
received a cash payment of $16.0 million and a note
receivable of $1.0 million due in four years subject to
certain post-closing adjustments. In accordance with applicable
accounting rules, the results of this segment for prior periods
have been reported as discontinued operations. Accordingly, the
Consolidated Financial Statements for all prior periods have
been adjusted to reflect this presentation. General corporate
overhead costs previously allocated to the Specialty Papers
segment have not been allocated to discontinued operations. As a
result of the sale of our Specialty Papers business, all of our
business and operations are reported as one segment.
Executive Summary
|
|
|
2005 and 2006 Recent Highlights |
|
|
|
|
|
We launched several new products, including our Ulysses
removable backup hard drive, USB-enabled Micro Hard Drive, and
ForceFieldtm
Optical Media with scratch-resistant coating for CDs and DVDs |
|
|
|
We saw broad-based revenue growth across major product
categories including optical, mid-range server, and USB-flash
media products |
|
|
|
We benefited from a lower cost structure resulting from our
restructuring in 2004 |
|
|
|
We made demonstrable progress toward becoming a lean enterprise |
|
|
|
We sold our Specialty Papers business on June 30, 2005 |
|
|
|
We announced the planned acquisition of Memorex in January 2006 |
|
|
|
2005 Consolidated Results of Operations |
|
|
|
|
|
Revenue of $1,258.1 million in 2005 was up 7.2 percent
compared to revenue of $1,173.7 million in 2004 |
|
|
|
Gross margin of 24.0 percent in 2005 was down from
24.5 percent in 2004 |
|
|
|
Selling, general and administrative expenses were
11.6 percent of revenue in 2005, compared to
13.8 percent in 2004 |
|
|
|
Operating income was $103.3 million in 2005, an increase of
$58.7 million from 2004 |
|
|
|
Operating margin was 8.2 percent in 2005 compared to
3.8 percent in 2004 |
|
|
|
Net income was $87.9 million, or $2.54 per diluted
share in 2005, compared to $29.9 million, or $0.84 per
diluted share in 2004 |
|
|
|
Diluted earnings per share from continuing operations was $2.36
for 2005, compared to $1.03 for 2004 |
|
|
|
2005 Cash Flow/ Financial Condition |
|
|
|
|
|
Cash flow from operations totaled $87.7 million in 2005,
compared to $128.1 million in 2004 |
|
|
|
Total cash and liquid investments totaled $507.6 million at
year-end, an increase of $68.0 million during the year |
|
|
|
The Board of Directors declared dividends of $0.10 per
share in February 2005 and $0.12 per share in May, August
and November 2005, our third year of paying dividends |
17
Results of Operations
The following table sets forth the percentage relationship to
revenue of certain items in our Consolidated Statements of
Operations as well as the percentage of dollar increase/decrease
for the years indicated.
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Percentage of dollar | |
Percentage of revenue | |
|
|
|
increase/(decrease) | |
| |
|
|
|
| |
2005 | |
|
2004 | |
|
2003 | |
|
|
|
2005 vs. 2004 | |
|
2004 vs. 2003 | |
| |
|
| |
|
| |
|
|
|
| |
|
| |
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
Net revenue
|
|
|
7.2 |
% |
|
|
5.7 |
% |
|
24.0 |
|
|
|
24.5 |
|
|
|
28.9 |
|
|
Gross profit
|
|
|
5.0 |
|
|
|
(10.2 |
) |
|
11.6 |
|
|
|
13.8 |
|
|
|
14.8 |
|
|
Selling, general and administrative
expenses
|
|
|
(9.4 |
) |
|
|
(1.5 |
) |
|
4.1 |
|
|
|
4.8 |
|
|
|
5.1 |
|
|
Research and development expenses
|
|
|
(9.2 |
) |
|
|
0.2 |
|
|
0.1 |
|
|
|
2.1 |
|
|
|
(0.1 |
) |
|
Restructuring and other expenses
|
|
|
n/m |
|
|
|
n/m |
|
|
8.2 |
|
|
|
3.8 |
|
|
|
9.8 |
|
|
Operating income
|
|
|
131.6 |
|
|
|
(58.9 |
) |
|
(0.3 |
) |
|
|
0.1 |
|
|
|
(0.2 |
) |
|
Non-operating (income) expense, net
|
|
|
n/m |
|
|
|
n/m |
|
|
6.5 |
|
|
|
3.1 |
|
|
|
6.7 |
|
|
Income from continuing operations
|
|
|
124.1 |
|
|
|
(51.3 |
) |
n/m: not meaningful
Net revenue in 2005, 2004, and 2003 was $1,258.1 million,
$1,173.7 million, and $1,110.6 million, respectively.
Net revenue increased 7.2 percent in 2005 over 2004
compared to a 5.7 percent increase in 2004 over 2003. Total
worldwide 2005 revenue growth over 2004 was driven by volume
increases of approximately 17 percent and foreign currency
benefit of approximately one percent partially offset by price
declines of approximately 11 percent. The revenue increase
in 2005 was driven by growth in our optical products, including
our GDM joint venture with MBI, flash media and certain tape
cartridge formats, particularly LTO 2 and LTO 3. Total worldwide
2004 revenue growth over 2003 was driven by volume increases of
approximately 16 percent and foreign currency benefit of
approximately three percent partially offset by price declines
of approximately 13 percent. Results in 2004 and 2003 were
also driven by growth in optical products, including the benefit
of our GDM joint venture.
Gross profit for 2005, 2004, and 2003 was $302.1 million or
24.0 percent of revenue, $287.8 million or
24.5 percent of revenue, and $320.6 million or
28.9 percent of revenue, respectively. Gross profit
increased in 2005 by $14.3 million from 2004, while gross
profit decreased by $32.8 million from 2004 to 2003.
The 2005 gross margin was substantially in line with the 2004
gross margin, but the 2004 margin was impacted by certain items
discussed below. The 4.4 percentage point decrease in gross
margin as a percent of revenue for 2004 over 2003 was in part
due to a higher proportion of lower gross margin products in the
overall sales mix. Two other factors also negatively impacting
gross margin in 2004 were $9.0 million of inventory-related
charges and start-up
costs related to our coating facility in Weatherford, Oklahoma.
The inventory-related charges were driven by competitive market
pricing during the second quarter of 2004, which caused
inventory valuation write-downs of $6.0 million (recorded
as cost of goods sold) and price protection payments of
$3.0 million (recorded as reductions of revenue) made in
order to expand and retain certain retail business. The
start-up costs were
incurred as costs were added ahead of the commencement of
production and scale-up
of production on our new coater. The
scale-up and
improvement of performance of the new coater caused gross margin
to improve by 1.3 percentage points when comparing 2005 and
2004. This improvement, however, was more than offset by the
decrease in gross margin due to a higher proportion of lower
gross margin products in the overall sales mix.
18
|
|
|
Selling, General and Administrative (SG&A) |
In 2005, 2004, and 2003, SG&A expenses were
$146.3 million or 11.6 percent of revenue,
$161.5 million or 13.8 percent of revenue, and
$163.9 million or 14.8 percent of revenue,
respectively. The decrease in SG&A expense during 2005 was
due to our cost reduction efforts taken during 2004. The
decrease in SG&A as a percent of revenue in 2005, 2004, and
2003 was due to our cost reduction efforts and continued focus
on controlling spending and implementing an efficient cost
structure in all geographic areas as well as the result of our
revenue growth.
|
|
|
Research and Development (R&D) |
Research and development expenses in 2005, 2004, and 2003 were
$51.3 million, $56.5 million, and $56.4 million,
respectively. The $5.2 million decrease in 2005 as compared
to 2004 related to our cost reduction efforts taken during 2004
as we focused resources on higher priority projects within the
R&D organization. Research and development expenses in 2004
as compared to 2003 were essentially flat.
In 2003, we recorded a $1.0 million reversal of the reserve
set up in 2002 for a litigation matter related to optical disc
royalties in Spain (see Note 17 to the Consolidated
Financial Statements).
The components of our restructuring and other charges are as
follows:
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|
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|
Years Ended | |
|
|
December 31, | |
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|
| |
|
|
2005 | |
|
2004 | |
|
2003) | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Asset impairments
|
|
$ |
|
|
|
$ |
6.1 |
|
|
$ |
|
|
Severance and other
|
|
|
1.2 |
|
|
|
19.1 |
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1.2 |
|
|
$ |
25.2 |
|
|
$ |
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
In 2005, we recorded restructuring and other charges of
$1.2 million primarily for facility closing costs
associated with the Tucson, Arizona production facility closing.
In 2004, we recorded net severance and other charges of
$19.1 million to simplify structure, improve decision
making speed and lower overall operating costs. The charges
included the costs for employee separation programs related to a
headcount reduction of approximately 540 employees, of which 280
related mainly to the Tucson, Arizona production facility that
we closed in 2005. The remaining reduction of 260 employees
related to the restructuring program announced in the fourth
quarter of 2004. We also recognized asset impairment charges of
$6.1 million mainly related to the decision to discontinue
various product development strategies as development efforts
were focused on fewer projects.
In 2003, we recorded a $0.7 million benefit for the
reversal of previously recorded charges due to lower than
expected costs of restructuring (see Note 6 to the
Consolidated Financial Statements). This restructuring
adjustment was made as part of our regular practice of reviewing
quarterly restructuring reserves and making adjustments as
necessary to reflect managements best estimate of costs
remaining for each restructuring program.
During 2005, 2004 and 2003, we made cash payments of
approximately $14.5 million, $2.8 million, and
$5.3 million, respectively, related to our restructuring
programs. We expect to make payments of approximately
$2.1 million in 2006 related primarily to severance costs
to complete our 2004 restructuring programs (see Note 6 to
the Consolidated Financial Statements).
|
|
|
Gain on Sale of Color Proofing and Color Software
Business |
In 2003, we recorded an $11.1 million gain primarily
related to outstanding transition services payments for the
Color Proofing and Color Software business sold in 2001 (see
Note 3 to the Consolidated Financial Statements).
19
In 2003, we recorded a $4.6 million impairment of a loan
receivable from a contract manufacturer (see Note 16 to the
Consolidated Financial Statements).
Operating income for 2005, 2004, and 2003 was
$103.3 million, $44.6 million, and
$108.5 million, respectively. As a percent of revenue,
operating income for 2005, 2004, and 2003 was 8.2 percent,
3.8 percent, and 9.8 percent, respectively. Operating
income in each year was driven by the factors discussed above,
including the items included in Litigation, Restructuring and
Other, Gain on Sale of Color Proofing and Color Software
Business, and Loan Impairment.
|
|
|
Non-operating Income/ Expense |
Net non-operating income was $3.4 million in 2005 compared
to net non-operating expenses of $0.7 million in 2004 and
net non-operating income of $2.5 million in 2003. Interest
income was $11.6 million in 2005, $5.1 million in
2004, and $5.9 million in 2003. Increased interest income
in 2005 is primarily attributed to interest income from higher
invested cash balances and higher interest rates. The 2004
interest income decline compared to 2003 was due to lower
short-term interest rates. Other non-operating expenses in 2005
included foreign currency transaction losses of
$2.9 million and investment losses of $2.6 million.
Other non-operating expenses in 2004 included foreign currency
transaction losses of $2.9 million. We utilize certain
financial instruments to manage risks associated with foreign
currency risks (see Item 7A to this
Form 10-K and
Note 9 to the Consolidated Financial Statements).
Our effective tax rate was 23.3 percent, 16.9 percent,
and 32.5 percent for 2005, 2004, and 2003, respectively, as
discussed in Note 7 to the Consolidated Financial
Statements. The 2005 tax rate was benefited by a favorable
resolution of a U.S. tax matter that resulted in a one-time
tax benefit of $12.0 million (or $0.35 per diluted
share). The matter involved the U.S. treatment of tax
benefits associated with changes to our European structure
initiated in 2000 that were approved by U.S. tax
authorities in the first quarter of 2005, resulting in the
reversal of an income tax accrual. The 2004 tax rate was
benefited by a one-time tax benefit of $4.1 million
associated with the favorable resolution of a European tax
matter, as well as lower taxable income in the United States in
part due to restructuring and other charges incurred during the
year. As of December 31, 2005 and 2004, we had net deferred
tax assets of $48.9 million and $72.0 million,
respectively. The recoverability of our net deferred tax assets
is primarily dependent upon our ability to generate future
taxable income in the U.S. We believe that we will generate
sufficient future taxable income to recover our recorded net
deferred tax assets.
|
|
|
Income from Continuing Operations |
Income from continuing operations in 2005 was $81.8 million
or $2.41 per basic share and $2.36 per diluted share,
in 2004 was $36.5 million, or $1.04 per basic share
and $1.03 per diluted share, and in 2003 was
$74.9 million, or $2.11 per basic share and
$2.06 per diluted share. The fluctuations are due to
changes in operating income, non-operating income/expenses and
income taxes as discussed above.
|
|
|
Income (Loss) from Discontinued Operations |
In 2005, we recorded a gain of $4.6 million, net of income
tax, related to the sale of the Specialty Papers business. In
addition, the after tax income from operations of the Specialty
Papers business was $1.5 million. In 2004, we recorded a
loss of $12.4 million, net of income tax, related primarily
to the settlement of the Jazz Photo litigation from our Photo
Color Systems business that was sold in 1999 (see Note 17
to the Consolidated Financial Statements). In addition, the
after tax income from discontinued operations, related to
Specialty Papers, was $5.8 million in 2004 and
$6.9 million in 2003.
20
Net income in 2005 was $87.9 million or $2.54 per
diluted share, in 2004 was $29.9 million or $0.84 per
diluted share, and in 2003 was $82.0 million, or
$2.26 per diluted share. The fluctuations were due to
changes discussed above in both continuing and discontinued
operations.
Performance By Geographic Area
Approximately 64 percent, 62 percent, and
56 percent of our net revenue in 2005, 2004, and 2003,
respectively, was from sales outside the United States.
U.S. revenue totaled $450.9 million,
$447.9 million, and $486.0 million in 2005, 2004, and
2003, respectively. International revenue from sources outside
the U.S. was $807.2 million, $725.8 million, and
$624.6 million in 2005, 2004, and 2003, respectively. The
shift in revenue from the U.S. to international in 2005 was
driven by strong growth in GDM. In 2004, the shift in revenue
from the U.S. to international was driven by strong growth
in Asia and Latin America, as well as in GDM. Favorable currency
rates also benefited international revenue in all periods.
Financial Position
As of December 31, 2005, the cash and cash equivalents
balance was $483.0 million, an increase of
$85.9 million compared to December 31, 2004. We also
had other investments, which totaled $24.6 million and
$42.5 million as of December 31, 2005 and 2004,
respectively, related to investment grade interest bearing
securities with original maturities greater than three months
that are classified as other current assets or other assets
depending on the time remaining to maturity. Our cash and
investments increase was primarily attributed to operating cash
flows of $87.7 million, proceeds of $24.1 million from
option exercises and proceeds of $16.0 million from the
sale of the Specialty Papers business partially offset by share
repurchases of $15.9 million and dividend payments of
$15.7 million.
The accounts receivable days sales outstanding were 46 days
as of December 31, 2005, compared to 45 days as of
December 31, 2004. Days sales outstanding is calculated
using the count-back method, which calculates the number of days
of most recent revenue that is reflected in the net accounts
receivable balance. We had 56 days of inventory supply on
hand as of December 31, 2005 compared to 53 days as of
December 31, 2004. Days of inventory supply is calculated
using the current period inventory balance divided by the
average of the inventoriable portion of cost of goods sold for
the previous 12 months, expressed in days. There are a few
areas in which we expect some modest inventory increases in
early 2006, especially in optical products.
In late 2003, we entered into a tape media distribution
agreement with Exabyte Corp. (Exabyte), whereby we became the
exclusive distributor of Exabyte media including the VXA class
of tape cartridges. This transaction resulted in an intangible
asset of $18.5 million. On October 31, 2005, we
amended certain terms of the Exabyte distribution agreement
whereby Imation agreed to lower the margin we earned on
distribution in exchange for consideration of $10.3 million
in the form of Exabyte common stock, preferred stock, warrants,
and notes receivable with a corresponding offset to the original
intangible asset recorded in conjunction with the execution of
the original Exabyte distribution agreement.
Other assets were $63.0 million as of December 31,
2005 compared to $110.2 million as of December 31,
2004. This decrease was primarily caused by maturation of
certain cash investments, which caused them to move from
long-term to short-term in an amount of $24.4 million, as
well as a decrease in deferred income taxes of
$12.7 million and a decrease in intangible assets of
$10.3 million due to the amended Exabyte distribution
agreement.
Accrued payroll was $22.2 million as of December 31,
2005 compared to $11.7 million as of December 31,
2004. The increase was caused by higher accruals for broad-based
employee incentive compensation plans.
Other current liabilities were $91.1 million as of
December 31, 2005 compared to $135.3 million as of
December 31, 2004. The decrease was caused primarily by a
reduction in 2005 of $25.0 million related to the
settlement of Jazz Photo litigation recorded in 2004 (See
Note 17 to the Consolidated Financial Statements) as well
as a reduction of $13.8 million due to payments for
employee separation costs (see Note 6 to the Consolidated
Financial Statements).
21
Liquidity and Capital Resources
Cash provided by operating activities was $87.7 million in
2005. The major driver was net income as adjusted for non-cash
items of $142.8 million, offset by working capital changes
of $35.4 million as well as by payment of a litigation
settlement from discontinued operations recorded in 2004 of
$20.9 million for the Jazz Photo litigation. Net income as
adjusted for significant non-cash items includes net income of
$87.9 million adjusted for depreciation and amortization of
$38.3 million, and deferred income taxes of
$23.9 million. Certain factors related to generally higher
revenue levels impacted working capital during the year,
including increases in receivables and inventories, using
working capital of $26.7 million and $11.9 million,
respectively, offset by an increase in accounts payable
providing working capital of $9.4 million.
Cash provided by operating activities was $128.1 million in
2004. The major driver was net income as adjusted for non-cash
items of $101.7 million plus cash provided by working
capital changes of $26.2 million. Net income as adjusted
for significant non-cash items includes net income of
$29.9 million adjusted for depreciation and amortization of
$46.3 million and a pre-tax charge of $20.9 million
associated with the settlement of the Jazz Photo litigation.
Several factors impacted working capital changes including
decreases in inventories and receivables providing working
capital of $31.2 million and $21.0 million,
respectively, offset by decreases in accrued payroll and other
current liabilities as well as accounts payable using working
capital of $19.6 million and $17.3 million,
respectively.
Cash provided by operating activities was $81.0 million in
2003. The major driver was net income as adjusted for non-cash
items of $132.4 million, offset by other working capital
usages of $37.0 million. Net income as adjusted for
significant non-cash items includes net income of
$82.0 million adjusted for depreciation and amortization of
$39.0 million and deferred income taxes of
$19.6 million, less restructuring, litigation, and other
special items of $8.2 million (see Notes 6, 16 and 17
to the Consolidated Financial Statements). The working capital
changes in 2003 were driven by payments for broad-based employee
incentive compensation plans related to full year 2002
performance of $13.5 million, a $13.2 million increase
in inventory primarily related to growth in our optical
business, our settlement with Kodak resulting in a net
$7.2 million usage of cash (see Note 3 to the
Consolidated Financial Statements) and payments related to
restructuring programs of $5.3 million. The establishment
and growth in our joint venture with GDM, whose financial
statements are consolidated into our financial statements,
increased total accounts receivable by $22.1 million and
accounts payable by $30.7 million. The overall increase in
accounts receivable of $47.7 million (including GDM) was
nearly offset by an increase in accounts payable of
$42.9 million (including GDM), both primarily driven by
optical growth.
Cash provided by investing activities was $14.6 million in
2005, as compared to cash used in investing activities of
$62.3 million in 2004 and $129.6 million in 2003.
Capital spending totaled $21.6 million, $35.8 million,
and $75.1 million in 2005, 2004, and 2003, respectively.
The capital spending in 2003 was primarily related to the
installation of a new tape coating line at our Weatherford,
Oklahoma plant site. The new tape coating line was operational
by the end of 2004.
We also had net investment proceeds of $15.3 million
($16.1 million of purchases and $31.4 million of
proceeds from sale of investments) in 2005. In 2004 and 2003, we
had net investment purchases of $30.3 million and
$15.1 million, respectively, which related mainly to
investment grade interest bearing securities with original
maturities greater than three months that are classified as
other current assets or other assets depending on the time
remaining to maturity. The 2005 investing activities were also
impacted by proceeds of $16.0 million from the sale of
Specialty Papers. Investing activities in 2004 included
$3.0 million related to contingent consideration received
on the 2002 sale of the North America DSS business (see
Note 3 to the Consolidated Financial Statements). Investing
activities in 2003 also included usages of $20.5 million
associated mainly with the Exabyte distribution agreement and
$15.0 million associated with the purchase of certain
assets of EMTEC Magnetics GmbH.
Cash used in financing activities was $7.5 million in 2005,
as compared to $85.2 million in 2004 and $16.3 million
in 2003. Cash usages in 2005 were driven by share repurchases of
$15.9 million and dividend payments of $15.7 million,
offset by cash inflows of $24.1 million related to the
exercise of stock options. Cash usages in 2004 were driven by
share repurchases of $90.5 million and dividend payments of
$13.2 million, offset by cash inflows of $18.5 million
related to the exercise of stock options. Cash usages in 2003
were driven by share repurchases of $20.0 million, dividend
payments of $8.5 million and short-term debt repayments of
$4.5 million, offset by cash inflows of $12.2 million
related to the exercise of stock options.
22
As of December 31, 2005 and 2004, we did not have any debt
outstanding. We maintain a Credit Agreement with a group of
banks that expires December 15, 2006. The Credit Agreement
provides for revolving credit, including letters of credit, with
borrowing availability of $100 million. The Credit
Agreement provides for, at our option, borrowings at either a
floating interest rate based on a defined prime rate or a fixed
rate related to the Eurodollar rate, plus a margin based on our
consolidated leverage ratio. The margins over the defined prime
rate and Eurodollar rate range from zero to 0.4 percent and
1.1 to 1.6 percent, respectively. Letter of credit fees are
equal to the Eurodollar margins. A facility fee ranging from 0.2
to 0.4 percent per annum and a utilization fee ranging from
zero to 0.25 percent per annum based on our consolidated
leverage ratio is payable on the line of credit. In conjunction
with the Credit Agreement, we have pledged 65 percent of
the stock of certain of our foreign subsidiaries. Covenants
include maintenance of a minimum consolidated tangible net
worth, a required EBITDA, and a maximum leverage ratio. We do
not expect these covenants to materially restrict our ability to
borrow funds in the future. No borrowings were outstanding under
the Credit Agreement as of December 31, 2005, and we were
in compliance with all covenants under the Credit Agreement. We
are in the process of expanding our bank credit facility from
the current level of $100 million to a higher level of
approximately $200 million to $250 million.
In addition, certain international subsidiaries have borrowings
locally outside of the Credit Agreement discussed above. As of
December 31, 2005 and 2004, there were no borrowings
outstanding under such arrangements.
In 1997, our Board of Directors authorized the repurchase of up
to six million shares of our Common Stock and in 1999 increased
the authorization to a total of 10 million shares. On
August 4, 2004, our Board of Directors increased the
authorization for repurchase of Common Stock, expanding the then
remaining share repurchase authorization of 1.8 million
shares as of June 30, 2004, to a total of six million
shares. During 2005, 2004, and 2003, we repurchased
0.5 million shares, 2.7 million shares, and
0.6 million shares, respectively. As of December 31,
2005, we had repurchased 2.7 million shares under the
latest authorization and held, in total, 8.4 million shares
of treasury stock acquired at an average price of
$23.86 per share. Authorization for repurchases of an
additional 3.3 million shares remains outstanding as of
December 31, 2005.
We paid cash dividends of $0.46 per share or
$15.7 million during 2005, $0.38 per share or
$13.2 million during 2004 and $0.24 per share or
$8.5 million in 2003. Any future dividends are at the
discretion of and subject to the approval of Imations
Board of Directors.
We contributed $14.8 million to our defined benefit pension
plans during 2005. Based on this funding, as well as the market
performance on plan assets, we ended 2005 with an aggregate
unfunded status of these plans of $18.7 million, an
improvement from the $19.5 million aggregate unfunded
status at the end of 2004. We expect pension contributions to be
in the range of $10 million to $15 million in 2006,
depending on asset performance and interest rates. We estimate
that we have pension contributions of approximately
$1.0 million required by statute for 2006.
Our liquidity needs in 2006 include the following: the Memorex
acquisition cost of $330 million and other related
acquisition costs including possible restructuring costs,
capital expenditures targeted to be in a range of
$25 million to $30 million, pension funding of
approximately $10 million to $15 million, operating
lease payments of approximately $10 million (see
Note 10 to the Consolidated Financial Statements); and any
amounts associated with the repurchase of Common Stock under the
authorization discussed above or any dividends that may be paid
upon approval of the Board of Directors. We expect that cash and
cash equivalents, together with cash flow from operations and
availability of borrowings under our current and future sources
of financing, will provide liquidity sufficient to meet these
needs and for our operations.
Off-Balance Sheet Arrangements
Other than the operating lease commitments discussed in
Note 10 to the Consolidated Financial Statements, we are
not using off-balance sheet arrangements, including special
purpose entities, nor do we have any contractual obligations or
commercial commitments with terms greater than one year, that
would significantly impact our liquidity.
23
Summary of Contractual Obligations
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Payments Due by Period | |
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Less Than | |
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More Than | |
Contractual Obligations |
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Total | |
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1 Year | |
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1-3 Years | |
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3-5 Years | |
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5 Years | |
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(In millions) | |
Long-term debt
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$ |
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$ |
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$ |
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$ |
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$ |
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Capital lease obligations
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Operating leases
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19.1 |
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9.5 |
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8.6 |
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1.0 |
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Purchase obligations (1)
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91.3 |
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88.4 |
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2.1 |
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0.8 |
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Other long-term liabilities (2)
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45.8 |
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0.9 |
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1.7 |
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1.3 |
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41.9 |
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Total
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$ |
156.2 |
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$ |
98.8 |
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$ |
12.4 |
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$ |
3.1 |
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$ |
41.9 |
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(1) |
The majority of the purchase obligations consist of
90-day rolling
estimates. Each month, we provide various suppliers with rolling
forecasts of our demand for products for the next three months.
The forecasted amounts are generally binding on us as follows:
100% for the first month, 75% for the second month, and 50% for
the third month. |
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(2) |
Except for the sale-leaseback payments recorded in long-term
liabilities, timing of payments for the vast majority of the
remaining long-term liabilities, primarily consisting of pension
liabilities, cannot be reasonably determined and as such have
been included in the More Than 5 Years category. |
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and
results of operations is based upon our Consolidated Financial
Statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenue, expenses, and related
disclosures of contingent assets and liabilities. On an on-going
basis, we evaluate our estimates to ensure they are consistent
with historical experience and the various assumptions that are
believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these
estimates under different assumptions or conditions and could
materially impact our results of operations.
We believe the following critical accounting policies are
affected by significant judgments and estimates used in the
preparation of our Consolidated Financial Statements:
Income Tax Accruals and Valuation Allowances
When preparing the Consolidated Financial Statements, we are
required to estimate the income taxes in each of the
jurisdictions in which we operate. This process involves
estimating the actual current tax obligations based on expected
income, statutory tax rates and tax planning opportunities in
the various jurisdictions in which we operate. In the event
there is a significant unusual or one-time item recognized in
the results of operations, the tax attributable to that item
would be separately calculated and recorded in the period the
unusual or one-time item occurred.
Tax law requires certain items to be included in our tax return
at different times than the items are reflected in the results
of operations. As a result, the annual effective tax rate
reflected in the results of operations is different than that
reported on the tax return (i.e., the cash tax rate). Some of
these differences are permanent, such as expenses that are not
deductible in our tax return, and some differences reverse over
time, such as depreciation expense on capital assets. These
timing differences result in deferred tax assets and
liabilities, which are included within the Consolidated Balance
Sheets. Deferred tax assets generally represent items that can
be used as a tax deduction or credit in our tax return in future
years for which the expense has already been recorded in the
Consolidated Statements of Operations. We must assess the
likelihood that deferred tax assets will be recovered from
future taxable income, and to the extent we believe that
recovery is not likely, a valuation allowance must be
established against those deferred tax assets. Due to
uncertainties related to our ability to utilize some portion of
deferred tax assets, a valuation allowance of $8.5 million
has been recorded as of December 31, 2005, resulting in a
net deferred tax asset of $48.9 million. Deferred tax
24
liabilities generally represent items for which a deduction has
already been taken in the tax return, but the items have not
been recognized as expenses in the results of operations.
Significant judgment is required in evaluating tax positions,
and in determining the provision for income taxes, as well as
deferred tax assets and liabilities and any valuation allowance
recorded against the net deferred tax assets.
We establish reserves when, despite our belief that the tax
return positions are fully supportable, certain positions are
likely to be challenged and we recognize we may ultimately not
prevail in defending those positions. The reserves are adjusted
in light of changing facts and circumstances, such as the
closing of a tax audit. The effective tax rate includes the
impact of reserve provisions and changes to reserves that are
considered appropriate, as well as related interest. These
reserves relate to various tax years subject to audit by taxing
authorities. We believe that the current tax reserves of
$9.7 million are adequate and reflect the most probable
outcome of known tax contingencies. However, the ultimate
outcome may differ from current estimates and assumptions and
could impact the provision for income taxes reflected in the
Consolidated Statements of Operations. Unfavorable settlement of
any particular issue would likely require the use of cash.
Favorable resolution could result in reduced income tax expense
in our Consolidated Statements of Operations in the future.
Significant tax loss carryforwards have been generated in the
Netherlands for the years 1998-2000. The filing of the related
tax returns resulted in a nil assessment from the
Dutch tax authorities on carryforwards representing a possible
tax benefit of approximately $14.0 million. This results in
no tax loss carryforward from the viewpoint of the Dutch tax
authorities. The issuance of the assessment notice resulted in
Imation reporting no tax loss carryforwards relating to these
losses. However, we are pursuing opportunities to resolve the
validity of some or all of these amounts. In the event we are
successful, a discrete tax benefit will be realized in the
period of settlement. We are unable to estimate the possible
benefit or timing of resolution.
Litigation Managements current
estimated range of liability related to pending litigation is
based on claims for which we can estimate the amount or range of
loss. Based upon information presently available, management
believes that accruals for these claims are adequate. Due to
uncertainties related to both the amount and range of loss on
the remaining pending litigation, we are unable to make a
reasonable estimate of the liability that could result from an
unfavorable outcome. While these matters could materially affect
operating results in future periods depending on the final
resolution, it is our opinion that after final disposition, any
monetary liability to us beyond that provided in the
Consolidated Balance Sheet as of December 31, 2005 would
not be material to our financial position. As additional
information becomes available, potential liability related to
pending litigation will be assessed and estimates will be
revised as necessary.
Excess Inventory and Obsolescence Accruals We
write down our inventory for estimated excess and obsolescence
to the estimated net realizable value based upon assumptions
about future demand and market conditions. If actual market
conditions are less favorable than those we project, adjustments
to these reserves may be required. As of December 31, 2005,
the excess inventory and obsolescence accruals were
$10.3 million.
Rebates We maintain an accrual for customer
rebates that totaled $29.5 million as of December 31,
2005. This accrual requires a program by program estimation of
outcomes based on a variety of factors including customer unit
sell-through volumes and end user redemption rates. In the event
that actual volumes and redemption rates differ from the
estimates used in the accrual calculation, adjustments to the
accrual, upward or downward, may be necessary.
Other Accrued Liabilities We also have other
accrued liabilities, including uninsured claims and pensions.
These accruals are based on a variety of factors including past
experience and various actuarial assumptions and, in many cases,
require estimates of events not yet reported to us. If future
experience differs from these estimates, operating results in
future periods would be impacted.
We sponsor defined-benefit pension plans in both U.S. and
foreign entities. Expenses and liabilities for the pension plans
are actuarially calculated. These calculations are based on our
assumptions related to the discount rate, expected return on
plan assets and projected salary increases. The annual
measurement date for these assumptions is December 31.
Note 13 to the Consolidated Financial Statements includes
disclosure of these assumptions for both the U.S. and
international plans.
The discount rate assumptions are tied to portfolios of
long-term high quality bonds and are therefore subject to annual
fluctuations. A lower discount rate increases the present value
of the pension obligations, which results in higher
25
pension expense. The discount rate used in calculating the
benefit obligation in the U.S. was 5.50 percent at
December 31, 2005 as compared to 5.75 percent at
December 31, 2004 and 6.25 percent at
December 31, 2003. A discount rate reduction of
1.0 percent increases U.S. pension plan expense
(pre-tax) by approximately $0.1 million.
The expected return on assets assumptions on the investment
portfolios for the pension plans are based on the long-term
expected returns for the investment mix of assets currently in
the respective portfolio. Because the rate of return is a
long-term assumption, it generally does not change each year. We
use historic return trends of the asset portfolio combined with
recent market conditions to estimate the future rate of return.
In 2001 and 2002, we used an expected return on assets
assumption for the U.S. portfolio of 9.0 percent.
During 2003, given the poor performance of the U.S. equity
markets, we lowered the expected rate of return assumption to
8.0 percent. This rate was used in calculating the expenses
for 2003 and 2004 and was also used for 2005. A change of
1.0 percent for the expected return on plan assets
assumption will impact U.S. net pension plan expense
(pre-tax) by approximately $0.3 million. Expected
return on asset assumptions for
non-U.S. plans are
determined in a manner consistent with the U.S. plan.
The projected salary increase assumption is based on historic
trends and comparisons to the external market. Higher rates of
increase result in higher pension expenses. As this rate is also
a long-term expected rate it is less likely to change on an
annual basis. In the U.S., we have used the rate of
4.75 percent for the past three years. Mortality
assumptions were obtained from the 2000 Group Mortality Table.
Recently Issued Accounting Standards
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123 (Revised 2004)
(SFAS 123(R)), Share-Based Payment, which is a
revision of SFAS No. 123 and supersedes APB Opinion
No. 25. SFAS 123(R) requires all share-based payments
to employees, including grants of employee stock options, to be
valued at fair value on the date of grant and to be expensed
over the applicable vesting period. Pro forma disclosure of the
income statement effects of share-based payments will no longer
be an alternative.
In accordance with Staff Accounting Bulletin 107,
SFAS 123(R) is effective as of the beginning of the annual
reporting period that begins after June 15, 2005. In
addition, companies must also recognize compensation expense
related to any awards that are not fully vested as of the
effective date. Compensation expense for the unvested awards
will be measured based on the fair value of the awards
previously calculated in developing the pro forma disclosures in
accordance with the provisions of SFAS No. 123.
We will adopt SFAS 123(R) using the modified prospective
transition method in our first fiscal quarter of 2006, which
begins January 1, 2006. In addition to the recognition of
expense in the financial statements, under SFAS 123(R), any
excess tax benefits received upon exercise of options will be
presented as a financing activity inflow rather than as an
adjustment of operating activity as currently presented. Based
on our current analysis and information, we have determined that
the impact of adopting SFAS 123(R) will result in a
reduction of net earnings in the range of $10 million to
$12 million or $0.18 to $0.22 per diluted earnings per
share on a full year basis for fiscal 2006.
In March 2005, the FASB issued FASB Interpretation No. 47
(FIN 47), Accounting for Conditional Asset Retirement
Obligations (an interpretation of FASB Statement
No. 143). This Interpretation provides clarification
with respect to the timing of liability recognition for legal
obligations associated with the retirement of tangible
long-lived assets when the timing and/or method of settlement of
the obligation is conditional on a future event. This
Interpretation requires that the fair value of a liability for a
conditional asset retirement obligation be recognized in the
period in which it occurred if a reasonable estimate of fair
value can be made. The adoption of FIN 47 did not have a
material impact on our consolidated results of operations,
financial position, or cash flows.
In December 2004, the FASB issued FASB Staff Position
No. 109-2 (FSP 109-2), Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004 (the Act). The Act
introduced a special one-time dividends received deduction on
the repatriation of certain foreign earnings to a
U.S. taxpayer (Repatriation Provision), provided certain
criteria are met. FSP 109-2 provides accounting and disclosure
guidance for the Repatriation Provision. We have completed our
assessment of the effects of repatriating a portion of the
undistributed earnings of our foreign subsidiaries and did not
repatriate any undistributed earnings under the Act in 2005.
26
In November 2004, the FASB issued Statement No. 151
(SFAS No. 151), Inventory Costs, an Amendment of
ARB No. 43, Chapter 4. SFAS No. 151
clarifies that abnormal inventory costs such as costs of idle
facilities, excess freight and handling costs, and wasted
materials (spoilage) are required to be recognized as
current period charges and require the allocation of fixed
production overheads to inventory based on the normal capacity
of the production facilities. The provisions of
SFAS No. 151 are effective for inventory costs
incurred during fiscal years beginning after June 15, 2005.
We do not expect the adoption of SFAS No. 151 to have
a material impact on our consolidated results of operations,
financial position, or cash flows.
Forward-Looking Statements
We may from time to time make written or oral forward-looking
statements with respect to our future goals, including
statements contained in this
Form 10-K, in our
other filings with the SEC and in our reports to shareholders.
We wish to caution investors not to place undue reliance on any
such forward-looking statements. Any forward-looking statement
speaks only as of the date such statement is made, and we
undertake no obligation to update such statement to reflect
events or circumstances arising after such date.
2006 Outlook
On January 19, 2006, Imation and Memorex entered into an
Acquisition Agreement, providing for the acquisition of
substantially all of the assets of Memorex required to run the
business, including the capital stock of the operating
subsidiaries of Memorex engaged in the business of the design,
development, marketing, distribution and sale of hardware, media
and accessories used for the storage of electronic data under
the Memorex brand name. For its most recent fiscal year ended
March 31, 2005, Memorex reported revenue of
$430.0 million and operating income of $30.0 million.
In the subsequent two quarters, ending September 30, 2005,
Memorex revenue totaled $205.0 million and operating income
totaled $14.0 million. The vast majority of the Memorex
revenue is generated in the U.S. The current Memorex current
portfolio includes recordable CDs and DVDs, branded accessories,
USB-enabled flash drives, and magnetic and optical drives. See
Note 19 to the Consolidated Financial Statements.
The following statements are based on our current outlook for
fiscal year 2006, and include the anticipated impact from
closing the acquisition of Memorex no later than the middle of
the second quarter of 2006. The 2006 outlook estimates are
subject to change based on timing of the close and final
allocation of intangible assets, which will be determined
subsequent to close.
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Our revenue for 2006 is targeted between $1.54 billion to
$1.59 billion, which represents growth of approximately
23 percent to 27 percent. |
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Operating income for 2006 is targeted between $93 million
and $98 million. |
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Diluted earnings per share is targeted between $1.70 and $1.80
for 2006. |
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Capital spending for 2006 is targeted in the range of
$25 million to $30 million. |
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The 2006 tax rate is anticipated to be in the range of
36 percent and 37 percent. |
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Depreciation and amortization for 2006 is targeted in the range
of $39 million to $44 million, including amortization
of intangible assets resulting from the Memorex acquisition
ranging between $4 million and $9 million. |
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We have adopted SFAS 123(R) beginning January 2006, which
requires the expensing of equity-based compensation programs. We
expect an expense in the range of $10 million to
$12 million or $0.18 to $0.22 per diluted share
related to the adoption of SFAS 123(R) in 2006. This
expense is included in the diluted earnings per share target
cited above. |
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We anticipate that certain restructuring charges will likely be
incurred, the majority of which are associated with the Memorex
acquisition, which would range between $13 million and
$17 million, which is also included in the diluted earnings
per share target cited above. As a result, the impact of the
acquisition on 2006 operating income is anticipated to be
neutral to slightly positive. After full integration of Memorex,
the transaction is expected to be significantly accretive,
contributing $32 million to $36 million in annual
operating income. |
27
The impact of restructuring and other items on operating income,
as described above, is provided solely to assist an
investors understanding of these items on the
comparability of our operations. This information should not be
construed as an alternative to the reported results determined
in accordance with accounting principles generally accepted in
the United States of America.
Our business outlook is dependent on a variety of factors and is
subject to the risks and uncertainties discussed under
Forward-Looking Statements above and under
Risk Factors in Part I, Item 1A of this
Form 10-K.
Certain information contained in this
Form 10-K which
does not relate to historical financial information, including
our outlook for fiscal year 2006, may be deemed to constitute
forward-looking statements. The words or phrases is
targeting, 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, including
our ability to close the acquisition of Memorex in a timely
manner and integrate our operations while achieving anticipated
benefits and cost synergies, the continuing uncertainty in
global economic conditions that make it particularly difficult
to predict product demand, our ability to meet our cost
reduction and revenue growth targets, our ability to introduce
new offerings in a timely manner either independently or in
association with OEMs or other third parties, our ability to
achieve the expected benefits in a timely manner from MBI and
other strategic relationships, including the GDM joint venture,
the competitive pricing environment, the foreign currency
fluctuations, the outcome of litigation, our ability to secure
adequate supply of certain high demand products, the ready
availability and price of energy, the availability of key raw
materials or critical components, the market acceptance of newly
introduced products and service offerings, the rate of decline
for certain existing products as well as various factors set
forth, from time to time, in our filings with the SEC.
|
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Item 7A. |
Quantitative and Qualitative Disclosures About Market
Risk. |
We are exposed to various market risks including volatility in
foreign currency exchange rates, commodity price changes, and
credit risk. International operations, which comprised
approximately 64 percent of our revenue in 2005, may be
subject to various risks that are not present in domestic
operations. The additional risks include political instability,
the possibility of expropriation, restrictions on royalties,
dividends and currency remittances, requirements for
governmental approvals for new ventures, and local participation
in operations such as local equity ownership and workers
councils.
Our foreign currency hedging policy attempts to manage some of
the foreign currency risks over near term periods; however, we
cannot assure that these risk management activities will offset
more than a portion of the adverse financial impact resulting
from unfavorable movements in foreign exchange rates or that
medium and longer term effects of exchange rates will not be
significant.
In accordance with established policies and procedures, we may
utilize derivative financial instruments, including forward
exchange contracts, options and swap agreements to manage
certain of these exposures. Factors that could impact the
effectiveness of our hedging include the accuracy of our
forecasts, the volatility of the currency markets, and the
availability of hedging instruments. Although we attempt to
utilize hedging to manage the impact of changes in currency
exchange rates, when the U.S. dollar sustains a
strengthening position against currencies in which we sell
products or a weakening exchange rate against currencies in
which we incur costs, our revenue or costs are adversely
impacted. We do not hold or issue derivative financial
instruments for trading or speculative purposes and we are not a
party to leveraged derivative transactions. The utilization of
derivatives and hedging activities is described more fully in
Note 9 to the Consolidated Financial Statements.
As of December 31, 2005, we had $222.7 million
notional amount of foreign currency forward and option contracts
of which $43.8 million hedged recorded balance sheet
exposures. This compares to $176.2 million notional amount
of foreign currency forward and option contracts as of
December 31, 2004, of which $44.5 million hedged
recorded balance sheet exposures. An immediate adverse change of
10 percent in year-end foreign currency exchange rates with
all other variables (including interest rates) held constant
would reduce the fair value of foreign currency contracts
outstanding as of December 31, 2005 by $7.7 million.
28
Our exposure to commodity price changes relates primarily to
certain manufacturing operations that utilize aluminum ingot and
petroleum based products. We manage our exposure to changes in
these prices through our procurement and sales practices.
Significant unexpected increases in the price of or decreases in
the supply of these products could have a material adverse
impact on our business and financial results.
We are exposed to credit risk associated with cash investments
and foreign currency derivatives. We do not believe that our
cash investments and foreign currency derivatives present
significant credit risks because the counterparties to the
instruments consist of major financial institutions and we
monitor and manage the notional amount of contracts entered into
with each counterparty in accordance with our internal policies.
29
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Item 8. |
Financial Statements and Supplementary Data. |
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
Management of Imation Corp. (Imation) is responsible for
establishing and maintaining adequate internal control over
financial reporting. Imations internal control system is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Imation management assessed the effectiveness of Imations
internal control over financial reporting as of
December 31, 2005. In making this assessment, we used the
criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO) in Internal
Control Integrated Framework. Based on our
assessment, we concluded that, as of December 31, 2005,
Imations internal control over financial reporting is
effective, based on those criteria.
Imations independent registered public accounting firm has
audited our assessment of the effectiveness of Imations
internal control over financial reporting as of
December 31, 2005 as stated in the report appearing on the
following page.
|
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Bruce A. Henderson
|
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Paul R. Zeller
|
Chairman and Chief Executive
Officer |
|
Vice President and Chief
Financial Officer |
February 28, 2006
30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Imation Corp.:
We have completed an integrated audit of Imation Corp.s
2005 and 2004 consolidated financial statements and of its
internal control over financial reporting as of
December 31, 2005 and an audit of its 2003 consolidated
financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our
opinions, based on our audits, are presented below.
Consolidated financial statements
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations,
shareholders equity and comprehensive income and cash
flows present fairly, in all material respects, the financial
position of Imation Corp. and its subsidiaries at
December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2005 in conformity with
accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of
the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, managements assessment, included in
the accompanying Managements Report on Internal Control
Over Financial Reporting, that the Company maintained effective
internal control over financial reporting as of
December 31, 2005 based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2005,
based on criteria established in Internal Control
Integrated Framework issued by the COSO. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on managements
assessment and on the effectiveness of the Companys
internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
31
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
|
|
|
/s/ PricewaterhouseCoopers
LLP
|
|
|
|
PricewaterhouseCoopers LLP |
Minneapolis, MN
February 28, 2006
32
IMATION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions, except per share amounts) | |
Net revenue
|
|
$ |
1,258.1 |
|
|
$ |
1,173.7 |
|
|
$ |
1,110.6 |
|
Cost of goods sold
|
|
|
956.0 |
|
|
|
885.9 |
|
|
|
790.0 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
302.1 |
|
|
|
287.8 |
|
|
|
320.6 |
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
146.3 |
|
|
|
161.5 |
|
|
|
163.9 |
|
|
|
Research and development
|
|
|
51.3 |
|
|
|
56.5 |
|
|
|
56.4 |
|
|
|
Litigation
|
|
|
|
|
|
|
|
|
|
|
(1.0 |
) |
|
|
Restructuring and other
|
|
|
1.2 |
|
|
|
25.2 |
|
|
|
(0.7 |
) |
|
|
Gain on sale of Color Proofing and
Color Software business
|
|
|
|
|
|
|
|
|
|
|
(11.1 |
) |
|
|
Loan impairment
|
|
|
|
|
|
|
|
|
|
|
4.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
198.8 |
|
|
|
243.2 |
|
|
|
212.1 |
|
Operating income
|
|
|
103.3 |
|
|
|
44.6 |
|
|
|
108.5 |
|
Interest expense
|
|
|
0.7 |
|
|
|
0.6 |
|
|
|
1.3 |
|
Interest income
|
|
|
(11.6 |
) |
|
|
(5.1 |
) |
|
|
(5.9 |
) |
Other expense, net
|
|
|
7.5 |
|
|
|
5.2 |
|
|
|
2.1 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
|
106.7 |
|
|
|
43.9 |
|
|
|
111.0 |
|
Income tax provision
|
|
|
24.9 |
|
|
|
7.4 |
|
|
|
36.1 |
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
81.8 |
|
|
|
36.5 |
|
|
|
74.9 |
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations of
discontinued businesses, net of income taxes
|
|
|
1.5 |
|
|
|
5.8 |
|
|
|
6.9 |
|
|
|
Gain (loss) on disposal of
discontinued businesses, net of income taxes
|
|
|
4.6 |
|
|
|
(12.4 |
) |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations
|
|
|
6.1 |
|
|
|
(6.6 |
) |
|
|
7.1 |
|
Net income
|
|
$ |
87.9 |
|
|
$ |
29.9 |
|
|
$ |
82.0 |
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common
share basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
2.41 |
|
|
$ |
1.04 |
|
|
$ |
2.11 |
|
|
Discontinued operations
|
|
$ |
0.18 |
|
|
$ |
(0.19 |
) |
|
$ |
0.20 |
|
|
Net income
|
|
$ |
2.59 |
|
|
$ |
0.85 |
|
|
$ |
2.31 |
|
Earnings (loss) per common
share diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$ |
2.36 |
|
|
$ |
1.03 |
|
|
$ |
2.06 |
|
|
Discontinued operations
|
|
$ |
0.18 |
|
|
$ |
(0.19 |
) |
|
$ |
0.20 |
|
|
Net income
|
|
$ |
2.54 |
|
|
$ |
0.84 |
|
|
$ |
2.26 |
|
Weighted average basic shares
outstanding
|
|
|
33.9 |
|
|
|
35.0 |
|
|
|
35.5 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares
outstanding
|
|
|
34.6 |
|
|
|
35.6 |
|
|
|
36.3 |
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid per common share
|
|
$ |
0.46 |
|
|
$ |
0.38 |
|
|
$ |
0.24 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
33
IMATION CORP.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In millions, except per | |
|
|
share amounts) | |
ASSETS |
Current assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
483.0 |
|
|
$ |
397.1 |
|
|
Accounts receivable, net
|
|
|
194.7 |
|
|
|
181.0 |
|
|
Inventories, net
|
|
|
134.9 |
|
|
|
131.3 |
|
|
Other current assets
|
|
|
75.6 |
|
|
|
76.6 |
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
888.2 |
|
|
|
786.0 |
|
Property, plant and equipment, net
|
|
|
195.0 |
|
|
|
214.4 |
|
Other assets
|
|
|
63.0 |
|
|
|
110.2 |
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$ |
1,146.2 |
|
|
$ |
1,110.6 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY |
Current liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
131.8 |
|
|
$ |
128.2 |
|
|
Accrued payroll
|
|
|
22.2 |
|
|
|
11.7 |
|
|
Other current liabilities
|
|
|
91.1 |
|
|
|
135.3 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
245.1 |
|
|
|
275.2 |
|
Other liabilities
|
|
|
45.8 |
|
|
|
48.6 |
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par
value, authorized 25 million shares, none issued and
outstanding
|
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value,
authorized 100 million shares, 42.9 million issued
|
|
|
0.4 |
|
|
|
0.4 |
|
|
Additional paid-in capital
|
|
|
1,046.7 |
|
|
|
1,041.7 |
|
|
Retained earnings
|
|
|
120.5 |
|
|
|
57.1 |
|
|
Accumulated other comprehensive loss
|
|
|
(106.6 |
) |
|
|
(85.1 |
) |
|
Unearned compensation
|
|
|
(4.4 |
) |
|
|
(1.7 |
) |
|
Treasury stock, at cost,
8.4 million and 9.2 million shares as of
December 31, 2005 and 2004, respectively
|
|
|
(201.3 |
) |
|
|
(225.6 |
) |
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
855.3 |
|
|
|
786.8 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$ |
1,146.2 |
|
|
$ |
1,110.6 |
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
34
IMATION CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND
COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained | |
|
Accumulated | |
|
Unearned | |
|
|
|
|
|
|
|
|
Additional | |
|
Earnings | |
|
Other | |
|
ESOP Shares | |
|
|
|
Total | |
|
|
Common | |
|
Paid-In | |
|
(Accumulated | |
|
Comprehensive | |
|
and Other | |
|
Treasury | |
|
Shareholders | |
|
|
Stock | |
|
Capital | |
|
Deficit) | |
|
Loss | |
|
Compensation | |
|
Stock | |
|
Equity | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions, except share and per share amounts) | |
Balance as of December 31, 2002
|
|
$ |
0.4 |
|
|
$ |
1,033.3 |
|
|
$ |
(19.3 |
) |
|
$ |
(106.9 |
) |
|
$ |
(2.8 |
) |
|
$ |
(166.2 |
) |
|
$ |
738.5 |
|
|
Amortization of unearned ESOP shares
|
|
|
|
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
2.8 |
|
|
|
|
|
|
|
4.3 |
|
|
Purchase of treasury stock
(585,000 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20.0 |
) |
|
|
(20.0 |
) |
|
Exercise of stock options
(551,435 shares)
|
|
|
|
|
|
|
|
|
|
|
(4.8 |
) |
|
|
|
|
|
|
|
|
|
|
17.0 |
|
|
|
12.2 |
|
|
Tax benefit from shareholder
transactions
|
|
|
|
|
|
|
2.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.5 |
|
|
Dividend payments
|
|
|
|
|
|
|
|
|
|
|
(8.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8.5 |
) |
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
82.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82.0 |
|
|
|
Net change in cumulative
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.7 |
|
|
|
|
|
|
|
|
|
|
|
10.7 |
|
|
|
Minimum pension liability
adjustments (net of income tax provision of $1.9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.7 |
|
|
|
|
|
|
|
|
|
|
|
3.7 |
|
|
|
Cash flow hedging (net of income
tax benefit of $1.8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5.1 |
) |
|
|
|
|
|
|
|
|
|
|
(5.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2003
|
|
|
0.4 |
|
|
|
1,037.3 |
|
|
|
49.4 |
|
|
|
(97.6 |
) |
|
|
|
|
|
|
(169.2 |
) |
|
|
820.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
(2,658,000 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(90.5 |
) |
|
|
(90.5 |
) |
|
Exercise of stock options
(807,836 shares)
|
|
|
|
|
|
|
(0.4 |
) |
|
|
(9.0 |
) |
|
|
|
|
|
|
|
|
|
|
27.9 |
|
|
|
18.5 |
|
|
Restricted stock grants
(56,761 shares)
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
(1.7 |
) |
|
|
1.9 |
|
|
|
0.5 |
|
|
401(k) matching contribution
(123,022 shares)
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.3 |
|
|
|
4.5 |
|
|
Tax benefit from shareholder
transactions
|
|
|
|
|
|
|
4.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.3 |
|
|
Dividend payments
|
|
|
|
|
|
|
|
|
|
|
(13.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13.2 |
) |
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
29.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29.9 |
|
|
|
Net change in cumulative
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.0 |
|
|
|
|
|
|
|
|
|
|
|
5.0 |
|
|
|
Minimum pension liability
adjustments (net of income tax provision of $1.9)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.2 |
|
|
|
|
|
|
|
|
|
|
|
3.2 |
|
|
|
Cash flow hedging (net of income
tax provision of $2.1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.3 |
|
|
|
|
|
|
|
|
|
|
|
4.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004
|
|
|
0.4 |
|
|
|
1,041.7 |
|
|
|
57.1 |
|
|
|
(85.1 |
) |
|
|
(1.7 |
) |
|
|
(225.6 |
) |
|
|
786.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of treasury stock
(453,300 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15.9 |
) |
|
|
(15.9 |
) |
|
Exercise of stock options
(968,953 shares)
|
|
|
|
|
|
|
(0.4 |
) |
|
|
(8.4 |
) |
|
|
|
|
|
|
|
|
|
|
32.9 |
|
|
|
24.1 |
|
|
Restricted stock grants
(113,461 shares)
|
|
|
|
|
|
|
|
|
|
|
(0.4 |
) |
|
|
|
|
|
|
(2.7 |
) |
|
|
4.1 |
|
|
|
1.0 |
|
|
401(k) matching contribution
(91,790 shares)
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.2 |
|
|
|
3.6 |
|
|
Tax benefit from shareholder
transactions
|
|
|
|
|
|
|
5.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.0 |
|
|
Dividend payments
|
|
|
|
|
|
|
|
|
|
|
(15.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15.7 |
) |
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
87.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
87.9 |
|
|
|
Net change in cumulative
translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19.3 |
) |
|
|
|
|
|
|
|
|
|
|
(19.3 |
) |
|
|
Minimum pension liability
adjustments (net of income tax benefit of $1.0)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.6 |
) |
|
|
|
|
|
|
|
|
|
|
(2.6 |
) |
|
|
Cash flow hedging (net of income
tax provision of $0.3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
0.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005
|
|
$ |
0.4 |
|
|
$ |
1,046.7 |
|
|
$ |
120.5 |
|
|
$ |
(106.6 |
) |
|
$ |
(4.4 |
) |
|
$ |
(201.3 |
) |
|
$ |
855.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
35
IMATION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Cash Flows from Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
87.9 |
|
|
$ |
29.9 |
|
|
$ |
82.0 |
|
|
Adjustments to reconcile net income
to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
33.0 |
|
|
|
37.0 |
|
|
|
33.3 |
|
|
|
Amortization
|
|
|
5.3 |
|
|
|
9.3 |
|
|
|
5.7 |
|
|
|
Deferred income taxes
|
|
|
23.9 |
|
|
|
(1.5 |
) |
|
|
19.6 |
|
|
|
Non-cash restructuring, litigation,
and other special items
|
|
|
|
|
|
|
6.1 |
|
|
|
(8.2 |
) |
|
|
Gain on sale of Specialty Papers
|
|
|
(7.3 |
) |
|
|
|
|
|
|
|
|
|
|
Litigation settlement from
discontinued operation
|
|
|
(20.9 |
) |
|
|
20.9 |
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(26.7 |
) |
|
|
21.0 |
|
|
|
(47.7 |
) |
|
|
Inventories
|
|
|
(11.9 |
) |
|
|
31.2 |
|
|
|
(13.2 |
) |
|
|
Other current assets
|
|
|
(3.3 |
) |
|
|
10.9 |
|
|
|
37.5 |
|
|
|
Accounts payable
|
|
|
9.4 |
|
|
|
(17.3 |
) |
|
|
42.9 |
|
|
|
Accrued payroll and other current
liabilities
|
|
|
(2.9 |
) |
|
|
(19.6 |
) |
|
|
(56.5 |
) |
|
|
Other
|
|
|
1.2 |
|
|
|
0.2 |
|
|
|
(14.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
87.7 |
|
|
|
128.1 |
|
|
|
81.0 |
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(21.6 |
) |
|
|
(35.8 |
) |
|
|
(75.1 |
) |
|
Purchase of intangible assets
|
|
|
|
|
|
|
|
|
|
|
(20.5 |
) |
|
Purchase of investments
|
|
|
(16.1 |
) |
|
|
(41.7 |
) |
|
|
(15.1 |
) |
|
Prepayment and restricted cash
deposit related to planned asset purchase
|
|
|
|
|
|
|
|
|
|
|
(15.0 |
) |
|
Proceeds from sale of investments
|
|
|
31.4 |
|
|
|
11.4 |
|
|
|
|
|
|
Proceeds from sale of businesses
|
|
|
16.0 |
|
|
|
3.0 |
|
|
|
|
|
|
Other investing activities
|
|
|
4.9 |
|
|
|
0.8 |
|
|
|
(3.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
14.6 |
|
|
|
(62.3 |
) |
|
|
(129.6 |
) |
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in short-term debt
|
|
|
|
|
|
|
|
|
|
|
(4.5 |
) |
|
Purchase of treasury stock
|
|
|
(15.9 |
) |
|
|
(90.5 |
) |
|
|
(20.0 |
) |
|
Exercise of stock options
|
|
|
24.1 |
|
|
|
18.5 |
|
|
|
12.2 |
|
|
Dividend payments
|
|
|
(15.7 |
) |
|
|
(13.2 |
) |
|
|
(8.5 |
) |
|
Net proceeds from sale-leaseback
|
|
|
|
|
|
|
|
|
|
|
1.7 |
|
|
Decrease in unearned ESOP shares
|
|
|
|
|
|
|
|
|
|
|
2.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing
activities
|
|
|
(7.5 |
) |
|
|
(85.2 |
) |
|
|
(16.3 |
) |
Effect of exchange rate changes on
cash and cash equivalents
|
|
|
(8.9 |
) |
|
|
5.1 |
|
|
|
1.6 |
|
|
|
|
|
|
|
|
|
|
|
Change in cash and equivalents
|
|
|
85.9 |
|
|
|
(14.3 |
) |
|
|
(63.3 |
) |
Cash and cash
equivalents beginning of year
|
|
|
397.1 |
|
|
|
411.4 |
|
|
|
474.7 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents end of year
|
|
$ |
483.0 |
|
|
$ |
397.1 |
|
|
$ |
411.4 |
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures financed
through accounts payable
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5.0 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are
an integral part of these statements.
36
IMATION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Background and Basis of
Presentation
Imation Corp. (Imation, the Company, we, us, or our), a Delaware
corporation, was formed in 1996 as a result of the spin-off of
substantially all of the businesses which comprised the data
storage and imaging systems groups of 3M Company. We
develop, manufacture, source and market removable data storage
media products. Through divestitures, we have exited all of the
non-data storage businesses existing at the spin-off (see
Note 3 to the Consolidated Financial Statements) such that
the data storage business constituted all of our net revenue for
the year ended December 31, 2005.
On June 30, 2005, we closed on the sale of our Specialty
Papers business to Nekoosa Coated Products, LLC located in
Nekoosa, Wisconsin. These operations are presented in our
Consolidated Statements of Operations as discontinued operations
for all periods presented. Discontinued operations in previous
periods also include expenses associated with the Jazz Photo
Corp. (Jazz Photo) litigation (see Note 3 to the
Consolidated Financial Statements).
Note 2 Summary of Significant Accounting
Policies
Consolidation. The consolidated financial statements
include our accounts and our wholly- or majority-owned
subsidiaries. All significant inter-company transactions have
been eliminated. We have a 51 percent ownership interest in
our Global Data Media subsidiary that was formed in 2003, as
well as a 60 percent ownership interest in our subsidiary
in Japan. Minority interest in the income and net assets of
these subsidiaries is not material for the periods presented.
Use of Estimates. The preparation of financial statements
in conformity with accounting principles generally accepted in
the United States of America requires management to make
estimates and assumptions that affect the reported asset and
liability amounts, and the contingent asset and liability
disclosures at the date of the financial statements, as well as
the revenue and expense amounts reported during the period.
Actual results could differ from those estimates.
Foreign Currency. Generally, local currencies are the
functional currencies for our subsidiaries outside the U.S.,
except for subsidiaries located in highly inflationary economies
where the U.S. dollar is considered the functional
currency. Income and expense items are translated at average
foreign exchange rates prevailing during the year. For
operations in local currency environments, assets and
liabilities are translated at year-end exchange rates with
cumulative translation adjustments included as a component of
shareholders equity. Foreign currency transaction gains
and losses are included in the results of operations. For
operations in which the U.S. dollar is considered the
functional currency, certain financial statement amounts are
remeasured at historical exchange rates, with all other asset
and liability amounts translated at year-end exchange rates.
These remeasured adjustments are reflected in the results of
operations.
Concentrations of Credit Risk. We sell a wide range of
products and services to a diversified base of customers around
the world and perform ongoing credit evaluations of our
customers financial condition. Therefore, we believe there
is no material concentration of credit risk. No single customer
represented more than 10 percent of total net revenue in
2005, 2004 or 2003.
Cash Equivalents. Cash equivalents consist of highly
liquid investments purchased with original maturities of three
months or less. These investments are carried at cost, which
approximates fair value.
Trade Accounts Receivables and Allowances. Trade accounts
receivables are initially recorded at the invoiced amount upon
the sale of goods or services to customers and do not bear
interest. They are stated net of allowances, which primarily
represent estimated amounts for expected customer returns,
allowances and deductions for a variety of claims such as terms
discounts, quality and pricing, or the inability of certain
customers to make the required payments. When determining the
allowances, we take several factors into consideration,
including prior history of accounts receivable credit activity
and write-offs, the overall composition of accounts receivable
aging, the types of customers,
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
and our day-to-day
knowledge of specific customers. Changes in the allowances are
recorded as reductions of net revenue or bad debt expense
(included in selling, general and administrative expense), as
appropriate, in the Consolidated Statements of Operations.
Inventories. Inventories are valued at the lower of cost
or market, with cost generally determined on a
first-in, first-out
basis. We provide estimated inventory allowances for excess,
slow moving and obsolete inventory as well as inventory with a
carrying value in excess of net realizable value.
Investments. We invest in interest bearing securities
with original maturities ranging from three months to two years,
which are accounted for in accordance with Statement of
Financial Accounting Standard (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity
Securities. The carrying amounts of such investments
approximate fair value. Marketable equity securities that have
readily determinable fair values are classified as
available-for-sale and are reported at fair value. Fair value is
based on quoted market prices as of the end of the reporting
period.
Our policy is to review our venture capital and minority equity
securities classified as investments on a quarterly basis to
determine if an other-than-temporary decline in fair value
exists. The policy includes, but is not limited to, reviewing
the revenue and income outlook, financial viability, and
management of each investment. If an other-than-temporary
decline exists in one of the investments, the carrying value of
the investment is reduced to the market value with a
corresponding loss recorded in other expense in the Consolidated
Statement of Operations.
Derivative Financial Instruments. We follow
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, which requires that all derivatives,
including foreign currency exchange contracts, be recognized on
the balance sheet at fair value. Derivatives that are not hedges
must be recorded at fair value through operations. If a
derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of the derivative are either offset
against the change in fair value of the underlying assets or
liabilities through operations or recognized in accumulated
other comprehensive income (loss) in shareholders equity
until the underlying hedged item is recognized in operations.
These gains and losses are generally recognized as an adjustment
to cost of goods sold for inventory-related hedge transactions,
or as adjustments to foreign currency transaction gains/losses
included in non-operating expenses for foreign denominated
payables- and receivables-related hedge transactions. Cash flows
attributable to these financial instruments are included with
cash flows of the associated hedged items. The ineffective
portion of a derivatives change in fair value is
immediately recognized in operations.
Other Financial Instruments. Our other financial
instruments consist principally of cash and cash equivalents,
certain investments, and short-term receivables and payables,
for which their current carrying amounts approximate fair market
value.
Property, Plant and Equipment. Property, plant and
equipment, including leasehold and other improvements that
extend an assets useful life or productive capabilities,
are recorded at cost. Maintenance and repairs are expensed as
incurred. The cost and related accumulated depreciation of
assets sold or otherwise disposed are removed from the related
accounts and resulting gains or losses are reflected in the
results of operations.
Property, plant and equipment are generally depreciated on a
straight-line basis over their estimated useful lives. The
estimated depreciable lives range from 20 to 40 years for
buildings and 5 to 12 years for machinery and equipment.
Leasehold and other improvements are amortized over the lesser
of the remaining life of the lease or the estimated useful life
of the improvement.
Intangible Assets. Intangible assets consist primarily of
capitalized software and certain purchased distribution and
intellectual property rights. We capitalize certain external and
internal costs related to the design and implementation of
internally developed software, along with related interest.
Intangible assets are amortized over their estimated useful
lives, which generally range from three to five years.
Goodwill. We evaluate the carrying value of goodwill
during the fourth quarter of each year and between annual
evaluations if events occur or circumstances change that would
more likely than not reduce the fair value of the reporting unit
below its carrying amount. When evaluating whether goodwill is
impaired, the fair value of the reporting
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
unit to which the goodwill is assigned is compared to its
carrying amount, including goodwill. If the carrying amount of a
reporting unit exceeds its fair value, then the amount of the
impairment loss must be measured.
Long-Lived Assets. We periodically review our long-lived
assets, including property, plant and equipment and intangible
assets, in order to assess recoverability based on projected
income and related cash flows on an undiscounted basis. Should
the sum of the related expected future net cash flows be less
than the carrying value, an impairment loss would be recognized.
An impairment loss would be measured as the amount by which the
carrying value of the asset exceeds the fair value of the asset.
Revenue Recognition. Revenue is recognized in accordance
with Staff Accounting Bulleting No. 104, Revenue
Recognition, which requires that persuasive evidence of an
arrangement exists, delivery has occurred or services have been
rendered, fees are fixed or determinable, and collectibility is
reasonably assured. For product sales, delivery is considered to
have occurred when the risks and rewards of ownership transfer,
which is primarily upon delivery of goods to customers. For
services, revenue is recognized upon performance. For service
contracts, revenue is deferred and recognized over the life of
the contracts as service is performed. Provisions for returns
are recorded against sales based on historical experience. We
base our estimates for returns on historical experience and have
not experienced significant fluctuations between estimated and
actual return activity.
Research and Development Costs. Research and development
costs are charged to expense as incurred.
Advertising Costs. Advertising and other promotional
costs are expensed as incurred, and were approximately
$16 million, $21 million, and $24 million in
2005, 2004, and 2003, respectively. Prepaid advertising costs
were not significant at December 31, 2005 and 2004.
Rebates. We provide rebates to our customers. Customer
rebates are accounted for as a reduction of revenue at the time
of sale based on an estimate of the cost to honor the related
rebate programs.
Income Taxes. We account for income taxes under the
provisions of SFAS No. 109, Accounting for Income
Taxes. Under the asset and liability method prescribed in
SFAS No. 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Restructuring. Over the past several years, we have
recorded restructuring charges as a result of cost management
efforts and business divestitures. The primary component of
these charges has been employee termination benefits paid under
our ongoing severance plan. We record charges for these benefits
in the period they become probable and reasonably estimable.
Treasury Stock. Our repurchases of shares of Common Stock
are recorded as treasury stock and are presented as a reduction
of shareholders equity. When treasury shares are reissued,
we use a last-in,
first-out method and the excess of repurchase cost over
reissuance price is treated as an adjustment to equity.
Stock-Based Compensation. We have accounted for
stock-based compensation using the intrinsic value method of
accounting prescribed by Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock Issued to
Employees. Accordingly, compensation cost for employee stock
options is measured as the excess, if any, of the quoted market
price of our Common Stock at the date of the grant over the
amount an employee must pay to acquire the stock. Historically,
we have elected to retain our method of accounting as described
above and have adopted the disclosure only provisions of
SFAS No. 123, Accounting for Stock-Based
Compensation.
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The issuance of SFAS No. 123 (Revised 2004)
(SFAS 123(R)) Share-Based Payment will significantly
change the way we account for grants of stock options. This new
pronouncement and its impact are discussed in the Recent
Accounting Pronouncements section below. No compensation
expense was recognized for time-based stock options granted in
2005, 2004 and 2003 as options granted had no intrinsic value at
the time of grant. Compensation expense has been recorded for
restricted stock issued under our stock incentive program, as
well as certain performance based stock options. The table below
illustrates the effect on net income and earnings per share if
the fair value of options granted had been recognized as
compensation expense on a straight-line basis over the vesting
periods in accordance with the provisions of
SFAS No. 123. See Note 15 for additional
information regarding Employee Stock Plans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions, except per | |
|
|
share amounts) | |
Net income, as reported
|
|
$ |
87.9 |
|
|
$ |
29.9 |
|
|
$ |
82.0 |
|
Add: Stock-based employee
compensation expense included in net income, net of income tax
|
|
|
0.9 |
|
|
|
0.3 |
|
|
|
|
|
Deduct: Total stock-based employee
compensation expense determined under fair value based method of
accounting, net of income tax
|
|
|
(5.8 |
) |
|
|
(5.8 |
) |
|
|
(5.5 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
83.0 |
|
|
$ |
24.4 |
|
|
$ |
76.5 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$ |
2.59 |
|
|
$ |
0.85 |
|
|
$ |
2.31 |
|
|
Basic pro forma
|
|
$ |
2.45 |
|
|
$ |
0.70 |
|
|
$ |
2.15 |
|
|
Diluted as reported
|
|
$ |
2.54 |
|
|
$ |
0.84 |
|
|
$ |
2.26 |
|
|
Diluted pro forma
|
|
$ |
2.37 |
|
|
$ |
0.68 |
|
|
$ |
2.11 |
|
Comprehensive Income. Comprehensive income includes net
income, the effects of currency translation, unrealized gains
and losses on cash flow hedges and other, and minimum pension
liability adjustments. Comprehensive income for all periods
presented is included in the Consolidated Statements of
Shareholders Equity and Comprehensive Income.
Weighted Average Basic and Diluted Shares Outstanding.
Basic earnings per share is calculated using the weighted
average number of shares outstanding during the period, adjusted
for Employee Stock Ownership Plan (ESOP) shares not
allocated to employee accounts. Under the applicable accounting
rules, unallocated shares held in our 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. ESOP shares were
fully allocated by March 31, 2004. Diluted earnings per
share is computed on the basis of the weighted average basic
shares outstanding plus the dilutive effect of our stock-based
compensation plans using the treasury stock method.
The following table sets forth the computation of the weighted
average basic and diluted shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Weighted average number of shares
outstanding during the period
|
|
|
33.9 |
|
|
|
35.0 |
|
|
|
35.6 |
|
Weighted average number of shares
held by the ESOP not yet allocated
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding
|
|
|
33.9 |
|
|
|
35.0 |
|
|
|
35.5 |
|
Dilutive effect of stock-based
compensation plans
|
|
|
0.7 |
|
|
|
0.6 |
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares
outstanding
|
|
|
34.6 |
|
|
|
35.6 |
|
|
|
36.3 |
|
|
|
|
|
|
|
|
|
|
|
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Options to purchase approximately 0.9 million,
1.0 million and 0.1 million shares of our common stock
were outstanding as of December 31, 2005, 2004 and 2003,
respectively, and were not considered in the computation of
potential common shares because the effect of the options would
be antidilutive.
|
|
|
Recent Accounting Pronouncements |
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS 123(R), which is a revision of
SFAS No. 123 and supersedes APB Opinion No. 25.
SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be valued at fair
value on the date of grant and to be expensed over the
applicable vesting period. Pro forma disclosure of the income
statement effects of share-based payments will no longer be an
alternative.
In accordance with Staff Accounting Bulletin 107,
SFAS 123(R) is effective as of the beginning of the annual
reporting period that begins after June 15, 2005. In
addition, companies must also recognize compensation expense
related to any awards that are not fully vested as of the
effective date. Compensation expense for the unvested awards
will be measured based on the fair value of the awards
previously calculated in developing the pro forma disclosures in
accordance with the provisions of SFAS No. 123.
We will adopt SFAS 123(R) using the modified prospective
transition method beginning with our first fiscal quarter of
2006, which begins January 1, 2006. In addition to the
recognition of expense in the financial statements, under
SFAS 123(R), any excess tax benefits received upon exercise
of options will be presented as a financing activity inflow
rather than as an adjustment of operating activity as currently
presented. Based on our current analysis and information,
management has determined that the impact of adopting
SFAS 123(R) will result in a reduction of net earnings in
the range of $10 million to $12 million or $0.18 to
$0.22 per diluted earnings per share on a full year basis
for fiscal 2006.
In March 2005, the FASB issued FASB Interpretation No. 47
(FIN 47), Accounting for Conditional Asset Retirement
Obligations (an interpretation of FASB Statement
No. 143). This Interpretation provides clarification
with respect to the timing of liability recognition for legal
obligations associated with the retirement of tangible
long-lived assets when the timing and/or method of settlement of
the obligation is conditional on a future event. This
Interpretation requires that the fair value of a liability for a
conditional asset retirement obligation be recognized in the
period in which it occurred if a reasonable estimate of fair
value can be made. The adoption of FIN 47 did not have a
material impact on our consolidated results of operations,
financial position, or cash flows.
In December 2004, the FASB issued FASB Staff Position
No. 109-2 (FSP 109-2), Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within
the American Jobs Creation Act of 2004 (the Act). The Act
introduced a special one-time dividends received deduction on
the repatriation of certain foreign earnings to a
U.S. taxpayer (Repatriation Provision), provided certain
criteria are met. FSP 109-2 provides accounting and disclosure
guidance for the Repatriation Provision. We have completed our
assessment of the effects of repatriating a portion of the
undistributed earnings of our foreign subsidiaries and did not
repatriate any undistributed earnings under the Act in 2005.
In November 2004, the FASB issued Statement No. 151
(SFAS No. 151), Inventory Costs, an Amendment of
ARB No. 43, Chapter 4. SFAS No. 151
clarifies that abnormal inventory costs such as costs of idle
facilities, excess freight and handling costs, and wasted
materials (spoilage) are required to be recognized as
current period charges and require the allocation of fixed
production overheads to inventory based on the normal capacity
of the production facilities. The provisions of
SFAS No. 151 are effective for inventory costs
incurred during our fiscal year beginning January 1, 2006.
We do not expect the adoption of SFAS No. 151 to have
a material impact on our consolidated results of operations,
financial position, or cash flows.
Note 3 Divestitures
|
|
|
Divestitures presented as discontinued operations |
Specialty Papers Business: On June 30, 2005, we
closed on the sale of our Specialty Papers business to Nekoosa
Coated Products, LLC located in Nekoosa, Wisconsin. The business
provided carbonless cut-sheet and digital
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
carbonless paper for businesses and institutions such as
printers, banks, and hospitals. The sale was for
$17.0 million, with the potential of up to an additional
$4.0 million consideration over the next three years,
contingent on performance of the business. Upon closing, we
received a cash payment of $16.0 million and a note
receivable of $1.0 million due in four years subject to
certain post-closing adjustments. A gain of $4.6 million,
net of taxes of $2.7 million, was recognized on the sale.
We sold virtually all of the assets of our Specialty Papers
business, including the Nekoosa manufacturing plant.
Approximately 90 employees were also transferred as a part of
the sale. These operations are presented in our Consolidated
Statements of Operations as discontinued operations for all
periods presented.
North America DSS Business: On August 30, 2002, we
consummated the sale of our North America DSS business to
DecisionOne Corporation (DecisionOne). These operations are
presented in our Consolidated Statements of Operations as
discontinued operations. Under the terms of the agreement,
DecisionOne paid us $5.0 million in cash. In the third
quarter of 2002, we recognized a pre-tax gain of
$2.6 million, or $1.6 million after-tax, on the
disposal of the discontinued business. In addition, the terms of
the sale included the potential for additional future payments
to us of up to $5.0 million in 2004, based upon revenue
targets achieved by DecisionOne associated with the DSS
business. During the fourth quarter of 2004, we received a
$3.0 million payment, or $1.9 million after tax, based
on these terms. The contingent payment received in 2004 is shown
as proceeds from sale of business in the Consolidated Statements
of Cash Flows.
Medical Imaging and Photo Color Systems Businesses: In
1998, we sold our worldwide Medical Imaging Systems business
(the Medical Imaging Sale) to Eastman Kodak Company (Kodak). As
noted in previously issued financial statements, our medical
imaging/photo color manufacturing facility in Ferrania, Italy
(the Ferrania Facility) where certain x-ray and wet laser
medical imaging products and photographic film were manufactured
was excluded from the Medical Imaging Sale. In exchange for
retaining the Ferrania Facility and pursuant to certain
conditions, Kodak agreed to pay us up to $25.0 million at
such time as it was sold.
In 1999, we sold our worldwide Photo Color Systems business,
together with the Ferrania Facility and certain other associated
assets and businesses, to Schroder Ventures, through Schroder
Ventures wholly owned affiliate, Ferrania Lux, S.A.R.L.
During 1999, Kodak had challenged our claim for the full
$25.0 million as well as claims for other amounts that we
believed were due from Kodak in connection with the Medical
Imaging Sale. We had retained cash, which we collected on behalf
of Kodak, in an amount approximately equal to these disputed
items.
During the second quarter of 2003, we resolved the disputed
items with Kodak on terms more favorable than anticipated,
resulting in a pre-tax gain of $1.8 million in discontinued
operations, or $1.1 million after-tax. The settlement
resulted in a net $7.2 million reduction in our cash and
cash equivalents balance, reflecting a $17.2 million cash
payment to Kodak, $10.0 million of which was offset by
previously recorded restricted cash in other current assets. As
a result of the settlement, our other current assets were
reduced by $32.0 million and other current liabilities were
reduced by $41.0 million. There were no other impacts to
our financial statements resulting from the settlement of the
Kodak dispute.
Other Discontinued Operations Activity: In the fourth
quarter of 2004, we recorded the settlement, reached in February
2005, of the Jazz Photo litigation associated with the Photo
Color Systems business we sold in 1999 (see Note 17). The
charge for this matter was $12.9 million, net of taxes of
$8.0 million. During 2004 and 2003, we recorded litigation
costs primarily related to the Jazz Photo matter of
$1.4 million, net of taxes of $0.8 million, and
$1.3 million, net of taxes of $0.7 million,
respectively.
In the fourth quarter of 2003, we recorded a gain of
$0.4 million, net of income taxes of $0.3 million,
resulting from an adjustment of estimated costs associated with
discontinued operations described above.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The results of discontinued operations for the years ended
December 31, 2005, 2004, and 2003 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Net revenue
|
|
$ |
20.1 |
|
|
$ |
45.6 |
|
|
$ |
52.9 |
|
Income before income taxes
|
|
|
2.4 |
|
|
|
9.3 |
|
|
|
11.1 |
|
Income tax provision
|
|
|
0.9 |
|
|
|
3.5 |
|
|
|
4.2 |
|
|
|
|
|
|
|
|
|
|
|
Income from operations of
discontinued businesses, net of income tax
|
|
|
1.5 |
|
|
|
5.8 |
|
|
|
6.9 |
|
Gain from disposal of discontinued
businesses, net of income tax
|
|
|
4.6 |
|
|
|
1.9 |
|
|
|
|
|
Litigation settlement, net of
income tax
|
|
|
|
|
|
|
(14.3 |
) |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on disposal of
discontinued businesses, net of income tax
|
|
|
4.6 |
|
|
|
(12.4 |
) |
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
Total discontinued operations
|
|
$ |
6.1 |
|
|
$ |
(6.6 |
) |
|
$ |
7.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divestitures presented as part of continuing
operations |
Color Proofing and Color Software Business: On
December 31, 2001, we consummated the sale of our 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 us $50 million in cash on December 31, 2001.
In addition, KPG was required to pay us approximately
$20 million over a two year period for transition services.
During the fourth quarter of 2003, we settled all claims with
KPG, which consisted primarily of a dispute over the amount of
KPGs minimum transition services obligation owed to us
over and above the amount already reimbursed for services
provided. As a result of the settlement, we recorded a pre-tax
gain of $11.1 million in the Consolidated Statement of
Operations for the year ended December 31, 2003.
Note 4 Supplemental Balance Sheet
Information
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In millions) | |
Inventories
|
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$ |
104.7 |
|
|
$ |
94.8 |
|
|
Work in process
|
|
|
10.7 |
|
|
|
14.7 |
|
|
Raw materials and supplies
|
|
|
19.5 |
|
|
|
21.8 |
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$ |
134.9 |
|
|
$ |
131.3 |
|
|
|
|
|
|
|
|
Other Current Assets
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
$ |
24.6 |
|
|
$ |
35.1 |
|
|
Short-term investments
|
|
|
24.6 |
|
|
|
18.1 |
|
|
Receivables from insurance
companies(1)
|
|
|
|
|
|
|
4.1 |
|
|
Restricted cash
|
|
|
|
|
|
|
1.2 |
|
|
Other
|
|
|
26.4 |
|
|
|
18.1 |
|
|
|
|
|
|
|
|
|
|
Total other current assets
|
|
$ |
75.6 |
|
|
$ |
76.6 |
|
|
|
|
|
|
|
|
43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In millions) | |
Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
2.4 |
|
|
$ |
2.9 |
|
|
Buildings and leasehold improvements
|
|
|
149.9 |
|
|
|
164.7 |
|
|
Machinery and equipment
|
|
|
511.7 |
|
|
|
569.6 |
|
|
Construction in progress
|
|
|
8.4 |
|
|
|
13.6 |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
672.4 |
|
|
$ |
750.8 |
|
|
Less accumulated depreciation
|
|
|
(477.4 |
) |
|
|
(536.4 |
) |
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$ |
195.0 |
|
|
$ |
214.4 |
|
|
|
|
|
|
|
|
Other Assets
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
$ |
24.3 |
|
|
$ |
37.0 |
|
|
Long-term investments
|
|
|
8.4 |
|
|
|
31.2 |
|
|
Intangible assets
|
|
|
7.6 |
|
|
|
23.1 |
|
|
Goodwill
|
|
|
12.3 |
|
|
|
12.3 |
|
|
Other
|
|
|
10.4 |
|
|
|
6.6 |
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
$ |
63.0 |
|
|
$ |
110.2 |
|
|
|
|
|
|
|
|
Other Current Liabilities
|
|
|
|
|
|
|
|
|
|
Employee separation costs
|
|
$ |
2.1 |
|
|
$ |
15.9 |
|
|
Rebates
|
|
|
29.5 |
|
|
|
32.9 |
|
|
Litigation settlement(1)
|
|
|
|
|
|
|
25.0 |
|
|
Income taxes
|
|
|
11.6 |
|
|
|
9.6 |
|
|
Other
|
|
|
47.9 |
|
|
|
51.9 |
|
|
|
|
|
|
|
|
|
|
Total other current liabilities
|
|
$ |
91.1 |
|
|
$ |
135.3 |
|
|
|
|
|
|
|
|
Other Liabilities
|
|
|
|
|
|
|
|
|
|
Pension
|
|
$ |
17.5 |
|
|
$ |
21.0 |
|
|
Other
|
|
|
28.3 |
|
|
|
27.6 |
|
|
|
|
|
|
|
|
|
|
Total other liabilities
|
|
$ |
45.8 |
|
|
$ |
48.6 |
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment
|
|
$ |
(90.9 |
) |
|
$ |
(71.6 |
) |
|
Minimum pension liability
adjustments, net of income tax
|
|
|
(15.0 |
) |
|
|
(12.4 |
) |
|
Cash flow hedging and other, net of
income tax
|
|
|
(0.7 |
) |
|
|
(1.1 |
) |
|
|
|
|
|
|
|
|
|
Total accumulated other
comprehensive loss
|
|
$ |
(106.6 |
) |
|
$ |
(85.1 |
) |
|
|
|
|
|
|
|
|
|
(1) |
See Note 17 to the Consolidated Financial Statements. |
44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts | |
|
|
Inventory | |
|
Receivable | |
|
|
| |
|
| |
|
|
(In millions) | |
Reserves and Allowances:
|
|
|
|
|
|
|
|
|
|
Balance, as of December 31,
2002
|
|
$ |
9.1 |
|
|
$ |
16.4 |
|
|
|
Additions
|
|
|
3.9 |
|
|
|
36.7 |
|
|
|
Write-offs, net of recoveries
|
|
|
(3.4 |
) |
|
|
(38.4 |
) |
|
|
|
|
|
|
|
|
Balance, as of December 31,
2003
|
|
|
9.6 |
|
|
|
14.7 |
|
|
|
Additions
|
|
|
14.1 |
|
|
|
30.7 |
|
|
|
Write-offs, net of recoveries
|
|
|
(12.2 |
) |
|
|
(32.6 |
) |
|
|
|
|
|
|
|
|
Balance, as of December 31,
2004
|
|
|
11.5 |
|
|
|
12.8 |
|
|
|
Additions
|
|
|
5.0 |
|
|
|
29.8 |
|
|
|
Write-offs, net of recoveries
|
|
|
(6.2 |
) |
|
|
(32.4 |
) |
|
|
|
|
|
|
|
|
Balance, as of December 31,
2005
|
|
$ |
10.3 |
|
|
$ |
10.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In millions) | |
Intangible Assets
|
|
|
|
|
|
|
|
|
|
Software
|
|
$ |
49.5 |
|
|
$ |
47.8 |
|
|
Other
|
|
|
17.0 |
|
|
|
31.0 |
|
|
|
|
|
|
|
|
|
|
Total gross carrying amount
|
|
|
66.5 |
|
|
|
78.8 |
|
|
Accumulated amortization-software
|
|
|
49.3 |
|
|
|
46.8 |
|
|
Accumulated amortization-other
|
|
|
9.6 |
|
|
|
8.9 |
|
|
|
|
|
|
|
|
|
|
Total accumulated amortization
|
|
|
58.9 |
|
|
|
55.7 |
|
|
|
|
|
|
|
|
|
|
|
Intangibles assets, net
|
|
$ |
7.6 |
|
|
$ |
23.1 |
|
|
|
|
|
|
|
|
In late 2003, we entered into a tape media distribution
agreement with Exabyte Corp. (Exabyte), whereby we became the
exclusive distributor of Exabyte media including the VXA class
of tape cartridges. This transaction resulted in an intangible
asset of $18.5 million. On October 31, 2005, we
amended certain terms of the Exabyte distribution agreement
whereby Imation agreed to lower the margin we earn on
distribution in exchange for consideration of $10.3 million
in the form of Exabyte common stock, preferred stock, warrants,
and note receivables with a corresponding offset to the original
intangible asset recorded with the execution of the original
Exabyte distribution agreement.
Based on the intangible assets in service as of
December 31, 2005, estimated amortization expense for each
of the next five years ending December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Amortization expense
|
|
$ |
2.7 |
|
|
$ |
2.2 |
|
|
$ |
1.9 |
|
|
$ |
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 5 Investments
Our venture capital and minority equity investment portfolio
consists of investments of $16.7 million and
$16.8 million as of December 31, 2005 and
December 31, 2004, respectively. These investments are
accounted for on the cost basis. The carrying value of these
investments has been reduced by other-than-temporary declines in
fair value of $8.3 million and $10.0 million as of
December 31, 2005 and December 31, 2004, respectively.
In accordance with Emerging Issues Task Force
(EITF) 03-1,
The Meaning of Other-Than-Temporary Impairment and Its
Application to Certain Investments, the following table
shows the gross unrealized losses and fair value of our
investments with unrealized losses that are not deemed to be
other-than-temporarily impaired, aggregated by investment
category and length of time that individual securities have been
in a continuous unrealized loss position at December 31,
2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than 12 Months | |
|
12 Months or Greater |
|
Total | |
|
|
| |
|
|
|
| |
|
|
|
|
Unrealized | |
|
|
|
Unrealized |
|
|
|
Unrealized | |
|
|
Fair Value | |
|
Losses | |
|
Fair Value |
|
Losses |
|
Fair Value | |
|
Losses | |
|
|
| |
|
| |
|
|
|
|
|
| |
|
| |
|
|
(In millions) | |
Marketable equity securities
|
|
$ |
5.3 |
|
|
$ |
1.2 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5.3 |
|
|
$ |
1.2 |
|
Our investments in marketable equity securities consist of
strategic investments in common stock of companies in the data
storage industry. The unrealized losses are due to the decline
in value of a marketable security. We evaluated the near-term
prospects of the marketable security in relation to the severity
and duration of the impairment. The duration of the impairment
is less than 3 months. Based on this evaluation and our
ability to hold the investment for a reasonable period of time
sufficient for a forecasted recovery of fair value, we do not
consider this investment to be other-than-temporarily impaired
at December 31, 2005.
Note 6 Restructuring and Other
The components of our restructuring and other charges are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Asset impairments
|
|
$ |
|
|
|
$ |
6.1 |
|
|
$ |
|
|
Severance and other
|
|
|
1.2 |
|
|
|
19.1 |
|
|
|
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
1.2 |
|
|
$ |
25.2 |
|
|
$ |
(0.7 |
) |
|
|
|
|
|
|
|
|
|
|
During the fourth quarter of 2005, we incurred restructuring
charges of $1.2 million primarily for clean-up costs
associated with the Tucson, Arizona production facility closing
announced in 2004.
46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Severance and other: During the fourth quarter of 2004,
we recorded severance and other charges of $16.6 million
related to the restructuring of our business to lower overall
operating costs, simplify structure, and improve decision making
speed. The charge included $15.3 million for estimated cash
severance payments and related benefits associated with the
planned reductions in headcount of approximately 260 employees,
the majority of which was completed by the middle of 2005. The
other charges of $1.3 million included pension related
costs associated with severed employees and lease termination
costs. These charges were partially offset by a
$0.6 million benefit for European severance and related
costs, reflecting adjustments of $0.2 million to the second
quarter 2004 charges and $0.4 million to prior charges.
During the second quarter of 2004, we recorded severance and
other charges of $3.1 million. The charges related to a
plan to close our production facility in Tucson as well as
international administrative and sales employee reductions and
consisted of estimated severance payments and related benefits
related to the elimination of 280 positions. The restructuring
has since impacted approximately 270 positions as of the end of
2005. Production at the facility was terminated on
September 30, 2005 and the facility was closed by
December 31, 2005. Ongoing production activities from this
facility have concluded or shifted to other facilities as the
shutdown occurred.
The following tables summarize the activity related to our 2004
restructuring programs. Changes in the restructuring accruals
during the twelve months ended December 31, 2005 were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
No. of | |
|
|
|
|
Employees | |
|
|
Amount | |
|
Affected | |
|
|
| |
|
| |
|
|
(In millions) | |
|
|
Balance, December 31, 2004
|
|
$ |
15.9 |
|
|
|
250 |
|
Usage
|
|
|
13.8 |
|
|
|
236 |
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
$ |
2.1 |
|
|
|
14 |
|
|
|
|
|
|
|
|
On a cumulative basis through December 31, 2005, the status
of the 2004 restructuring accruals was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability as of | |
|
|
Program | |
|
Cumulative | |
|
Net | |
|
December 31, | |
|
|
Amounts | |
|
Usage | |
|
Adjustments | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Severance
|
|
$ |
18.0 |
|
|
$ |
15.8 |
|
|
$ |
(0.2 |
) |
|
$ |
2.0 |
|
Pension and lease termination costs
|
|
|
1.7 |
|
|
|
1.6 |
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
19.7 |
|
|
$ |
17.4 |
|
|
$ |
(0.2 |
) |
|
$ |
2.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative | |
|
Balance as of | |
|
|
Program | |
|
Reductions and | |
|
December 31, | |
|
|
Amounts | |
|
Adjustments | |
|
2005 | |
|
|
| |
|
| |
|
| |
No. of employees affected
|
|
|
540 |
|
|
|
526 |
|
|
|
14 |
|
Asset impairments: The asset impairment charges related
mainly to our decision to discontinue various product
development strategies as development efforts were focused on
fewer projects in conjunction with the program announced in the
fourth quarter of 2004. The 2004 asset impairment charges
included fixed assets of $4.2 million and intangible assets
of $1.9 million.
In the fourth quarter of 2003, we recorded a $0.7 million
benefit for restructuring, reflecting adjustments to previously
recorded restructuring reserves.
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Note 7 Income Taxes
The components of income from continuing operations before
income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
U.S.
|
|
$ |
83.2 |
|
|
$ |
21.2 |
|
|
$ |
80.1 |
|
International
|
|
|
23.5 |
|
|
|
22.7 |
|
|
|
30.9 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
106.7 |
|
|
$ |
43.9 |
|
|
$ |
111.0 |
|
|
|
|
|
|
|
|
|
|
|
The income tax provision from continuing operations is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$ |
(0.2 |
) |
|
$ |
(1.8 |
) |
|
$ |
10.7 |
|
|
State
|
|
|
3.2 |
|
|
|
(0.3 |
) |
|
|
0.8 |
|
|
International
|
|
|
6.0 |
|
|
|
3.0 |
|
|
|
7.6 |
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
14.0 |
|
|
|
8.1 |
|
|
|
14.4 |
|
|
State
|
|
|
2.3 |
|
|
|
0.7 |
|
|
|
1.3 |
|
|
International
|
|
|
(0.4 |
) |
|
|
(2.3 |
) |
|
|
1.3 |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
24.9 |
|
|
$ |
7.4 |
|
|
$ |
36.1 |
|
|
|
|
|
|
|
|
|
|
|
The components of net deferred tax assets and
(liabilities) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
As of | |
|
|
December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In millions) | |
Accounts receivable allowances
|
|
$ |
2.7 |
|
|
$ |
2.0 |
|
Inventories
|
|
|
7.6 |
|
|
|
5.8 |
|
Property, plant and equipment
|
|
|
(11.9 |
) |
|
|
(9.7 |
) |
Payroll, pension and severance
|
|
|
11.8 |
|
|
|
12.7 |
|
Credit carryforwards
|
|
|
9.2 |
|
|
|
14.8 |
|
Net operating loss carryforwards
|
|
|
8.5 |
|
|
|
8.7 |
|
Accrued liabilities and other
reserves
|
|
|
3.9 |
|
|
|
16.2 |
|
Research and experimentation costs
|
|
|
25.4 |
|
|
|
33.2 |
|
Other, net
|
|
|
0.2 |
|
|
|
0.1 |
|
Valuation allowance
|
|
|
(8.5 |
) |
|
|
(11.8 |
) |
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$ |
48.9 |
|
|
$ |
72.0 |
|
|
|
|
|
|
|
|
The valuation allowance was provided to account for
uncertainties regarding the recoverability of certain foreign
net operating loss carryforwards and state tax credit
carryforwards. The valuation allowance was $8.5 million,
$11.8 million, $18.2 million, and $20.8 million
as of December 31, 2005, 2004, 2003, and 2002,
respectively. The decreases in 2005 and 2004 were primarily due
to the reversal of certain valuation allowances on net operating
loss carryforwards. The changes during the other years were not
due to any individually significant items. Of the aggregate net
operating loss carryforwards, $9.7 million will expire at
various dates up to 2023 and $21.9 million may be carried
forward indefinitely.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Certain foreign net operating loss carryforwards are subject to
adjustment by foreign tax authorities. Foreign tax credit
carryforwards of $1.4 million will expire between 2009 and
2010, state tax credit carryforwards of $7.6 million will
expire between 2007 and 2019, and foreign alternative minimum
tax credits of $0.2 million will expire between 2009 and
2014.
Substantially all of our net deferred tax assets as of
December 31, 2005 relate to the U.S. tax jurisdiction.
Future recoverability is primarily dependent upon the generation
of future taxable income in the U.S. We believe that we
will generate sufficient future taxable income in the
U.S. to recover our recorded net deferred tax assets.
The income tax provision from continuing operations differs from
the amount computed by applying the statutory U.S. income
tax rate (35 percent) because of the following items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In millions) | |
Tax at statutory U.S. tax rate
|
|
$ |
37.3 |
|
|
$ |
15.3 |
|
|
$ |
38.8 |
|
|
State income taxes, net of federal
benefit
|
|
|
4.0 |
|
|
|
(0.3 |
) |
|
|
1.9 |
|
|
Net effect of international
operations
|
|
|
(1.2 |
) |
|
|
(2.0 |
) |
|
|
(6.1 |
) |
|
Resolution of European tax matter
|
|
|
(12.0 |
) |
|
|
|
|
|
|
|
|
|
Reversal of valuation allowances
|
|
|
(4.3 |
) |
|
|
(4.1 |
) |
|
|
|
|
|
Other
|
|
|
1.1 |
|
|
|
(1.5 |
) |
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$ |
24.9 |
|
|
$ |
7.4 |
|
|
$ |
36.1 |
|
|
|
|
|
|
|
|
|
|
|
In 2005, 2004 and 2003, cash paid for income taxes, relating to
both continuing and discontinued operations, was
$5.2 million, $18.3 million and $14.9 million,
respectively.
As of December 31, 2005, approximately $62.5 million
of earnings attributable to international subsidiaries were
considered to be permanently invested. No provision has been
made for taxes that might be payable if these earnings were
remitted to the U.S.
Significant tax loss carryforwards have been generated in the
Netherlands for the years 1998-2000. The filing of the related
returns resulted in a nil assessment from the Dutch
tax authorities on carryforwards representing a potential tax
benefit of approximately $14.0 million. This results in no
tax loss carryforward from the viewpoint of the Dutch tax
authorities. The issuance of the assessment notice resulted in
Imation reporting no tax loss carryforwards relating to these
losses. However, we are pursuing opportunities to resolve the
validity of some or all of these amounts. In the event we are
successful, a discrete tax benefit will be realized in the
period of settlement. We are unable to estimate the possible
benefit of timing of resolution.
Note 8 Debt
We had no outstanding debt as of December 31, 2005 or 2004.
We maintain a Credit Agreement with a group of banks that
expires December 15, 2006. The Credit Agreement provides
for revolving credit, including letters of credit, with
borrowing availability of $100 million. The Credit
Agreement provides for, at our option, borrowings at either a
floating interest rate based on a defined prime rate or a fixed
rate related to the Eurodollar rate, plus a margin based on our
consolidated leverage ratio. The margins over a defined prime
rate and Eurodollar rate range from zero to 0.4 percent and
1.1 to 1.6 percent, respectively. Letter of credit fees are
equal to the Eurodollar margins. A facility fee ranging from 0.2
to 0.4 percent per annum and a utilization fee ranging from
zero to 0.25 percent per annum based on our consolidated
leverage ratio is payable on the line of credit. In conjunction
with the Credit Agreement, we have pledged 65 percent of
the stock of certain of our foreign subsidiaries. Covenants
include maintenance of a minimum consolidated tangible net
worth, a required EBITDA, and a maximum leverage ratio. We do
not expect these covenants to materially restrict our ability to
borrow funds in the future. No borrowings were outstanding under
the Credit Agreement as of December 31, 2005, and we were
in compliance with all covenants under the Credit Agreement.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 2005 and 2004, we had outstanding
standby letters of credit of $4.6 million and
$4.1 million, respectively. As of December 31, 2005,
we had $12.4 million available under credit facilities of
various subsidiaries outside the U.S.
Our interest expense, which includes letter of credit fees,
facility fees and commitment fees under the Credit Agreement,
for 2005, 2004, and 2003 was $0.7 million,
$0.6 million, and $1.3 million, respectively. Cash
paid for interest in these periods, relating to both continuing
and discontinued operations, was $0.7 million,
$0.6 million, and $1.2 million, respectively.
Note 9 Derivatives and Hedging Activities
We maintain a foreign currency exposure management policy that
allows the use of derivative instruments, principally foreign
currency forward and option contracts, to manage risks
associated with foreign exchange rate volatility. Generally,
these contracts are entered into to fix the U.S. dollar
amount of the eventual cash flows. The derivative instruments
range in duration from less than one to fourteen months. We do
not hold or issue derivative financial instruments for
speculative or trading purposes, and we are not a party to
leveraged derivatives.
We are exposed to the risk of nonperformance by our
counter-parties in foreign currency forward and option
contracts, but we do not anticipate nonperformance by any of
these counter-parties. We actively monitor our exposure to
credit risk through the use of credit approvals and credit
limits, and by using major international banks and financial
institutions as counter-parties.
We attempt to mitigate the risk that forecasted cash flows
denominated in foreign currencies may be adversely affected by
changes in currency exchange rates through the use of option and
forward contracts. We formally document all relationships
between hedging instruments and hedged items, as well as our
risk management objective and strategy for undertaking the hedge
items. This process includes linking all derivatives to
forecasted transactions.
We also formally assess, both at the hedges inception and
on an ongoing basis, whether the derivatives used in hedging
transactions are highly effective in offsetting changes in the
cash flows of hedged items. Gains and losses related to cash
flow hedges are deferred in accumulated other comprehensive
income (loss) with a corresponding asset or liability. When the
hedged transaction occurs, the gains and losses in accumulated
other comprehensive income (loss) are reclassified into the
Consolidated Statement of Operations in the same line as the
item being hedged. If at any time it is determined that a
derivative is not highly effective as a hedge, we discontinue
hedge accounting prospectively, with deferred gains and losses
being recognized in current period operations.
As of December 31, 2005 and 2004, cash flow hedges ranged
in duration from one to twelve months and had a total notional
amount of $178.9 million and $131.7 million,
respectively. Hedge costs, representing the premiums paid on
expired options net of hedge gains and losses, of
$0.5 million, $5.4 million and $2.1 million were
reclassified into the Consolidated Statement of Operations in
2005, 2004 and 2003, respectively. The amount of net deferred
gains on foreign currency cash flow hedges included in
accumulated other comprehensive income (loss) in
shareholders equity as of December 31, 2005 was
$0.3 million, pre-tax, which depending on market factors is
expected to reverse or be reclassified into operations in 2006.
We enter into foreign currency forward contracts, generally with
durations of less than two months, to manage the foreign
currency exposure related to our monetary assets and liabilities
denominated in foreign currencies. We record the estimated fair
value of these forwards within other current assets or other
current liabilities in the Consolidated Balance Sheets, and all
changes in their fair value are immediately recognized in the
Consolidated Statement of Operations. As of December 31,
2005 and 2004, we had a notional amount of forward contracts of
$43.8 million and $44.5 million, respectively, to
hedge our recorded balance sheet exposures.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
As of December 31, 2005 and 2004, the fair value of our
foreign currency forward and option contracts outstanding was
$1.6 million and $0.2 million, respectively. The
estimated fair market values were determined using available
market information or other appropriate valuation methodologies.
Note 10 Leases
Rent expense under operating leases, which primarily relate to
equipment and office space, amounted to $12.4 million,
$12.3 million, and $10.4 million in 2005, 2004, and
2003, respectively. The following table sets forth the minimum
rental payments under operating leases with non-cancelable terms
in excess of one year as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Minimum lease payments
|
|
$ |
9.5 |
|
|
$ |
6.9 |
|
|
$ |
1.7 |
|
|
$ |
0.8 |
|
|
$ |
0.2 |
|
|
$ |
19.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sale-Leaseback Transactions |
In 2002, we executed a sale-leaseback transaction related to an
expanded manufacturing facility that we had constructed in
Wahpeton, North Dakota. The terms of this agreement include
monthly payments by us to the buyer/lessor and an obligation by
us to purchase the facility at the end of the agreement term. In
2003, we executed another sale-leaseback transaction related to
a portion of our manufacturing facility in Camarillo,
California. We accepted a note from the buyer/lessor for a
portion of the sale price and are required, under the lease
agreement, to make monthly payments to the buyer/lessor. As a
result of our continuing involvement with each of the
facilities, the agreements have been accounted for as
financings. As of December 31, 2005 and 2004, net assets
totaling $5.0 million and $9.7 million, respectively,
are included in property, plant and equipment related to these
facilities. The following table sets forth the future minimum
payments related to these obligations as of December 31,
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Minimum lease payments
|
|
$ |
0.9 |
|
|
$ |
0.9 |
|
|
$ |
0.8 |
|
|
$ |
0.8 |
|
|
$ |
0.5 |
|
|
$ |
3.8 |
|
|
$ |
7.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11 Shareholders Equity
We maintain a shareholder rights plan (Rights Plan) under which
we have issued one preferred share purchase right (Right) for
each share of our Common Stock. If they become exercisable, each
Right will entitle its holder to purchase one one-hundredth of a
share of Series A Junior Participating Preferred Stock at
an exercise price of $125, subject to adjustment. The Rights are
exercisable only if a person or group (Acquiring Person)
acquires beneficial ownership of 15 percent or more of our
outstanding Common Stock, except that the Rights Plan excludes
acquisitions by any Acquiring Person who becomes the beneficial
owner of 15 percent or more of the shares of Common Stock
then outstanding as a result of a reduction in the number of
shares of Common Stock outstanding due to our repurchase of
Common Stock unless and until such person, after becoming aware
of such, acquires beneficial ownership of any additional shares
of Common Stock. The Rights expire on July 1, 2006 and may
be redeemed earlier by the Board of Directors for $0.01 per
Right.
In 1997, our Board of Directors authorized the repurchase of up
to six million shares of our Common Stock and in 1999 increased
the authorization to a total of 10 million shares. On
August 4, 2004, our Board of Directors increased the
authorization for repurchase of Common Stock, expanding the then
remaining share repurchase authorization of 1.8 million
shares as of June 30, 2004, to a total of six million
shares. During 2005, 2004, and 2003, we repurchased
0.5 million shares, 2.7 million shares, and
0.6 million shares, respectively. As of December 31,
2005, we had repurchased 2.7 million shares under the
latest authorization and held, in total, 8.4 million shares
of treasury stock
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
acquired at an average price of $23.86 per share.
Authorization for repurchases of an additional 3.3 million
shares remains outstanding as of December 31, 2005.
Note 12 Business Segment Information
Since the formation of Imation in 1996, we have divested several
operating segments, including our Specialty Papers segment, as
discussed below. As a result, we now operate as a single
segment. In January 2006, we entered into an Acquisition
Agreement with Memorex International Inc. (Memorex), a
corporation organized under the laws of the British Virgin
Islands (see Note 19 to the Consolidated Financial
Statements), and we are evaluating changes to our operating
structure given the significance of this pending acquisition.
On June 30, 2005, we closed on the sale of our Specialty
Papers business to Nekoosa Coated Products, LLC for
$17.0 million, with the potential for up to an additional
$4.0 million in consideration over the next three years,
contingent on performance of the business. Upon closing, we
received a cash payment of $16.0 million and a note
receivable of $1.0 million due in four years subject to
certain post closing adjustments. A gain of $4.6 million,
net of taxes of $2.7 million, was recognized on the sale.
Specialty Papers is reported as a discontinued operation as the
operations and cash flows of the Specialty Papers business have
been eliminated from that of the Company and there will not be
significant continuing involvement in the Specialty Papers
business in the future. As such, the consolidated financial
statements for all prior periods have been adjusted to reflect
this presentation.
The following table presents information about our geographic
areas.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United | |
|
|
|
Total | |
|
|
|
|
States | |
|
International | |
|
Company | |
|
|
|
|
| |
|
| |
|
| |
|
|
|
|
(In millions) | |
Net revenue(1)
|
|
|
2005 |
|
|
$ |
450.9 |
|
|
$ |
807.2 |
|
|
$ |
1,258.1 |
|
|
|
|
2004 |
|
|
|
447.9 |
|
|
|
725.8 |
|
|
|
1,173.7 |
|
|
|
|
2003 |
|
|
|
486.0 |
|
|
|
624.6 |
|
|
|
1,110.6 |
|
Long-lived assets
|
|
|
2005 |
|
|
$ |
190.9 |
|
|
$ |
4.1 |
|
|
$ |
195.0 |
|
|
|
|
2004 |
|
|
|
209.1 |
|
|
|
5.3 |
|
|
|
214.4 |
|
|
|
|
2003 |
|
|
|
221.6 |
|
|
|
4.9 |
|
|
|
226.5 |
|
|
|
(1) |
Net revenue is generally classified into geographic areas
primarily based on destination. |
Note 13 Retirement Plans
We have various non-contributory defined benefit employee
pension plans covering substantially all U.S. employees and
certain employees outside the U.S. Total pension expense
was $11.1 million, $11.9 million and
$11.1 million in 2005, 2004, and 2003, respectively. The
funded status of the pension plans includes both continuing and
discontinued operations. The measurement date for our pension
plans is December 31. We expect to contribute approximately
$10 million to $15 million to our pension plans in
2006. It is our general practice, at a minimum, to fund amounts
sufficient to meet the requirements set forth in applicable
benefits laws and local tax laws. From time to time, we
contribute additional amounts, as we deem appropriate.
The following provides reconciliations of benefit obligations,
plan assets, and funded status of the plans as well as a summary
of net periodic pension cost.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States | |
|
International | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Change in projected benefit
obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation,
beginning of year
|
|
$ |
136.9 |
|
|
$ |
123.8 |
|
|
$ |
67.1 |
|
|
$ |
62.5 |
|
Service cost
|
|
|
9.1 |
|
|
|
10.4 |
|
|
|
0.5 |
|
|
|
0.5 |
|
Interest cost
|
|
|
7.4 |
|
|
|
7.0 |
|
|
|
3.2 |
|
|
|
3.1 |
|
Actuarial (gain) loss
|
|
|
(0.2 |
) |
|
|
4.0 |
|
|
|
6.8 |
|
|
|
(1.3 |
) |
Benefits paid
|
|
|
(18.2 |
) |
|
|
(9.3 |
) |
|
|
(2.2 |
) |
|
|
(2.2 |
) |
Foreign exchange rate changes
|
|
|
|
|
|
|
|
|
|
|
(6.6 |
) |
|
|
4.4 |
|
Settlements and curtailments(1)
|
|
|
|
|
|
|
1.0 |
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation, end
of year
|
|
$ |
135.0 |
|
|
$ |
136.9 |
|
|
$ |
68.8 |
|
|
$ |
67.1 |
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets at fair value,
beginning of year
|
|
$ |
125.4 |
|
|
$ |
111.5 |
|
|
$ |
59.1 |
|
|
$ |
49.3 |
|
Actual return on plan assets
|
|
|
5.5 |
|
|
|
13.2 |
|
|
|
6.6 |
|
|
|
3.9 |
|
Foreign exchange rate changes
|
|
|
|
|
|
|
|
|
|
|
(6.1 |
) |
|
|
3.7 |
|
Company contributions
|
|
|
12.1 |
|
|
|
10.0 |
|
|
|
2.7 |
|
|
|
4.4 |
|
Benefits paid
|
|
|
(18.2 |
) |
|
|
(9.3 |
) |
|
|
(2.0 |
) |
|
|
(2.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets at fair value, end of
year
|
|
$ |
124.8 |
|
|
$ |
125.4 |
|
|
$ |
60.3 |
|
|
$ |
59.1 |
|
|
Prepaid (accrued) pension
cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status of the plan
|
|
$ |
(10.2 |
) |
|
$ |
(11.5 |
) |
|
$ |
(8.5 |
) |
|
$ |
(8.0 |
) |
Unrecognized prior service cost
|
|
|
1.5 |
|
|
|
1.7 |
|
|
|
(1.3 |
) |
|
|
(1.2 |
) |
Unrecognized actuarial loss
|
|
|
17.2 |
|
|
|
15.7 |
|
|
|
11.5 |
|
|
|
9.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total prepaid pension cost
|
|
$ |
8.5 |
|
|
$ |
5.9 |
|
|
$ |
1.7 |
|
|
$ |
0.2 |
|
|
Amount recognized in financial
statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued pension liability
|
|
$ |
(9.0 |
) |
|
$ |
(10.1 |
) |
|
$ |
(8.5 |
) |
|
$ |
(10.9 |
) |
Prepaid pension cost
|
|
|
|
|
|
|
|
|
|
|
0.8 |
|
|
|
2.7 |
|
Intangible asset
|
|
|
1.5 |
|
|
|
1.7 |
|
|
|
0.4 |
|
|
|
0.2 |
|
Accumulated other comprehensive
loss pre-tax
|
|
|
16.0 |
|
|
|
14.3 |
|
|
|
9.0 |
|
|
|
8.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized
|
|
$ |
8.5 |
|
|
$ |
5.9 |
|
|
$ |
1.7 |
|
|
$ |
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States | |
|
International | |
|
|
| |
|
| |
|
|
Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Net periodic pension
cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$ |
9.1 |
|
|
$ |
10.4 |
|
|
$ |
9.9 |
|
|
$ |
0.5 |
|
|
$ |
0.5 |
|
|
$ |
0.6 |
|
Interest cost
|
|
|
7.4 |
|
|
|
7.0 |
|
|
|
6.9 |
|
|
|
3.2 |
|
|
|
3.1 |
|
|
|
2.8 |
|
Expected return on plan assets
|
|
|
(9.7 |
) |
|
|
(8.6 |
) |
|
|
(7.3 |
) |
|
|
(3.2 |
) |
|
|
(2.8 |
) |
|
|
(2.4 |
) |
Amortization of prior service cost
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.2 |
|
|
|
0.1 |
|
|
|
0.1 |
|
|
|
0.1 |
|
Amortization of transition
obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
0.4 |
|
|
|
0.4 |
|
Recognized net actuarial loss
|
|
|
0.3 |
|
|
|
0.1 |
|
|
|
|
|
|
|
0.1 |
|
|
|
0.2 |
|
|
|
0.2 |
|
Settlements and curtailments(1)(2)
|
|
|
2.2 |
|
|
|
1.2 |
|
|
|
|
|
|
|
0.7 |
|
|
|
0.1 |
|
|
|
|
|
Discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$ |
9.5 |
|
|
$ |
10.3 |
|
|
$ |
9.7 |
|
|
$ |
1.6 |
|
|
$ |
1.6 |
|
|
$ |
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
In 2004, we recognized $1.2 million for curtailment and
other benefits, including $0.2 million of prior service
cost, associated with the restructuring charges recorded during
the year. |
|
(2) |
In 2005, we recognized $2.2 million for settlement expenses
in connection with lump sum benefit distributions. |
The following assumptions were used to determine the plans
benefit obligations as of the end of the plan year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States | |
|
International | |
|
|
| |
|
| |
Weighted-average assumptions |
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Discount rate
|
|
|
5.50 |
% |
|
|
5.75 |
% |
|
|
4.50 |
% |
|
|
5.00 |
% |
Rate of compensation increase
|
|
|
4.75 |
% |
|
|
4.75 |
% |
|
|
3.40 |
% |
|
|
3.70 |
% |
The following assumptions were used to determine the plans
net periodic pension cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States | |
|
International | |
|
|
| |
|
| |
Weighted-average assumptions |
|
2005 | |
|
2004 | |
|
2003 | |
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Discount rate
|
|
|
5.75 |
% |
|
|
6.25 |
% |
|
|
6.75 |
% |
|
|
5.00 |
% |
|
|
5.00 |
% |
|
|
4.90 |
% |
Expected return on plan assets
|
|
|
8.00 |
% |
|
|
8.00 |
% |
|
|
8.00 |
% |
|
|
5.70 |
% |
|
|
5.60 |
% |
|
|
5.60 |
% |
Rate of compensation increase
|
|
|
4.75 |
% |
|
|
4.75 |
% |
|
|
4.75 |
% |
|
|
3.30 |
% |
|
|
3.50 |
% |
|
|
3.20 |
% |
The expected long-term rate of return on plan assets is chosen
from the range of likely results of compounded average annual
returns over a 10-year
time horizon based on the plans current investment policy.
The expected return and volatility for each asset class is based
on historical equity, bond and cash market returns. When this
approach gives appropriate consideration to recent fund
performance and historical returns, the assumption is primarily
a long-term, prospective rate.
The projected benefit obligation, accumulated benefit
obligation, and plan assets at fair value for the pension plans
with accumulated benefit obligations in excess of plan assets
resulting in minimum pension liability adjustments are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States | |
|
International | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In millions) | |
Projected benefit obligation, end
of year
|
|
$ |
135.0 |
|
|
$ |
136.9 |
|
|
$ |
62.5 |
|
|
$ |
60.3 |
|
Accumulated benefit obligation, end
of year
|
|
|
133.9 |
|
|
|
135.5 |
|
|
|
61.8 |
|
|
|
59.2 |
|
Plan assets at fair value, end of
year
|
|
|
124.8 |
|
|
|
125.4 |
|
|
|
53.6 |
|
|
|
52.2 |
|
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The plans weighted average asset allocations as of
December 31, 2005 and 2004 by asset category are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States | |
|
International | |
|
|
| |
|
| |
|
|
2005 | |
|
2004 | |
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
| |
|
| |
Equity securities
|
|
|
65 |
% |
|
|
76 |
% |
|
|
38 |
% |
|
|
34 |
% |
Debt securities
|
|
|
18 |
% |
|
|
23 |
% |
|
|
36 |
% |
|
|
35 |
% |
Other
|
|
|
17 |
% |
|
|
1 |
% |
|
|
26 |
% |
|
|
31 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
In the U.S., we maintain target allocation percentages among
various asset classes based on an investment policy established
for the plan, which is designed to achieve long-term objectives
of return, while mitigating against downside risk, and
considering expected cash flows. The current target asset
allocation includes equity securities at 50 to 80 percent,
debt securities at 15 to 25 percent, and other investments
at 10 to 20 percent. Management reviews our
U.S. investment policy for the plan at least annually.
Outside the U.S., the investment objectives are similar to the
U.S., subject to local regulations. In some countries, a higher
percentage allocation to fixed income securities is required.
The following benefit payments as of December 31, 2005
reflect expected future services and are expected to be paid in
each of the next five fiscal years and in the aggregate for the
five fiscal years thereafter:
|
|
|
|
|
|
|
|
|
|
|
United States | |
|
International | |
|
|
| |
|
| |
|
|
(In millions) | |
2006
|
|
$ |
17.3 |
|
|
$ |
3.7 |
|
2007
|
|
$ |
13.7 |
|
|
$ |
1.8 |
|
2008
|
|
$ |
10.5 |
|
|
$ |
1.8 |
|
2009
|
|
$ |
11.3 |
|
|
$ |
1.9 |
|
2010
|
|
$ |
12.0 |
|
|
$ |
2.0 |
|
2011-2015
|
|
$ |
74.2 |
|
|
$ |
12.3 |
|
Note 14 Employee Savings and Stock Ownership
Plans
We sponsor a 401(k) retirement savings plan under which eligible
U.S. employees may choose to save up to 20 percent of
eligible compensation on a pre-tax basis, subject to certain IRS
limitations. We match 100 percent of employee contributions
on the first three percent of eligible compensation and
25 percent on the next three percent of eligible
compensation in our stock. We also sponsor a variable
compensation program in which we may, at our discretion,
contribute up to three percent of eligible employee compensation
to employees 401(k) retirement accounts, depending upon
our performance.
We established an ESOP during 1996 as a cost-effective way of
funding the employee retirement savings benefits noted above.
The ESOP borrowed $50.0 million from us in 1996 and used
the proceeds to purchase approximately 2.2 million shares
of our common stock, with the ESOP shares pledged as collateral
for the debt. We made monthly contributions to the ESOP to cover
the debt service plus an additional amount so that the total
contribution released shares to satisfy our matching
requirements. As the debt was repaid, shares were released from
collateral, and these shares were allocated to employee accounts
as they were earned. The shares not yet allocated to employee
accounts were reported as unearned ESOP shares in the
Consolidated Balance Sheets. We reported compensation expense
equal to the current market price of the shares allocated to
employee accounts, and all such shares were considered
outstanding for the computation of earnings per share.
The ESOP was terminated in the first quarter of 2004, and we
used shares of treasury stock to match employee 401(k)
contributions for the remainder of 2004 and 2005.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Total expense related to the use of shares of treasury stock to
match employee 401(k) contributions was $3.6 million and
$4.5 million in 2005 and 2004, respectively. Total expense
related to the ESOP was $4.3 million in 2003.
Note 15 Employee Stock Plans
We currently have restricted stock and stock options outstanding
under our 1996 Employee Stock Incentive Program (Employee Plan),
our 1996 Directors Stock Compensation Program (Directors
Plan), our 2000 Stock Incentive Plan (2000 Incentive Plan),
and/or our 2005 Stock Incentive Plan (2005 Incentive Plan).
The Employee Plan was approved and adopted by 3M Company on
June 18, 1996, as our sole shareholder, and became
effective on July 1, 1996. The total number of shares of
common stock that could have been issued or awarded under the
Employee Plan could not exceed 6 million. Grant prices are
equal to the fair market value of our Common Stock at date of
grant. The outstanding options are non-qualified, normally have
a term of ten years, and generally become exercisable from one
to five years after grant date. As a result of the approval and
adoption of the 2000 Incentive Plan, no further shares are
available for grant under the Employee Plan.
The Directors Plan was also approved and adopted by 3M Company,
as our sole shareholder, and became effective on July 1,
1996. The total number of shares of common stock that could have
been issued or awarded under the Directors Plan could not exceed
800,000. The outstanding options are non-qualified options,
normally have a term of ten years, and generally become
exercisable one year after grant date. Grant prices are equal to
the fair market value of our Common Stock at the date of grant.
As a result of the approval and adoption of the 2005 Incentive
Plan in May 2005, no further shares are available for grant
under the Directors Plan.
The 2000 Incentive Plan was approved and adopted by our
shareholders on May 16, 2000, and became effective
immediately. The total number of shares of Common Stock that may
be issued or awarded under the 2000 Incentive Plan may not
exceed 4.0 million. Grant prices are equal to the fair
market value of our Common Stock at date of grant. The
outstanding options are non-qualified, normally have a term of
seven to ten years, and generally become exercisable
25 percent per year beginning on the first anniversary of
the grant date. As a result of the approval and adoption of the
2005 Incentive Plan in May 2005, no further shares are available
for grant under the 2000 Incentive Plan.
The 2005 Incentive Plan was approved and adopted by our
shareholders on May 4, 2005, and became effective
immediately. The 2005 Incentive Plan permits the granting of
incentive and non-qualified stock options, stock appreciation
rights, restricted stock, restricted stock units, dividend
equivalents, performance awards, and other stock and stock-based
awards. The total number of shares of Common Stock that may be
issued or awarded under the 2005 Incentive Plan may not exceed
2.5 million. The maximum number of shares that may be
awarded pursuant to grants of restricted stock, restricted stock
units, and stock awards is 1.5 million. Grant prices are
equal to the fair market value of our Common Stock at date of
grant. The outstanding options are non-qualified, normally have
a term of ten years, and generally become exercisable
25 percent per year beginning on the first anniversary of
the grant date. As of December 31, 2005, there were
2,399,460 shares available for grant under the 2005 Stock
Incentive Plan.
The following table summarizes stock option activity for 2005,
2004, and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
Stock | |
|
Weighted Average | |
|
Stock | |
|
Weighted Average | |
|
Stock | |
|
Weighted Average | |
|
|
Options | |
|
Exercise Price | |
|
Options | |
|
Exercise Price | |
|
Options | |
|
Exercise Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Outstanding, January 1
|
|
|
4,593,608 |
|
|
$ |
29.14 |
|
|
|
5,021,838 |
|
|
$ |
26.44 |
|
|
|
4,766,080 |
|
|
$ |
24.12 |
|
Granted
|
|
|
754,616 |
|
|
|
34.36 |
|
|
|
933,536 |
|
|
|
39.66 |
|
|
|
1,168,223 |
|
|
|
34.08 |
|
Exercised
|
|
|
(968,952 |
) |
|
|
24.83 |
|
|
|
(807,836 |
) |
|
|
22.97 |
|
|
|
(551,435 |
) |
|
|
21.97 |
|
Canceled
|
|
|
(263,639 |
) |
|
|
33.79 |
|
|
|
(553,930 |
) |
|
|
31.18 |
|
|
|
(361,030 |
) |
|
|
27.40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31
|
|
|
4,115,633 |
|
|
|
30.82 |
|
|
|
4,593,608 |
|
|
|
29.16 |
|
|
|
5,021,838 |
|
|
|
26.44 |
|
Exercisable, December 31
|
|
|
2,276,091 |
|
|
|
27.32 |
|
|
|
2,650,718 |
|
|
|
25.33 |
|
|
|
2,726,723 |
|
|
|
23.52 |
|
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table summarizes information about stock options
outstanding as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding | |
|
Options Exercisable | |
|
|
| |
|
| |
|
|
|
|
Weighted Average | |
|
|
|
|
|
|
Stock | |
|
Remaining | |
|
Weighted Average | |
|
Stock | |
|
Weighted Average | |
Range of Exercise Prices |
|
Options | |
|
Contractual Life | |
|
Exercise Price | |
|
Options | |
|
Exercise Price | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
$10.39
|
|
|
433 |
|
|
|
1.0 |
|
|
$ |
10.39 |
|
|
|
433 |
|
|
$ |
10.39 |
|
$14.15 to $19.20
|
|
|
285,181 |
|
|
|
3.1 |
|
|
|
17.35 |
|
|
|
285,181 |
|
|
|
17.35 |
|
$19.56 to $23.95
|
|
|
701,050 |
|
|
|
4.5 |
|
|
|
23.02 |
|
|
|
551,983 |
|
|
|
23.00 |
|
$24.10 to $28.70
|
|
|
337,840 |
|
|
|
1.5 |
|
|
|
24.98 |
|
|
|
337,340 |
|
|
|
24.98 |
|
$28.75 to $39.38
|
|
|
2,028,084 |
|
|
|
7.2 |
|
|
|
32.91 |
|
|
|
921,504 |
|
|
|
31.42 |
|
$39.45 to $41.75
|
|
|
751,245 |
|
|
|
5.6 |
|
|
|
39.99 |
|
|
|
179,650 |
|
|
|
39.84 |
|
$41.76 to $44.52
|
|
|
11,800 |
|
|
|
9.8 |
|
|
|
42.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$10.39 to $44.52
|
|
|
4,115,633 |
|
|
|
5.7 |
|
|
|
30.82 |
|
|
|
2,276,091 |
|
|
|
27.32 |
|
The weighted average fair values at date of grant for options we
granted, all of which had exercise prices equal to the market
price on the grant date, were $13.42, $15.06, and $13.72, in
2005, 2004, and 2003, respectively.
The fair values at date of grant were estimated using the
Black-Scholes option-pricing model with the following weighted
average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Volatility
|
|
|
42 |
% |
|
|
41 |
% |
|
|
45 |
% |
Risk free interest rate
|
|
|
3.89 |
% |
|
|
3.67 |
% |
|
|
2.60 |
% |
Expected life (months)
|
|
|
60 |
|
|
|
60 |
|
|
|
59 |
|
Dividend yield
|
|
|
1.20 |
% |
|
|
1.00 |
% |
|
|
0.90 |
% |
Note 16 Loan Impairment
During 2003, we re-evaluated our manufacturing strategy products
and decided to leverage our metal particulate manufacturing
capabilities and selective outsourcing to a greater degree in
place of an existing contract manufacturer. As a result, we
recorded a $4.6 million provision to offset substantially
all of an outstanding loan receivable from the contract
manufacturer. This charge was recorded on a separate line in the
Consolidated Statement of Operations in 2003.
Note 17 Commitments and Contingencies
In the normal course of business, we periodically enter into
agreements that incorporate general indemnification language.
Performance under these indemnities would generally be triggered
by a breach of terms of the contract or by a third-party claim.
There have historically been no material losses related to such
indemnifications, and we do not expect any material adverse
claims in the future.
We are the subject of various pending or threatened legal
actions in the ordinary course of our business. All such matters
are subject to many uncertainties and outcomes that are not
predictable with assurance. Consequently, as of
December 31, 2005, we are unable to ascertain the ultimate
aggregate amount of any monetary liability or financial impact
that we may incur with respect to these matters. While these
matters could materially affect operating results depending upon
the final resolution in future periods, it is our opinion that
after final disposition, any monetary liability beyond that
provided in the Consolidated Balance Sheet as of
December 31, 2005 would not be material to our financial
position.
Jazz Photo Corp.
On May 10, 1999, Jazz Photo Corp. (Jazz Photo) served us
and our affiliate, Imation S.p.A., with a civil complaint filed
in New Jersey Superior Court. The complaint charged breach of
contract, breach of warranty, fraud and
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
racketeering activity in connection with our sale of allegedly
defective film to Jazz Photo by our Photo Color Systems
business, which was sold in 1999.
The trial of the Jazz Photo v. Imation lawsuit commenced on
January 10, 2005 before the Honorable Jose L. Linares, in
the Federal District Court in Newark, New Jersey. The trial
proceeded for approximately 4 weeks, at which time Jazz
Photo had not yet concluded its case. On February 7, 2005,
with facilitation by Judge Linares, a proposed settlement
agreement was negotiated between us, our insurers (discussed
below), Fuji Photo Film Co., Ltd. (Fuji) and the Creditors
Committee of Jazz Photo, which had filed a Voluntary Petition
for Relief under Chapter 11 of the United States Bankruptcy
Code on May 20, 2003. Fuji, the largest bankruptcy creditor
listed by Jazz Photo, had obtained a judgment against Jazz Photo
and Mr. Benun, Jazz Photos principal shareholder, in
the amount of approximately $30 million after a patent
infringement trial in the United States District Court for the
District of New Jersey. Mr. Benun had filed bankruptcy in
July 2003.
On February 16, 2005, at a hearing before the Honorable
Morris Stern and following a finding by an independent examiner
appointed by the Bankruptcy Court that the proposed settlement
was reasonable, the Bankruptcy Court approved the proposed
settlement. The trustee for Mr. Benuns personal
bankruptcy case appealed that approval order. On April 11,
2005, the Honorable Dennis M. Cavanaugh, to whom the appeal was
assigned, denied the trustees motion to stay execution of
the settlement pending the appeal.
On February 17, 2005, Judge Linares dismissed the jury and
entered an order dismissing the Jazz Photo v. Imation
action, subject to the right of either party to reopen the
action if a settlement agreement was not consummated within
60 days. On February 28, 2005, Judge Linares entered
an Order Clarifying his May 20, 2004 summary judgment order
by ruling that all claims of Jazz Photo (Hong Kong) Limited,
which was a plaintiff in the litigation along with Jazz Photo,
were dismissed with prejudice. Jazz Photo (Hong Kong) Limited is
in liquidation pursuant to an order of a Hong Kong bankruptcy
court.
On March 14, 2005, we, the counsel for Jazz Photo, and the
counsel for the Creditors Committee of Jazz Photo executed a
Settlement Agreement and General Release (the Settlement
Agreement). Pursuant to the Settlement Agreement, we paid
$20.9 million and our insurers paid $4.1 million of
the settlement to Jazz Photo in exchange for a complete release
of all claims by Jazz Photo. Also pursuant to the Settlement
Agreement, the settlement payment was held in escrow until the
effective date, which occurred on March 31, 2005. The
settlement payment was distributed pursuant to the procedures of
the Bankruptcy Court.
We had tendered defense and liability obligations arising from
the Jazz Photo v. Imation action to The St. Paul Fire and
Marine Insurance Co. (St. Paul) pursuant to a primary commercial
general liability policy. St. Paul, under a reservation of
rights, reimbursed us for our defense costs in the Jazz Photo
litigation up to the limit of $2 million under one insuring
agreement of the policy issued by St. Paul. We asserted that we
were entitled to higher limits for defense and indemnity
contained in other insuring agreements of the St. Paul policy.
We also asserted that we had coverage for defense and/or
indemnity under policies issued by another primary carrier, ACE
American Insurance Company, f/k/a CIGNA Insurance Company (Ace
American), and by our excess carrier, National Union Fire
Insurance of Pittsburgh, PA (National Union). A coverage dispute
concerning the St. Paul and Ace American policies was commenced
in Minnesota District Court, and a coverage dispute concerning
the National Union policy was commenced in the Federal District
Court for the District of Minnesota. All coverage disputes were
then stayed pending resolution of the Jazz Photo v. Imation
litigation. On March 16, 17 and 18, 2005, a Settlement
Agreement and Release was executed between us and each of Ace
American, St. Paul and National Union, respectively. Pursuant to
those agreements, the insurers made the payments to Jazz Photo
described above and the dispute actions have been dismissed.
Spanish Collecting Society
We were a defendant in a lawsuit filed in Court of First
Instance Num. 5 in Madrid by a Spanish collecting society
demanding copyright levies for recording artists to be paid on
all CDR-Data discs that were sold during 1998 and 1999. Prior to
July 2003, there was an agreed upon levy assessed on all
CDR-Audio discs sold in Spain but no agreement had been reached
regarding an applicable levy for CDR-Data discs. The Spanish
collecting society filed a lawsuit against us and at least three
other companies alleging that consumers are using CDR-Data discs
to make copies of
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
music for private use and, therefore, the same levy that applies
to CDR-Audio disc sales should also apply to CDR-Data disc
sales. A judgment was rendered by a Court of First Instance in
Madrid on November 28, 2002, which required our affiliate,
Imation Iberia S.A., to provide an accounting of CDR-Data discs
that were sold in 1998 and 1999 which may be subject to CDR
levies. We appealed this judgment.
In July 2003, an agreement for the payment of levies on CDR-Data
discs was reached in Spain between the collecting society and
the industry association (in which we are an active member). The
agreement anticipates that the member companies of the industry
association will enter into individual agreements with the
collecting society containing the terms agreed to between the
industry association and the collecting society. Pursuant to
terms of the agreement between the industry association and the
collecting society, we entered into an agreement with the
collecting society and began to pay levies on CDR-Data discs
sold in Spain on a going-forward basis as of September 1,
2003. In accordance with this agreement, there will be no
payment of levies for sales of CDR-Data discs in Spain prior to
September 1, 2003. Based upon the agreement between the
parties, in October 2003, the appellate court dismissed the
appeals, with prejudice, filed by the collecting society and us.
Note 18 Acquisition
We entered into an agreement on June 30, 2003, to purchase
certain assets and intellectual property relating to the
removable data storage tape media operations from EMTEC
Magnetics GmbH, a German-based manufacturing subsidiary of EMTEC
International Holding GmbH. This agreement required us to escrow
approximately $15.0 million in the third quarter of 2003
with final payment pending the satisfaction of certain terms of
the agreement. In the second quarter of 2004, the purchase was
finalized and all amounts were released from escrow and all
payments were made. The total purchase price was
$16.7 million, of which $9.7 million was allocated to
goodwill, $6.0 million to intangible assets and
$1.0 million to fixed assets. The intangible assets are
being amortized over a weighted-average life of five years.
Note 19 Subsequent Event
On January 19, 2006, we entered into an Acquisition
Agreement with Memorex, providing for the acquisition of
substantially all of the assets of Memorex, including capital
stock of its operating subsidiaries engaged in the business of
the design, development, marketing, distribution and sale of
hardware, media and accessories used for the storage of
electronic data under the Memorex brand name.
The purchase price for the assets of Memorex is
$330.0 million in cash, plus or minus certain post-closing
price adjustments, plus earn-out payments over the course of the
next three fiscal years of $5.0 million to
$45.0 million. We will place $33.0 million of the
purchase price paid at closing in escrow to address potential
indemnification claims against us. One-half of the escrowed
amounts (less claims made) will be released to Memorex on
March 31, 2007, and the remainder will be released to
Memorex on September 30, 2007. We will also place
$8.0 million of the purchase price paid at closing in
escrow until the determination of any required post-closing
purchase price adjustments under the Acquisition Agreement.
Consummation of the acquisition is subject to various customary
conditions, including the assignment, amendment and/or
termination of certain third-party contracts, the transfer of
certain assets held by affiliates of Memorex, no legal
impediment to the acquisition, receipt of required regulatory
approvals and approval by the shareholders of Hanny Holdings
Limited, a Hong Kong-based company listed on the Hong Kong Stock
Exchange that beneficially owns a controlling interest in
Memorex. The acquisition is expected to close during the second
quarter of 2006.
Concurrent with entering into the Acquisition Agreement, we
entered into an Inducement Agreement with certain beneficial
owners of Memorex who collectively hold more than 67% of
Memorex, including Hanny Holdings Limited, Hanny Magnetics
(B.V.I.) Limited, Investor Capital Management Asia Limited,
Investor Capital Partners Asia Fund L.P.,
Global Media Limited and Memorex Holdings Limited (together, the
Owners). The Inducement Agreement provides that the Owners will
vote their shares (or their controlling interest in such shares)
of Memorex in favor of the Acquisition Agreement and the
transactions contemplated thereby. Hanny Holdings Limited has
further agreed to call and hold a general meeting of its
shareholders to vote on a proposal to approve the transactions,
as well as to
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
recommend to its shareholders that they vote in favor of the
transactions. Failure to achieve the required shareholder vote
from Hanny Holdings Limited may trigger a breakup fee of
$16.5 million to Imation under certain circumstances. Hanny
Holdings Limited has also agreed to guarantee a certain
percentage of Memorexs indemnification obligations under
the Acquisition Agreement.
Note 20 Quarterly Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
|
Total(1) | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In millions, except per share amounts) | |
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$ |
315.0 |
|
|
$ |
301.5 |
|
|
$ |
298.6 |
|
|
$ |
343.0 |
|
|
$ |
1,258.1 |
|
Gross profit
|
|
|
82.3 |
|
|
|
75.2 |
|
|
|
70.5 |
|
|
|
74.1 |
|
|
|
302.1 |
|
Operating income
|
|
|
31.3 |
|
|
|
23.8 |
|
|
|
23.6 |
|
|
|
24.6 |
|
|
|
103.3 |
|
Income from continuing operations
|
|
|
30.8 |
|
|
|
15.8 |
|
|
|
16.8 |
|
|
|
18.4 |
|
|
|
81.8 |
|
Discontinued operations
|
|
|
0.6 |
|
|
|
5.5 |
|
|
|
|
|
|
|
|
|
|
|
6.1 |
|
Net income
|
|
|
31.4 |
|
|
|
21.3 |
|
|
|
16.8 |
|
|
|
18.4 |
|
|
|
87.9 |
|
Earning per common share,
continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.91 |
|
|
$ |
0.47 |
|
|
$ |
0.49 |
|
|
$ |
0.54 |
|
|
$ |
2.41 |
|
|
Diluted
|
|
|
0.90 |
|
|
|
0.46 |
|
|
|
0.48 |
|
|
|
0.52 |
|
|
|
2.36 |
|
Gain per common share, discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.02 |
|
|
$ |
0.16 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
0.18 |
|
|
Diluted
|
|
|
0.02 |
|
|
|
0.16 |
|
|
|
|
|
|
|
|
|
|
|
0.18 |
|
Earnings per common share, net
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.93 |
|
|
$ |
0.63 |
|
|
$ |
0.49 |
|
|
$ |
0.54 |
|
|
$ |
2.59 |
|
|
Diluted
|
|
|
0.92 |
|
|
|
0.62 |
|
|
|
0.48 |
|
|
|
0.52 |
|
|
|
2.54 |
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$ |
326.3 |
|
|
$ |
272.3 |
|
|
$ |
259.3 |
|
|
$ |
315.8 |
|
|
$ |
1,173.7 |
|
Gross profit
|
|
|
90.1 |
|
|
|
67.1 |
|
|
|
59.0 |
|
|
|
71.6 |
|
|
|
287.8 |
|
Operating income (loss)
|
|
|
30.9 |
|
|
|
8.0 |
|
|
|
6.7 |
|
|
|
(1.0 |
) |
|
|
44.6 |
|
Income from continuing operations
|
|
|
20.1 |
|
|
|
5.9 |
|
|
|
8.7 |
|
|
|
1.8 |
|
|
|
36.5 |
|
Discontinued operations
|
|
|
1.3 |
|
|
|
0.9 |
|
|
|
0.9 |
|
|
|
(9.7 |
) |
|
|
(6.6 |
) |
Net income (loss)
|
|
|
21.4 |
|
|
|
6.8 |
|
|
|
9.6 |
|
|
|
(7.9 |
) |
|
|
29.9 |
|
Earning per common share,
continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.57 |
|
|
$ |
0.17 |
|
|
$ |
0.25 |
|
|
$ |
0.05 |
|
|
$ |
1.04 |
|
|
Diluted
|
|
|
0.56 |
|
|
|
0.16 |
|
|
|
0.24 |
|
|
|
0.05 |
|
|
|
1.03 |
|
Gain (loss) per common share,
discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.04 |
|
|
$ |
0.03 |
|
|
$ |
0.03 |
|
|
$ |
(0.29 |
) |
|
$ |
(0.19 |
) |
|
Diluted
|
|
|
0.04 |
|
|
|
0.02 |
|
|
|
0.03 |
|
|
|
(0.28 |
) |
|
|
(0.19 |
) |
Earnings per common share, net
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.60 |
|
|
$ |
0.20 |
|
|
$ |
0.27 |
|
|
$ |
(0.23 |
) |
|
$ |
0.85 |
|
|
Diluted
|
|
|
0.59 |
|
|
|
0.19 |
|
|
|
0.27 |
|
|
|
(0.23 |
) |
|
|
0.84 |
|
|
|
(1) |
The sum of the quarterly earnings per share may not equal the
annual earnings per share due to changes in average shares
outstanding. |
60
|
|
Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. |
None.
|
|
Item 9A. |
Controls and Procedures. |
Based on an evaluation of our disclosure controls and procedures
(as defined in
Rule 13a-15(e)
under the Exchange Act) as of December 31, 2005, the end of
the period covered by this report, the Chairman and Chief
Executive Officer, Bruce A. Henderson, and the Vice President
and Chief Financial Officer, Paul R. Zeller, have concluded that
the disclosure controls and procedures were effective.
During the fiscal quarter ended December 31, 2005, there
was no change in our internal control over financial reporting
(as defined in
Rule 13a-15(f)
under the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
Managements Report on Internal Control Over Financial
Reporting as well as the attestation report of
PricewaterhouseCoopers LLP, our independent registered public
accounting firm, regarding our internal control over financial
reporting is provided in Item 8 of this
Form 10-K.
|
|
Item 9B. |
Other Information. |
None.
PART III
Except where otherwise noted, the information required by
Items 10 through 14 is incorporated by reference from our
definitive Proxy Statement pursuant to general instruction G(3)
to Form 10-K, with
the exception of the executive officers section of Item 10,
which is included in Item 1 of this
Form 10-K. We will
file our definitive Proxy Statement pursuant to
Regulation 14A by April 28, 2006.
|
|
Item 10. |
Directors and Executive Officers of the Registrant. |
Board of Directors
Michael S. Fields, Chairman and Chief Executive Officer of KANA
Software, Inc. (a customer relationship management software and
services company) and Chairman and Chief Executive Officer, The
Fields Group (a management consulting firm)
Charles A. Haggerty, Chief Executive Officer, Le Conte
Associates, LLC (a consulting and investment company) and Former
Chairman and Chief Executive Officer, Western Digital
Corporation (a provider of products and services for collection,
management, and use of digital information)
Linda W. Hart, Vice Chairman and Chief Executive Officer, Hart
Group, Inc. (a diversified group of companies primarily involved
in residential and commercial building materials)
Bruce A. Henderson, Chairman and Chief Executive Officer,
Imation Corp.
Ronald T. LeMay, Industrial Partner of Ripplewood Holdings (a
private equity fund), Chairman, Last Mile Connections, Inc. (a
network bandwidth exchange and solutions provider), and
Chairman, October Capital (a private investment company)
L. White Matthews, III, Retired Executive Vice
President and Chief Financial Officer, Ecolab, Inc. (developer
and marketer of cleaning and sanitizing products and services),
and Former Chief Financial Officer and Executive Vice President,
Union Pacific Corporation (a company involved in rail/truck
transportation and oil/gas exploration and production)
Charles Reich, Former Executive Vice President, 3M Company (a
diversified technology company)
Glen A. Taylor, Chairman, Taylor Corporation (a holding company
in the specialty printing and marketing areas)
61
Daryl J. White, Former President and Chief Financial Officer,
Legerity, Inc. (a supplier of data and voice communications
integrated circuitry), and Former Senior Vice President of
Finance and Chief Financial Officer, Compaq Computer Corporation
(a computer equipment manufacturer).
See Part I of this
Form 10-K,
Executive Officers of the Registrant. The Sections
of the Proxy Statement entitled Board of
Directors-Director Independence and Determination of Audit
Committee Financial Expert, Board of
Directors-Meetings of the Board and Board Committees,
Information Concerning Solicitation and Voting
Section 16(a) Beneficial Ownership Reporting
Compliance and Item 1-Election of
Directors Information Concerning Directors are
incorporated by reference into this
Form 10-K.
We adopted a code of ethics that applies to our principal
executive officer, principal financial officer, principal
accounting officer/controller, or persons performing similar
functions and all our other employees. This code of ethics is
part of our broader Business Conduct Policy, posted on our
website. The Internet address for the our website is
http://www.imation.com, and the Business Conduct Policy may be
found on the Corporate Governance page, which can be
accessed from the Investor Relations web page, which
can be accessed from the main web page. We intend to satisfy the
disclosure requirement under Item 5.05 of
Form 8-K regarding
an amendment to, or waiver from, a provision of the required
code of ethics that applies to our principal executive officer,
principal financial officer, principal accounting
officer/controller or persons performing similar functions by
posting such information on our website, at the address and
location specified above. Our Corporate Governance Guidelines
and charters for our Audit and Finance, Compensation, and
Nominating and Governance Committees are also available on our
website on the Corporate Governance page, which can
be accessed from the Investor Relations page, which
can be accessed from the main web page. The Business Conduct
Policy, Corporate Governance Guidelines, and charters for our
Audit and Finance, Compensation, and Nominating and Governance
Committees are also available in print to any shareholder who
requests them and such requests should be made to: Imation
Corp., Investor Relations, 1 Imation Place, Oakdale, MN 55128.
Materials posted on our website are not incorporated by
reference into this annual report on
Form 10-K.
|
|
Item 11. |
Executive Compensation. |
The Sections of the Proxy Statement entitled Compensation
of Executive Officers and Board of
Directors Compensation of Directors are
incorporated by reference into this
Form 10-K.
|
|
Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters. |
The Sections of the Proxy Statement entitled Information
Concerning Solicitation and Voting Security
Ownership of Certain Beneficial Owners and
Information Concerning Solicitation and Voting-Security
Ownership of Management is incorporated by reference into
this Form 10-K.
Equity Compensation Plan Information
The following table gives information about our Common Stock
that may be issued upon the exercise of options under all of our
existing equity compensation plans as of December 31, 2005,
including the 2005 Stock Incentive Plan, 2000 Stock Incentive
Plan, the 1996 Employee Stock Incentive Program, and the
1996 Directors Stock Compensation Program. As of
December 31, 2005, options are the only form of award that
had been granted under the 1996 Employee Stock Incentive
Program, options and restricted stock have been granted under
the 2005 Stock Incentive Plan and 2000 Stock Incentive Plan, and
options, restricted stock and restricted stock units had been
granted to directors
62
under the 1996 Directors Stock Compensation Program. Our
shareholders have approved all of the compensation plans listed
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities | |
|
|
Number of securities | |
|
Weighted-average | |
|
remaining available for | |
|
|
to be issued upon | |
|
exercise price of | |
|
future issuance under the | |
|
|
exercise of | |
|
outstanding | |
|
equity compensation plans | |
|
|
outstanding options, | |
|
options, warrants | |
|
(excluding securities | |
Equity compensation plans approved by shareholders |
|
warrants and rights | |
|
and rights | |
|
reflected in the first column) | |
|
|
| |
|
| |
|
| |
2005 Stock Incentive Plan
|
|
|
727,766 |
(1) |
|
$ |
34.37 |
|
|
|
2,399,460 |
|
2000 Stock Incentive Plan
|
|
|
2,141,160 |
(1) |
|
$ |
32.82 |
|
|
|
|
(2) |
1996 Employee Stock Incentive
Program
|
|
|
865,434 |
|
|
$ |
23.41 |
|
|
|
|
(2) |
1996 Directors Stock
Compensation Program
|
|
|
380,840 |
(1) |
|
$ |
29.70 |
|
|
|
|
(2) |
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
4,115,200 |
(3) |
|
$ |
30.82 |
|
|
|
2,399,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
This number does not include restricted stock, including
12,684 shares under our 2005 Stock Incentive Plan,
139,325 shares under our 2000 Stock Incentive Plan, and
5,050 shares under our Directors Stock Compensation Program. |
|
(2) |
No additional awards may be granted under our 2000 Stock
Incentive Plan, 1996 Employee Stock Incentive Plan, and
1996 Directors Stock Compensation Program. |
|
(3) |
This number does not include outstanding options for
433 shares of Common Stock at a weighted average exercise
price of $10.39 per share that were assumed in connection
with an acquisition. No subsequent grants of any kind will be
made pursuant to this compensation plan. |
|
|
Item 13. |
Certain Relationships and Related Transactions. |
None.
|
|
Item 14. |
Principal Accountant Fees and Services. |
The Section of the Proxy Statement entitled Audit and
Other Fees and Audit and Finance Committee Pre-Approval
Policies is incorporated by reference into this
Form 10-K.
PART IV
|
|
Item 15. |
Exhibits and Financial Statement Schedules. |
|
|
|
|
|
List of Documents filed as Part of this Report |
|
|
|
|
|
|
|
Page | |
|
|
| |
Report of Independent Registered
Public Accounting Firm
|
|
|
31 |
|
Consolidated Statements of
Operations for the Years Ended December 31, 2005, 2004, and
2003
|
|
|
33 |
|
Consolidated Balance Sheets as of
December 31, 2005 and 2004
|
|
|
34 |
|
Consolidated Statements of
Shareholders Equity and Comprehensive Income for the Years
Ended December 31, 2005, 2004, and 2003
|
|
|
35 |
|
Consolidated Statements of Cash
Flows for the Years Ended December 31, 2005, 2004, and 2003
|
|
|
36 |
|
Notes to Consolidated Financial
Statements
|
|
|
37 |
|
2. Financial Statement Schedules
All financial statement schedules are omitted because of the
absence of the conditions under which they are required or
because the required information is included in the Consolidated
Financial Statements or the notes thereto.
63
3. Exhibits
The following Exhibits are filed as part of, or incorporated by
reference into, this Report:
|
|
|
|
|
Exhibit | |
|
|
Number | |
|
Description of Exhibit |
| |
|
|
|
2.1 |
|
|
Acquisition Agreement, dated
January 19, 2006, by and between Imation Corp. and Memorex
International Inc. (incorporated by reference to
Exhibit 2.1 to Imations Form 8-K Current Report
filed on January 25, 2006)
|
|
2.2 |
|
|
Inducement Agreement, dated
January 19, 2006, among Hanny Holding Limited, Hanny
Magnetics (B.V.I.) Limited, Investor Capital Management Asia
Limited, Investor Capital Partners Asia
Fund L.P, Global Media Limited, Memorex Holdings Limited
and Imation Corp. (incorporated by reference to Exhibit 2.2
to Imations Form 8-K Current Report filed on
January 25, 2006)
|
|
3.1 |
|
|
Restated Certificate of
Incorporation of Imation (incorporated by reference to
Exhibit 3.1 to Registration Statement on Form 10,
No. 1-14310)
|
|
3.2 |
|
|
Amended and Restated Bylaws of
Imation (incorporated by reference to Exhibit 3.1 of
Imations Form 10-Q for the quarter ended
June 30, 2004)
|
|
3.3 |
|
|
Amended and Restated Bylaws of
Imation (to be effective May 3, 2006) (incorporated by
reference to Exhibit 3.1 to Imations Form 8-K
Current Report filed on February 13, 2006)
|
|
4.1 |
|
|
Rights Agreement, dated as of
June 18, 1996 between Imation and Norwest Bank Minnesota,
N.A., as Rights Agent (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form 10,
No. 1-14310)
|
|
4.2 |
|
|
Amendment No. 1 to the Rights
Agreement dated as of January 12, 1999 between Imation and
Norwest Bank Minnesota, N.A., as Rights Agent (incorporated by
reference to Exhibit 4.2 to Imations Form 8-K
Current Report dated February 8, 1999)
|
|
4.3 |
|
|
Amendment No. 2 to the Rights
Agreement (incorporated by reference to Exhibit 4.1 of
Imations Form 10-Q for the quarter ended
June 30, 2003)
|
|
4.4 |
|
|
Amendment No. 3 to the Rights
Agreement (incorporated by reference to Exhibit 4.2 of
Imations Form 10-Q for the quarter ended
June 30, 2003)
|
|
4.5 |
|
|
Certificate of Designations,
Preferences and Rights of Series A Junior Participating
Preferred Stock of Imation (incorporated by reference to
Exhibit 4.2 to Registration Statement on Form 10,
No. 1-14310)
|
|
10.1* |
|
|
Imation 1996 Employee Stock
Incentive Program (incorporated by reference to
Exhibit 10.8 to Registration Statement on Form 10,
No. 1-14310)
|
|
10.2* |
|
|
Imation Excess Benefit Plan
(incorporated by reference to Exhibit 10.10 to Registration
Statement on Form 10, No. 1-14310)
|
|
10.3* |
|
|
Form of Indemnity Agreement between
Imation and each of its directors (incorporated by reference to
Exhibit 10.13 to Annual Report on Form 10-K for the
year ended December 31, 1996)
|
|
10.4* |
|
|
Form of amended and restated
severance agreement between Imation and its executive officers
other than the CEO (incorporated by reference to
Exhibit 10.1 of Imations Form 10-Q for the
quarter ended March 31, 2001)
|
|
10.5* |
|
|
Imation 2000 Stock Incentive Plan,
as amended (incorporated by reference to Exhibit 10.7 to
Annual Report on Form 10-K for the year ended
December 31, 2003)
|
|
10.6* |
|
|
1996 Directors Stock
Compensation Program, as amended May 8, 2002 (incorporated
by reference to Exhibit 10.1 of Imations
Form 10-Q for the quarter ended June 30, 2002)
|
|
10.7* |
|
|
Director Compensation Program, as
amended (incorporated by reference to Exhibit 10.9 to
Imations Form 8-K Current Report filed on
February 13, 2006)
|
|
10.8 |
|
|
Shareholders Agreement in relation
to Global Data Media FZ-LLC (incorporated by reference to
Exhibit 10.11 to Annual Report on Form 10-K for the
year ended December 31, 2003)
|
|
10.9 |
|
|
Amendment Agreement to Shareholders
Agreement in relation to Global Data Media FZ-LLC (incorporated
by reference to Exhibit 10.1 to Imations
Form 8-K Current Report filed on January 26, 2006)
|
|
10.10* |
|
|
Form of Restricted Stock Award
Agreement Employees 2004 (incorporated by reference
to Exhibit 10.1 of Imations Form 10-Q for the
quarter ended September 30, 2004)
|
|
10.11* |
|
|
Form of Restricted Stock Award
Agreement Executive Officers 2004 (incorporated by
reference to Exhibit 10.2 of Imations Form 10-Q
for the quarter ended September 30, 2004)
|
64
|
|
|
|
|
Exhibit | |
|
|
Number | |
|
Description of Exhibit |
| |
|
|
|
10.12* |
|
|
Form of Stock Option
Agreement Employees 2004 (incorporated by reference
to Exhibit 10.3 of Imations Form 10-Q for the
quarter ended September 30, 2004)
|
|
10.13* |
|
|
Form of Stock Option
Agreement Executive Officers 2004 (incorporated by
reference to Exhibit 10.4 of Imations Form 10-Q
for the quarter ended September 30, 2004)
|
|
10.14* |
|
|
Performance Stock Option Agreement
between Imation and Frank P. Russomanno dated May 13, 2004
(incorporated by reference to Exhibit 10.16 to Annual
Report on Form 10-K for the year ended December 31,
2004)
|
|
10.15* |
|
|
Amendment to
Mr. Russomannos Performance Option Agreement
(incorporated by reference to Exhibit 10.4 to
Imations Form 8-K Current Report filed on
February 13, 2006)
|
|
10.16* |
|
|
Form of Restricted Stock Award
Agreement between Imation and Frank Russomanno (incorporated by
reference to Exhibit 10.12 to Imations Form 8-K
Current Report filed on May 9, 2005)
|
|
10.17* |
|
|
Employment Agreement dated May 13,
2004 between Imation and Bruce A. Henderson (incorporated by
reference to Exhibit 10.1 of Imations Form 10-Q for the
quarter ended June 30, 2004)
|
|
10.18* |
|
|
Amendment to Performance Stock
Option Agreement between Imation and Bruce A. Henderson dated
February 2, 2005 (incorporated by reference to Imations
Form 8-K Current Report filed on February 7, 2005)
|
|
10.19* |
|
|
Amendment to Mr. Hendersons
Performance Option Agreement (incorporated by reference to
Exhibit 10.3 to Imations Form 8-K Current Report filed on
February 13, 2006)
|
|
10.20* |
|
|
Amendment to 2000 Stock Incentive
Plan Restricted Stock Award Agreement Executive
Officers (incorporated by reference to Exhibit 10.8 to
Imations Form 8-K Current Report filed on May 9, 2005)
|
|
10.21* |
|
|
Form of 2000 Stock Incentive Plan
Restricted Stock Award Agreement Executive Officers
(incorporated by reference to Exhibit 10.9 to Imations
Form 8-K Current Report filed on May 9, 2005)
|
|
10.22* |
|
|
Form of 2000 Stock Incentive Plan
Stock Option Agreement Employees (incorporated by
reference to Exhibit 10.10 to Imations Form 8-K Current
Report filed on May 9, 2005)
|
|
10.23* |
|
|
Form of 2000 Stock Incentive Plan
Stock Option Agreement Executive Officers
(incorporated by reference to Exhibit 10.11 to Imations
Form 8-K Current Report filed on May 9, 2005)
|
|
10.24* |
|
|
Form of Amendment to 2000 Employee
Stock Incentive Plan Restricted Stock Award
Agreements Executive Officer (incorporated by
reference to Exhibit 10.2 to Imations Form 8-K Current
Report filed on February 13, 2006)
|
|
10.25* |
|
|
Description of 2005 Annual Bonus
Plan Target Approval (incorporated by reference to
Imations Form 8-K Current Report filed on February 8, 2005)
|
|
10.26* |
|
|
Imation 2005 Stock Incentive Plan,
as amended November 9, 2005 (incorporated by reference to
Exhibit 10.1 to Imations Form 8-K Current Report filed on
November 16, 2005)
|
|
10.27* |
|
|
Imation 2005 Stock Incentive Plan
Stock Option Agreement Employees (incorporated by
reference to Exhibit 10.2 to Imations Form 8-K Current
Report filed on May 9, 2005)
|
|
10.28* |
|
|
Imation 2005 Stock Incentive Plan
Stock Option Agreement Executive Officers
(incorporated by reference to Exhibit 10.3 to Imations
Form 8-K Current Report filed on May 9, 2005)
|
|
10.29* |
|
|
Imation 2005 Stock Incentive Plan
Stock Option Agreement Directors (incorporated by
reference to Exhibit 10.4 to Imations Form 8-K Current
Report filed on May 9, 2005)
|
|
10.30* |
|
|
Imation 2005 Stock Incentive Plan
Restricted Stock Award Agreement Employees
(incorporated by reference to Exhibit 10.5 to Imations
Form 8-K Current Report filed on May 9, 2005)
|
|
10.31* |
|
|
Imation 2005 Stock Incentive Plan
Restricted Stock Award Agreement Executive Officers
(incorporated by reference to Exhibit 10.6 to Imations
Form 8-K Current Report filed on May 9, 2005)
|
|
10.32* |
|
|
Imation 2005 Stock Incentive Plan
Restricted Stock Award Agreement Directors
(incorporated by reference to Exhibit 10.7 to Imations
Form 8-K Current Report filed on May 9, 2005)
|
|
10.33* |
|
|
Amendment to 2005 Stock Incentive
Plan Stock Option Agreement Directors (incorporated
by reference to Exhibit 10.2 to Imations Form 8-K Current
Report filed on November 16, 2005)
|
|
10.34* |
|
|
Amendment to 2005 Stock Incentive
Plan Restricted Stock Award Agreement Directors
(incorporated by reference to Exhibit 10.3 to Imations
Form 8-K Current Report filed on November 16, 2005)
|
65
|
|
|
|
|
Exhibit | |
|
|
Number | |
|
Description of Exhibit |
| |
|
|
|
10.35* |
|
|
Form of Amendment to 2004 and 2005
Executive Officer Option Agreements under the 2000 Employee
Stock Incentive Plan (incorporated by reference to Exhibit 10.1
to Imations Form 8-K Current Report filed on February 13,
2006)
|
|
10.36* |
|
|
Form of Amendment to 2005 Stock
Incentive Plan Option Agreements Executive Officer
(incorporated by reference to Exhibit 10.5 to Imations
Form 8-K Current Report filed on February 13, 2006)
|
|
10.37* |
|
|
Form of Amendment to 2005 Stock
Incentive Plan Restricted Stock Award Agreements
Executive Officer (incorporated by reference to Exhibit 10.6 to
Imations Form 8-K Current Report filed on February 13,
2006)
|
|
10.38* |
|
|
Form of Amendment to 2005 Stock
Option Agreements Non-Employee Directors
(incorporated by reference to Exhibit 10.7 to
Imations Form 8-K Current Report filed on
February 13, 2006)
|
|
10.39* |
|
|
Form of Amendment to 2005
Restricted Stock Award Agreements Non-Employee
Directors (incorporated by reference to Exhibit 10.8 to
Imations Form 8-K Current Report filed on
February 13, 2006)
|
|
10.40* |
|
|
Form of Executive Officer Option
Agreement (incorporated by reference to Exhibit 10.10 to
Imations Form 8-K Current Report filed on
February 13, 2006)
|
|
10.41* |
|
|
Form of Executive Officer
Restricted Stock Award Agreement (incorporated by reference to
Exhibit 10.11 to Imations Form 8-K Current
Report filed on February 13, 2006)
|
|
10.42* |
|
|
Form of Non-employee Director
Option Agreement (incorporated by reference to
Exhibit 10.12 to Imations Form 8-K Current
Report filed on February 13, 2006)
|
|
10.43* |
|
|
Form of Non-employee Director
Restricted Stock Award Agreement (incorporated by reference to
Exhibit 10.13 to Imations Form 8-K Current
Report filed on February 13, 2006)
|
|
21.1 |
|
|
Subsidiaries of Imation Corp.
|
|
23.1 |
|
|
Consent of Independent Registered
Public Accounting Firm
|
|
24.1 |
|
|
Power of Attorney
|
|
31.1 |
|
|
Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31.2 |
|
|
Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32.1 |
|
|
Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
32.2 |
|
|
Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
|
* |
Items that are management contracts or compensatory plans or
arrangements required to be filed as an exhibit pursuant to
Item 15(b) of
Form 10-K.
|
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
|
|
By: |
/s/ Bruce A. Henderson
|
|
|
|
|
|
Bruce A. Henderson |
|
Chairman and Chief Executive Officer |
Date: February 28, 2006
67
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
|
|
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
|
/s/
Bruce A. Henderson
Bruce
A. Henderson
|
|
Chairman and Chief Executive Officer
|
|
February 28, 2006
|
|
/s/
Paul R. Zeller
Paul
R. Zeller
|
|
Vice President and Chief Financial
Officer
|
|
February 28, 2006
|
|
/s/
Peter A. Koehn
Peter
A. Koehn
|
|
Vice President, Controller and
Principal Accounting Officer
|
|
February 28, 2006
|
|
*
Michael
S. Fields
|
|
Director
|
|
February 28, 2006
|
|
*
Charles
A. Haggerty
|
|
Director
|
|
February 28, 2006
|
|
*
Linda
W. Hart
|
|
Director
|
|
February 28, 2006
|
|
*
Ronald
T. LeMay
|
|
Director
|
|
February 28, 2006
|
|
*
L.
White Matthews, III
|
|
Director
|
|
February 28, 2006
|
|
*
Charles
Reich
|
|
Director
|
|
February 28, 2006
|
|
*
Glen A.
Taylor
|
|
Director
|
|
February 28, 2006
|
|
*
Daryl
J. White
|
|
Director
|
|
February 28, 2006
|
|
*By:
|
|
/s/
John L.
Sullivan
John
L. Sullivan
Attorney-in-fact
|
|
|
|
|
68
EXHIBIT INDEX
The following exhibits are filed as part of this report:
|
|
|
|
|
Exhibit |
|
|
Number |
|
Description of Exhibit |
|
|
|
|
21.1 |
|
|
Subsidiaries of Imation Corp.
|
|
23.1 |
|
|
Consent of Independent Registered
Public Accounting Firm
|
|
24.1 |
|
|
Power of Attorney
|
|
31.1 |
|
|
Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
31.2 |
|
|
Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
|
|
32.1 |
|
|
Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|
|
32.2 |
|
|
Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
|