UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
Commission file number: 1-14310
_______________
IMATION CORP.
Delaware | 41-1838504 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
1 Imation Place
Oakdale, Minnesota 55128
(Address of principal executive offices)
(651) 704-4000
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X]. No[ ].
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [X]. No[ ].
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date: 34,013,250 shares of Common Stock, par value $0.01 per share, were outstanding at November 2, 2004.
IMATION CORP.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
IMATION CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes to consolidated financial statements are an integral part of these statements.
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IMATION CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
The accompanying notes to consolidated financial statements are an integral part of these statements.
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IMATION CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes to consolidated financial statements are an integral part of these statements.
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IMATION CORP.
1. BASIS OF PRESENTATION
The interim consolidated financial statements are unaudited but, in the opinion
of management, reflect all adjustments necessary for a fair presentation of
financial position, results of operations and cash flows for the periods
presented. Except as otherwise disclosed herein, these adjustments consist of
normal, recurring items. The results of operations for any interim period are
not necessarily indicative of results for the full year. The consolidated
financial statements and notes are presented as permitted by the requirements
for Form 10-Q and do not contain certain information included in the Companys
annual consolidated financial statements and notes. The December 31, 2003
Condensed Consolidated Balance Sheet was derived from the audited financial
statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America. This Form 10-Q
should be read in conjunction with the Companys consolidated financial
statements and notes included in its Annual Report on Form 10-K for the year
ended December 31, 2003.
2. STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation using the intrinsic value
approach under Accounting Principles Board Opinion 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 the Companys
common stock at the date of the grant over the amount an employee must pay to
acquire the stock
.
The Company has adopted the disclosure only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based
Compensation
. Accordingly, no compensation expense has been recognized for the
stock option plans as all options granted have had no intrinsic value at the
time of grant. Compensation expense has been recorded for restricted stock
issued under the Companys stock incentive program. The table below illustrates
the effect on net income and earnings per share if the fair value of all
options previously 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 14 to the Consolidated Financial Statements included
in the Companys Annual Report on Form 10-K for the year ended December 31,
2003, for additional information regarding employee stock plans.
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3. EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted average number of
shares outstanding during the period, adjusted for ESOP shares not allocated to
employee accounts. Under the applicable accounting rules, unallocated shares
held in the Companys 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 the Companys 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:
As of September 30, 2004 and 2003, certain options under the Companys
stock-based compensation plans to purchase approximately 850,000 and 33,000
shares, respectively, of the Companys common stock were outstanding that were
not considered in the computation of potential common shares because the effect
would be antidilutive.
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4. SUPPLEMENTARY BALANCE SHEET INFORMATION
(In millions)
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5. LITIGATION, COMMITMENTS AND CONTINGENCIES
Discussion of legal matters is cross-referenced to this Form 10-Q, Part II.
Item 1, Legal Proceedings, and should be considered an integral part of the
Consolidated Financial Statements and Notes.
6. RESTRUCTURING AND OTHER
During the second quarter of 2004, the Company recorded restructuring charges
of $3.1 million for employee reductions. The charges related to a plan to close
the Companys production facility in Tucson, Arizona and international
administrative and sales employee reductions. The restructuring will impact
approximately 280 positions. It is anticipated that the Tucson facility will be
closed by December 31, 2005. Ongoing production activities from this facility
will be shifted to other facilities as the shutdown occurs. The restructuring
charges consist of estimated severance payments and related benefits, which are
payable under the Companys on-going severance benefit plan. In addition to
these costs, commencing in the fourth quarter of 2004, the Company will also be
incurring costs related to the Tucson facility closing such as scale-up costs
at other facilities, equipment and employee relocation. These costs will be
generally expensed as incurred, and are estimated to total approximately $6
million, of which approximately $1.3 million are expected to be incurred in the
fourth quarter of 2004.
Changes in the restructuring accrual during the three months ended September
30, 2004 were as follows:
All other previous restructuring programs were substantially complete as of
March 31, 2004. See the Companys Annual Report on Form 10-K for the year ended
December 31, 2003 for additional details regarding prior restructuring
programs. There were no net adjustments related to these former programs recorded in
the three or nine month periods ended September 30, 2004 or 2003.
As discussed in Note 14 in this Form 10-Q, the Company announced a new
restructuring program on October 19, 2004.
7. RETIREMENT PLANS
Employer Contributions
During the nine months ended September 30, 2004, $9.5 million of contributions
were made to the Companys pension plans. The Company presently anticipates
contributing approximately $4 million to fund its pension plans during
the last three months of 2004.
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Components of Net Periodic Pension Cost
8. COMPREHENSIVE INCOME
Accumulated other comprehensive (loss) income represents certain items which,
according to the respective accounting rules, are required to be recorded
directly to equity accounts and consists of the following:
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Comprehensive income for the three months ended September 30, 2004 and 2003
consists of the following:
Comprehensive income for the nine months ended September 30, 2004 and 2003
consists of the following:
9. BUSINESS SEGMENT INFORMATION
The Companys current businesses are organized, managed and internally reported
as segments differentiated primarily by their products and services and the
markets and customers they serve. These segments, whose results are shown
below, are Data Storage and Information Management, providing removable data
storage media and services for use by mobile, desktop, network and data center
end-users, and Specialty Papers, providing carbonless paper for use in the
creation of multi-part business forms.
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(1) The operating loss for the nine month period ended September 30, 2004
included restructuring charges of $3.1 million. The operating income (loss) for
the three and nine month periods ended September 30,2004 included a net benefit
of $1.0 million related primarily to the sale of a parcel of land. The
operating income for the three and nine month periods ended September 30, 2003
included a $1.0 million gain from the reversal of a reserve related to
litigation.
Intersegment revenues are not material. The proportion of total assets by
segment has not changed materially from December 31, 2003.
10. DERIVATIVES AND HEDGING ACTIVITIES
The Company maintains a foreign currency exposure management policy that allows
for the use of derivative instruments, principally foreign currency forward and
option contracts, to manage risks associated with exchange rate volatility.
Generally, these contracts are entered into to fix the U.S. dollar amount of
the eventual cash flows resulting from such transactions. The Company does not
hold or issue derivative financial instruments for speculative or trading
purposes and is not a party to leveraged derivatives.
The Company is exposed to credit loss in the event of nonperformance by
counter-parties in foreign currency forward and option contracts, but does not
anticipate nonperformance by any of these counter-parties. The Company actively
monitors its exposure to credit risk through the use of credit approvals and
credit limits, and by selecting major international banks and financial
institutions as counter-parties.
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Cash Flow Hedges-
The Company attempts to mitigate a portion of the risk
associated with forecasted foreign currency cash flows through a combination of foreign currency option and forward contracts.
The Company formally documents all relationships between hedging instruments
and hedged items, as well as its risk management objective and strategy for
undertaking various hedge items. This process includes linking all derivatives
to forecasted transactions. The Company also formally assesses, both at the
hedges inception and on an ongoing basis, whether the derivatives that are
used in hedging transactions are highly effective in offsetting changes in cash
flows of hedged items. When it is determined that a derivative is not highly
effective as a hedge or that it has ceased to be highly effective as a hedge,
the Company discontinues hedge accounting prospectively, with future gains and
losses recognized in current period operations. As of September 30, 2004, cash
flow hedges ranged in duration from one to three months and had a total
notional amount of $33.3 million. Hedge costs, representing the premiums paid
on expired options net of hedge gains and losses, of $1.3 and $0.6 million were
reclassified into operations during the quarters ended September 30, 2004 and
2003, respectively. The amount of net deferred losses on foreign currency cash
flow hedges included in other comprehensive (loss) income in shareholders
equity as of September 30, 2004 was $1.9 million, pre-tax, which depending on
market factors is expected to reverse or be reclassified into operations by
March 31, 2005
.
Other Hedges-
The Company enters into foreign currency forward contracts,
generally with durations of less than two months, to manage foreign currency
exposure of its monetary assets and liabilities denominated in foreign
currencies. The Company records the estimated fair value of these forwards
within other current assets or other current liabilities in the Condensed
Consolidated Balance Sheets, and changes in their fair value are immediately
recognized in earnings. As of September 30, 2004, the Company had a notional
amount of forward contracts of $46.2 million to hedge the Companys recorded
balance sheet exposures.
Fair Value Disclosure-
As of September 30, 2004, the fair value of the
Companys foreign currency forward and option contracts outstanding was
negative $1.1 million. The estimated fair market values were determined using
available market information or other appropriate valuation methodologies.
11. INCOME TAXES
During the third quarter of 2004, a one-time tax benefit of $4.1 million was
recorded associated with the resolution of a European tax matter.
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12. AGREEMENT WITH EMTEC MAGNETICS GMBH
The Company entered into an agreement on June 30, 2003 to purchase certain
assets and intellectual property relating to the removable data storage tape
media operations of EMTEC Magnetics GmbH, a German-based manufacturing
subsidiary of EMTEC International Holding GmbH. This agreement required the
Company to escrow approximately $15 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.
13. DISCONTINUED OPERATIONS
In the third quarter of both 2004 and 2003, the Company recorded expenses of
$0.3 million (net of tax benefits of $0.2 million), related to the litigation
expense associated with discontinued operations. For the nine month period
ended September 30, 2004, such expenses were $1.1 million (net of a tax benefit
of $0.7 million). The nine month period ended September 30, 2003 included a net
gain of $0.2 million (net of a tax expense of $0.1 million) resulting from a
favorable outcome of the dispute with Kodak related to the 1998 sale of the
Medical Imaging Systems business, partially offset by expense related to the
litigation associated with discontinued operations.
The litigation costs associated with discontinued operations related to the
Companys defense of its ongoing legal dispute with Jazz Photo Corp. See Part
II. Item 1, Legal Proceedings in this Form 10-Q for additional details.
14. SUBSEQUENT EVENT
On October 19, 2004, the Companys Board of Directors committed the Company
to a restructuring plan consisting of the elimination of approximately 250
positions globally. The restructuring is intended to simplify the Companys
structure, improve decision-making speed and lower overall operating costs.
The restructuring program is expected to result in a total charge of $15 to
$20 million in the fourth quarter of 2004. The charge will be utilized
mainly to cover the cash expenses associated with the termination benefits
for the reduction in workforce (primarily severance and related costs). The
program is expected to be substantially completed in 2004 with the remainder
completed in 2005.
15. REVIEW REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP, the Companys independent registered public
accounting firm, has performed a review of the unaudited interim consolidated
financial statements included herein and their report thereon accompanies this
filing. This report is not a report within the meaning of Sections 7 and 11
of the 1933 Act and the independent accountants liability under Section 11 does
not extend to it.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Imation Corp.:
We have reviewed the accompanying condensed consolidated balance sheet of
Imation Corp. and its subsidiaries as of September 30, 2004, and the related
consolidated statements of operations for each of the three-month and
nine-month periods ended September 30, 2004 and 2003 and the condensed
consolidated statements of cash flows for the nine-month periods ended
September 30, 2004 and 2003. These interim financial statements are the
responsibility of the Companys management.
We conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying consolidated interim financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.
We previously audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheet as
of December 31, 2003, and the related consolidated statements of operations,
shareholders equity and comprehensive income, and of cash flows for the year
then ended (not presented herein), and in our report dated January 27, 2004,
we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2003, is fairly stated
in all material respects in relation to the consolidated balance sheet from
which it has been derived.
/s/ PricewaterhouseCoopers LLP
Minneapolis, Minnesota
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Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
General Overview
Imation is a global technology development, manufacturing, sourcing and
distribution company that derives revenue and profits primarily from the sale
of removable data storage media products to both consumers and businesses.
These products range from floppy diskettes, recordable CDs and DVDs, solid
state removable flash memory, and tape cartridges used in small and medium
businesses to high capacity tape cartridges used in large automated tape silos
in a data center environment. These products are sold in the U.S.
and in over 100 other countries, and approximately 57 percent of the Companys revenues for
the first nine months of 2004 came from outside the U.S. The Company also has
a Specialty Papers business, representing approximately four percent of
revenues for the three and nine month periods ended September 30, 2004, which
manufactures and distributes carbonless paper for use in the creation of
multi-part business forms.
The core data storage market presents attractive growth opportunities as well
as challenges. The market is highly competitive, characterized by continuing
changes in technology, pricing pressure on media products, diverse
distribution channels, and a large variety of formats for both tape and
optical products. During the second quarter of 2004, price competition for
recordable optical products was unusually strong. This resulted from increased
supply as significant additional manufacturing capacity in Asia came on line,
coupled with softer than expected demand for the Companys products
principally in the U.S. and Europe. Price reductions in optical markets
moderated somewhat during the third quarter of 2004.
The Company delivers a broad portfolio of products across diverse distribution
channels and geographies. Success in this market is dependent on being early
to market with new formats, having efficient sourcing, manufacturing and
supply chain operations, maintaining competitive total delivered cost, working
closely with leading OEMs (Original Equipment Manufacturers) to develop
enhancements to existing and new formats, carrying a broad assortment of
products across multiple competing drive platforms, and having a broad
geographic and market coverage across a variety of distribution channels.
While the demand for data storage capacity continues to grow, the highest
revenue growth opportunities over the next three to five years lie outside the
Companys historical core magnetic tape and diskette media businesses. These
higher growth areas include newer tape formats in semi-proprietary or open
system environments, recordable optical discs, which currently are more
consumer oriented products, and removable flash memory. These higher revenue
growth opportunities provide revenue streams that are, as a rule, at lower
gross profit margins than the Companys historical gross margins on the core
magnetic media businesses.
The Companys strategy is to profitably 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 the Company has intellectual property,
patents and know-how in optical media, it sources products from third party
manufacturers. As a result, the Companys business is a
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combination of a
manufacturer and a brand distributor. 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 revenues. In addition, the Company has launched a
program implementing lean organization principles throughout the
Company, starting in manufacturing.
Results of Operations
Comparison of Three Months Ended
September 30, 2004 and 2003
Net revenues of $269.7 million decreased 6.3 percent from last years third
quarter revenues of $287.8 million, due to revenue declines in both optical,
related mainly to CDR discs, and magnetic products, related mainly to high-end
data center tapes. For the quarter, U.S. revenues totaled $123.1 million, or
46 percent of worldwide revenues, compared with $136.2 million, or 47 percent,
from a year ago. Non-U.S. revenues totaled $146.6 million, or 54 percent of
worldwide revenues, compared with $151.6 million, or 53 percent, from a year
ago.
Data Storage and Information Management (DS&IM) third quarter revenues
decreased $15.1 million, or 5.5 percent, to $259.3 million from $274.4 million
a year ago. DS&IM accounted for approximately 96 percent of the Companys
revenues during the quarter. The revenue decrease in the third quarter 2004 was
driven by price declines of approximately 13 percent. The price declines were
partially offset by volume increases of approximately five percent and the
effect of a positive currency translation of approximately two percent. Price
competition for recordable optical products was unusually strong during the
second quarter of 2004 and this decline negatively impacted the third quarter.
Pricing declines did, however, moderate somewhat during the third quarter. As
discussed under Impact of Changes in Foreign Currency Rates below, pricing
changes can be impacted by changes in foreign currency exchange rates. Optical
media products accounted for approximately one-third and tape products
accounted for approximately two-thirds of total DS&IM revenues during the third
quarter of 2004.
Specialty Papers also experienced a revenue decline, with revenues of $10.4
million in the third quarter 2004 as compared with $13.4 million in the third
quarter 2003. The decrease was due primarily to the loss of two major customers.
Gross profit in third quarter 2004 was $61.5 million or 22.8 percent of
revenues, compared to $77.7 million, or 27.0 percent of revenues in the third
quarter of 2003. This decline was caused by several factors. The first and
largest factor was the impact of the sell through of optical inventory which
was written down to net realizable value at the end of the second quarter and
therefore sold at essentially zero gross margin during the third quarter of
2004. The second factor related to the Companys new
coating facility in Oklahoma where costs were added ahead of the
Companys commencement of production. The third factor was the sales decline in
high-end data center tapes, which carry higher than corporate average gross
margins, thereby negatively impacting the Companys gross margin percentage.
The fourth factor was lower manufacturing volumes in magnetic products which
negatively impacted production utilization, thereby increasing manufactured
cost.
Selling, general and administrative (SG&A) expenses in third quarter of 2004
were $39.2 million, or 14.5 percent of revenues, compared to $40.5 million, or
14.1 percent of revenues, in the third quarter of 2003. During the quarter
ended September 30, 2004, SG&A included a
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benefit of $1.4 million related
to the sale of land attached to the Camarillo, California production site,
partially offset by $0.4 million of costs associated with the
down-sizing of the
Specialty Papers business segment.
Research and development costs were $13.8 million, or 5.1 percent of revenues
in the third quarter of 2004, as compared to $15.5 million, or 5.4 percent of
revenues in the third quarter of 2003. The decrease was due to the
completion of spending on certain development programs.
As a result of the above factors, operating income in the third quarter of
2004 was $8.5 million, or 3.2 percent of revenues, compared with operating
income of $22.7 million, or 7.9 percent of revenues, for the same period last
year. Operating income in the third quarter of 2003 was benefited by $1.0
million from the settlement of a litigation matter in Spain.
The tax impact for the third quarter of 2004 was a benefit of $0.9 million
compared to a tax provision of $7.4 million at a rate of 31 percent for the
same period last year. The benefit in the current quarter was due to a
one-time impact of $4.1 million (or $0.11 per share) associated with the
favorable resolution of a European tax matter. Future periods could benefit
from the favorable resolution of other outstanding tax matters. The Company is
unable to project with certainty those tax benefits at this time. The fourth
quarters normalized tax rate excluding the impact of any one-time tax items
is expected to be approximately 36 percent.
Income from continuing operations in the third quarter of 2004 was $9.9
million, or $0.28 per basic and diluted share, compared with income from
continuing operations of $16.7 million, or $0.47 per basic share and $0.46 per
diluted share in the third quarter of 2003.
Net income in the third quarter of 2004 was $9.6 million, or $0.27 per basic
and $0.27 per diluted share, compared with net income of $16.4 million, or
$0.46 per basic share and $0.45 per diluted share, in the third quarter of
2003. Net income in both the third quarter of 2004 and 2003 included a loss of
$0.3 million, net of taxes, related to the litigation costs associated with
discontinued operations.
Comparison of Nine Months Ended
September 30, 2004 and 2003
On a year to date basis, net revenues of $893.1 million increased 7.7 percent
from last years revenues of $829.1 million, driven by revenue growth in
DS&IM. For the year to date period, U.S. revenues totaled $383.8 million, or
43 percent of worldwide revenues, compared with $388.7 million, or 47 percent,
from a year ago. Non-U.S. revenues totaled $509.3 million, or 57 percent of
worldwide revenues, compared with $440.4 million, or 53 percent, from a year
ago. The relative shift in revenues from the U.S. to international was driven
by the launch in 2003 of Global Data Media, the Companys joint venture with
Moser Baer India, as well as strong growth in Asia and Latin America.
DS&IM revenues for the first nine months of 2004 increased $68.8 million, or
8.7 percent, to $857.9 million from $789.1 million a year ago. DS&IM accounted
for approximately 96 percent of the Companys revenues during the period. The
revenue increase during the period was driven by volume increases of
approximately 17 percent and the effect of a positive currency exchange rate
translation of approximately three
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percent. The volume and currency translation benefits were partially offset by price declines of approximately
12 percent. The price decline was higher than recent periods as price
competition for recordable optical products was unusually strong during the
second quarter of 2004. The declines resulted from increased supply as
significant additional manufacturing capacity in Asia came on line, coupled
with softer than expected demand. As discussed under Impact of Changes in
Foreign Currency Rates below, pricing changes can be impacted by changes in
foreign currency exchange rates. Optical media products accounted for
approximately one-third and tape products accounted for approximately
two-thirds of total DS&IM revenues during the first nine months of 2004.
Specialty Papers revenues for the first nine months of 2004 were $35.2 as
compared to $40.0 million a year ago. The decrease was driven mainly by sales
declines due to the loss of two major customers.
Gross profit was $225.2 million, or 25.2 percent of revenues, for the first
nine months of 2004 compared with $246.3 million, or 29.7 percent of revenues
a year ago. The decrease was due to several factors including $9 million of
inventory related charges recorded in the second quarter of 2004 associated
with optical media and the subsequent sell-through of this inventory, which
was written down to net realizable value at the end of the second quarter and
therefore sold at essentially zero gross margin during the third quarter of
2004. The inventory related charges during the second quarter of 2004 were
driven by competitive market pricing which caused inventory valuation
write-downs of $6 million and price protection payments of $3 million to be
made in order to retain and expand certain retail business. The inventory
write-down was recorded in cost of goods sold and the price protection payment
was recorded as a reduction of revenues. Also contributing to the decrease in
gross profit were the additional factors experienced in the third quarter
discussed above.
SG&A expenses for the first nine months of 2004 were $126.2 million, or 14.1
percent of revenues, compared to $124.1 million, or 15.0 percent of revenues,
for the same period a year ago. The period over period 0.9 percentage point
decrease in SG&A as a percent of revenues was primarily the result of the
revenue growth initiatives within DS&IM which increased revenues without a
corresponding increase in the level of SG&A expenses. This is in line with the
Companys strategy, as discussed in General Overview above.
Research and development costs for the first nine months of 2004 were $43.6
million, or 4.9 percent of revenues, as compared to $40.9 million, or 4.9
percent of revenues, for the same period a year ago. The increased spending in
dollar terms was related to investments in new storage platforms.
During the second quarter of 2004, the Company recorded restructuring charges
of $3.1 million for employee reductions. The charges related to a plan to
close the Companys production facility in Tucson, Arizona and international
administrative and sales employee reductions. The restructuring will impact
approximately 280 positions. It is anticipated that the Tucson facility will
be closed by December 31, 2005. Ongoing production activities from this
facility will be shifted to other facilities as the shutdown occurs. The
restructuring charge consists of estimated severance payments and related
costs. In addition to these costs, commencing in the fourth quarter of 2004,
the Company will also be incurring costs related to the Tucson facility
closing such as scale-up costs at other facilities, equipment moves and
relocation. These costs will be
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generally expensed as incurred, and
are expected to total approximately $6 million, of which approximately $1.3
million are expected to be incurred in the fourth quarter of 2004. These
actions are expected to result in ongoing earnings and cash flow benefits
commencing in 2006. During the transition period, through the end of 2005, the
benefits will be largely offset by the implementation costs.
As a result of the above factors, operating income for the first nine months
of 2004 was $52.3 million, or 5.9 percent of revenues, as compared to $82.3
million, or 9.9 percent of revenues, for the same period last year.
The tax rate for the first nine months of 2004 was approximately 26 percent
compared to 33 percent for the same period last year. The decrease in the tax
rate was due to a one-time tax benefit of $4.1 million associated with the
favorable resolution of a European tax matter, as well as better than expected
results related to the taxation of certain foreign income on the U.S. Federal
tax return. Future periods could benefit from the favorable resolution of
other outstanding tax matters. The Company is unable to project with certainty
those tax benefits at this time. The fourth quarters normalized tax rate
excluding the impact of any one-time tax items is expected to be approximately
36 percent.
Income from continuing operations for the first nine months of 2004 was $38.9
million, or $1.10 per basic share and $1.08 per diluted share, compared with
income from continuing operations of $57.1 million, or $1.61 per basic share
and $1.58 per diluted share for the first nine months of 2003.
Net income, including discontinued operations, in the first nine months of
2004 was $37.8 million or $1.07 per basic share and $1.05 per diluted share
compared with net income of $57.3 million or $1.61 per basic share and $1.58
per diluted share for the first nine months of 2003. Discontinued operations
for the first nine months of 2004 included a loss of $1.1 million, net of
taxes, related to the litigation costs. Discontinued operations for the first
nine months of 2003 included a net gain of $0.2 million, net of taxes,
resulting from a favorable outcome of the dispute with Kodak related to the
1998 sale of the Medical Imaging Systems business, partially offset by
litigation costs.
Impact of Changes in Foreign
Currency Rates
The Company has a market presence in more than 100 countries and sells
products on a local currency basis through a variety of distribution channels.
While the Company sources finished goods, primarily optical products, from
outside the U.S., the majority of the Companys revenues are from products
produced in its own manufacturing facilities, all of which are located in the
U.S. Comparisons of revenues and income from outside the U.S. are subject to
fluctuations due to the impact of translating results at differing exchange
rates in different periods.
Changes in foreign currency exchange rates in the first nine months of 2004
positively impacted worldwide revenues by approximately three percent due to
favorable translation. The impact on profits is more difficult to determine
due to the influence of other factors that the Company believes are also
impacted by currency rate changes, including the translation impact on local
offsetting expenses and pricing declines that over time work to offset
translation benefits. For example, the Company has generally experienced
increased price erosion internationally as the
20
dollar weakened. In addition, the weak dollar negatively impacts some regional business activity. The
Companys objective is to hedge a portion of its Euro-based operating income
exposure through the purchase of a combination of currency forwards and
options, which protects a portion of operating income against downside risk
but enables the Company to capture upside benefits from favorable translation
(see Item 3. Quantitative and Qualitative Disclosures About Market Risk in
this Form 10-Q).
Financial Position
As of September 30, 2004, the Companys cash and equivalents balance was $339.6
million, a decrease of $71.8 million from $411.4 million as of December 31,
2003. The decrease was primarily due to share repurchase of $75.5 million. The
Company also has other investments, which total $38.7 million and $13.4
million as of September 30, 2004 and December 31, 2003, 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.
Accounts receivable days sales outstanding was 45 days as of September 30,
2004, down 1 day from December 31, 2003. Days sales outstanding is calculated
using the count-back method, which calculates the number of days of most recent
revenues that are reflected in the net accounts receivable. The accounts
receivable balance was $155.5 million as of September 30, 2004 and $196.8
million as of December 31, 2003. Days of inventory supply was 66 days as of
September 30, 2004 compared to 71 days as of December 31, 2003. 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. The decrease in days of inventory
supply was primarily related to a concentrated effort to reduce inventories
across the Companys supply chain. This resulted in a decrease in the inventory
balance to $157.8 million as of September 30, 2004 from $192.7 million as of
June 30, 2004 and from $159.4 million as of December 31, 2003.
The decrease of $9.8 million in other current assets from December 31, 2003 was
driven by finalizing the purchase of EMTEC and the release of funds from escrow
to pay for the acquisition (see Note 12 to the Consolidated Financial
Statements) which generated a similar increase in other assets. The decline in
other current assets was also the result of $4.4 million received from the
collection of a receivable related to the settlement reached in January 2004
for outstanding transition services payments for the color proofing and color
software business sold in 2001. These and other decreases were partially offset
by an increase in short-term investments related to the Companys cash
investments discussed above.
The increase of $8.5 million in other assets from December 31, 2003 was
primarily caused by finalizing the purchase of EMTEC and the purchase of cash
investments as described above, partially offset by a reduction of deferred
tax assets of $10.8 million.
The decrease in accounts payable of $59.1 million from December 31, 2003 was
driven by several factors, including significantly reduced inventory purchases
during the three month period ended September 30, 2004 and payments during the
first quarter of 2004 for capital expenditures of $5.0 million reported as
accounts payable as of December 31, 2003.
21
The decrease in other current liabilities of $31.5 million from December 31,
2003 was driven by a reduction of $20.6 million of income taxes payable due to
higher income tax payments and a reduction of pre-tax income in the third
quarter of 2004, as well as a reduction of $5.2 million in the rebate accrual,
which reflects the seasonal nature of payments made for the Companys rebate
programs.
Liquidity and Capital Resources
Cash provided by operating activities was $50.0 million in the first nine
months of 2004. The major driver was net income as adjusted for non-cash items
of $83.7 million, offset by working capital usages of $39.0 million. Net
income as adjusted for significant non-cash items includes net income of $37.8
million, adjusted for depreciation and amortization of $34.6 million, deferred
income taxes of $8.2 million and a restructuring charge of $3.1 million. The
working capital usages in 2004 were caused by several factors including a
$53.5 million decrease in accounts payable, a $17.8 million decrease in
accrued payroll and other current liabilities and a $16.4 million decrease in
income taxes payable. The working capital usages were partially offset by a
reduction in accounts receivable of $39.9 million.
For the first nine months of 2003, cash provided by operating activities was
$50.8 million. The major driver was net income as adjusted for non-cash items
of $101.4 million, offset by working capital usages of $46.9 million. Net
income as adjusted for significant non-cash items includes net income of $57.3
million, adjusted for depreciation and amortization of $28.3 million and
deferred income taxes of $16.8 million. The working capital usages in 2003
were driven by a $19.5 million increase in inventory, payments for broad-based
employee incentive compensation plans related to full year 2002 performance of
$13.5 million, the Companys settlement with Kodak resulting in a net $9.0
million usage of working capital as well as payments related to restructuring
programs of $4.8 million.
Cash used by investing activities was $53.2 million in the first nine months
of 2004 and $75.5 million in the first nine months of 2003. Capital spending
in the first nine months of 2004 was $28.4 million compared with $53.8 million
for the same period last year. The reduction was due to the high level of
investment during 2003 related to the Companys new coating facility in
Oklahoma. Investing activities primarily related to capital spending for both
periods and for net purchases of investments of $25.6 million in the first
nine months of 2004. These investments related to investment grade interest
bearing securities with maturities greater than one year and are classified as
other current assets or other assets, depending on the time remaining to
maturity.
Cash used in financing activities was $68.5 million in the first nine months
of 2004 and $10.9 million in the first nine months of 2003. Cash usages in
2004 were driven by share repurchases of $75.5 million and dividend payments
of $9.8 million, offset partially by cash inflows of $16.8 million related to
the exercise of stock options. Cash usages for the same period in 2003 were
driven by share repurchases of $14.7 million, dividend payments of $5.7
million and repayment of short-term debt of $4.5 million, offset by cash
inflows of $11.7 million related to the exercise of stock options.
22
As of September 30, 2004, the Company does not have any debt. In December 2003,
the Company entered into a new Credit Agreement with a group of banks that
expires December 16, 2006. The Credit Agreement provides for revolving credit,
including letters of credit, with borrowing availability of $100 million. The
Credit Agreement provides for, at the option of the Company, 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 the Companys
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, both based on the Companys
consolidated leverage ratio, are payable on the total credit line. In
conjunction with the Credit Agreement, the Company has pledged 65 percent of
the stock of certain of the Companys foreign subsidiaries. Covenants include
maintenance of a minimum consolidated tangible net worth, a required EBITDA,
and a maximum leverage ratio. The Company does not expect these covenants to
restrict materially its ability to borrow funds in the future. No borrowings
were outstanding under the Credit Agreement as of September 30, 2004 and the
Company was in compliance with all covenants under the Credit Agreement.
In addition, certain international subsidiaries have arranged borrowings
locally outside of the Credit Agreement discussed above. As of September 30,
2004, there were no borrowings outstanding under such arrangements.
In 1997, the Companys Board of Directors authorized the repurchase of up to
six million shares of the Companys common stock and in 1999 increased that
authorization up to a total of 10 million shares available for repurchase as of
that date. On August 4, 2004, the Companys Board of Directors increased the
authorization for repurchase of common stock, expanding the remaining share
repurchase authorization of 1.8 million shares as of June 30, 2004, to a total
of six million shares. The Company repurchased 2.2 million shares during the
first nine months of 2004. As of September 30, 2004, the Company had
repurchased a total of 10.0 million shares since January 1, 1999 under these
authorizations and held, in total, 8.8 million shares of treasury stock
acquired at an average price of $24.36 per share.
During the nine months ended September 30, 2004, $9.5 million of contributions
have been made to the Companys pension plans. The Company presently
anticipates contributing approximately $4 million to fund its pension
plans during the last three months of 2004.
The
Company paid cash dividends of $0.08, $0.10 and $0.10 per share during the
first, second and third quarters of 2004, respectively, for a total of $9.8
million. During the same period in 2003 total dividend payments were $5.7
million. Any future dividends are at the discretion of and subject to the
approval of Imations Board of Directors.
The
Companys remaining liquidity needs for 2004 include: capital expenditures
of approximately $10 million; pension funding of approximately $4
million; lease payments of approximately $3 million; any amounts associated
with dividend payments and the repurchase of common stock; and amounts
associated with the restructuring program announced in
October 2004. The restructuring program is expected to result in
a total charge of $15 to $20 million. The charge will be mainly
used to cover cash expenses in the fourth quarter of 2004 and the
first quarter of 2005. The Company expects that cash and equivalents plus cash
investments, together with cash flow from operations and available
23
borrowing capacity, will provide liquidity sufficient to
meet these needs and operate available borrowing capacity.
Other than operating lease commitments, the Company is not using off-balance
sheet arrangements, including special purpose entities. The Company does not
have any contractual obligations or commercial commitments with terms greater
than one year that would significantly impact its liquidity.
Contractual Obligations
A table of the Companys contractual obligations was provided in Item 7 in the
Companys Annual Report on Form 10-K for the year ended December 31, 2003.
There were no significant changes to the Companys contractual obligations
during the first nine months of 2004.
Critical Accounting Policies and Estimates
For further discussion, see the Critical Accounting Policies and Estimates
section in Item 7 in the Companys Annual Report on Form 10-K for the year
ended December 31, 2003. There were no significant changes to these
accounting policies during the first nine months of 2004.
Recent Board Actions
On October 19, 2004, the Companys Board of Directors committed the Company
to a restructuring plan consisting of the elimination of approximately 250
positions globally. The restructuring is intended to simplify the Companys
structure, improve decision-making speed and lower overall operating costs
and is expected to result in an estimated annualized savings of $25 to $30
million. The restructuring program is expected to result in a total charge
of $15 to $20 million in the fourth quarter of 2004. The charge will be
utilized mainly to cover the cash expenses associated with the termination
benefits for the reduction in workforce (primarily severance and related
benefits). The program is expected to be substantially completed in 2004
with the remainder completed in 2005.
24
Forward-Looking Statements and Risk Factors
The following section contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. These statements are
based on the Companys current outlook for fiscal year 2004, and are subject
to the risks and uncertainties described below.
Fourth Quarter Outlook
The following summarizes the Companys current outlook for the fourth quarter
of 2004.
The Companys near term outlook is cautious due to current economic and market
uncertainty. This revised outlook is lower than and replaces the Companys
previous statements in its business outlook. The Company expects a typical
seasonally strong fourth quarter of 2004, resulting in improvement in revenue,
gross profit margins and earnings prior to restructuring, compared with the
third quarter of 2004. However, the Company expects that both revenue and
earnings will be down compared with the very strong fourth quarter of 2003. As
a result, full year 2004 revenue is expected to grow one percent to three
percent over 2003.
Certain information contained in this report which does not relate to
historical financial information, including the 2004 targeted projections, 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.
The Company wishes to caution investors not to place undue reliance on any
such forward looking statements. Any forward-looking statement speaks only as
of the date on which such statement is made, and the Company undertakes no
obligation to update such statement to reflect events or circumstances arising
after such date. Among the factors that could cause the Companys actual
results in the future to differ materially from any opinion or statements
expressed with respect to future periods are continuing uncertainty in global
economic conditions that make it particularly difficult to predict product
demand, the Companys ability to meet its cost reduction and revenue growth
targets, its ability to introduce new offerings in a timely manner either
independently or in association with OEMs or other third parties, its ability
to achieve the expected benefits in a timely manner from the Moser Baer
relationships, in particular the Global Data Media joint venture, the
competitive pricing environment which could significantly impact the
Companys profit margins and valuation of inventory, foreign currency fluctuations, the outcome of
litigation, its ability to secure adequate supply of certain high demand
products, the ready availability and price of energy, availability of key raw
materials or critical components, the market acceptance of newly introduced
product and service offerings, the rate of decline for certain existing
products as well as various factors set forth under the caption Risk Factors
in Item 7 of the Companys Annual Report on Form 10-K for the year ended
December 31, 2003, and in the Companys other filings with the Securities and
Exchange Commission.
25
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Except for the paragraph noted below, there has been no material change since
the Companys Annual Report Form 10-K for the year ended December 31, 2003.
For further information, see Item 7A. Quantitative and Qualitative
Disclosures About Market Risk included in the Companys Annual Report on Form
10-K for the year ended December 31, 2003. Also, see information on
derivatives and hedging activities in Note 10 to the Consolidated Financial
Statements of this Form 10-Q.
As of September 30, 2004, the Company had $79.5 million notional amount of
foreign currency forward and option contracts of which $46.2 million hedged
recorded balance sheet exposures. This compares to $182.6 million notional
amount of foreign currency forward and option contracts as of December 31,
2003, of which $51.4 million hedged recorded balance sheet exposures. A
hypothetical adverse change of 10 percent in quarter-end foreign currency
exchange rates would reduce the fair value of foreign currency contracts
outstanding as of September 30, 2004 by $4.4 million.
Item 4. Controls and Procedures
Based on an evaluation of the Companys disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the
Exchange Act)) as of September 30, 2004, the end of the period covered by
this report, the Chairman of the Board 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 quarter ended September 30, 2004, there was no change in the
Companys 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, the Companys internal control over
financial reporting.
26
(In millions, except for per share amounts)
(Unaudited)
Three months ended
Nine months ended
September 30,
September 30,
2004
2003
2004
2003
$
269.7
$
287.8
$
893.1
$
829.1
208.2
210.1
667.9
582.8
61.5
77.7
225.2
246.3
39.2
40.5
126.2
124.1
13.8
15.5
43.6
40.9
(1.0
)
(1.0
)
3.1
53.0
55.0
172.9
164.0
8.5
22.7
52.3
82.3
(1.3
)
(1.2
)
(3.4
)
(4.7
)
0.2
0.3
0.5
0.9
0.6
(0.5
)
2.7
0.7
(0.5
)
(1.4
)
(0.2
)
(3.1
)
9.0
24.1
52.5
85.4
(0.9
)
7.4
13.6
28.3
9.9
16.7
38.9
57.1
(0.3
)
(0.3
)
(1.1
)
0.2
$
9.6
$
16.4
$
37.8
$
57.3
$
0.28
$
0.47
$
1.10
$
1.61
(0.01
)
(0.01
)
(0.03
)
$
0.27
$
0.46
$
1.07
$
1.61
$
0.28
$
0.46
$
1.08
$
1.58
(0.01
)
(0.01
)
(0.03
)
$
0.27
$
0.45
$
1.05
$
1.58
35.0
35.5
35.3
35.5
35.7
36.3
36.0
36.3
$
0.10
$
0.08
$
0.28
$
0.16
Table of Contents
(In millions)
(Unaudited)
September 30,
December 31,
2004
2003
$
339.6
$
411.4
155.5
196.8
157.8
159.4
61.0
70.8
713.9
838.4
220.1
226.5
116.4
107.9
$
1,050.4
$
1,172.8
$
89.2
$
148.3
13.8
22.2
95.2
126.7
198.2
297.2
51.9
55.3
800.3
820.3
$
1,050.4
$
1,172.8
Table of Contents
(In millions)
(Unaudited)
Nine months ended
September 30,
2004
2003
$
37.8
$
57.3
34.6
28.3
8.2
16.8
3.1
(1.0
)
39.9
(29.2
)
0.5
(19.5
)
8.3
41.1
(53.5
)
32.2
(17.8
)
(65.8
)
(16.4
)
(5.7
)
5.3
(3.7
)
50.0
50.8
(28.4
)
(53.8
)
(35.6
)
10.0
(15.0
)
0.8
(6.7
)
(53.2
)
(75.5
)
(4.5
)
(75.5
)
(14.7
)
(9.8
)
(5.7
)
16.8
11.7
2.3
(68.5
)
(10.9
)
(0.1
)
0.4
(71.8
)
(35.2
)
411.4
474.7
$
339.6
$
439.5
Table of Contents
Table of Contents
Three months ended
Nine months ended
September 30,
September 30,
(In millions, except per share amounts)
2004
2003
2004
2003
$
9.6
$
16.4
$
37.8
$
57.3
0.1
0.1
(2.0
)
(1.3
)
(4.9
)
(3.8
)
$
7.7
$
15.1
$
33.0
$
53.5
$
0.27
$
0.46
$
1.07
$
1.61
$
0.22
$
0.43
$
0.93
$
1.51
$
0.27
$
0.45
$
1.05
$
1.58
$
0.22
$
0.42
$
0.92
$
1.47
Table of Contents
September 30,
December 31,
2004
2003
$
168.3
$
211.5
(12.8
)
(14.7
)
$
155.5
$
196.8
$
110.3
$
117.9
17.8
15.0
29.7
26.5
$
157.8
$
159.4
$
24.9
$
24.5
14.4
8.3
21.7
38.0
$
61.0
$
70.8
$
746.6
$
748.2
(526.5
)
(521.7
)
$
220.1
$
226.5
$
39.3
$
50.1
24.3
13.4
26.8
27.2
12.3
2.6
13.7
14.6
$
116.4
$
107.9
$
32.4
$
37.6
6.8
27.4
56.0
61.7
$
95.2
$
126.7
$
28.3
$
25.4
23.6
29.9
$
51.9
$
55.3
Table of Contents
Q2 2004 Initiative
No. of
Employees
(Dollars in millions)
Amount
Affected
$
3.1
280
(0.8
)
(26
)
$
2.3
254
Table of Contents
(In millions)
Three months ended
Nine months ended
September 30,
September 30,
U. S. Plan
2004
2003
2004
2003
$
2.6
$
2.4
$
7.8
$
7.4
1.8
1.7
5.3
5.2
(2.2
)
(1.8
)
(6.5
)
(5.5
)
0.1
0.1
0.2
0.2
0.1
0.4
$
2.3
$
2.4
$
7.3
$
7.3
(1)
In the second quarter of 2004, $0.4 million was recognized for employee benefits associated
with the restructuring charges recorded during the second quarter of 2004.
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October 20, 2004
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Reference is made to Item 3 Legal Proceedings included in the Companys
Annual Report on Form 10-K for the year ended December 31, 2003 and to Part II,
Item 1 Legal Proceedings included in the Companys Quarterly Reports on Form
10-Q for the quarters ended March 31 and June 30, 2004.
The Company is the subject of various pending or threatened legal actions in
the ordinary course of its business. All such matters are subject to many
uncertainties and outcomes that are not predictable with assurance.
Consequently, as of September 30, 2004, the Company is unable to ascertain the
ultimate aggregate amount of any monetary liability or financial impact that
may be incurred by the Company with respect to these matters. While these
matters, certain of which are described below, could materially affect
operating results when resolved in future periods, it is managements opinion
that after final disposition, any monetary liability to the Company beyond that
provided in the Consolidated Balance Sheet as of September 30, 2004 would not
be material to the Companys financial position.
On May 10, 1999, Jazz Photo Corp. (Jazz Photo) served the Company and its
affiliate, Imation S.p.A., with a civil complaint filed in New Jersey Superior
Court. The complaint charges breach of contract, breach of warranty, fraud, and
racketeering activity in connection with the Companys sale of allegedly
defective film to Jazz Photo by its Photo Color Systems business which was sold
in 1999. In the complaint, Jazz Photo seeks unspecified compensatory damages,
treble damages, punitive damages, and equitable relief for both initial
purchases and subsequent additional purchases of film.
The Company is vigorously defending the action. In 2002, the parties continued
to litigate the scope of document production and discovery, and depositions
began in the third quarter of 2002. Depositions were taken in the fourth
quarter of 2002 through the first quarter of 2004. Factual discovery is now
complete.
On February 24, 2003, the Company was served with the reports of Jazz Photos
testifying expert witnesses in the case (the Jazz Photo Reports). In the
opinion of Jazz Photos experts as set forth in the Jazz Photo Reports, the
alleged damages to Jazz Photo were caused by a combination of heat, moisture,
and fumes from packaging materials supplied by Jazz Photo. The Jazz Photo
Reports do not contain any opinions that the alleged damages to Jazz Photo were
caused by any error by the Company in the manufacture of the film or by damage
to the film during shipment to Jazz Photo. The primary opinion set forth in the
Jazz Photo Reports is that the film was not fit for Jazz Photos particular use
or purpose (use in reloaded single use cameras) because the film design made it
more vulnerable to a combination of heat, moisture, and chemical fumes than
other film products. The Jazz Photo Reports further conclude that the Company
should have known that use in reloaded cameras would expose the film to the
damaging combination of heat, moisture, and chemical fumes. The Company
vigorously disputes this theory of liability and believes that it has
meritorious defenses. The Jazz Photo Reports claim alleged out-of-pocket
damages of approximately $13 million, lost profits through 2002 of
approximately $41 million, and lost future profits of approximately $32
million. The Company vigorously disputes the amount of the out-of-pocket
damages claim and vigorously disputes that Jazz Photo has suffered any lost
27
profits as a result of any action by the Company. Any claim for treble damages
by Jazz Photo would have to be based on a violation of the New Jersey Racketeer
Influenced and Corrupt Organizations Act or the New Jersey Consumer Fraud Act.
Even though Jazz Photo has asserted claims under these acts, the Jazz Photo
Reports contain no allegation of damages related to additional purchases of
film by Jazz Photo in 1999.
On May 6, 2003, the Company served reports of testifying expert witnesses, who
conclude that the Companys film was appropriately designed and manufactured
and was fit for use in single use cameras, including reloaded single use
cameras. The Companys experts agree that the damage to the film was caused by
a combination of chemical fumes, excess moisture, and excess heat occurring
after the film was delivered to Jazz Photo. They conclude that Jazz Photo was
responsible for the damage because it failed to put in place a quality control
system consistent with industry norms and failed to comply with manufacturer
instructions and industry standards concerning protecting film from heat,
humidity, and chemical fumes. Also on May 6, 2003, the Company served the
report of a financial expert who concludes that the plaintiffs financial
analysis is fundamentally flawed. Both sides filed rebuttal expert reports and
have taken expert depositions.
On May 20, 2003, Jazz Photo filed a Voluntary Petition for Relief under Chapter
11 of the United States Bankruptcy Code. The Jazz Photo litigation with the
Company will proceed despite the bankruptcy. The largest bankruptcy creditor
Jazz Photo listed was Fuji Photo Film Co., Ltd. (Fuji). Fuji obtained a
judgment against Jazz Photo 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, Jazz Photos principal shareholder, filed bankruptcy
in July 2003. On April 6, 2004, an Administrative Law Judge issued an
Enforcement Initial Decision recommending that the U.S. International Trade
Commission rule that Jazz Photo has been continuing to infringe on Fujis
patents and impose a $13 million civil penalty on Jazz Photo and Mr. Benun. The
infringement recommendation has been affirmed by the Commission. The penalty
recommendation is still pending before the Commission.
On October 2, 2003, the Company filed a motion for summary judgment dismissal
of the entire case against it. On the same date, Jazz Photo filed a motion for
partial summary judgment in its favor on its New Jersey racketeering and
consumer fraud claims. The final pre-trial conference was held on October 30,
2003. A settlement conference and hearing on the parties summary judgment
motions took place on January 22, 2004. An unsuccessful mediation was held
before retired Federal District Court Judge Nicholas Politan on April 1, 2004.
Imation has requested that mediation efforts continue and that representatives
of Jazz Photos creditors participate in mediation.
On May 20, 2004, the Federal District Judge in New Jersey issued his ruling on
the summary judgment motions brought by the Company and Jazz Photo. The Judge
denied Jazz Photos motion in its entirety. Regarding the Companys motion, the
Judge granted several parts and denied certain parts. The Judge granted the
Companys motion to dismiss Jazz Photos statute-based consumer fraud claims.
He also granted the Companys motion to dismiss the implied warranty claims and
rejected Jazz Photos attempt to add a new state product liability claim.
Finally, the Judge granted summary judgment to the Company on its claim against
Jazz Photo for $1,134,000 due on film purchased in 1999. The Judge denied the
Companys motion to dismiss certain fraud and racketeering claims. The Judge
granted the Companys motion to dismiss Jazz
28
Photos fraud and racketeering claims relating to film purchased in 1999, but he left those
claims relating to film purchased in 1997 and 1998. As a result of the Judges
ruling, Jazz Photo is left only with its pre-1999 fraud and racketeering
claims. Jazz Photo can still seek all the damages under these fraud claims that
it could have sought under the dismissed claims, including treble damages and
punitive damages.
The Company and Jazz Photo have each filed motions to reconsider portions of
the summary judgment ruling. These motions are pending before the Judge. The
Company and Jazz Photo have each filed numerous motions to limit evidence and
claims, in part based on this ruling. The Company seeks by such motions to
limit significantly Jazz Photos damages claims. On July 29, 2004, the Court
issued an order limiting the time period over which Jazz Photo can seek
lost-profit damages, which effectively cut Jazz Photos lost-profit claim in
half.
The Judge had set trial for September 20, 2004. In early September, the Judge
notified the parties that the trial date would be postponed to a date not
earlier that January 10, 2005. A hearing on the many motions now pending
before the Court has been scheduled for November 19, 2004. Barring some change
in Jazz Photos position caused by a change in its bankruptcy status, further
dismissal of claims or limitation of damages or otherwise, or unless the case
is disposed of by the ruling on reconsideration of summary judgment, the
Company expects to try this case.
The St. Paul Fire and Marine Insurance Co. (St. Paul) insured the Company under
a primary commercial general liability policy. St. Paul has, under a
reservation of rights, reimbursed the Company for its 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. In 2003 and the first nine months of 2004, the
Company recorded $1.3 million and $1.1 million, respectively of after-tax
expenses in discontinued operations, primarily related to incurred litigation
costs associated with the Companys defense of its ongoing legal dispute with
Jazz Photo that have not been reimbursed. The Company has asserted that it is
entitled to higher limits for defense and indemnity contained in other insuring
agreements of the St. Paul policy. The Company also believes it has coverage
for defense and/or indemnity under policies issued by another primary carrier
(CIGNA) and by its excess carrier (AIG). The disputes regarding coverage under
both the primary and excess policies have been stayed pending resolution of the
Jazz Photo litigation.
29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) (b)
Not applicable
(c) Registrant Purchases of Equity Securities
In 1997, the Companys Board of Directors authorized the repurchase of up to
six million shares of the Companys common stock and in 1999 increased the
authorization up to a total of 10 million shares available for repurchase as
of that date. This program was announced on February 4, 1997 and the
increased authorization was announced on January 26, 1999. On August 4, 2004,
the Companys Board of Directors increased the authorization for repurchase
of common stock, expanding the remaining share repurchase authorization as of
August 5,2004 to a total of six million shares. This increased authorization
program was announced on August 4, 2004 and has no expiration date.
Item 3. Defaults Upon Senior Securities
Not Applicable
30
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits
The following documents are filed as exhibits to this Report.
31
Table of Contents
Table of Contents
Table of Contents
Table of Contents
10.1
Form of Restricted Stock Award Agreement -
Employees 2004
10.2
Form of Restricted Stock Award Agreement -
Executive Officers 2004
10.3
Form of Stock Option Agreement - Employees 2004
10.4
Form of Stock Option Agreement - Executive
Officers 2004
15.1
Awareness Letter from the Companys
Independent Public Accounting Firm regarding Unaudited
Interim Financial Statements
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
Table of Contents
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
32
Imation Corp.
(REGISTRANT)
By:
/s/ Paul R. Zeller
Paul R. Zeller
Vice President and
Chief Financial Officer
Table of Contents
EXHIBIT INDEX
Exhibit
Number
Description
Form of Restricted Stock Award
Agreement - Employees 2004
Form of Restricted Stock Award
Agreement - Executive Officers 2004
Form of Stock Option Agreement - Employees 2004
Form of Stock Option Agreement - Executive Officers 2004
Awareness Letter from the Companys Independent Registered Public
Accounting Firm regarding Unaudited Interim Financial Statements
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act 2002
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
33
Exhibit 10.1
Form for Employees
Imation Corp. 2000 Stock Incentive Plan,
as Amended February 6, 2003
Restricted Stock Award Agreement
This RESTRICTED STOCK AWARD AGREEMENT (the Agreement) effective as of «GrantDt» is between Imation Corp., a Delaware corporation (the Company), and «Name», an employee of the Company or one of its Affiliates (the Participant), pursuant to and subject to the terms and conditions of the Imation Corp. 2000 Stock Incentive Plan, as Amended February 6, 2003 (the Plan).
The Company desires to award to the Participant a number of shares of the Companys common stock, par value $.01 per share (the Common Stock), subject to certain restrictions as provided in this Agreement, in order to carry out the purpose of the Plan. The purpose of this Agreement is to evidence the terms and conditions of an award of restricted stock granted to the Participant under the Plan.
Accordingly, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and the Participant hereby agree as follows:
Award of Restricted Stock .
Effective «GrantDt» (the Effective Date), the Company granted to the Participant a restricted stock award of «GrantDt»(«GrantDt») shares of Common Stock (the Shares), subject to the terms and conditions set forth in this Agreement and in accordance with the terms of the Plan (the Restricted Stock Award).
Rights with Respect to the Shares .
Stockholder Rights . With respect to the Shares, the Participant shall be entitled at all times on and after the date of issuance of the Shares to exercise the rights of a stockholder of Common Stock of the Company, including the right to vote the Shares and the right to receive dividends on the Shares as provided in Section 2(b) hereof, unless and until the Shares are forfeited pursuant to Section 3 hereof. However, the Shares shall be nontransferable and subject to a risk of forfeiture to the Company at all times prior to the dates on which such Shares become vested, and the restrictions with respect to the Shares lapse, in accordance with Section 3 of this Agreement.
(b) Dividends . As a condition to receiving the Shares under the Plan, the Participant hereby agrees to defer the receipt of dividends paid on the Shares. Cash dividends or other cash distributions paid with respect to the Shares prior to the date or dates the Shares vest shall be subject to the same restrictions, terms and conditions as the Shares to which they relate, shall be promptly deposited with the Secretary of the Company or a custodian designated by the Secretary, and shall be forfeited in the event that the Shares with respect to which the dividends were paid are forfeited.
(c) Issuance of Shares . The Company shall cause the Shares to be issued in the Participants name or in a nominee name on the Participants
34
behalf, either by book-entry registration or issuance of a stock certificate or certificates evidencing the Shares, which certificate or certificates shall be held by the Secretary of the Company or the stock transfer agent or brokerage service selected by the Secretary of the Company to provide such services for the Plan. The Shares shall be restricted from transfer and shall be subject to an appropriate stop-transfer order. If any certificate is issued, the certificate shall bear an appropriate legend referring to the restrictions applicable to the Shares. The Participant hereby agrees to the retention by the Company of the Shares and, if a stock certificate is issued, the Participant agrees to execute and deliver to the Company a blank stock power with respect to the Shares as a condition to the receipt of this Restricted Stock Award. After any Shares vest pursuant to Section 3 hereof, and following payment of the applicable withholding taxes pursuant to Section 6 of this Agreement, the Company shall promptly cause to be issued a certificate or certificates, registered in the Participants name, evidencing such vested whole Shares (less any Shares withheld to pay withholding taxes) and shall cause such certificate or certificates to be delivered to the Participant free of the legend and the stop-transfer order referenced above. The Company will not deliver any fractional Share but will pay, in lieu thereof, the Fair Market Value of such fractional Share at the time certificates evidencing the Shares are delivered to the Participant.
Vesting; Forfeiture .
Vesting . Subject to the terms and conditions of this Agreement, twenty five percent (25%) of the Shares shall vest, and the restrictions with respect to the Shares shall lapse, on each of the first, second, third and fourth anniversaries of the Effective Date if the Participant remains continuously employed by the Company or an Affiliate of the Company until such respective vesting dates.
(b) Forfeiture . If the Participant ceases to be employed by the Company and all Affiliates of the Company for any reason prior to the vesting of the Shares pursuant to Section 3(a) hereof, Participants rights to all of the unvested Shares shall be immediately and irrevocably forfeited, including the right to vote such Shares and the right to receive dividends on such Shares.
(c) No Early Vesting . Unless otherwise determined by the Committee in its sole discretion, in no event will any of the Shares vest prior to their respective vesting dates set forth in Section 3(a) hereof.
Restrictions on Transfer .
Until the Shares vest pursuant to Section 3 hereof, neither the Shares, nor any right with respect to the Shares under this Agreement, may be sold, assigned, transferred, pledged, hypothecated (by operation of law or otherwise) or otherwise conveyed or encumbered and shall not be subject to execution, attachment or similar process. Any attempted sale, assignment, transfer, pledge, hypothecation or other conveyance or encumbrance shall be void and unenforceable against the Company or any Affiliate of the Company.
Distributions and Adjustments .
If any Shares vest subsequent to any change in the number or character of the Common Stock of the Company through any stock dividend or other distribution, recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of shares or other securities of the Company, issuance of warrants or other rights to purchase shares of Common Stock or other securities of the Company or other similar corporate transaction or event such that an adjustment is
35
determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under this Agreement, then the Committee shall, in such manner as it may deem equitable, in its sole discretion, adjust any or all of the number and type of such Shares.
Any additional shares of Common Stock of the Company, any other securities of the Company and any other property distributed with respect to the Shares prior to the date or dates the Shares vest shall be subject to the same restrictions, terms and conditions as the Shares to which they relate and shall be promptly deposited with the Secretary of the Company or a custodian designated by the Secretary.
Taxes .
The Participant acknowledges that the Participant will consult with the Participants personal tax adviser regarding the income tax consequences of the grant of the Shares, payment of dividends on the Shares, the vesting of the Shares and any other matters related to this Agreement. In order to comply with all applicable federal, state, local or foreign income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal, state, local or foreign payroll, withholding, income or other taxes, which are the Participants sole and absolute responsibility, are withheld or collected from the Participant. In accordance with the terms of the Plan, and such rules as may be adopted by the Committee administering the Plan, the Participant may elect to satisfy tax withholding obligations arising from the receipt of, or the lapse of restrictions relating to, the Shares by (i) delivering cash, check, bank draft, money order or wire transfer payable to the order of the Company, (ii) having the Company withhold a portion of the Shares otherwise to be delivered having a Fair Market Value equal to the amount of such taxes, or (iii) delivering to the Company shares of Common Stock having a Fair Market Value equal to the amount of such taxes. The Company will not deliver any fractional Share but will pay, in lieu thereof, the Fair Market Value of such fractional Share. The Participants election must be made on or before the date that the amount of tax to be withheld is determined. If the Participant does not make an election, the Company will withhold a portion of the Shares otherwise to be delivered having a Fair Market Value equal to the amount of such taxes.
Definitions .
Terms not defined in this Agreement shall have the meanings given to them in the Plan.
Governing Law .
The internal law, and not the law of conflicts, of the State of Delaware will govern all questions concerning the validity, construction and effect of this Agreement.
Plan Provisions .
This Agreement is made under and subject to the provisions of the Plan, and all of the provisions of the Plan are also provisions of this Agreement. If there is a difference or conflict between the provisions of this Agreement and the provisions of the Plan, the provisions of the Plan will govern. By accepting this Restricted Stock Award, the Participant confirms that the Participant has received a copy of the Plan and
36
represents that the Participant is familiar with the terms and provisions thereof, and hereby accepts this Restricted Stock Award subject to all the terms and provisions of the Plan.
No Rights to Continue Service or Employment .
Nothing herein shall be construed as giving the Participant the right to continue in the employ or to provide services to the Company or any Affiliate, whether as an employee or as a consultant or otherwise, or interfere with or restrict in any way the right of the Company or any Affiliate to discharge the Participant, whether as an employee or consultant or otherwise, at any time, with or without cause. In addition, the Company or any Affiliate may discharge the Participant free from any liability or claim under this Agreement.
Entire Agreement .
This Agreement together with the Plan supersede any and all other prior understandings and agreements, either oral or in writing, between the parties with respect to the subject matter hereof and constitute the sole and only agreements between the parties with respect to said subject matter. All prior negotiations and agreements between the parties with respect to the subject matter hereof are merged into this Agreement. Each party to this Agreement acknowledges that no representations, inducements, promises or agreements, orally or otherwise, have been made by any party or by anyone acting on behalf of any party, which are not embodied in this Agreement or the Plan and that any agreement, statement or promise that is not contained in this Agreement or the Plan shall not be valid or binding or of any force or effect.
Modification .
No change or modification of this Agreement shall be valid or binding upon the parties unless the change or modification is in writing and signed by the parties. Notwithstanding the preceding sentence, the Plan, this Agreement and the Restricted Stock Award may be amended, altered, suspended, discontinued or terminated to the extent permitted by the Plan.
Shares Subject to Agreement .
The Shares shall be subject to the terms and conditions of this Agreement. Except as otherwise provided in Section 5, no adjustment shall be made for dividends or other rights for which the record date is prior to the issuance of the Shares. The Company shall not be required to deliver any Shares until the requirements of any federal or state securities or other laws, rules or regulations (including the rules of any securities exchange) as may be determined by the Committee to be applicable are satisfied.
Severability .
In the event that any provision that is contained in the Plan or this Agreement is or becomes invalid, illegal or unenforceable in any jurisdiction or would disqualify the Plan or this Agreement for any reason and under any law as deemed applicable by the Committee, the invalid, illegal or unenforceable provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without materially altering the purpose and intent of the Plan or this Agreement in the discretion of the Committee, such provision shall be stricken as to such jurisdiction or Shares, and the remainder of the Plan or this Agreement shall remain in full force and effect.
37
Headings .
Headings are given to the sections and subsections of this Agreement solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of this Agreement or any provision hereof.
Participants Acknowledgments .
The Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee or the Board of Directors of the Company, as appropriate, upon any questions arising under the Plan or this Agreement. Any determination in this connection by the Company, including the Board of Directors of the Company or the Committee, shall be final, binding and conclusive. The obligations of the Company and the rights of the Participant are subject to all applicable laws, rules and regulations.
Parties Bound .
The terms, provisions and agreements that are contained in this Agreement shall apply to, be binding upon, and inure to the benefit of the parties and their respective heirs, executors, administrators, legal representatives and permitted successors and assigns, subject to the limitation on assignment expressly set forth herein. This Agreement shall have no force or effect unless it is duly executed and delivered by the Company.
The Company has caused this Agreement to be signed and delivered as of the
date set forth above.
IMATION CORP.
By:
Name:
Title:
38
Exhibit 10.2
Form for Executive Officers
Imation Corp. 2000 Stock Incentive Plan,
as Amended February 6, 2003
Restricted Stock Award Agreement
This RESTRICTED STOCK AWARD AGREEMENT (the Agreement) effective as of «GrantDt» is between Imation Corp., a Delaware corporation (the Company), and «Name», an employee of the Company or one of its Affiliates (the Participant), pursuant to and subject to the terms and conditions of the Imation Corp. 2000 Stock Incentive Plan, as Amended February 6, 2003 (the Plan).
The Company desires to award to the Participant a number of shares of the Companys common stock, par value $.01 per share (the Common Stock), subject to certain restrictions as provided in this Agreement, in order to carry out the purpose of the Plan. The purpose of this Agreement is to evidence the terms and conditions of an award of restricted stock granted to the Participant under the Plan.
Accordingly, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and the Participant hereby agree as follows:
Award of Restricted Stock .
Effective «GrantDt» (the Effective Date), the Company granted to the Participant a restricted stock award of «GrantDt»(«GrantDt») shares of Common Stock (the Shares), subject to the terms and conditions set forth in this Agreement and in accordance with the terms of the Plan (the Restricted Stock Award).
Rights with Respect to the Shares .
Stockholder Rights . With respect to the Shares, the Participant shall be entitled at all times on and after the date of issuance of the Shares to exercise the rights of a stockholder of Common Stock of the Company, including the right to vote the Shares and the right to receive dividends on the Shares as provided in Section 2(b) hereof, unless and until the Shares are forfeited pursuant to Section 3 hereof. However, the Shares shall be nontransferable and subject to a risk of forfeiture to the Company at all times prior to the dates on which such Shares become vested, and the restrictions with respect to the Shares lapse, in accordance with Section 3 of this Agreement.
(b) Dividends . As a condition to receiving the Shares under the Plan, the Participant hereby agrees to defer the receipt of dividends paid on the Shares. Cash dividends or other cash distributions paid with respect to the Shares prior to the date or dates the Shares vest shall be subject to the same restrictions, terms and conditions as the Shares to which they relate, shall be promptly deposited with the Secretary of the Company or a custodian designated by the Secretary, and shall be forfeited in the event that the Shares with respect to which the dividends were paid are forfeited.
(c) Issuance of Shares . The Company shall cause the Shares to be issued in the Participants name or in a nominee name on the Participants
39
behalf, either by book-entry registration or issuance of a stock certificate or certificates evidencing the Shares, which certificate or certificates shall be held by the Secretary of the Company or the stock transfer agent or brokerage service selected by the Secretary of the Company to provide such services for the Plan. The Shares shall be restricted from transfer and shall be subject to an appropriate stop-transfer order. If any certificate is issued, the certificate shall bear an appropriate legend referring to the restrictions applicable to the Shares. The Participant hereby agrees to the retention by the Company of the Shares and, if a stock certificate is issued, the Participant agrees to execute and deliver to the Company a blank stock power with respect to the Shares as a condition to the receipt of this Restricted Stock Award. After any Shares vest pursuant to Section 3 hereof, and following payment of the applicable withholding taxes pursuant to Section 6 of this Agreement, the Company shall promptly cause to be issued a certificate or certificates, registered in the Participants name, evidencing such vested whole Shares (less any Shares withheld to pay withholding taxes) and shall cause such certificate or certificates to be delivered to the Participant free of the legend and the stop-transfer order referenced above. The Company will not deliver any fractional Share but will pay, in lieu thereof, the Fair Market Value of such fractional Share at the time certificates evidencing the Shares are delivered to the Participant.
Vesting; Forfeiture .
Vesting . Subject to the terms and conditions of this Agreement, twenty five percent (25%) of the Shares shall vest, and the restrictions with respect to the Shares shall lapse, on each of the first, second, third and fourth anniversaries of the Effective Date if the Participant remains continuously employed by the Company or an Affiliate of the Company until such respective vesting dates.
(b) Forfeiture . If the Participant ceases to be employed by the Company and all Affiliates of the Company for any reason prior to the vesting of the Shares pursuant to Section 3(a) hereof, Participants rights to all of the unvested Shares shall be immediately and irrevocably forfeited, including the right to vote such Shares and the right to receive dividends on such Shares.
(c) No Early Vesting . Unless otherwise determined by the Committee in its sole discretion, and notwithstanding any provisions contained in the Severance Agreement between the Company and the Participant (the Severance Agreement), in no event will any of the Shares vest prior to their respective vesting dates set forth in Section 3(a) hereof. Without limiting the generality of the foregoing, the Company and the Participant hereby expressly acknowledge and agree that the provisions of Section 5(i)(d) of the Severance Agreement shall not apply to the Shares or to this Restricted Stock Award.
Restrictions on Transfer .
Until the Shares vest pursuant to Section 3 hereof, neither the Shares, nor any right with respect to the Shares under this Agreement, may be sold, assigned, transferred, pledged, hypothecated (by operation of law or otherwise) or otherwise conveyed or encumbered and shall not be subject to execution, attachment or similar process. Any attempted sale, assignment, transfer, pledge, hypothecation or other conveyance or encumbrance shall be void and unenforceable against the Company or any Affiliate of the Company.
Distributions and Adjustments .
If any Shares vest subsequent to any change in the number or character of the Common Stock of the Company through any stock
40
dividend or other distribution, recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of shares or other securities of the Company, issuance of warrants or other rights to purchase shares of Common Stock or other securities of the Company or other similar corporate transaction or event such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under this Agreement, then the Committee shall, in such manner as it may deem equitable, in its sole discretion, adjust any or all of the number and type of such Shares.
Any additional shares of Common Stock of the Company, any other securities of the Company and any other property distributed with respect to the Shares prior to the date or dates the Shares vest shall be subject to the same restrictions, terms and conditions as the Shares to which they relate and shall be promptly deposited with the Secretary of the Company or a custodian designated by the Secretary.
Taxes .
The Participant acknowledges that the Participant will consult with the Participants personal tax adviser regarding the income tax consequences of the grant of the Shares, payment of dividends on the Shares, the vesting of the Shares and any other matters related to this Agreement. In order to comply with all applicable federal, state, local or foreign income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal, state, local or foreign payroll, withholding, income or other taxes, which are the Participants sole and absolute responsibility, are withheld or collected from the Participant. In accordance with the terms of the Plan, and such rules as may be adopted by the Committee administering the Plan, the Participant may elect to satisfy tax withholding obligations arising from the receipt of, or the lapse of restrictions relating to, the Shares by (i) delivering cash, check, bank draft, money order or wire transfer payable to the order of the Company, (ii) having the Company withhold a portion of the Shares otherwise to be delivered having a Fair Market Value equal to the amount of such taxes, or (iii) delivering to the Company shares of Common Stock having a Fair Market Value equal to the amount of such taxes. The Company will not deliver any fractional Share but will pay, in lieu thereof, the Fair Market Value of such fractional Share. The Participants election must be made on or before the date that the amount of tax to be withheld is determined. If the Participant does not make an election, the Company will withhold a portion of the Shares otherwise to be delivered having a Fair Market Value equal to the amount of such taxes.
Definitions .
Terms not defined in this Agreement shall have the meanings given to them in the Plan.
Governing Law .
The internal law, and not the law of conflicts, of the State of Delaware will govern all questions concerning the validity, construction and effect of this Agreement.
41
Plan Provisions .
This Agreement is made under and subject to the provisions of the Plan, and all of the provisions of the Plan are also provisions of this Agreement. If there is a difference or conflict between the provisions of this Agreement and the provisions of the Plan, the provisions of the Plan will govern. By signing this Agreement, the Participant confirms that the Participant has received a copy of the Plan and represents that the Participant is familiar with the terms and provisions thereof, and hereby accepts this Restricted Stock Award subject to all the terms and provisions of the Plan.
No Rights to Continue Service or Employment .
Nothing herein shall be construed as giving the Participant the right to continue in the employ or to provide services to the Company or any Affiliate, whether as an employee or as a consultant or otherwise, or interfere with or restrict in any way the right of the Company or any Affiliate to discharge the Participant, whether as an employee or consultant or otherwise, at any time, with or without cause. In addition, the Company or any Affiliate may discharge the Participant free from any liability or claim under this Agreement.
Entire Agreement .
This Agreement together with the Plan supersede any and all other prior understandings and agreements, either oral or in writing, between the parties with respect to the subject matter hereof and constitute the sole and only agreements between the parties with respect to said subject matter. All prior negotiations and agreements between the parties with respect to the subject matter hereof are merged into this Agreement. Each party to this Agreement acknowledges that no representations, inducements, promises or agreements, orally or otherwise, have been made by any party or by anyone acting on behalf of any party, which are not embodied in this Agreement or the Plan and that any agreement, statement or promise that is not contained in this Agreement or the Plan shall not be valid or binding or of any force or effect.
Modification .
No change or modification of this Agreement shall be valid or binding upon the parties unless the change or modification is in writing and signed by the parties. Notwithstanding the preceding sentence, the Plan, this Agreement and the Restricted Stock Award may be amended, altered, suspended, discontinued or terminated to the extent permitted by the Plan.
Shares Subject to Agreement .
The Shares shall be subject to the terms and conditions of this Agreement. Except as otherwise provided in Section 5, no adjustment shall be made for dividends or other rights for which the record date is prior to the issuance of the Shares. The Company shall not be required to deliver any Shares until the requirements of any federal or state securities or other laws, rules or regulations (including the rules of any securities exchange) as may be determined by the Committee to be applicable are satisfied.
Severability .
In the event that any provision that is contained in the Plan or this Agreement is or becomes invalid, illegal or unenforceable in any
42
jurisdiction or would disqualify the Plan or this Agreement for any reason and under any law as deemed applicable by the Committee, the invalid, illegal or unenforceable provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without materially altering the purpose and intent of the Plan or this Agreement in the discretion of the Committee, such provision shall be stricken as to such jurisdiction or Shares, and the remainder of the Plan or this Agreement shall remain in full force and effect.
Headings .
Headings are given to the sections and subsections of this Agreement solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of this Agreement or any provision hereof.
Participants Acknowledgments .
The Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee or the Board of Directors of the Company, as appropriate, upon any questions arising under the Plan or this Agreement. Any determination in this connection by the Company, including the Board of Directors of the Company or the Committee, shall be final, binding and conclusive. The obligations of the Company and the rights of the Participant are subject to all applicable laws, rules and regulations.
Parties Bound .
The terms, provisions and agreements that are contained in this Agreement shall apply to, be binding upon, and inure to the benefit of the parties and their respective heirs, executors, administrators, legal representatives and permitted successors and assigns, subject to the limitation on assignment expressly set forth herein. This Agreement shall have no force or effect unless it is duly executed and delivered by the Company and the Participant.
The Company and the Participant have caused this Agreement to be signed and delivered as of the date set forth above.
43
Exhibit 10.3
Form for Employees
Imation Corp. 2000 Stock Incentive Plan,
as Amended February 6, 2003
Stock Option Agreement
This STOCK OPTION AGREEMENT (the Agreement) effective as of «GrantDt» is between Imation Corp., a Delaware corporation (the Company), and «Name», an employee of the Company or one of its Affiliates (the Participant), pursuant to and subject to the terms and conditions of the Imation Corp. 2000 Stock Incentive Plan, as Amended February 6, 2003 (the Plan).
The Company desires to provide the Participant with an opportunity to purchase shares of the Companys common stock, par value $.01 per share (the Common Stock), as provided in this Agreement in order to carry out the purpose of the Plan. The purpose of this Agreement is to evidence the terms and conditions of a Non-Qualified Stock Option granted to the Participant under the Plan.
Accordingly, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and the Participant hereby agree as follows:
1. Grant of Non-qualified Stock Option . Effective «GrantDt» (the Effective Date), the Company granted to the Participant the right and option to purchase all or any part of an aggregate of «Shares» («NbrShares») shares of Common Stock on the terms and conditions set forth in this Agreement and in accordance with the terms of the Plan (the Option). The Option is not intended to be an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended.
2. Purchase Price . The purchase price of the shares of Common Stock subject to the Option shall be «Price» per share.
3. Term of the Option . The term of the Option (the Option Period) shall be for a period of seven (7) years from the Effective Date, terminating at the close of business on the seventh anniversary of the Effective Date (the Expiration Date) or such shorter period as provided in Section 6 hereof.
4. Vesting of the Option . Subject to Section 6 hereof, the Option may be exercised at any time or from time to time during the Option Period, as to any part or all of the shares covered thereby in accordance with the following vesting schedule:
(a) twenty five percent (25%) of the Option may be exercised at any time on or after the first anniversary of the Effective Date;
(b) fifty percent (50%) of the Option may be exercised at any time on or after the second anniversary of the Effective Date;
(c) seventy five percent (75%) of the Option may be exercised at any time on or after the third anniversary of the Effective Date; and
(d) one hundred percent (100%) of the Option may be exercised at any time on or after the fourth anniversary of the Effective Date.
5. Transferability . The Option may not be assigned, transferred (other than by will or the laws of descent and distribution), pledged,
44
hypothecated (whether by operation of law or otherwise) or otherwise conveyed or encumbered, and shall not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge, hypothecation or other disposition of the Option contrary to the provisions of the Plan or this Agreement, or the levy of any execution, attachment or similar process upon the Option, shall be void and unenforceable against the Company and shall constitute an immediate cancellation of the Option.
6 . Effect of Termination of Employment .
(a) In the event the Participant shall cease to be employed by the Company or an Affiliate for any reason other than Termination for Cause, Retirement, death or Disability, the Participant may exercise the Option to the extent of (but only to the extent of) the number of vested shares the Participant was entitled to purchase under the Option on the date of such termination of employment, and the exercise of the Option to that limited extent may be effected at any time within thirty (30) days after the date of such termination of employment but not thereafter; provided, however, that the Option may not be exercised after the Expiration Date.
(b) In the event the Participant shall cease to be employed by the Company or an Affiliate upon Termination for Cause, the Option shall be terminated as of the date of such termination.
(c) Except as otherwise provided in Sections 6(b) and 6(d), in the event the Participant shall cease to be employed by the Company or an Affiliate because of Retirement, the Option, to the extent not previously exercised or forfeited, shall be exercisable to the extent of (but only to the extent of) the number of vested shares the Participant was entitled to purchase under the Option on the date of the Participants Retirement, and the exercise of the Option to that limited extent may be effected at any time within three (3) years after the date of the Participants Retirement, but not thereafter; provided, however, that the Option may not be exercised after the Expiration Date. If a Participant who has thus retired dies within three (3) years after the date of the Participants Retirement and prior to the Expiration Date, the exercise of the Option to the limited extent provided for in the first sentence of this Section 6(c) may be effected by the Participants estate or by any Person or Persons to whom the Option has been transferred by will or the applicable laws of descent and distribution at any time within two (2) years after the date of the Participants death, but not after the Expiration Date.
(d) In the event the Participant dies or is deemed to suffer a Disability while employed by the Company or an Affiliate, the Option, to the extent not previously exercised or forfeited, shall be exercisable to the extent of (but only to the extent of) the number of vested shares the Participant was entitled to purchase under the Option on the date of the Participants death or Disability. In the event of Participants death, the exercise of the Option to the limited extent provided for in the first sentence of this Section 6(d) may be effected by the Participants estate or by any Person or Persons to whom the Option has been transferred by will or the applicable laws of descent and distribution at any time within two (2) years after the date of the Participants death, but not after the Expiration Date. In the event of the Participants Disability, the exercise of the Option to the limited extent provided for in the first sentence of this Section 6(d) may be effected by the Participant at any time within two (2) years after the date of the Participants Disability, but not after the Expiration Date.
7. Anti-Dilution Adjustments . In the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, shares of Common Stock, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of shares or other securities of the Company, issuance of warrants or other rights to purchase shares of Common Stock or other securities of the Company or other similar corporate transaction or event affects the shares of Common Stock covered by the Option such that an adjustment is determined by the Committee to be appropriate in order to prevent
45
dilution or enlargement of the benefits or potential benefits intended to be made available under this Agreement, then the Committee shall, in such manner as it may deem equitable, in its sole discretion, adjust any or all of the number and type of the shares covered by the Option and the exercise price of the Option.
8. Manner of Exercise . Subject to the terms and conditions of this Agreement, the Option may be exercised by delivering written notice to the Stock Plan Administrator pursuant to procedures prescribed by the Company from time to time. Such notice shall state the election to exercise the Option and the number of shares in respect of which it is being exercised and shall be signed by the Participant or such other Person entitled to exercise the Option. Such notice shall be accompanied by payment of the full purchase price of such shares and applicable federal, state, local and foreign withholding taxes, if any. The Participant shall deliver to the Company consideration with a value equal to such purchase price and applicable withholding taxes, if any, payable in whole or in part as follows: (a) cash, check, bank draft, money order or wire transfer payable to the order of the Company, (b) shares of Common Stock owned by the Participant at the time of exercise and/or (c) in any other form of valid consideration that is acceptable to the Committee in its sole discretion. The value of any share of Common Stock delivered in payment of all or part of the purchase price or applicable withholding taxes upon the exercise of the Option shall be the last sale price of a share of Common Stock on the New York Stock Exchange on the date the Option shall be exercised or, if such date is not a day on which trading occurs generally on the New York Stock Exchange, on the immediately preceding date on which such trading occurred. In the event that the Option shall be exercised pursuant to Section 6(c) or 6(d) hereof by any Person or Persons other than the Participant, such notice shall be accompanied by appropriate proof of the right of such Person or Persons to exercise the Option. If the Participant fails to pay the full purchase price of such shares or applicable withholding taxes, then the Option, and right to purchase such shares, may be forfeited by the Participant, in the sole discretion of the Committee. The Option may be exercised in whole or in part to the extent the Option is exercisable in accordance with the terms of this Agreement, but only with respect to full shares of Common Stock. No fractional shares of Common Stock shall be issued upon exercise of the Option, but the Company will pay, in lieu thereof, the Fair Market Value of such fractional share.
9. Issuance of Shares . Upon exercise of all or any portion of the Option, the Company will cause to be issued to the Participant the shares of Common Stock purchased. Notwithstanding anything to the contrary in this Agreement, the Companys obligation to issue shares of Common Stock shall be subject to (i) all applicable laws, rules and regulations and such approvals by any governmental agencies as may be required, including, without limitation, the effectiveness of a registration statement under the Securities Act of 1933, as amended, and (ii) the condition that such shares shall have been duly listed on the New York Stock Exchange. The Participant shall not have any of the rights and privileges of a shareholder of the Company with respect to the shares of Common Stock subject to this Option unless and until such shares are issued to the Participant upon due exercise of the Option.
10 . Taxes . The Participant acknowledges that the Participant will consult with the Participants personal tax adviser regarding the income tax consequences of exercising the Option or any other matters related to this Agreement. In order to comply with all applicable federal, state, local or foreign income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal, state, local or foreign payroll, withholding, income or other taxes, which are the Participants sole and absolute responsibility, are withheld or collected from the Participant.
11 . Definitions . Terms not defined in this Agreement shall have the meanings given to them in the Plan, and the following terms shall have the following meanings when used in this Agreement:
(a) Committee means the Compensation Committee of the Board of Directors of the Company or such other committee of Directors designated by the Board of Directors to administer the Plan.
46
(b) Disability shall be as defined under the Imation Corp. Long Term Disability Income Protection Plan.
(c) Retirement means retirement as defined under the Imation Corp. Cash Balance Pension Plan.
(d) Stock Plan Administrator means the Committee or any Director, officer or agent of the Company designated by the Committee from time to time.
(e) Termination for Cause means termination of Participants employment with the Company or an Affiliate for the following acts: (i) the Participants gross incompetence or substantial failure to perform his or her duties, (ii) misconduct by the Participant that causes or is likely to cause harm to the Company or that causes or is likely to cause harm to the Companys reputation, as determined by the Companys Board of Directors in its sole and absolute discretion (such misconduct may include, without limitation, insobriety at the workplace during working hours or the use of illegal drugs), (iii) failure to follow directions of the Companys Board of Directors that are consistent with the Participants duties, (iv) the Participants conviction of, or entry of a pleading of guilty or nolo contendre to, any crime involving moral turpitude, or the entry of an order duly issued by any federal or state regulatory agency having jurisdiction in the matter permanently prohibiting the Participant from participating in the conduct of the affairs of the Company or (v) any breach of this Agreement that is not remedied within thirty (30) days after receipt of written notice from the Company specifying such breach in reasonable detail.
12. Governing Law . The internal law, and not the law of conflicts, of the State of Delaware will govern all questions concerning the validity, construction and effect of this Agreement.
13. Plan Provisions . This Agreement is made under and subject to the provisions of the Plan, and all of the provisions of the Plan are also provisions of this Agreement. If there is a difference or conflict between the provisions of this Agreement and the provisions of the Plan, the provisions of the Plan will govern. By accepting this Option, the Participant confirms that the Participant has received a copy of the Plan and represents that the Participant is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all the terms and provisions of the Plan.
14. No Right to Continue Service or Employment . Nothing herein shall be construed as giving the Participant the right to continue in the employ or to provide services to the Company or any Affiliate, whether as an employee or as a consultant or otherwise, or interfere with or restrict in any way the right of the Company or any Affiliate to discharge the Participant, whether as an employee or consultant or otherwise, at any time, with or without cause. In addition, the Company or any Affiliate may discharge the Participant free from any liability or claim under this Agreement, unless otherwise expressly provide herein.
15. Entire Agreement . This Agreement together with the Plan supersede any and all other prior understandings and agreements, either oral or in writing, between the parties with respect to the subject matter hereof and constitute the sole and only agreements between the parties with respect to said subject matter. All prior negotiations and agreements between the parties with respect to the subject matter hereof are merged into this Agreement. Each party to this Agreement acknowledges that no representations, inducements, promises or agreements, orally or otherwise, have been made by any party or by anyone acting on behalf of any party, which are not embodied in this Agreement or the Plan and that any agreement, statement or promise that is not contained in this Agreement or the Plan shall not be valid or binding or of any force or effect.
47
16. Modification . No change or modification of this Agreement shall be valid or binding upon the parties unless the change or modification is in writing and signed by the parties. Notwithstanding the preceding sentence, the Plan, this Agreement and the Option may be amended, altered, suspended, discontinued or terminated to the extent permitted by the Plan.
17. Shares Subject to Agreement . The shares covered by the Option shall be subject to the terms and conditions of this Agreement. Except as otherwise provided in Section 7, no adjustment shall be made for dividends or other rights for which the record date is prior to the issuance of such shares. The Company shall at all times during the Option Term reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of this Agreement.
18. Severability . In the event that any provision that is contained in the Plan or this Agreement is or becomes invalid, illegal or unenforceable in any jurisdiction or would disqualify the Plan or this Agreement for any reason and under any law as deemed applicable by the Committee, the invalid, illegal or unenforceable provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without materially altering the purpose and intent of the Plan or this Agreement in the discretion of the Committee, such provision shall be stricken as to such jurisdiction or Option, and the remainder of the Plan or this Agreement shall remain in full force and effect.
19. Headings . Headings are given to the sections and subsections of this Agreement solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of this Agreement or any provision hereof.
20. Participants Acknowledgments . The Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee or the Board of Directors of the Company, as appropriate, upon any questions arising under the Plan or this Agreement. Notwithstanding any of the provisions hereof, the Participant hereby agrees that the Participant will not exercise the Option granted hereby, and that the Company will not be obligated to issue any shares to the Participant hereunder, if the exercise thereof or the issuance of such shares shall constitute a violation by the Participant or the Company of any provision of any law or regulation of any governmental authority. Any determination in this connection by the Company, including the Board of Directors of the Company or the Committee, shall be final, binding and conclusive. The obligations of the Company and the rights of the Participant are subject to all applicable laws, rules and regulations.
21. Parties Bound . The terms, provisions, and agreements that are contained in this Agreement shall apply to, be binding upon, and inure to the benefit of the parties and their respective heirs, executors, administrators, legal representatives and permitted successors and assigns, subject to the limitation on assignment expressly set forth herein. This Agreement shall have no force or effect unless it is duly executed and delivered by the Company.
The Company has caused this Agreement to be signed and delivered as of the
date set forth above.
IMATION CORP.
By:
Name:
Title:
48
Exhibit 10.4
Form for Executive Officers
Imation Corp. 2000 Stock Incentive Plan,
as Amended February 6, 2003
Stock Option Agreement
This STOCK OPTION AGREEMENT (the Agreement) effective as of «GrantDt» is between Imation Corp., a Delaware corporation (the Company), and «Name», an employee of the Company or one of its Affiliates (the Participant), pursuant to and subject to the terms and conditions of the Imation Corp. 2000 Stock Incentive Plan, as Amended February 6, 2003 (the Plan).
The Company desires to provide the Participant with an opportunity to purchase shares of the Companys common stock, par value $.01 per share (the Common Stock), as provided in this Agreement in order to carry out the purpose of the Plan. The purpose of this Agreement is to evidence the terms and conditions of a Non-Qualified Stock Option granted to the Participant under the Plan.
Accordingly, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company and the Participant hereby agree as follows:
1. Grant of Non-qualified Stock Option . Effective «GrantDt» (the Effective Date), the Company granted to the Participant the right and option to purchase all or any part of an aggregate of «Shares» («NbrShares») shares of Common Stock on the terms and conditions set forth in this Agreement and in accordance with the terms of the Plan (the Option). The Option is not intended to be an incentive stock option within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the Code).
2. Purchase Price . The purchase price of the shares of Common Stock subject to the Option shall be «Price» per share.
3. Term of the Option . The term of the Option (the Option Period) shall be for a period of seven (7) years from the Effective Date, terminating at the close of business on the seventh anniversary of the Effective Date (the Expiration Date) or such shorter period as provided in Section 6 hereof.
5. Vesting of the Option . Subject to Section 6 hereof, the Option may be exercised at any time or from time to time during the Option Period, as to any part or all of the shares covered thereby in accordance with the following vesting schedule:
(b) twenty five percent (25%) of the Option may be exercised at any time on or after the first anniversary of the Effective Date;
(c) fifty percent (50%) of the Option may be exercised at any time on or after the second anniversary of the Effective Date;
(d) seventy five percent (75%) of the Option may be exercised at any time on or after the third anniversary of the Effective Date; and
(e) one hundred percent (100%) of the Option may be exercised at any time on or after the fourth anniversary of the Effective Date.
49
5. Transferability . The Option may not be assigned, transferred (other than by will or the laws of descent and distribution), pledged, hypothecated (whether by operation of law or otherwise) or otherwise conveyed or encumbered, and shall not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge, hypothecation or other disposition of the Option contrary to the provisions of the Plan or this Agreement, or the levy of any execution, attachment or similar process upon the Option, shall be void and unenforceable against the Company and shall constitute an immediate cancellation of the Option.
6. Effect of Termination of Employment .
(a) In the event the Participant shall cease to be employed by the Company or an Affiliate for any reason other than Termination for Cause, Retirement, death or Disability or within two (2) years following a Change of Control, the Participant may exercise the Option to the extent of (but only to the extent of) the number of vested shares the Participant was entitled to purchase under the Option on the date of such termination of employment, and the exercise of the Option to that limited extent may be effected at any time within thirty (30) days after the date of such termination of employment but not thereafter; provided, however, that the Option may not be exercised after the Expiration Date.
(d) In the event the Participant shall cease to be employed by the Company or an Affiliate upon Termination for Cause, the Option shall be terminated as of the date of such termination.
(e) Except as otherwise provided in Sections 6(b), 6(d) and 6(e), in the event the Participant shall cease to be employed by the Company or an Affiliate because of Retirement, the Option, to the extent not previously exercised or forfeited, shall be exercisable to the extent of (but only to the extent of) the number of vested shares the Participant was entitled to purchase under the Option on the date of the Participants Retirement, and the exercise of the Option to that limited extent may be effected at any time within three (3) years after the date of the Participants Retirement but not thereafter; provided, however, that the Option may not be exercised after the Expiration Date. If a Participant who has thus retired dies within three (3) years after the date of the Participants Retirement and prior to the Expiration Date, the exercise of the Option to the limited extent provided for in the first sentence of this Section 6(c) may be effected by the Participants estate or by any Person or Persons to whom the Option has been transferred by will or the applicable laws of descent and distribution at any time within two (2) years after the date of the Participants death, but not after the Expiration Date.
(d) In the event the Participant dies or is deemed to suffer a Disability while employed by the Company or an Affiliate, the Option, to the extent not previously exercised or forfeited, shall be exercisable to the extent of (but only to the extent of) the number of vested shares the Participant was entitled to purchase under the Option on the date of the Participants death or Disability. In the event of Participants death, the exercise of the Option to the limited extent provided for in the first sentence of this Section 6(d) may be effected by the Participants estate or by any Person or Persons to whom the Option has been transferred by will or the applicable laws of descent and distribution at any time within two (2) years after the date of the Participants death, but not after the Expiration Date. In the event of the Participants Disability, the exercise of the Option to the limited extent provided for in the first sentence of this Section 6(d) may be effected by the Participant at any time within two (2) years after the date of the Participants Disability, but not after the Expiration Date.
(e) In the event the Participant shall cease to be employed by the Company or an Affiliate for any reason other than death, Disability or Termination for Cause within two (2) years following a Change of Control, the Option shall become immediately exercisable in full on the date of such termination of employment, and the exercise of the Option may be effected at any time within six (6) months after the date of the
50
Participants termination of employment, but not after the Expiration Date. In the event that the provisions of this Section 6(e) result in payments that are finally and conclusively determined by a court or Internal Revenue Service proceeding to be subject to the excise tax imposed by Section 4999 of the Code, and the Participant has not received any additional cash payment from the Company relating thereto under the provisions of Section 6 of the Severance Agreement between the Company and the Participant (the Severance Agreement), the Company shall pay to the Participant an additional amount such that the net amount retained by the Participant following realization of all compensation under the Plan that resulted in such payments, after allowing for the amount of such excise tax and any additional federal, state and local income and employment taxes paid on the additional amount, shall be equal to the net amount that would otherwise have been retained by the Participant if there were no excise tax imposed by Section 4999 of the Code. If the Participant receives any additional cash payment from the Company under Section 6 of the Severance Agreement, the foregoing sentence shall be of no force or effect and the provisions of the Severance Agreement shall be deemed to supersede the foregoing sentence in its entirety.
7. Anti-Dilution Adjustments . In the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, shares of Common Stock, other securities or other property), recapitalization, stock split, reverse stock split, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of shares or other securities of the Company, issuance of warrants or other rights to purchase shares of Common Stock or other securities of the Company or other similar corporate transaction or event affects the shares of Common Stock covered by the Option such that an adjustment is determined by the Committee to be appropriate in order to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under this Agreement, then the Committee shall, in such manner as it may deem equitable, in its sole discretion, adjust any or all of the number and type of the shares covered by the Option and the exercise price of the Option.
8. Manner of Exercise . Subject to the terms and conditions of this Agreement, the Option may be exercised by delivering written notice to the Stock Plan Administrator pursuant to procedures prescribed by the Company from time to time. Such notice shall state the election to exercise the Option and the number of shares in respect of which it is being exercised and shall be signed by the Participant or such other Person entitled to exercise the Option. Such notice shall be accompanied by payment of the full purchase price of such shares and applicable federal, state, local and foreign withholding taxes, if any. The Participant shall deliver to the Company consideration with a value equal to such purchase price and applicable withholding taxes, if any, payable in whole or in part as follows: (a) cash, check, bank draft, money order or wire transfer payable to the order of the Company, (b) shares of Common Stock owned by the Participant at the time of exercise and/or (c) in any other form of valid consideration that is acceptable to the Committee in its sole discretion. The value of any share of Common Stock delivered in payment of all or part of the purchase price or applicable withholding taxes upon the exercise of the Option shall be the last sale price of a share of Common Stock on the New York Stock Exchange on the date the Option shall be exercised or, if such date is not a day on which trading occurs generally on the New York Stock Exchange, on the immediately preceding date on which such trading occurred. In the event that the Option shall be exercised pursuant to Section 6(c) or 6(d) hereof by any Person or Persons other than the Participant, such notice shall be accompanied by appropriate proof of the right of such Person or Persons to exercise the Option. If the Participant fails to pay the full purchase price of such shares or applicable withholding taxes, then the Option, and right to purchase such shares, may be forfeited by the Participant, in the sole discretion of the Committee. The Option may be exercised in whole or in part to the extent the Option is exercisable in accordance with the terms of this Agreement, but only with respect to full shares of Common Stock. No fractional shares of Common Stock shall be issued upon exercise of the Option, but the Company will pay, in lieu thereof, the Fair Market Value of such fractional share.
9. Issuance of Shares . Upon exercise of all or any portion of the Option, the Company will cause to be issued to the Participant the shares of
51
Common Stock purchased. Notwithstanding anything to the contrary in this Agreement, the Companys obligation to issue shares of Common Stock shall be subject to (i) all applicable laws, rules and regulations and such approvals by any governmental agencies as may be required, including, without limitation, the effectiveness of a registration statement under the Securities Act of 1933, as amended, and (ii) the condition that such shares shall have been duly listed on the New York Stock Exchange. The Participant shall not have any of the rights and privileges of a shareholder of the Company with respect to the shares of Common Stock subject to this Option unless and until such shares are issued to the Participant upon due exercise of the Option.
10 . Taxes . The Participant acknowledges that the Participant will consult with the Participants personal tax adviser regarding the income tax consequences of exercising the Option or any other matters related to this Agreement. In order to comply with all applicable federal, state, local or foreign income tax laws or regulations, the Company may take such action as it deems appropriate to ensure that all applicable federal, state, local or foreign payroll, withholding, income or other taxes, which are the Participants sole and absolute responsibility, are withheld or collected from the Participant.
11 . Definitions . Terms not defined in this Agreement shall have the meanings given to them in the Plan, and the following terms shall have the following meanings when used in this Agreement:
(a) Change of Control means any of the following events:
(i) the acquisition by any person, entity or group, within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the Exchange Act), other than the Company or an Affiliate, or any employee benefit plan of the Company or an Affiliate, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of thirty percent (30%) or more of either the then outstanding Common Stock or the combined voting power of the Companys then outstanding voting securities in a transaction or series of transactions not approved in advance by a vote of a majority of the Continuing Directors (as hereinafter defined); or
(ii) individuals who, as of the Effective Date, constitute the Board of Directors of the Company (generally the Directors and as of the Effective Date the Continuing Directors) cease for any reason to constitute at least a majority thereof, provided that any person becoming a Director subsequent to the Effective Date whose nomination for election was approved in advance by a vote of a majority of the Continuing Directors (other than a nomination of an individual whose initial assumption of office is in connection with an actual or threatened solicitation with respect to the election or removal of the Directors of the Company, as such terms are used in Regulation 14A under the Exchange Act) shall be deemed to be a Continuing Director; or
(iii) the approval by the shareholders of the Company of a reorganization, merger, consolidation, liquidation or dissolution of the Company or of the sale (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company other than a reorganization, merger, consolidation, liquidation, dissolution or sale approved in advance by a vote of a majority of the Continuing Directors; or
(iv) the first purchase under any tender offer or exchange offer (other than an offer by the Company or an Affiliate) pursuant to which Common Stock is purchased.
(b) Committee means the Compensation Committee of the Board of Directors of the Company or such other committee of Directors designated by the Board of Directors to administer the Plan.
52
(c) Disability shall be as defined under the Imation Corp. Long Term Disability Income Protection Plan.
(d) Retirement means retirement as defined under the Imation Corp. Cash Balance Pension Plan.
(e) Stock Plan Administrator means the Committee or any Director, officer or agent of the Company designated by the Committee from time to time.
(f) Termination for Cause means termination of Participants employment with the Company or an Affiliate for the following acts: (i) the Participants gross incompetence or substantial failure to perform his or her duties, (ii) misconduct by the Participant that causes or is likely to cause harm to the Company or that causes or is likely to cause harm to the Companys reputation, as determined by the Companys Board of Directors in its sole and absolute discretion (such misconduct may include, without limitation, insobriety at the workplace during working hours or the use of illegal drugs), (iii) failure to follow directions of the Companys Board of Directors that are consistent with the Participants duties, (iv) the Participants conviction of, or entry of a pleading of guilty or nolo contendre to, any crime involving moral turpitude, or the entry of an order duly issued by any federal or state regulatory agency having jurisdiction in the matter permanently prohibiting the Participant from participating in the conduct of the affairs of the Company or (v) any breach of this Agreement that is not remedied within thirty (30) days after receipt of written notice from the Company specifying such breach in reasonable detail.
12. Governing Law . The internal law, and not the law of conflicts, of the State of Delaware will govern all questions concerning the validity, construction and effect of this Agreement.
13. Plan Provisions . This Agreement is made under and subject to the provisions of the Plan, and all of the provisions of the Plan are also provisions of this Agreement. If there is a difference or conflict between the provisions of this Agreement and the provisions of the Plan, the provisions of the Plan will govern. By accepting this Option, the Participant confirms that the Participant has received a copy of the Plan and represents that the Participant is familiar with the terms and provisions thereof, and hereby accepts this Option subject to all the terms and provisions of the Plan.
14. No Right to Continue Service or Employment . Nothing herein shall be construed as giving the Participant the right to continue in the employ or to provide services to the Company or any Affiliate, whether as an employee or as a consultant or otherwise, or interfere with or restrict in any way the right of the Company or any Affiliate to discharge the Participant, whether as an employee or consultant or otherwise, at any time, with or without cause. In addition, the Company or any Affiliate may discharge the Participant free from any liability or claim under this Agreement, unless otherwise expressly provide herein.
15. Entire Agreement . Except as specifically provided herein with regard to the Severance Agreement, (i) this Agreement together with the Plan supersede any and all other prior understandings and agreements, either oral or in writing, between the parties with respect to the subject matter hereof and constitute the sole and only agreements between the parties with respect to said subject matter; (ii) all prior negotiations and agreements between the parties with respect to the subject matter hereof are merged into this Agreement; and (iii) each party to this Agreement acknowledges that no representations, inducements, promises or agreements, orally or otherwise, have been made by any party or by anyone acting on behalf of any party, which are not embodied in this Agreement or the Plan and that any agreement, statement or promise that is not contained in this Agreement or the Plan shall not be valid or binding or of any force or effect.
53
16. Modification . No change or modification of this Agreement shall be valid or binding upon the parties unless the change or modification is in writing and signed by the parties. Notwithstanding the preceding sentence, the Plan, this Agreement and the Option may be amended, altered, suspended, discontinued or terminated to the extent permitted by the Plan.
17. Shares Subject to Agreement . The shares covered by the Option shall be subject to the terms and conditions of this Agreement. Except as otherwise provided in Section 7, no adjustment shall be made for dividends or other rights for which the record date is prior to the issuance of such shares. The Company shall at all times during the Option Term reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of this Agreement.
18. Severability . In the event that any provision that is contained in the Plan or this Agreement is or becomes invalid, illegal or unenforceable in any jurisdiction or would disqualify the Plan or this Agreement for any reason and under any law as deemed applicable by the Committee, the invalid, illegal or unenforceable provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without materially altering the purpose and intent of the Plan or this Agreement in the discretion of the Committee, such provision shall be stricken as to such jurisdiction or Option, and the remainder of the Plan or this Agreement shall remain in full force and effect.
19. Headings . Headings are given to the sections and subsections of this Agreement solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of this Agreement or any provision hereof.
20. Participants Acknowledgments . The Participant hereby agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee or the Board of Directors of the Company, as appropriate, upon any questions arising under the Plan or this Agreement. Notwithstanding any of the provisions hereof, the Participant hereby agrees that the Participant will not exercise the Option granted hereby, and that the Company will not be obligated to issue any shares to the Participant hereunder, if the exercise thereof or the issuance of such shares shall constitute a violation by the Participant or the Company of any provision of any law or regulation of any governmental authority. Any determination in this connection by the Company, including the Board of Directors of the Company or the Committee, shall be final, binding and conclusive. The obligations of the Company and the rights of the Participant are subject to all applicable laws, rules and regulations.
21. Parties Bound . The terms, provisions, and agreements that are contained in this Agreement shall apply to, be binding upon, and inure to the benefit of the parties and their respective heirs, executors, administrators, legal representatives and permitted successors and assigns, subject to the limitation on assignment expressly set forth herein. This Agreement shall have no force or effect unless it is duly executed and delivered by the Company.
The Company has caused this Agreement to be signed and delivered as of the
date set forth above.
IMATION CORP.
By:
Name:
Title:
54
Exhibit 15.1
(PricewaterhouseCoopers LLP Letterhead)
(Minneapolis, MN)
November 5, 2004
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Commissioners:
We are aware that our report dated October 20, 2004, on our reviews of the interim consolidated financial statements of Imation Corp. (the Company) for the three and nine months ended September 30, 2004 and 2003, and included in the Companys Form 10-Q for the quarter ended September 30, 2004, is incorporated by reference in the Companys Registration Statements on Form S-8 (Registration Nos. 333-15273, 333-15275, 333-15277, 333-35591, 333-38196, and 333-66030).
Yours very truly,
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
55
Exhibit 31.1
Certification Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
I, Bruce A. Henderson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Imation Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 5, 2004
By: /s/ Bruce A. Henderson
56
Exhibit 31.2
Certification Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
I, Paul R. Zeller, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Imation Corp.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: November 5, 2004
By: /s/ Paul R. Zeller
57
Exhibit 32.1
Certification Pursuant to
In connection with the Quarterly Report of Imation Corp. (the Company)
on Form 10-Q for the period ending September 30, 2004, as filed with the
Securities and Exchange Commission on the date hereof (the Report), I,
Bruce A. Henderson, Chairman and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to
section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Bruce A.
Henderson
November 5, 2004
Section 906 of the Sarbanes-Oxley Act of 2002
Chairman and Chief Executive Officer
58
Exhibit 32.2
Certification Pursuant to
In connection with the Quarterly Report of Imation Corp. (the Company)
on Form 10-Q for the period ending September 30, 2004, as filed with the
Securities and Exchange Commission on the date hereof (the Report), I,
Paul R. Zeller, Vice President and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of
the Company.
/s/ Paul R. Zeller
November 5, 2004
Section 906 of the Sarbanes-Oxley Act of 2002
Vice President and Chief Financial Officer
59