ITEM 1. BUSINESS
Introduction and History
Manpower Inc. (the "Company") is the largest non-governmental employment services organization in the world,1 with over 2,500 offices in 43 countries. The Company's largest operations, based on revenues, are located in the United States, France and the United Kingdom. The Company is primarily engaged in temporary help, contract services and training and testing of temporary and permanent workers. The Company provides employment services to a wide variety of customers, none of which individually comprise a significant portion of revenues within a given geographic region or for the Company as a whole. Unless the context requires otherwise, references to the Company include its subsidiaries.
The Company was organized in 1991 as a holding company to acquire Manpower International Inc. ("Manpower"). Manpower, subsequently renamed Manpower Wisconsin Inc., was the primary operating subsidiary of the Company until June 30, 1996, when it was merged into the Company. The predecessor of Manpower was organized in 1948 and its shares were listed on the New York Stock Exchange (the "NYSE") in 1962.
The Company's principal executive offices are located at 5301 North Ironwood Road, Milwaukee, Wisconsin 53217 (telephone: 414-961-1000).
THE COMPANY'S OPERATIONS - MANPOWER
United States
In the United States, the Company's operations are carried out through both branch (i.e., Company-owned) and franchise offices. The Company had 653 branch and 458 franchise offices in the United States at December 31, 1996. The Company provides a number of central support services to its branches and franchises which enable it to maintain consistent service quality throughout the United States regardless of whether an office is a branch or franchise. The Company has developed a comprehensive system of assessment/selection, training and quality assurance for its temporary help operations. All assessment/selection, training and support materials are designed and produced by the Company for both branches and franchises. In addition, the Company conducts a series of training classes for all employees of both branches and franchises, including training classes for service representatives and branch managers, at its Milwaukee headquarters. The Company provides customer invoicing and payroll processing of its temporary employees for all branch offices and virtually all franchise offices through its Milwaukee headquarters.
The Company's franchise agreement provides the franchisee with the right to use the Manpower(R) service mark and associated marks in a specifically defined exclusive territory. U.S. franchise fees range from 2-3% of franchise sales. The Company's franchise agreement provides that in the event of a proposed sale of a franchise to a third party, the Company has the right to repurchase the franchise at the same price and on the same terms as proposed by the third party. The Company frequently exercises this right and intends to continue to do so in the future if opportunities arise with appropriate prices and terms.
In the United States, the Company's operations are primarily related to providing temporary employment services. During 1996, approximately 39% of the Company's United States temporary help revenues were derived from placing office workers, 41% from placing industrial workers and 20% from placing technical and other workers.
____________________
1 Based on publicly available information, including annual reports to shareholders, filings with governmental agencies and investment analyst reports.
France
The Company is the second largest temporary employment service provider in France (see footnote 1 on page 1). The Company conducts its operations in France through over 646 branch offices.
The temporary services market in France is predominately industrial. In 1996, the Company derived approximately 72% of its revenue in France from the industrial sector, 14% from the construction sector and 14% from the office sector.
United Kingdom
The Company is the largest supplier of temporary employment services in the United Kingdom (see footnote 1 on page 1). As of December 31, 1996, it conducted operations in the United Kingdom through 156 branch offices.
The Company uses the same approach to selection assessment, training and marketing programs in the United Kingdom as it uses in the United States with such modifications as necessary to reflect differences in language, culture and business practices. Ultraskill, the Company's proprietary program for assessing the word processing skills of its temporary workers, has received endorsement from the Royal Society of Arts, one of the world's foremost qualification standards for office skills. Candidates whose results exceed prescribed levels can be automatically certified through the RSA. The Company was the first temporary help company to be registered under BS5750-IS09000, the international quality assurance standard.
In the United Kingdom, the Company offers temporary employment services in the office, industrial, technical, information technology, nursing and transport markets. It also offers a variety of specialized services targeted at the health sector and local government which consist of specialized assessment, selection and training, as well as the supply of specialized staff. The Company is also the leading company in the United Kingdom for the provision of managed services, project work and subcontracted activities.
During 1996, approximately 49% of the Company's revenues were derived from the supply of office staff, 31% from the supply of industrial/technical staff, 7% from the supply of information technology staff, 7% from the supply of nursing staff and 6% from the supply of drivers.
Other Europe
The Company operates through 244 branch offices and 51 franchise offices in other European countries. The largest operations are located in Belgium, Denmark, Germany, The Netherlands, Norway, Spain and Sweden, all of which are branch offices, and Switzerland, which is a 49% owned franchise. The Company is the largest non-governmental temporary employment services firm in the European Economic Community (see footnote 1 on page 1). The Company utilizes the same approach to selection, training, recruiting and marketing techniques in continental Europe as are used in the United States with such modifications as may be appropriate for local legal requirements, cultural characteristics and business practices.
Other Markets of the World
The Company operates through 157 branch offices and 63 franchise offices in the other markets of the world. The largest of these operations are located in Japan (27 branch offices) and Israel (44 branch offices). Other significant operations are located in Australia, Canada and Mexico and in 9 South American countries. The Company uses the same general approach to testing, training and marketing tools in other areas of the world as employed in the United States with such modifications as may be appropriate for local cultural differences and business practices. In most of these countries, the Company primarily supplies temporary workers to the industrial, general office and technical markets.
THE COMPANY'S OTHER OPERATIONS
The Company also owns Brook Street Bureau PLC which operates separate from the Manpower brand exclusively in the United Kingdom. Brook Street Bureau PLC, acquired by the Company in 1985, has a total of 91 branches in England, Scotland and Wales. It provides services in the office, industrial and catering markets. In 1996, approximately 90% of its revenues were derived from temporary placements and 10% were derived from permanent placement. Brook Street Bureau PLC competes in certain U.K. markets with the Company's Manpower brand. Its permanent placement business primarily consists of recruitment for office workers.
COMPETITION
Historically, in periods of economic prosperity, the number of firms operating in the temporary help industry has increased significantly due to the combination of a favorable economic climate and low barriers to entry. Recessionary periods, such as that experienced in the United States and United Kingdom in the early 1990s, result in a reduction in competition through consolidation and closures. However, historically this reduction has proven to be of a limited duration as the following periods of economic recovery have led to a return to growth in the number of competitors operating in the industry.
The temporary employment services market throughout the world is highly competitive and highly fragmented with more than 15,000 firms competing in the industry throughout the world. In addition to the Company, the largest publicly owned companies (the only companies about which financial information is readily available) specializing in temporary employment services are Adecco S.A. (Switzerland), Kelly Services, Inc. (U.S.), The Olsten Corporation (U.S.), Randstad Holding N.V. (Holland), BIS S.A. (France), Pasona (Japan), and Interim Services, Inc. (U.S.). However, except for Adecco, S.A. these companies all operate primarily in their country of origin, with only small operations in a limited number of other markets.
In the temporary help industry, competition is limited to firms with offices located within a customer's particular local market because temporary employees generally are unwilling to travel long distances. In most major markets, competitors generally include many of the publicly traded companies, and in addition, numerous regional and local competitors, some of which may operate only in a single market. Competition may also be provided by governmental entities, such as state employment offices in the United Kingdom and many European countries.
Since client companies rely on temporary employment firms having offices within the local area in which they operate, competition varies from market-to-market and country-to-country. In most areas, no single company has a dominant share of the market. Many client companies use more than one temporary employment services provider; however, in recent years, the practice of using a sole temporary supplier or a primary supplier has become an increasingly important factor among the largest customers, particularly in the United States and the United Kingdom. These sole supplier relationships can have a significant impact on the Company's revenue and operating profit growth. The Company's strategy is to build its large account business, including sole supplier relationships. While the Company believes that these large account relationships will prove to be less cyclical in the long-term than its traditional business, volume reductions by such customers, whether related to economic factors or otherwise, could have a material adverse effect on the Company's results in any period.
Methods of Competition
Temporary help firms act as intermediaries in matching available temporary workers to employer assignments. As a result, temporary help firms compete both to recruit and retain a supply of workers and to attract customers to use temporary employees. Competition is generally limited to firms having offices located in a specific local geographic market. Depending on the economy of a particular market at any point in time, it may be necessary to place greater emphasis on recruitment and retention of temporaries or marketing to customers. The Company recruits temporary workers through a wide variety of means, principally personal referrals and advertisements, and by providing an attractive compensation package, including health insurance, vacation and holiday pay, incentive plans and a recognition program.
Methods used to market temporary services to customers vary depending on the customer's perceived need for temporary workers, the local labor supply, the length of assignment and the number of workers required. Depending on these factors, the Company competes by means of quality of service provided, scope of service offered and price. In the temporary help industry, quality is measured primarily by the ability to effectively match an individual worker to a specific assignment, as well as promptness in filling an order. Success in providing a high quality service is a function of the ability to access a large supply of available temporary workers, select suitable individuals for a particular assignment and, in some cases, train available workers in skills required for an assignment.
An important aspect in the selection of a temporary worker for an assignment is the ability of the temporary services firm to identify the skills, knowledge, abilities, and personal characteristics of a temporary worker and match their competencies or capabilities to an employer's requirements. The Company has developed a variety of proprietary programs for identifying and assessing skill levels of its temporary workers, including Ultraskill(R) (for word processing skills), UltradexO (for several important light industrial skills) and Predicta (for critical general office skills) which are used in selecting a particular individual for a specific assignment. The Company believes that its assessment systems enable it to offer a higher quality service by increasing productivity, decreasing turnover and reducing absenteeism. The Company believes it is the only temporary employment firm whose employee selection systems have been statistically validated in full or complete accordance with the guidelines established by the Equal Employment Opportunity Commission and standards set forth by the American Psychological Association in the United States and similar authorities in various other countries. In the United Kingdom, candidates whose test results on Ultraskill(R) exceed prescribed levels are automatically certified through the Royal Society of Arts, one of the world's best known qualification standards for word processing skills.
It is also important to be able to access a large network of skilled workers and to be able to "create" certain hard-to-find skills by offering training to available workers. The Company's competitive position is enhanced by being able to offer a wide variety of skills in one of the most important market segments for temporary work, the office automation market, through the use of a proprietary training system. This system, called Skillware(R), allows temporary workers to quickly and conveniently learn new or enhance existing office automation skills in a variety of word processing, data base, spreadsheet, data entry or graphics applications from a variety of the most popular software manufacturers including Microsoft and Lotus. Skillware(R) is a hands-on, disk-based training program enabling workers to train on the actual hardware and software to be utilized on an assignment. The Skillware(R) system combines the human elements of classroom instruction with the self-paced work-related aspects of a disk-based system. A Skillware(R) Administrator sets up the training, monitors all sessions and is available to answer questions. The Company supports over 150 different software programs through Skillware(R) for the equipment of a wide variety of hardware manufacturers, including IBM compatibles (PCs, mid-range and mainframes), Apple and DEC. New Skillware(R) is constantly developed or revised as new or updated hardware or software programs are introduced. The Company's offices maintain a variety of hardware and software commonly used in their local market. Every person completing a Skillware(R) course receives an Operator Support Manual and keyboard template which serves as an on-the-job reference and refresher.
The Company also offers a variety of specific skill development programs in spelling, punctuation, keyboard skills and word processing to assist its temporaries in improving general office skills.
The Company has partnered with CBT Systems to develop TechTrack, a CD-based training program for technical professionals. TechTrack is an interactive, self-directed training program which enhances technical employees' skills to meet the current and emerging demands of the business environment. TechTrack offers a spectrum of instruction focusing on client/server, networking and operating systems technologies. The training prepares technical employees for certification testing by guiding them through Visual Basic, C++ Programming, PowerBuilder, IEEE LAN Architecture and more than 200 other courses.
Although temporary help firms compete in a local market, for administrative purposes, the largest customers demand national, and increasingly global, arrangements. Less than 5% of the Company's sales in 1996 were derived
from global arrangements, but approximately 50% of the Company's sales in 1996 were derived from national arrangements. A large national or multi-national company will frequently enter into non-exclusive arrangements with several firms, with the ultimate choice among them being left to its local managers; this effectively limits competition to the few firms, including the Company, with large branch networks.
The Company also competes in the large company market by providing permanent staff training using its Skillware(R) training capability, widespread office network and large temporary work force, to train the permanent employees of large companies, particularly in new word or data processing software programs or hardware configurations. Of the Fortune 100 companies, 90 have utilized Skillware training for their permanent staff. The Company believes its capability to offer permanent staff training, in addition to generating sufficient revenue to offset development costs, provides it with a key marketing advantage over its competitors in supplying temporary help to companies where it has been involved in significant staff training.
Beginning in 1994 the Company began delivering to all workers - both its permanent employees and temporary staff - a training program that focuses on providing exceptional service. Called Putting Quality to Work, this series of eight independent video programs introduces concepts that will influence workers' attitudes and behavior, with an emphasis on providing better service to a company's customers and providing support to co-workers.
REGULATION
The temporary employment services industry is closely regulated in all of the major markets in which the Company operates except the United States and Canada. Temporary employment service firms are generally subject to one or more of the following types of government regulation: (i) regulation of the employer/employee relationship between the firm and its temporary employees; (ii) registration, licensing, record keeping and reporting requirements; and (iii) substantive limitations on its operations.
In many markets, the existence or absence of collective bargaining agreements with labor organizations has a significant impact on the Company's operations and the ability of customers to use the Company's services. In some markets, labor agreements are structured on an industry-wide (rather than Company) basis. Changes in these collective labor agreements have occurred in the past and are expected to occur in the future and may have a material impact on the operations of temporary employment services firms, including the Company.
In many countries, including the United States, temporary employment services firms are considered the legal employers of temporary workers. Therefore, the firm is governed by laws regulating the employer/employee relationship, such as tax withholding or reporting, social security or retirement, anti-discrimination and workers' compensation. In other countries, temporary employment services firms, while not the direct legal employer of temporary workers, are still responsible for collecting taxes and social security deductions and transmitting such amounts to the taxing authorities.
In many countries, particularly in continental Europe, entry into the temporary employment market is restricted by the requirement to register with, or obtain licenses from, a government agency. In addition, a wide variety of ministerial requirements may be imposed, such as record keeping, written contracts and reporting. The United States and Canada do not presently have any form of national registration or licensing requirement.
In addition to licensing or registration requirements, many countries impose substantive restrictions on temporary employment services. Such restrictions include regulations affecting the types of work permitted (e.g., Germany prohibits the use of temporary workers in construction work and Japan and Norway generally prohibit the use of temporary workers in industrial work), the maximum length of a temporary assignment (varying from 3 to 24 months), wage levels (e.g., in France, wages paid to temporaries must be the same as paid to permanent workers) or reasons for which temporary workers may be employed. In some countries special taxes, fees or costs are imposed in connection with the use of temporary workers. For example, in France, temporary workers are entitled to a 15% allowance for the precarious nature of employment which is reduced to 10% if a new assignment is offered to them
within three days. In some countries, the contract of employment with the temporary employee must differ from the length of assignment.
In the United States, the Company is subject to various federal and state laws relating to franchising, principally the Federal Trade Commission's franchise rules and analogous state laws. These laws and related rules and regulations impose specific disclosure requirements to prospective franchisees. Virtually all states also regulate the termination of franchises. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Legal Regulations and Union Relationships" which is found in the Company's 1996 Annual Report to Shareholders and which is incorporated herein by reference.
TRADEMARKS
The Company maintains a number of trademarks, tradenames, service marks and other intangible rights. The principal service marks are the Manpower(R) service mark and logo, Ultraskill(R), Skillware(R) and certain other names and logos, which are registered in the United States and certain other countries. The trademark Manpower(R) has been federally registered under United States Service Mark Registration No. 921701, issued October 5, 1971. Affidavits of use and incontestability have been filed. The Company renewed this registration for another ten years on October 5, 1991. The mark Skillware(R) has been federally registered under United States Trademark Registration No. 1413105, issued October 14, 1986, and the mark Ultraskill(R) has been federally registered under United States Trademark Registration No. 1361848, issued September 24, 1985. The Company plans to file affidavits of use and incontestability at the proper time and will effect timely renewals, as appropriate, for these and other intangible rights it maintains. The Company is not currently aware of any infringing uses which would be likely to substantially and detrimentally affect these rights.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are concentrated on the development and updating of its Skillware(R) training and employee selection programs. Approximately 23 employees are engaged in research and development at the Company's international headquarters. Independent contractors are also utilized to assist in the development of these tools. Expenditures for research and development, which were internally financed, aggregated approximately $4.3 million in 1996, 1995 and 1994.
EMPLOYEES
The Company had approximately 10,200 permanent full-time employees at December 31, 1996. In addition, the Company estimates that it assigned over 1.6 million temporary workers on a worldwide basis in 1996. As described above, in most jurisdictions, the Company (through its subsidiaries), as the employer of its temporary workers or, as otherwise required by applicable law, is responsible for employment administration, including collection of withholding taxes, employer contributions for social security (or its equivalent outside the United States), unemployment tax, workers' compensation and fidelity and liability insurance, and other governmental requirements imposed on employers. In most jurisdictions where such benefits are not legally required, including the United States, the Company provides health and life insurance, paid holidays and paid vacations to qualifying temporary employees.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Note 12 to the Company's Consolidated Financial Statements sets forth the revenues, earnings before income taxes, identifiable assets and net assets derived from each geographical area for the years ended December 31, 1996, 1995 and 1994. Such note is found in the Company's 1996 Annual Report to Shareholders and is incorporated herein by reference.
ITEM 2.

ITEM 2. PROPERTIES
The Company's headquarters are in Glendale, Wisconsin, a suburb of Milwaukee. The Company owns, free of any material encumbrances, its headquarters, consisting of an 82,000 square foot building and a 32,000 square foot building situated on a sixteen-acre site in Glendale, Wisconsin.
The Company owns two properties in England which are held for sale, consisting of a 24,000 square foot freehold building in London and a 90,000 square foot freehold building in St._Albans, Hertfordshire. The Company also owns additional properties in St._Albans and various other locations which are not material.
Most of the Company's operations are conducted from leased premises, none of which are material to the Company taken as a whole. The Company does not anticipate any difficulty in renewing these leases or in finding alternative sites in the ordinary course of business.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation of a routine nature and various legal matters which are being defended and handled in the ordinary course of business.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's Common Stock is listed for trading on the New York Stock Exchange (the "NYSE"), which is the principal exchange for trading in the Company's shares. The table below sets forth the reported high and low sales price for shares of the Company's Common Stock on the NYSE during the indicated quarters based on the NYSE Trading Report:
HOLDERS
As of February 25, 1997, 81,703,035 shares of Common Stock were held of record by 5,247 record holders.
HISTORICAL DIVIDENDS
The Company paid a dividend of $.07 per share in the second quarter and $.08 per share in the fourth quarter of 1996. The Company paid a dividend of $.06 per share in the second quarter and $.07 per share in the fourth quarter of 1995.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is set forth in the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1996, under the heading "Selected Financial Data," (page 24) which information is hereby incorporated herein by reference.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The information required by this Item is set forth in the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1996, under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations," (pages 7 to 10) which information is hereby incorporated herein by reference.
Certain information included or incorporated by reference in this Annual Report on Form 10-K, including under the headings "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business," information included or incorporated by reference in future filings by the Company with the Securities and Exchange Commission or information contained in written material, releases and oral statements issued by or on behalf of the Company contain forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Certain factors such as
competitive market pressures, material changes in demand from larger customers, including customers with which the Company has national or global arrangements, availability of temporary workers, changes in customer attitudes toward outsourcing, government policies adverse to the employment services industry and changes in economic conditions could cause actual results to differ materially from those in the forward-looking statements.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is set forth in the Financial Statements and the Notes thereto (pages 11 to 23) contained in the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1996, which information is hereby incorporated herein by reference.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers. Reference is made to "Executive Officers of the Registrant" in Part I after Item_4.
(b) Directors. The information required by this Item is set forth in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 28, 1997 at pages 3-4 under the caption "Election of Directors," which information is hereby incorporated herein by reference.
(c) Section 16 Compliance. The information required by this Item is set forth in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 28, 1997 at page 18 under the caption "Section 16(a) Beneficial Ownership Reporting Compliance," which information is hereby incorporated herein by reference.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is set forth in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 28, 1997, at page 5 under the caption "Remuneration of Directors," pages 7-10 under the caption "Executive Compensation," and page 12 under the caption "Executive Compensation Committee Interlocks and Insider Participation," which information is hereby incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is set forth in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 28, 1997, at page 2 under the caption "Security Ownership of Certain Beneficial Owners" and at page 6 under the caption "Security Ownership of Management," which information is hereby incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is set forth in the Company's Proxy Statement for the Annual Meeting of Shareholders to be held on April 28, 1997, at page 5 under the caption "Remuneration of Directors" and at page 12 under the caption "Executive Compensation Committee Interlocks and Insider Participation," which information is hereby incorporated herein by reference.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(2) Financial Statement Schedules.
Report of Independent Public Accountants on Financial Statement Schedules Consent of Independent Public Accountants SCHEDULE II - Valuation and Qualifying Accounts
(a)(3) Exhibits.
See (c) below.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed for the three months ended December 31, 1996.
(c) Exhibits.
3.1 Articles of Incorporation of Manpower Inc. incorporated by reference to Annex_C of the Prospectus which is contained in Amendment No. 1 to Form S-4 (Registration No._33-38684).
3.2 Amended and Restated By-laws of Manpower Inc.
10.1 [Reserved]
** Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MANPOWER INC.
By: /s/ Mitchell S. Fromstein ---------------------------- Mitchell S. Fromstein Chairman of the Board
Date: March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
*Pursuant to authority granted by powers of attorney, copies of which are filed herewith.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of Manpower Inc.:
We have audited in accordance with generally accepted auditing standards, the financial statements included in Manpower Inc.'s annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 31, 1997. Our audit was made for the purpose of forming an opinion on those statements taken as a whole. The schedule listed in the index at item 14(a)(2) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
Milwaukee, Wisconsin, January 31, 1997.
____________________
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by reference in this Annual Report on Form 10-K of Manpower Inc. of our report dated January 31, 1997, included in the 1996 Annual Report to Shareholders of Manpower Inc.
We also consent to the incorporation of our reports included (or incorporated by reference) in this Annual Report on Form 10-K, into the Company's previously filed Registration Statements on Form S-8 (File Nos. 33-40441, 33-51336, 33-55264, 33-84736 and 333-1040), the Company's Registration Statements on Form S-3 (File Nos. 33-89660 and 333-6545) and the Company's Registration Statements on Form S-4 (File Nos. 333-650 and 33-95896).
ARTHUR ANDERSEN LLP
/s/ Arthur Andersen LLP
Milwaukee, Wisconsin, March 28, 1997.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1996, 1995, and 1994, in thousands:
Allowance for Doubtful Accounts:


ITEM 1. BUSINESS.
INTRODUCTION Imation Corp. (together with its subsidiaries, "Imation" or the "Company") was incorporated as a Delaware corporation in March 1996. The Company's principal executive offices are located at 1 Imation Place, Oakdale, Minnesota 55128 (telephone number (612) 704-4000). Prior to July 1, 1996, Minnesota Mining and Manufacturing Company ("3M") operated the Company's business through various divisions and subsidiaries.
The Company was formed as a result of the decision by 3M to spin-off a separate company comprised of substantially all of the businesses previously operated within 3M's data storage and imaging systems groups (the "Transferred Businesses"). To effectuate the transaction, on June 18, 1996, the Board of Directors of 3M declared a dividend payable to the holders of record of 3M common stock as of June 28, 1996, based upon a ratio of one share of the Company's common stock, par value $0.01 per share (the "Common Stock") for every ten shares of 3M common stock owned on the record date. Effective July 1, 1996 (the "Distribution Date"), all of the outstanding shares of Common Stock were distributed to 3M stockholders (the "Distribution"). In connection with the Distribution, 3M and the Company entered into various agreements to facilitate the transition of the Company to an independent business enterprise. See "Relationship Between 3M and the Company." As used herein, references to the "Company" or "Imation" include the historical operating results and activities of the business and operations which comprise the Company today.
BUSINESS DESCRIPTION The Company develops, manufactures and markets a wide variety of products and services worldwide for the information processing industry, specializing in data storage and imaging applications. The Company's products, which number in excess of 10,000, are used to capture, process, store, reproduce and distribute information and images in a wide range of information-intensive markets, including enterprise computing, network servers, personal computing, graphic arts, medical imaging, photographic imaging, and commercial and consumer markets. Approximately 57% of the Company's revenues in 1996 were derived from products and services utilizing digital technologies. In addition, a number of the Company's products are market leaders in the conventional/analog processes for recording, manipulation and storage of data and images. While these established products generate a substantial portion of the Company's revenues today, the Company is expanding its opportunities to serve the growing needs of its customers to create, process, manipulate, store, reproduce and distribute increasing amounts of information and images through the use of digital technologies. The Company intends to leverage its existing market positions to increase the use of its products and services as well as to expand its opportunities in the information processing industry by developing more complete workflow solutions based on digital technologies.
The Company operates in a single industry segment, the information processing industry, supplying products and services to meet the information processing needs for a variety of customer applications. Below are the product and service revenues by class of similar products or services for each of the years ended December 31.
The Company does business in more than 60 countries and nearly half of the Company's revenues are derived internationally. Expectations are for this percentage to grow over time. The Company reports its operating results in three geographic areas--United States, Europe/Middle East/Africa, and Latin America/Asia/Canada. Financial information by geographic area can be found in Note 10 to the Company's Consolidated Financial Statements appearing on page 53 of the Company's 1996 Annual Report to Shareholders.
Data Storage Products The Company is the world's largest supplier and developer of branded removable data storage media, in both magnetic and optical formats. The Company also is a supplier of CD-ROM and laser disc replication and software services provided to software developers. The Company's products include:
* Data cartridge and Travan(TM) cartridge products used for backup of data from hard disk storage systems and for applications in which large volumes of information do not need to be retrieved on a frequent basis. Travan cartridges more than double the storage capacity of the prior mini-cartridge. Used primarily on desktop personal computer systems, local area networks and workstation computer systems, the Travan cartridges make up a family of innovative products that were introduced in 1995 through the joint efforts of 3M, Hewlett Packard Company and a group of drive manufacturers. The Company maintains relationships with these and other companies regarding the production and joint marketing of compatible drives and cartridge storage media and the development of future versions of the technology.
* Computer cartridge tapes used for near-line data storage and retrieval, mass storage and archival storage of data. Large cartridge tapes are used primarily on enterprise computer systems and in data library systems that store very large volumes of data. The smaller 4 mm and 8 mm cartridges are used primarily in workstations and mid-size computer systems and networks for backup and other data storage applications.
* Diskettes (3.5 inch, 5.25 inch and 8 inch) used for personal file storage, for backup and for exchange of data. Diskettes are used primarily in desktop and notebook personal computer systems, and also in workstations, word processors and computer control equipment. In April 1996, the Company released the LS-120 diskette, a "next generation" 3.5-inch diskette with a formatted capacity of 120 MB. The LS-120 diskette provides more than 80 times the storage capacity of a standard diskette, and is read/write backward-compatible with the installed base of more than 5 billion 1.44 MB and 720 KB DOS-formatted diskettes. The LS-120 technology was originally developed as part of the Laser Servo 120 MB program in which the Company, Compaq Computer Corporation and MKE are co-developers. In late 1996 and early 1997, drive manufacturers MKE and Mitsubishi Electric Corp. announced that their production facilities are capable of producing LS-120 drives in high volumes, and OR Technology announced a strategic alliance with Kaifa Group, one of the largest computer component manufacturers in China, to mass produce an ultra slim-line LS-120 drive for notebook computers in 1997. Several leading PC original equipment manufacturers, including Compaq Computer Corporation and two European companies, Siemens Nixdorf Information Systems AG and Fujitsu ICL Computers, Ltd., have announced plans to integrate LS-120 drives into certain of their PC lines.
* Rewritable optical disks including magneto-optical (90mm and 130mm), phase change disks (PD) and CD recordable disks used for the storage of data and images on personal computers, workstations and local area networks. These disks are also used in library systems for multi-user/client server computer installations.
* Laserdiscs, CD-ROM and DVD-ROM products produced on a made-to-order basis and used for the distribution of data and software to the personal computer and mid-range markets. The Company recently announced it will begin offering full DVD-ROM manufacturing, mastering, replication, packaging and fulfillment services from the Company's Menomonie, Wisconsin facility beginning in late 1997. DVD is a high-density, next generation compact disc, identical in size and appearance to current CDs.
Printing and Publishing Systems The Company manufactures and markets products and provides service and technical support for the printing, publishing and graphic arts markets. Products include conventional color proofing systems, digital color proofing systems and software, pre-press software (Luminous), laser films and image setting materials, metal printing plates, graphic arts films, photographic chemicals and miscellaneous supplies. The Company also markets carbonless paper products, such as multi-part business forms. The Company has strong leadership positions in certain product areas, including the Matchprint(TM) color proofing system, an industry standard for more than 20 years. More recently, the Rainbow(TM) color proofing system, which provides color proofs from digital data before a job is put on a printing press, also has established a leadership role, winning both industry awards and acceptance as the digital proofer of choice among many graphic arts professionals. The Company offers a two-page digital proofing system (the Rainbow(TM) model 2730 digital proofer) and will be introducing later in 1997 a two-page digital proofer for professional applications (the Rainbow(TM) model 2740 digital proofer). The Company has also announced it will expand its line of Rainbow(TM) color proofers with a new four-page (A2 size) ink jet digital proofing solution for users who require large format, contract quality proofs. The new Rainbow(TM) model 4700 proofer is expected to be available during the second quarter of 1997. In addition, in 1996 the Company announced the development of two new Viking(TM) metal laser plates and a third infrared thermal plate, which were designed for computer-to-plate printing technology. The Company began shipping the two new Viking(TM) laser plates in December 1996 and expects to introduce the third plate in the third quarter of 1997.
In October 1996, the Company acquired Luminous Corporation of Seattle, Washington, a developer and marketer of desktop software for the prepress, print production, printing and graphic arts industries. Luminous' portfolio of desktop prepress software products strengthens the Company's existing digital capabilities through its Rainbow(TM) digital color proofing systems and Color Locking Software. As an increasing number of commercial printing operations are moving their production processes to the desktop and are expanding their use of color and networked computing, the need for integrated digital workflow solutions is dramatically increasing. The acquisition of Luminous, combined with the Company's expertise in digital proofing, color science and high-capacity digital storage, expands the Company's leadership in prepress workflow software to speed development of integrated digital prepress solutions.
In addition to expanding its offerings of digital workflow solutions, the Company intends to continue to develop its conventional product lines. In 1996, the Company announced plans to leverage its proprietary dry film technology in the medical imaging industry to develop a proprietary new dry imagesetting film for the printing industry. The dry imagesetting film will be used in a new family of dry film imagesetters being developed by systems developers including Scitex Corporation Ltd., ECRM Incorporated and Ultre Division of Linotype-Hell Company, and is expected to be available in mid-1997. The Company also has announced it intends to introduce a new line of high-quality, medium-run "no-process" printing plates in mid 1997. The advantages to the user of both the dry imagesetting film and the "no-process" plates include reduced operating costs, increased productivity and the elimination of "wet chemistry" processing resulting in substantial benefits to the environment. During 1996, the Company also expanded its line of films and bases available for its conventional proofing systems by introducing new large format Matchprint(TM) color proofing films and bases. In November 1996, the Company announced its strategic decision to discontinue manufacturing 3M(TM) Onyx(TM) polyester printing plates effective June 30, 1997. The decision to exit the Onyx business was made to allow the Company to focus on strategic conventional and digital platforms and to align the Company's product mix with the Company's strategy of focusing on higher value-added products and services.
Medical Imaging Systems and Photo Color Products The Company develops, manufactures and markets diagnostic imaging film, film processors and imaging systems for both X-ray and electronic imaging systems. The Company's customers include major hospital network buying groups as well as individual hospitals and medical imaging centers. The Company participates in the conventional X-ray film market and is the world's leading supplier of high-quality laser imagers for producing medical diagnostic images directly from MRI, CT, ultrasound, nuclear and other electronic systems, with more than 10,000 laser imagers installed worldwide. In late 1995, the Company began shipping its proprietary line of DryView(TM) laser imagers that produce high-quality film images without using standard wet chemistry through a specially designed photothermographic process. Since no wet chemistry is involved, the DryView laser imagers represent a significant technological breakthrough and offer significant cost savings, productivity gains and environmental benefits to the health care industry. In 1996, the Company introduced a new desk-top version of the DryView laser imager, which conveniently may be located in a variety of settings. As of December 31, 1996, the Company had shipped more than 1,500 units of its DryView laser imaging systems. Through an alliance with Cemax-Icon, hardware and software solutions are provided to clients that help them manage, distribute and archive their medical images. Under the alliance, the Company sells its DryView products and other medical imaging equipment and Cemax-Icon redistributes such products on an integrated basis with its own software products.
The Company is one of the world's leading suppliers of private label film for the amateur photography retail market. The Company's primary geographic markets for color photographic film are the United States and Europe, which represents approximately 70% of the global demand for film. The Company manufactures a complete line of print and slide films which fit in standard 35mm, 110, and 126 cameras used by consumers globally. The Company also manufactures single use cameras which are sold preloaded with the Company's ISO 400 speed film. Single-use cameras represent a high growth segment of the consumer film market. The Company's color print film can be found in more than 125 private label brands, as well as 3M's Scotch(TM) brand. The Company continues to use certain 3M trademarks and tradenames including the Scotch brand for a period of time following the Distribution. See "Relationship Between 3M and the Company--Intellectual Property Agreement." These products and brands are positioned as a high value, comparable quality alternative to global brands such as Kodak and Fuji.
In 1996, the Company announced the development of a new product that allows desktop computer users to print photo-quality images on color ink jet printers. The new photographic paper for ink jet printers is believed to provide superior image quality and color reproduction, and significantly faster drying time than competitive products. The new product, which was designed for use with a variety of color ink jet printers, is expected to be available during the first half of 1997 through mass retail and photo stores.
Customer Service Technology The Company's team of field service technicians provides technical servicing and other post-sale technical support for equipment sold by the Company and by 3M. The Company offers 24 hour information and customer support telephone lines for the products it supports. Customers also benefit from user-friendly product documentation and training programs in a variety of languages. The Company intends to expand its technical service and support capabilities to assist customers with the installation, service, support, integration and optimization of equipment and systems offered for sale by the Company and other manufacturers.
Document Imaging The Company supplies office and engineering document archiving and management systems and produces and distributes black-and-white dry photographic papers and films for the industrial imaging market.
INDUSTRY BACKGROUND The information processing industry in which the Company operates is concerned with the creation, capture, manipulation, storage, production and distribution of information. In data storage and imaging applications in which the Company specializes, the industry has been profoundly impacted by advancements in digital technologies. Digital technologies provide much needed information processing solutions as users are required to use, manage and store more complex information in less time and with fewer resources and greater accuracy. The industry is also being profoundly impacted by the availability of new methods of transporting and accessing data through software developments, networking and the development of the World Wide Web.
Removable data storage solutions, based on digital technologies, are used in applications across all computing platforms -- enterprise systems, network servers, desktop systems and mobile computing. International Data Corporation ("IDC") has estimated that there are over 150 million computer systems in use worldwide that use removable data storage technologies. Removable data storage technologies are used in a variety of applications including graphic imaging, video imaging, medical diagnostics, communications systems and consumer entertainment electronics. Overall, the data storage solution market is growing at a double digit rate annually, with Asia, Latin America and Eastern Europe leading this growth, although there is significant price competition. Customer demand for these solutions is multiplying at an ever increasing pace due to enhanced enabling software that increases the applications and usage rates and the developing need by customers to manipulate, store and protect even larger databases. The need for convenient digital storage solutions is also accelerating as people gain access to information of all types from many sources, including the Internet. Increasingly, end users want to download files and information for later use. As the number of Internet users grow and the variety of information increases, the demand for portable, cost-effective data storage and output media also will grow. This is true in both commercial and consumer markets.
Imaging technologies also have been profoundly impacted by advancements in digital technologies as many users begin to convert their conventional/analog processes to proprietary digital processes to capture, create, manipulate, process, transmit and store still and moving images. Conventional/analog technologies rely upon chemical or electrical processes which capture information onto paper, film or other media by reacting to external stimuli. Digital technologies have significantly increased the amount of information that can be used, managed and stored and have reduced the need for film and chemicals in the imaging process. Many work processes in use today are hybrid systems in which users continue to use conventional materials for certain processes in their workflows while utilizing the speed of digital processing.
COMPETITION The Company operates in a highly competitive environment. The Company's principal competitors include large, well capitalized technology companies based in the United States, Europe and Japan. These competitors include Eastman Kodak, Fuji Photo Film, Sony, Agfa, Polaroid, Konica, KAO and Du Pont. The Company also competes in certain product markets with smaller, more specialized firms such as Polychrome, Scitex America, ADAC and Iomega. Businesses in the information processing industry compete on a variety of factors such as price, value, product quality, customer service, breadth of product line and availability of system solutions.
SALES, MARKETS AND DISTRIBUTION METHODS The Company's products and services are sold directly to users through the Company's field sales organizations and through numerous wholesalers, retailers, jobbers, distributors and dealers in over 60 countries. No one customer individually accounts for a material amount of the Company's total sales.
RAW MATERIALS The principal raw materials used by the Company are silver, polyester film and aluminum. The Company makes significant purchases of these and other materials and components used in the Company's manufacturing operations from many domestic and foreign sources. The Company has been able to obtain sufficient materials and components from sources around the world to meet its needs. 3M continues to be a major supplier to the Company of certain raw materials and intermediate products including film, specialty chemicals and abrasives, and certain contract manufacturing services, primarily equipment assembly services. See "Relationship Between 3M and the Company--Supply, Service and Contract Manufacturing Agreements."
RESEARCH AND PATENTS Research and product development have historically played an important role in the Company's activities. The Company has research laboratories for the improvement of its existing products and development of new products. The Company's research and development expenses were $183.1 million, $222.4 million, and $211.2 million for 1996, 1995 and 1994, respectively. The Company expects its research and development expenses, as a percent of total revenues, to remain in the 7-8% range during the next several years.
In connection with the Distribution, the Company was granted rights, on both exclusive and non-exclusive bases, from 3M and others which enable it to continue to use the intellectual property previously utilized by the Company when it was part of 3M. See "Relationship Between 3M and the Company--Intellectual Property Agreement." The Company does not consider that its business as a whole is materially dependent upon any one patent, license or trade secret or any group of related patents, licenses or trade secrets, except with respect to those rights granted from 3M.
MANUFACTURING During 1996 the Company consolidated its manufacturing facilities by centralizing such operations into the United States and Italy. This consolidation was implemented in order to reduce costs and improve quality by allowing the Company to adjust its capacity to current needs and take advantage of the facilities with the most advanced quality management systems. In August 1996, the Company sold its offset printing plate production facility in Sulmona, Italy, and in connection with the sale the Company entered into a contract with the purchaser of the facility to supply the Company with Viking(TM) printing plates for the European market. The Company has also announced it will close its manufacturing facility in Rochester, New York by June 30, 1997. Costs associated with this plant closing were recorded by the Company in its 1995 and 1996 consolidated financial statements.
The core manufacturing competencies of the Company include coating, fine chemical production for photographic film, state-of-the-art molding capabilities, hardware prototyping and unit cost reduction. These competencies, combined with the Company's research and development competencies of materials science, color management, hardcopy imaging and magnetic and optical recording, give the Company a strong technological base to take advantage of the opportunities in the evolving information processing industry.
EMPLOYEES In connection with the Distribution, the Company achieved significant cost reductions through changes in its corporate structure, including a more than 20 percent reduction in head count from the levels prior to the Distribution. As of December 31, 1996, the Company had approximately 9,400 employees, approximately 5,500 in the United States and 3,900 internationally. As of December 31, 1995, the Company had approximately 12,300 employees, which included both direct employees and indirect equivalent positions in staff services functions at 3M which historically provided services to the Company's businesses prior to the Distribution. Approximately 1,600 positions were reduced prior to the Distribution Date through employee separation programs and as a result of the consolidation of the Company's manufacturing operations. The separation costs associated with these reductions were recorded by the Company in its 1996 consolidated financial statements. Most of the cash requirements of the separation programs were funded by 3M. In addition, approximately 1,100 staff services equivalent positions remained with 3M. The Company continues to incur some of the costs related to the staff services support provided by these employees through a services agreement with 3M. See "Relationship Between 3M and the Company--Corporate Services Transition Agreement."
ENVIRONMENTAL MATTERS The Company's operations are subject to a wide range of environmental protection laws. The Company has remedial and investigatory activities underway at some of its current facilities. In connection with the Distribution, the Company assumed and agreed to indemnify 3M from all liabilities relating to, arising out of or resulting from (i) operations at the Company's facilities as conducted prior to the Distribution Date; (ii) the disposal of hazardous materials from the Company's facilities before the Distribution Date and at disposal sites operated by third parties ("Superfund Sites"), where such liabilities are discovered after the Distribution Date, or (iii) operations of the Company's businesses on and after the Distribution Date. 3M agreed to retain responsibility for environmental liabilities relating to former premises which may have been associated with the Company's businesses prior to the Distribution Date and known Superfund Sites associated with the Company's properties as of the Distribution Date.
It is the Company's policy to accrue environmental remediation costs if it is probable that a liability has been incurred and the amount of such liability is reasonably estimable. As assessments and remediations proceed, these accruals are reviewed periodically and adjusted, if necessary, as additional information becomes available. The accruals for these liabilities can change due to such factors as additional information on the nature or extent of contamination, methods of remediation required, the allocated share of responsibility among other parties, if applicable, and other actions by governmental agencies or private parties. However, it is often difficult to estimate the future impact of environmental matters, including potential liabilities.
As of December 31, 1996, the Company had reserved approximately $6 million with respect to environmental liabilities. Although the Company believes that its reserves are adequate, there can be no assurance that the amount of expenses relating to remedial actions and compliance with applicable environmental laws will not exceed the amounts reflected in the Company's reserves. The Company believes that such additional charges, if any, will not have a material adverse effect on the financial position of the Company.
RELATIONSHIP BETWEEN 3M AND THE COMPANY For purposes of governing certain of the relationships between 3M and the Company following the Distribution, 3M and the Company entered into the Transfer and Distribution Agreement and various ancillary agreements to which they are parties, including those described below. Certain of these agreements have been filed as exhibits to this Form 10-K, and the following summaries are qualified in their entirety by reference to the agreements as filed.
Transfer and Distribution Agreement 3M and the Company have entered into the Transfer and Distribution Agreement, which provides for, among other things, the principal corporate transactions required to effect the Distribution, the transfer to the Company of the Transferred Businesses, the division between 3M and the Company of certain liabilities and certain other agreements governing the relationship between 3M and the Company following the Distribution.
Tax Sharing and Indemnification Agreement 3M and the Company entered into a Tax Sharing and Indemnification Agreement (the "Tax Sharing Agreement"), providing for their respective obligations concerning various tax liabilities. The Tax Sharing Agreement provides that 3M shall pay, and indemnify the Company if necessary, with respect to all federal, state, local and foreign income taxes relating to the Transferred Businesses for any taxable period ending on or before the Distribution Date except that the Company shall indemnify 3M for any income taxes arising out of the failure of the Distribution or any of the transactions related to it to qualify as tax free as a result of certain actions taken by the Company or any of its subsidiaries. Prior to the Distribution, 3M received a ruling from the Internal Revenue Service that 3M shareholders who received shares of the Company's common stock in connection with the Distribution would not recognize income, gain or loss upon receipt of such shares, except in connection with any cash received in lieu of fractional shares. 3M also generally agreed to pay all other taxes (other than those which are imposed solely on the Company) that are payable in connection with the Distribution and the transactions related to it the liability for which arose on or before the Distribution Date. The Tax Sharing Agreement further provides for cooperation with respect to certain tax matters, the exchange of information and the retention of records which may affect the income tax liability of either party.
Corporate Services Transition Agreement 3M and the Company entered into a Corporate Services Transition Agreement (the "Corporate Services Agreement") pursuant to which 3M agreed to provide to the Company certain services, including engineering and environmental services, logistics and information technology services, financial services, human resources administration services and tax, insurance, treasury, and employee benefits administration, which 3M historically provided to the Transferred Businesses prior to the Distribution Date. The length of time that 3M will provide such services and the amount that the Company will pay for such services varies based on the type of service. Generally, no services are expected to be provided beyond two years following the Distribution Date, and after such time the Company expects to provide such services on its own behalf. The Corporate Services Agreement is terminable by each party upon 90 days notice, provided that 3M is not permitted to terminate certain specified services, which the parties have determined will require a longer period to replace. The costs associated with the services provided by 3M are either a fixed dollar amount based on the estimated cost of the services provided, or an amount determined pursuant to a formula based on the services actually provided. Any services required by the Company beyond the first year will be based on costs incurred plus an 8% mark-up. Certain foreign subsidiaries of the Company and 3M entered into corporate services agreements pursuant to which 3M agreed to provide to such subsidiaries services similar to those being provided to the Company pursuant to the Corporate Services Agreement. The cost of all such services supplied by 3M to the Company during the last six months of 1996 totaled approximately $51 million.
Environmental Matters Agreement 3M and the Company entered into an Environmental Matters Agreement (the "Environmental Matters Agreement") providing for their respective obligations concerning environmental liabilities arising out of the operation of the premises of the Transferred Businesses and other environmental matters.
Under the Environmental Matters Agreement, the Company assumed and agreed to indemnify 3M for all liabilities relating to, arising out of or resulting from (i) operations at the Company's facilities as conducted before the Distribution Date; (ii) the disposal of hazardous materials from the Company's facilities before the Distribution Date and at Superfund Sites, where such liabilities are discovered after the Distribution Date; or (iii) operations of the Transferred Businesses on and after the Distribution Date. 3M agreed to retain responsibility for environmental liabilities relating to former premises which may have been associated with the Transferred Businesses, and known Superfund sites associated with the properties of the Transferred Businesses on or before the Distribution Date.
Intellectual Property Agreement 3M and the Company entered into an Intellectual Property Rights Agreement (the "Intellectual Property Agreement") pursuant to which 3M granted to the Company, effective as of the Distribution Date, rights to use certain intellectual property (such as patent rights, copyrights, mask work rights and proprietary information) exclusively in the fields of use in which the Transferred Businesses operated as of the Distribution Date and non-exclusively in certain other fields. In addition, 3M transferred to the Company title to certain intellectual property rights previously used by the Transferred Businesses, subject to certain rights of 3M to continue to use such intellectual property rights. The Intellectual Property Agreement further provides for cross licensing of certain future intellectual property developed during a transition period. In addition, for various transition periods specified in the Intellectual Property Agreement, the Company is granted the right to use certain 3M trademarks under a royalty-bearing license. Trademarks used only by the Transferred Businesses were assigned to the Company as of the Distribution Date.
The Intellectual Property Agreement provides that the costs associated with the procurement and maintenance of patents and trademarks licensed to either party by the other under the Intellectual Property Agreement are the responsibility of the party owning the particular patent or trademark. However, with respect to patents, either party may designate a patent or patent application under which it is licensed by the other party to be of "common interest." The licensed party is granted certain rights to participate in decisions involving such common interest patents and patent applications, and the costs thereof are shared by the parties. The costs of enforcing licensed patents against an infringer will be borne by the party instituting the lawsuit unless the parties agree otherwise. For jointly-owned patents, enforcement costs are shared if both parties desire to participate. The licensed party's enforcement of patents requires prior approval by the party owning the patent.
With the exception of licensed trademark rights, no royalties or fees are payable by the Company to 3M for the assignment and license of intellectual property to the Company under the Intellectual Property Agreement. With respect to licensed trademarks, the Company is required to pay a royalty, which the Company believes is reasonable, through cash payments, commitments to purchase product from 3M and/or engaging in certain other activities benefiting 3M.
The parties have agreed to cross-license each other under certain patents and proprietary information developed by each party during the two year period following the Distribution Date. The cross-licenses are royalty-free and generally of the same scope (i.e., exclusive or non-exclusive in defined fields) as the licenses granted to and retained by the Company and 3M, respectively, under the patents and proprietary information existing at the time of the Distribution.
The Company and 3M have entered into joint development agreements pursuant to which the parties will assist each other in the development of new products following the Distribution Date. The relationship between the parties under the agreements varies from simple purchased research to shared product development.
3M and the Company agreed not to compete with each other in their respective businesses for a period of five years following the Distribution Date. 3M agreed that, except for ancillary activity involving an insubstantial business, it would not compete directly or indirectly in the Company's Exclusive Fields (which, as defined in the Intellectual Property Agreement, are generally the fields of business in which the Company was engaged as of the Distribution Date). The Company agreed that, except for ancillary activity involving an insubstantial business, it would not compete, directly or indirectly in the 3M Business Fields (which, as defined in the Intellectual Property Agreement, are generally the fields of business in which 3M was engaged as of the Distribution Date). However, this provision does not preclude the Company from indirect activity, outside of the 3M Reserved Fields (which, as defined in the Intellectual Property Agreement, are generally fields closely related to the Company's Exclusive Fields where 3M has retained exclusive rights), involving working with a third party on that party's imaging and electronic information processing needs, internal or external, as long as the activity does not benefit, in more than an ancillary way, a product or service of the third party which competes with a product or service in the 3M Business Fields.
Supply, Service and Contract Manufacturing Agreements 3M and the Company entered into various product and service supply agreements (the "Supply Agreements") providing for the supply by 3M to the Company and by the Company to 3M, of certain products and services. Under the Supply Agreements, 3M supplies to the Company certain raw material and intermediate products including film, specialty chemicals and abrasives and provides to the Company certain contract manufacturing services, primarily equipment assembly services. Under the Supply Agreements, the Company supplies to 3M certain semi-finished products and components and provides to 3M certain contract manufacturing and other services, including converting, slitting and coating services and technical field service. The prices for products supplied by either party under the Supply Agreements are based on the cost of supplying such product plus a 5% mark-up in 1996, a 10% mark-up in 1997 and a 15% mark-up in 1998 and thereafter. The prices paid for contract manufacturing services provided by either party vary depending on the services provided but generally are based on costs incurred plus an 8% mark-up. The net cost to the Company of all such transactions between 3M and the Company totaled approximately $60 million in 1996.
Shared Facility and Lease Agreements 3M and the Company entered into various lease agreements with respect to certain facilities (the "Shared Facility Agreements") at which 3M and the Company share space. With respect to each of these facilities, the party that is the owner (or primary tenant) of the facility leases to the other party a portion of the facility so as to enable the other party to conduct operations at such facility.
The form of lease entered into by 3M and the Company provides for the payment of rent in an amount approximating the standard recharge rate used by the lessor with respect to internal uses of such facilities. The leases generally provide for a two year term, in some cases with an option to extend for an additional two years. The amount paid by 3M to the Company during the last six months of 1996 with respect to Shared Facility Agreements totaled approximately $400,000 and the amount paid by the Company to 3M during the same period and for the same purpose totaled approximately $9 million.
The Company has commenced construction of an office building and research and development facilities at its headquarters site in Oakdale in order to consolidate its headquarters operations. The Company will continue to lease certain laboratory and manufacturing space from 3M following the consolidation of its headquarters operations. See "Item 2.

ITEM 2. PROPERTIES The Company's headquarters are located in Oakdale, Minnesota. The Company is in the process of constructing an office building and research and development facilities at its Oakdale site in order to consolidate its headquarters operations. The costs of construction of these research and development facilities will be financed through a synthetic lease financing arrangement. Construction of these facilities will enable the Company to re-locate approximately 1,100 employees currently located in facilities being leased by the Company from 3M. The Company's major facilities (all of which are owned by the Company, except where noted), and the products manufactured at such facilities are listed below. The Company's facilities are in good operating condition suitable for their respective uses and adequate for the Company's current needs.
FACILITY PRODUCTS
Domestic Camarillo, California Data tape Fremont, California (leased) CD-ROM Menomonie, Wisconsin (leased) Laserdisc, CD-ROM and DVD-ROM Middleway, W. Virginia Printing plates Nekoosa, Wisconsin Carbonless paper Oakdale, Minnesota Headquarters Pine City, Minnesota Micrographic cards St. Paul, Minnesota (leased) Laboratory facilities Tucson, Arizona Data tape Vadnais Heights, Minnesota (leased) Optical Wahpeton, North Dakota Diskettes/molding Weatherford, Oklahoma Diskettes/photographic film White City, Oregon Imagers/X-ray films
International Bracknell, United Kingdom Administrative Breda, Netherlands (leased) CD-ROM services Milan, Italy (leased) Administrative Rotterdam, Netherlands (leased) Administrative Ferrania, Italy X-ray films/photographic film Florida, Argentina X-ray films Harlow, United Kingdom Research facility London, Ontario, Canada Administrative
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS In connection with the Distribution, the Company assumed substantially all liabilities for legal proceedings relating to the Company's businesses as conducted prior to the Distribution Date. See "Relationships Between 3M and the Company--Transfer and Distribution Agreement." In addition, in the normal course of business, the Company is subject to proceedings, lawsuits and other claims, including proceedings under laws and regulations related to environmental and other matters. All such matters are subject to many uncertainties and outcomes that are not predictable with assurance. Consequently, the Company is unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters as of December 31, 1996. While these matters could materially affect operating results of any one quarter when resolved in future periods, it is management's opinion that after final disposition, any monetary liability or financial impact to the Company beyond that provided in the consolidated balance sheet as of December 31, 1996 would not be material to the Company's financial position or annual results of operations or cash flows.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. As of February 28, 1997, there were 42,627,470 shares of the Company's common stock, $.01 par value ("Common Stock"), outstanding held by approximately 67,394 shareholders of record. The Company's Common Stock is listed on the New York and Chicago Stock Exchanges. The Company did not pay any dividends during 1996. Future dividends will be determined by the Board of Directors.
In connection with the Company's acquisition of Luminous Corporation, on October 11, 1996, the Company issued 922,845 shares of the Company's Common Stock to the shareholders of Luminous Corporation in exchange for all of the issued and outstanding shares of that company. The issuance of the shares of Common Stock did not involve a public offering and was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
The following table sets forth, for the periods indicated, the high and low sales prices of Common Stock as reported on the New York Stock Exchange Composite Transactions. The Company's Common Stock commenced regular way trading on the New York Stock Exchange on July 15, 1996.
PERIOD SALES PRICES ------ ------------ HIGH LOW ---- --- Third Quarter 1996 $26.25 $20.38 Fourth Quarter 1996 $33.00 $22.75
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA. The information for the years 1991 through 1996 contained on page 33 of the Company's 1996 Annual Report to Shareholders is incorporated herein by reference.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information set forth in the section entitled "Management's Discussion and Analysis" on pages 34 through 40 of the Company's 1996 Annual Report to Shareholders is incorporated herein by reference.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information on pages 41 through 58 of the Company's 1996 Annual Report to Shareholders is incorporated herein by reference.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information contained in the sections entitled "Information Concerning Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" contained in the Company's Proxy Statement for its 1997 Annual Shareholders Meeting is incorporated herein by reference. See also "Executive Officers of the Company" in Part I above.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION. The sections entitled "Compensation of Executive Officers" and "Compensation of Directors" contained in the Company's Proxy Statement for its 1997 Annual Shareholders Meeting is incorporated herein by reference. The information appearing under the heading "Committee Report on Executive Compensation" is not incorporated herein.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information contained in the sections entitled "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management" contained in the Company's Proxy Statement for its 1997 Annual Shareholders Meeting is incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Not applicable.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS:
Report of Independent Accountants (incorporated herein by reference to page 58 of the Company's 1996 Annual Report to Shareholders).
Consolidated Statements of Operations for the Years Ended December 31, 1996, 1995 and 1994 (incorporated herein by reference to page 41 of the Company's 1996 Annual Report to Shareholders).
Consolidated Balance Sheets as of December 31, 1996 and 1995 (incorporated herein by reference to page 42 of the Company's 1996 Annual Report to Shareholders).
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 (incorporated herein by reference to page 43 of the Company's 1996 Annual Report to Shareholders).
Notes to Consolidated Financial Statements (incorporated herein by reference to pages 44 through 57 of the Company's 1996 Annual Report to Shareholders).
2. FINANCIAL STATEMENT SCHEDULES
All financial statement schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the Consolidated Financial Statements or the notes thereto.
3. EXHIBITS
3.1 Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to Registration Statement on Form 10, No. 1-14310)
3.2 Amended and Restated By-Laws of the Registrant
4.1 Rights Agreement, dated as of June 18, 1996 between the Registrant and Norwest Bank Minnesota, N.A., as Rights Agent (incorporated by reference to Exhibit 4.1 to Registration Statement on Form 10, No. 1-14310)
4.2 Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock of the Registrant (incorporated by reference to Exhibit 4.2 to Registration Statement on Form 10, No. 1-14310)
10.1 Transfer and Distribution Agreement, dated as of July 1, 1996, between Minnesota Mining and Manufacturing Company ("3M") and the Registrant (incorporated by reference to Exhibit 2.1 to Registration Statement on Form 10, No. 1-14310)
10.2 Tax Sharing and Indemnification Agreement, dated as of July 1, 1996 between 3M and the Registrant (incorporated by reference to Exhibit 10.1 to Registration Statement on Form 10, No. 1-14310)
10.3. Corporate Services Transition Agreement, dated as of July 1, 1996 between 3M and the Registrant (incorporated by reference to Exhibit 10.2 to Registration Statement on Form 10, No. 1-14310)
10.4 Environmental Matters Agreement dated as of July 1, 1996 between 3M and the Registrant (incorporated by reference to Exhibit 10.3 to Registration Statement on Form 10, No. 1-14310)
10.5 Intellectual Property Rights Agreement, dated as of July 1, 1996 between 3M and the Registrant (incorporated by reference to Exhibit 10.4 to Registration Statement on Form 10, No. 1-14310)
10.6 Supply Agreement, dated as of July 1, 1996, between 3M and the Registrant (incorporated by reference to Exhibit 10.5 to Registration Statement on Form 10, No. 1-14310)
10.7 Lease Agreement dated as of July 1, 1996 between 3M and the Registrant (incorporated by reference to Exhibit 10.6 to Registration Statement on Form 10, No. 1-14310)
10.8* Employment Agreement, dated as of July 1, 1996, between William T. Monahan and the Registrant (incorporated by reference to Exhibit 10.7 to Registration Statement on Form 10, No. 1-14310)
10.9* Imation 1996 Employee Stock Incentive Program (incorporated by reference to Exhibit 10.8 to Registration Statement on Form 10, No. 1-14310)
10.10* Imation Excess Benefit Plan (incorporated by reference to Exhibit 10.10 to Registration Statement on Form 10, No. 1-14310)
10.11* Imation 1996 Retirement Investment Plan (incorporated by reference to Exhibit 10.11 to Registration Statement on Form 10, No. 1-14310)
10.12* Imation 1996 Directors Stock Compensation Program, as Amended
10.13* Form of Indemnity Agreement between the Company and each of its directors
11 Computation of Common Shares and Common Share Equivalents
13 Portions of the Company's 1996 Annual Report to Shareholders
21 Subsidiaries of the Registrant
23 Consent of Coopers & Lybrand L.L.P.
24 Powers of Attorney
27 Financial Data Schedule
The Company undertakes to furnish to the Commission upon request a copy of the Company's Credit Agreement dated July 1, 1996 among the Company, certain lenders who are parties thereto, and Citicorp USA, Inc., as Administrative Agent.
*Items that are management contracts or compensatory plans or arrangements required to be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
(b) REPORTS ON FORM 8-K
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
IMATION CORP.
By: /s/ William T. Monahan ----------------------- William T. Monahan CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: March 31, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.