Download - Mark W. Falkowski, et al. v. Imation Corporation, et al ...securities.stanford.edu/filings-documents/1015/IMN... · 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

l

2

3

4

5

6

7

28

'AGINAL

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

LIONEL Z. GLANCY # 134180NEAL A. DUBLINSKY #135712LAW OFFICES OF LIONEL Z. GLANCY1801 Avenue of the Stars , Suite 311Los Angeles , CA 90067Telephone : (310) 201-9150Facsimile : (310) 201-9160

Attorneys for Plaintiffs JUL 31 zoaU

Fat^Kflb (J jb0etocA

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

MARK W. FALKOWSKI, MICHAEL BENZ,JEAN-LUC CHATELAIN, PHILIPPE C.CIAMPOSSIN, CRAIG W. CORNELIUS, P.H.D.,GREGG R. CRETELLA, JOHN H. DAVIS, JOHND. EDWARDS, ANTHONY J. FILLCELLI,GRADY FLOYD, INGEMAR GUSTAFSON,ARTURO GAMBOA, SRIVIDYAKRISHNAMACHARY, MATTHEW LONG,RUSSEL W. LOOP, SR., GREGORY J. MASEK,SANJAY MEHTA, DOUGLAS A. MERK, KARLE. MINSER, LINDA J. MOORE, AN TRUONGNGUYEN, BANG NGUYEN, DENNIS O'DELL,GREGORY L. ORR, P.H.D., TUAN PHAM, ELIRAPAICH, JONATHAN RE-IS, BRIAN K. RICE,ERIC RODRIGUEZ, KEN H. ROSENFELD,JEREMY RUBIN, M.D., JAN SCHIEBERL, RICKSHROYER, CHARLES H. SMITH, JOHNHAMPTON SMITH, MARTHA TORRES,DENNIS TOTAH, VU HAO TRUONG, andSHARON WOOLSEY, on behalf of themselves andall others similarly situated,

Plaintiffs,

vs.

IMATION CORP., a Delaware corporation,WILLIAM T. MONAHAN, BRADLEY T. SAUER,JILL D. BURCHILL,

Defendants.

Case No. C-99-21072JF

Hon. Jeremy Fogel

CLASS ACTION

FIRST AMENDEDCOMPLAINT FORVIOLATIONS OF THEFEDERAL SECURITIESLAWS

[CORRECTED SOLELY BYTHE ATTACHMENT OFREFERENCED EXHIBITSALREADY ON FILE WITHTHE COURT]

JURY TRIAL DEMANDED

CORRECTED FIRST AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS

CORRECTED I stamend.728.new.wpd Case No. C-99-2I072JF

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Plaintiffs allege:

1. Plaintiffs MARK W. FALKOWSKI, MICHAEL BENZ, JEAN-LUC CHATELAIN,

PHILIPPE C. CIAMPOSSIN, CRAIG W. CORNELIUS, P.H.D., GREGG R. CRETELLA, JOHN

H. DAVIS, JOHN D. EDWARDS, ANTHONY J. FILLCELLI, GRADY FLOYD, INGEMAR

GUSTAFSON, ARTURO GAMBOA, SRIVIDYA KRISHNAMACHARY, MATTHEW LONG,

RUSSEL W. LOOP, SR., GREGORY J. MASEK, SANJAY MEHTA, DOUGLAS A. MERK,

KARL E. MINSER, LINDA J. MOORE, AN TRUONGNGUYEN, BANGNGUYEN, GREGORY

L. ORR, P.H.D., DENNIS O'DELL, TUAN PHAM, ELI RAPAICH, JONATHAN REIS, BRIAN

K. RICE, ERIC RODRIGUEZ, KEN H. ROSENFELD, JEREMY RUBIN, M.D., JAN

SCHIEBERL, RICK SHROYER, CHARLES H. SMITH, JOHN HAMPTON SMITH, MARTHA

TORRES, DENNIS TOTAH, VU HAO TRUONG, and SHARON WOOLSEY, (" Plaintiffs") bring

suit to secure redress from Defendants on behalf of themselves and a class of individuals similarly

situated (" Class" ), and/or sub -classes thereof, consisting of those employees and consultants of

Cemax-Icon, Inc. ("Cemax-Icon ") who, based on the Defendants' material misrepresentations and

omissions had received various allotments of Defendant Imation Corp . ("Imation") stock options in

the aftermath of Imation' s mid- 1997 acquisition of the previously independent Cemax-Icon and

whose rights to those stock options Defendants wrongfully extinguished and abrogated in the course

of Imation ' s subsequent sale of Cemax-Icon, in late-1998, to the Eastman Kodak Company

("Kodak") and Imation ' s sale-related transfer or intended transfer of all of these Cemax-Icon

employees and consultants to Kodak, as more specifically defined herein below (collectively, the

"Class Members")

2. The Class Members received their respective Imation stock option allotments when

and as a result of (a) Imation's assuming of and substituting of its own stock options for those

previously granted to them under three previous Cemax-Icon plans ("substitute options") and/or (b)

Imation's subsequent making of original grants to them under its own pre-existing company-wide

stock option plan ("new options"). The Defendants falsely represented that Imation was basing its

quantitative allotment of the substitute options that it gave to each Class Member and the exercise


CORRECTED Istamcnd.728.new.wpd 1 Case No. C-99-21072JF

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

price on those options on the existing conversion value and the existing terms and conditions of the

individual Class Members' original Cemax-Icon stock options as weighed against the true value of

Imation's own common stock.

3. In reality, however, the Defendants harmed these Class Members by materially

overstating the underlying value of Imation's common stock in structuring these employee stock

option transactions. In addition, by misleading these Class Members as to the ultimate shelf-life and

the terms and extent ofthe exercisability of their various Imation stock options, the Defendants also

materially overstated to these Class Members the underlying value of and Imation's consideration

for the respective stock option agreements and grants.

4. Cemax-Icon is a leader and innovator in the multi-billion dollar medical information

I management industry. It manufactures, sells and services medical image information networks to

hospitals, healthcare facilities and diagnostic radiology centers. Its headquarters is, and, at all

relevant times, has been in Fremont, California.

5. As a major and sophisticated player in the high technology sector, a large portion of

Cemax-Icon's intrinsic value is and has been based on the intellectual capital represented by its

employees and its stability as a "going concern." Defendants knew and acted on this basis and

largely succeeded in retaining Cemax-Icon's employees and consultants after Imation's acquisition

of Cemax-Icon ("Imation acquisition") by formally granting the Class Members their respective

substitute options and new options.

6. It is a matter of common knowledge within the high technology business sector that

employee stock option grants and. rights are an important factor in attracting and retaining "top-

drawer" talent for executive and other positions. Such talented individuals commonly base their

decisions ofwhether or not to j oin and to stay with a particular company on these equity components

of their total compensation packages. This factor featured even more prominently in this situation

since the stock option grants issued at Cemax-Icon were, effectively, in lieu of employee retirement

pension plans.


CORRECTED I stamend. 728.new.wpd 2 Case No. C-99-2I472JF

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

7. Defendants wrongfully extinguished and abrogated the Class Members' individual

entitlement to their respective substitute options and new options in the course of Imation's sale of

Cemax-Icon, along with Imation's medical imaging business, to Kodak ("Imation-Kodak deal"). In

connection with the sale, Imation informed the Class Members that they were being transferred en

masse to Kodak without any interruption or termination of their employment status at Cemax-Icon

whatsoever. Despite taking that position, Imation informed the Class Members, nonetheless, that

they would have a thirty (30)-day deadline to exercise their substitute options at the risk of forfeiting

them and that those substitute options that had not yet vested were, indeed, already deemed to have

been forfeited.

8. Moreover, Imation adopted the position that the new options -- none of which, as

structured, would become exercisable until January, 1999 (that is, well after the Imation-Kodak deal

was to close) -- were similarly forfeited.

9. The result of Imation's fraudulent and legally unfounded position as to the substitute

options and new options was that while Imation sold Cemax-Icon to Kodak for a short-swing profit

and while Cemax-Icon has continued on as a viable entity, Imation fraudulently deprived the

individual Class Members of their well-earned stock options. This result impacted in a particularly

harsh fashion on the Class Members since, by way of contrast, those non-Cemax-Icon employees of

Imation, who also were transferred to Kodak as part ofthe Imation-Kodak deal, transferred with their

retirement packages substantially intact.

10. Had Defendants informed the Class Members at the time of implementation and

formalization ofthe substitute options that those very options were materially overvalued and would

be effectively forfeited and/or rendered virtually worthless in little over one year's time after the

Imation acquisition closed and that the new options would be forfeited in less than one year's time

after being granted, the Class Members would have refused to remain employed at Cemax-Tcon and

would not have agreed to the substitution of options. In such event, Defendants had reason to fear

that Cemax-Icon's shareholders would most likely have voted down that deal. Similarly, the Class

Members would not have committed themselves to employment at Cemax-Icon in return for the


CORRECTED Istamend.728.new.wpd 3 Case No. C-99-21072JF

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

illusory consideration eventually represented by the New Options. Defendants knew and understood

that had any or all of those events happened, they would not have been able to carry out their plans

to acquire Cemax-Icon through a favorable arrangement, which involved a minimal cash outlay by

Imation, nor their subsequent plans to sell it to Kodak.

It. Plaintiffs bring this class action on behalfofthemselves and all other Class Members,

including but not limited to the subclasses thereof, who were harmed as a result of Defendants'

misconduct as alleged herein and seek to obtain any and all available relief under the federal

securities laws.

PARTIES

Plaintiffs

12. Plaintiff Mark W. Falkowski, an individual harmed by the practices alleged herein,

is a citizen of California and resides in Contra Costa County.

13. Plaintiff Michael Benz, an individual harmed by the practices alleged herein, is a

citizen of California and resides in Alameda County.

14. Plaintiff Jean-Luc Chatelain, an individual harmed by the practices alleged herein,

is a citizen of California and resides in Alameda County.

15. Plaintiff Philippe C. Ciampossin, an individual harmed by the practices alleged

herein, is a citizen of California and resides in Santa Clara County.

16. Plaintiff Gregg R. Cretella, an individual harmed by the practices alleged herein, is

a citizen of California and resides in Alameda County.

17. Plaintiff Craig W. Cornelius, P.H.D., an individual harmed by the practices alleged

herein, is a citizen of California and resides in San Mateo County,

18. Plaintiff John H. Davis, an individual harmed by the practices alleged herein, is a.

citizen of California and resides in Santa Clara County.

19. Plaintiff John D. Edwards, an individual harmed by the practices alleged herein, is



CORRECTED I stamend.728.new.wpd 4 Case No. C-99-21072JF

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

20. Plaintiff Anthony J. Fillcelli, an individual harmed by the practices alleged herein,

is a citizen of California and resides in Stanislaus County.

21. Plaintiff Grady Floyd, an individual harmed by the practices alleged herein, is a


22. Plaintiff Arturo Gamboa, an individual harmed by the practices alleged herein, is a I


23. Plaintiff Ingemar Gustafson, an individual harmed by the practices alleged herein, is

a citizen of California and. resides in Santa Cruz County.

24. Plaintiff Srividya Krishnamachary, an individual harmed by the-practices alleged

1 herein, is a citizen of California and resides in Santa Clara County.

25. Plaintiff Matthew Long, an individual harmed by the practices alleged herein, is a


26. Plaintiff Russel W. Loop, Sr., an individual harmed by the practices alleged herein,

is a citizen of California and resides in Placer County.

27. Plaintiff Gregory J. Masek, an individual harmed by the practices alleged herein, is

a citizen of California and resides in Orange County.

28. Plaintiff Sanjay Mehta, an individual harmed by the practices alleged herein, is a


29. Plaintiff Douglas A. Merk, an individual harmed by the practices alleged herein, is

I a citizen of California and resides in Santa Clara County.

30. Plaintiff Karl E. Minser, an individual harmed by the practices alleged herein, is a


31. Plaintiff Linda J. Moore, an individual harmed by the practices alleged herein, is a


32. Plaintiff An Truong Nguyen, an individual harmed by the practices alleged herein,



CORRECTED Istamend.728.new. wpd 5 Case No. C-99-21072JF

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

33. Plaintiff Bang Nguyen, an individual harmed by the practices alleged herein, is a


34. Plaintiff Dennis O'Dell, an individual harmed by the practices alleged herein, is a

citizen of California and resides in San Mateo County.

35. Plaintiff Gregory L. Orr, P.H.D., an individual harmed by the practices alleged herein,


36. Plaintiff Tuan Pham, an individual harmed by the practices alleged herein, is a citizen

of California and resides in Santa Clara County.

37. Plaintiff Eli Rapaich, an individual harmed by the practices alleged herein, is a citizen

of California and resides in San Mateo County.

38. Plaintiff Jonathan Reis, an individual harmed by the practices alleged herein, is a


39. Plaintiff Brian K. Rice, an individual harmed by the practices alleged herein, is a

citizen of Colorado and a resident of that state.

40. Plaintiff Eric Rodriguez, an individual harmed by the practices alleged herein, is a

citizen of California and a resident of Santa Clara County.

41. Plaintiff Ken H. Rosenfeld, an individual. harmed by the practices alleged herein, is


42. Plaintiff Jeremy Rubin, M.D., an individual harmed by the practices alleged herein,

is a citizen of Washington and resides in that state.

43. Plaintiff Jan Schieberl, an individual harmed by the practices alleged herein, is a


44. Plaintiff Rick Shroyer, an individual harmed by the practices alleged herein, is a

I citizen of California and resides in Santa Clara County.

45. Plaintiff Charles H. Smith, an individual harmed by the practices alleged herein, is

1 a citizen of California and resides in Contra Costa County.


CORRECTEDIstamend.728.new.wpd 6 Case No. C-99-21072JF

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

46. Plaintiff John Hampton Smith, an individual harmed by the practices alleged herein,


47. Plaintiff Martha Torres, an individual harmed by the practices alleged herein, is a


48. Plaintiff Dennis Totah, an individual harmed by the practices alleged herein, is a


49. Plaintiff Vu Hao Truong, an individual harmed by the practices alleged herein, is a


50. Plaintiff Sharon Woolsey, an individual harmed by the practices alleged herein, is a


Defendants

51. Defendant Imation Corp. ("Imation") is a Delaware corporation with its principal

place ofbusiness in Oakdale, Minnesota. Imation is a publicly-traded Company that is listed on, and

whose shares are actively traded on, the New York Stock Exchange.

52. Imation describes itself, in its September 14, 1999 press release, as:

... a global technology company, [which] supplies a variety of products and servicesworldwide for the information and image management industry, specializing in datastorage and information management, color management and imaging solutions. In1998, Imation reported revenues of $1.3 billion from continuing operations.

53. At all times relevant to this action, Imation common stock was actively traded on the

New York Stock Exchange, a national securities exchange, under the ticker symbol "IMN" and was

registered pursuant to § 12 of the Exchange Act (15 U.S.C. § 781). The market for Imation common

stock was therefore open, well-developed and efficient at all relevant times. Imation files annual,

quarterly, and other reports with the SEC in accordance with the Exchange Act.

54. Defendant William T. Monahan ("Monahan") is a resident of the state of Minnesota

and, at all times material hereto, has been the Chairman ofthe Board, President and Chief Executive

Officer of Imation and signed certain material registration statement(s) and prospectuses relied on


CORRECTED Istamen d.728.new. wpd 7 Case No. C-99-21072JF

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

by Plaintiffs.

55. Defendant Bradley T. Sauer ("Sauer") was installed as Chief Executive Officer of

Cemax-Icon by Imation upon completion of its acquisition of Cemax-Icon and he served in that

capacity for approximately one year. He signed certain material prospectus(es) relied on by

Plaintiffs. At most, if not all times material hereto, he maintained a residence in the state of

California.

56. Defendant Jill D. Burchill ("Burchill") served at most, if not all, relevant times as the

Chief Financial Officer of Imation and signed certain material registration statement(s) relied on by

Plaintiffs.

57. The term "Individual Defendants" when used herein refers to Defendants Monahan,

Sauer and Burchill.

58. This action derives from Defendants' actions, conduct and omissions in connection

with Imation's former Cemax-Icon subsidiary, headquartered in Fremont, California.

59. At all times mentioned, each of the Defendants sued in the Section 10(b) claim is

liable as a participant in a fraudulent scheme and course ofbusiness that operated as a fraud or deceit

on the Class Members, by knowingly disseminating materially false and misleading statements

and/or knowingly concealing material adverse facts.

60. Defendants' scheme (i) deceived the Class Members regarding the intrinsic value

of Imation common stock and that of the substitute options and new options; (ii) deceived them as

to Defendants' intentions not to honor the pre-existing terms and conditions ofthe original options;

and (iii) caused them to purchase or otherwise acquire the substitute and new options at artificially

inflated prices and/or for illusory consideration.



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

JURISDICTION AND VENUE

61. The claims asserted herein arise under and pursuant to Sections 11, 12(a)(2) and 15

ofthe Securities Act of 1933 (the" Securities Act") [15 U.S.C. §§77k, 771(a)(2) and 77o] and Sections

10(b) and 20(a) of the Securities Exchange Act of 1934(the "Exchange Act") (the [15 U.S.C.

§§ 78j(b) and 78t(a)] and Rule IOb-5 promulgated thereunder by the Securities and Exchange

Commission ("SEC") [17 C.F.R. § 240.10b-5].

62. This Court has jurisdiction over the subject matter ofthis action pursuant to 28 U.S.C.

§§ 1331 and 1337, Section 22 of the Securities Act [15 U.S.C. §77v], and Section 27 of the

Exchange Act [15 U.S.C. § 78aa].

63. Venue is proper in this District pursuant to Section 22 of the Securities Act, Section

27 of the Exchange Act, and 28 U.S.C. § 1391(b). Imation transacted business within this District

during all relevant times and Defendants' acts charged herein, including the offer and sale of the

subject stock options and the preparation and dissemination of materially false and misleading

information, occurred in substantial part in this District.

64. In connection with the acts alleged in this complaint, Defendants, directly or

indirectly, used the means and instrumentalities of interstate commerce, including, but not limited

to, the mails , interstate telephone communications and the facilities of the New York Stock

Exchange, a national securities exchange.

CLASS ACTION ALLEGATIONS

65. Plaintiffs bring this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b) on behalf of a Class, consisting of all employees or consultants of Cemax-

Icon who purchased or otherwise acquired Imation stock options, by substitution in exchange for

their pre-existing Cemax-Icon employee stock options and/or by original grant of new Imation

options, in connection with Imation's acquisition, in and about May through August 15, 1997, of

Cemax-Icon, including without limitation all such persons that so purchased or otherwise acquired

such options pursuant or traceable to the Registration Statements(s) and Prospectus(es) issued and



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

any oral communications made by Defendants in connection with such substitution and/or original

grant, and were damaged thereby.

66. The members of the Class are so numerous that joinder of all members is

impracticable. Additional Class Members may be identified from records maintained by the

Defendants and/or Imation's transfer agents and may be notified of the pendency of this action by

mail, using a form of notice similar to that customarily used in securities actions.

67. Plaintiffs claims are typical of the claims of the other members of the Class as all

members ofthe Class were similarly harmed by Defendants' wrongful communications, omissions,

disseminated documents and other conduct in violation of federal law, which are the subject of this

Complaint.

68. The named Plaintiffs, as representative plaintiffs, will fairly and adequately protect

the interests of the members of the Class and have retained counsel competent and experienced in

class and securities litigation.

69. Common questions of law and fact exist as to all members of the Class and

predominate over any questions solely affecting individual members of the Class. Among the

questions of law and fact common to the Class are:

a. whether the federal securities laws were violated by Defendants' acts and

omissions as alleged herein;

b. whether statements made by Defendants to the Class Members during all

relevant times contained material misrepresentations and omissions about the underlying value of

Imation's common stock and the underlying value and nature of the substitute options and new

options; and

c. to what extent the members of the Class have sustained damages as a

proximate result and the proper measure of any such damages.

70. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the

damages suffered by certain individual Class members may be relatively small, the expense and


CORRECTED Istamend.728.new.wpd 10 Case No, C-99-21072JF

II

2I

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

burden of individual litigation might make it impossible for those members of the Class to

individually redress the wrongs done to them. Plaintiffs anticipate no difficulty in the management

of this action as a class action.

THE SAFE HARBOR DOES NOT APPLY

71. The statutory safe harbor provided for forward-looking statements under certain

circumstances does not apply to any of the allegedly false statements pleaded in this complaint.

Many ofthe specific statements pleaded herein were not identified as "forward-looking statements"

when made. To the extent there were any forward-looking statements, there were no meaningful

cautionary statements identifying important factors that could cause actual results to differ materially

from those in the purportedly forward-looking statements. Alternatively, to the extent that the

statutory safe harbor does apply to any forward-looking statements pleaded herein, Defendants are

liable for those false forward-looking statements because at the time each of those forward-looking

statements was made, the particular speaker knew that the particular forward-looking statement was

false, and/or the forward-looking statement was authorized and/or approved by an executive officer

of Imation who knew that those statements were false when made.

APPLICABILITY OF PRESUMPTION OF RELIANCE:FRAUD-ON-THE-MARKET DOCTRINE

72. At all relevant times, the market for Imation's stock was an efficient market for the

following reasons, among others:

a. Imation's common stock met the requirements for listing, and was listed and

actively traded on the New York Stock Exchange , a highly efficient and automated market;

b. As a regulated issuer, Imation filed periodic public reports with the SEC ;

c. Imation regularly communicated with public investors via established

market communication mechanisms, including through regular disseminations ofpress releases on

the national circuits ofmajor newswire services and through other wide-ranging public disclosures,


CORRECTED Istamend.728_new.wpd 11 Case No. C-99-21O72JF

1 such as communications with the financial press and other similar reporting services; and

d. Imation was followed by several securities analysts employed by major

brokerage firms who wrote reports which were distributed to the sales force and certain customers

of their respective brokerage firms. Each of these reports was publicly available and entered the

public marketplace.

73. As a result ofthe foregoing, the market for Imation's stock promptly digested current

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

information regarding Imation from all publicly available sources and reflected such information in

Imation's stock price. Under these circumstances, the Class Members suffered similar injury through

their purchase or acquisition of their Imation stock options at artificially inflated prices and a

presumption of reliance applies.

THE INDIVIDUAL DEFENDANTS ACTED AS A GROUP

74. It is appropriate to treat the Individual Defendants as a group for pleading purposes

and to presume that the false, misleading and incomplete information conveyed in the Company's

financial statements public filings, press releases and other publications as alleged herein are the

collective actions of these individuals. Each of the above-referenced Imation officers, by virtue of

his or her high-level position within or in connection with the Company, was directly involved in

the daily operations of the Company at the highest levels and was privy to confidential proprietary

information concerning the Company and. its business, operations, products, growth, and financial

condition as alleged herein. These Defendants were involved in drafting, producing, reviewing

and/or disseminating the false and misleading statements and information alleged herein, were aware

or recklessly disregarded that the false and misleading statements were being issued regarding the

Company and/or the actual. value of the substitute options and new options and approved or ratified

these statements in violation of the federal securities laws.

75. As officers, directors and controlling persons of a publicly held company whose

I common stock was, and is, registered with the SEC pursuant to the Exchange Act, traded on the New

York Stock Exchange and governed by the provisions of the federal securities laws, the Individual

CORRECTED FIRST AMENDED COMPLAINT FOR VIOLATIONS OF TIIE FEDERAL SECURITIES LAWS

CORRECTED I stamend .728,new.wpd 12 Case No. C-99-21072JF

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Defendants each had a duty to promptly disseminate accurate and truthful information with respect

to Imation's financial condition, performance, growth, operations, financial statements, business,

markets, management, earnings and present and future business prospects, and to correct any

previously-issued statements that had become materially misleading or untrue, so that the market

price of Imation's publicly-traded securities would be based upon truthful and accurate information.

The Individual Defendants' misrepresentations and omissions violated these specific requirements

and obligations.

76. The Individual Defendants participated in the drafting, preparation, and/or approval

of the various financial statements, press releases and other communications complained of herein

and were aware of, or recklessly disregarded, the misstatements contained therein and omissions

therefrom. Because of their Board membership and/or executive and managerial positions with

Imation, each ofthe Individual Defendants had access to the adverse undisclosed information about

Imation's business, finances, markets, and present and future business prospects, as particularized

herein, through access to internal corporate documents, conversations, or connections with corporate

officers or employees, attendance at management and/or Board of directors' meetings and

committees thereof, and/or through reports and other information provided to them in connection

therewith, and knew (or recklessly disregarded) that these adverse facts rendered the positive

representations made by or about Imation and its business issued or adopted by the Company

materially false and misleading.

77. The Individual Defendants, because of their positions with Imation, controlled the

contents ofquarterly and annual reports, press releases and presentations to securities analysts. Each

Individual Defendant was provided with copies of the reports and press releases alleged herein to

be misleading prior to or shortly after their issuance and had the ability and opportunity to prevent

their issuance or cause them to be corrected, Because of their positions and access to material

non-public information available to them but not the public, each of these Defendants knew that the

adverse facts specified herein had not been disclosed to, and were being concealed from, the Class

Members and that the positive representations which were being made were then false and


CORRECTED I stamend .728.new.wpd 13 Case No. C-99-2I072JF

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

misleading . As a result, each of the Individual Defendants is responsible for the accuracy of

Imation's corporate releases detailed herein as "group-published" information and is therefore

responsible and liable for the representations contained therein.

78. Each ofthe Individual Defendants is liable as a primary violator in making false and

misleading statements, and for participating in a fraudulent scheme and course of business that

operated as a fraud or deceit on the Class Members. All of the Defendants had motives to pursue

a fraudulent scheme in furtherance of their common goals, involving Imation's acquisition and

subsequent re-sale of Cemax-Icon, by making false and misleading statements and concealing

material adverse information. The fraudulent scheme and course of business was designed to and

did-." (i) deceive the Plaintiffs and other Class Members; (ii) artificially inflate the value of Imation

securities during all relevant times; (iii) cause Plaintiffs and other Class Members to purchase and

otherwise acquire Imation stock options at inflated prices and for illusory return consideration;

(iv) conceal the Individual Defendants' fraudulent conduct; and (v) improperly increase, thereby, the

value of their own Imation shareholdings.

FACTUAL ALLEGATIONS COMMON TO THE CLASS RELATING TOIMATION'S GRANTING OF THE SUBSTITUTE OPTIONS AND NEW OPTIONS

79. This action arises out of the events surrounding Imation's acquisition of Cemax-

Icon, Inc. ("Cemax-Icon") and Defendants' materially false representations to and omissions from

the Class members regarding various employee and consultant stock option agreements which

eventually surfaced in connection with Imation's sale, soon thereafter, of Cemax-Icon, along with

Imation's medical imaging business, to Kodak.

80. Cemax-Icon designs, manufactures, sells and services medical image information

networks particularly associated with the approximately $ 5 billion dollar radiology segment of

the medical industry . Cemax-Icon provides solutions for the following industry needs: Picture

Archiving and Communications Systems ("PACS" ), Consultative Teleradiology , Diagnostic

Teleradiology , and Digital Film Distribution . Cemax-Icon has installed over 1,600 PACS and


CORRECTED lstamend .728.new .wpd 14 Case No. C-99-2I072JF

Teleradiology sites, making the company's installed base one of the largest in the radiology

segment of the market. Its customer base is comprised of hospitals, healthcare facilities and

diagnostic radiology centers. Cemax-Icon is a leading single-source provider for PACS and

teleradiology systems. The company's scalable systems address all aspects of image acquisition,

viewing, storage and printing. At the time of the Imation acquisition, Cemax-Icon employed

approximately two hundred people.

81. Cemax-Icon was founded in June, 1995 by the merger of Cemax, Inc. ("Cemax")

and Icon Medical Systems, Inc ("Icon"). Cemax had been originally established in 1982 and Icon

had been originally established in 1989.

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

The Three Original Cemax-Icon Stock Option Plans

82. Prior to its acquisition by Imation, Cemax-Icon had adopted three (3) separate

stock option plans in. favor of its employees and consultants. Later on, and pursuant to and as a

prerequisite for consummation of that acquisition, Imation, in and about August through October,

1997 and thereabouts, assumed responsibility and substituted a comparable value of its own

stock options for those that been issued and outstanding under the three (3) Cemax-Icon plans.

83. The first of those plans was the 1986 Amended Incentive Stock Plan, adopted by

Cemax-Icon in July, 1986 ("Cemax-Icon 1986 Plan"), which Plaintiffs incorporate by reference

hereto as Exhibit A. Prior to the Imation acquisition, as of June 30, 1996, options to purchase an

aggregate of 632,481 shares of Cemax-Icon common stock were outstanding under the Cemax-

Icon 1986 Plan.

84. The second of those plans was the Icon Medical Systems, Inc. 1992 Stock Option

Plan, as amended September 13, 1994 ("Icon 1992 Plan"), which Plaintiffs incorporate by

reference hereto as Exhibit B. Pursuant to Cemax's merger with Icon in June, 1995, those

outstanding options under the Icon 1992 Plan became exercisable for conversion into

approximately 323,210 shares of Cemax-Icon stock at exercise prices of $1.46 and $7.48 per

share. Prior to the Imation acquisition, as of June 30, 1996, options to purchase an aggregate of


CORRECTED 1 stamend .728. new.wpd 15 Case No. C-99-21072JF

182,693 shares of Cemax-Icon common stock were outstanding under the Icon 1992 Plan.

2

4

5

6

7

85. The third plan was the Cemax-Icon, Inc. 1996 Stock Plan, adopted by the Cemax-

Icon Board of Directors in June, 1996, and subsequently approved by its shareholders at their

annual meeting in August, 1996 ("Cemax-Icon 1996 Plan"), which Plaintiffs incorporate by

reference hereto as Exhibit C. This plan reserved 700,000 shares of Cemax-Icon common stock

for issuance through incentive stock options, nonstatutory stock options and stock purchase

rights.

86. Cemax-Icon granted their respective substitute options by means of a Stock

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Option Agreement ("Stock Option Agreement"). Plaintiff Falkowski's Stock Option Agreement

is a representative sample which Plaintiffs incorporate by reference hereto as Exhibit D.

87. Each and every one of the three Cemax-Icon Stock Option Plans preserved the

rights of the Cemax-Icon employees and individuals who were granted options under their

respective plan(s) ("optionees") against any extinguishment and/or abrogation of these options

save for the following three (3) changes in their personal status: (a) termination of the optionee's

employment, (b) disability of the optionee, and (c) death of the optionee. This action revolves

solely around Defendants' material misrepresentations and omissions with respect to the first

type of personal status change.

88. Thus, Paragraph 8(b)(ii) of the Cemax-Icon 1986 Plan recites the conditions

necessary for an employment termination to be deemed to have occurred and provides, in full, as

follows:

Termination of Status as an Employee or Consultant . In the eventof termination of an Optionee's Continuous Status as an Employeeor Consultant (as the case may be), such Optionee may, but onlywithin thirty (30) days (or such other period of time not exceedingthree (3) months in the case of an Incentive Stock Option or six (6)months in the case of a Nonstatutory Stock Option, as isdetermined by the Board, with such determination in the case of anIncentive Stock Option being made at the time of grant of theOption) after the date of such termination (but in no event laterthan the date of expiration of the term of such Option as set forth inthe Option Agreement, exercise the Option to the extent that suchEmployee or Consultant was entitled to exercise it at the date ofsuch termination. To the extent that such Employee or Consultant



2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

was not entitled to exercise the Option at the date of suchtermination, or if such Employee or Consultant does not exercisesuch Option (which such Employee or Consultant was entitled toexercise) within the time specified herein, the Option shallterminate.

89. Paragraph 2(g) of that same plan expressly defines the operative clause, as

follows:

" Continuous Status as an Employee or Consultant" shall mean theabsence of any interruption or termination of service as anEmployee or Consultant, as applicable. Continuous Status as anEmployee or Consultant shall not be considered interrupted in thecase of sick leave, military leave, or any other leave of absenceapproved by the Board; provided that such leave is for a period ofnot more than ninety (90) days or reemployment upon theexpiration of such leave is guaranteed by contract or statute.

90. Sub-Class A of the Class consists of those Class Members who were granted

stock options under the Cemax-Icon 1986 Plan and whose options, based on the Defendants'

material misrepresentations and omissions, were later assumed and substituted by Imation into

Imation stock options and who have remained on or did remain on as uninterrupted and non-

terminated employees or consultants at Cemax-Icon at least through October 13, 1998.

91

follows:

92.

follows:

Similarly, again, Paragraph 9(c) of the Icon 1992 Plan provides, in full, as

Termination of Status as an Employee or Consultant . In the eventof termination of an Optionee's Continuous Status as an Employeeor Consultant (as the case may be), such Optionee may, but onlywithin three (3) months (or such shorter period of time, not lessthan thirty (30) days after termination, as it is determined by theBoard and specified in the Option Agreement) after the date ofsuch termination (but in no event later than the date of expirationof the term of such Option as set forth in the Option Agreement),exercise his Option to the extent that he was entitled to exercise itat the date of such termination. To the extent that he was notentitled to exercise the Option at the date of such termination, or ifhe does not exercise such Option (which he was entitled toexercise) within the time specified herein, the Option shallterminate.

Paragraph 2(h) of the Icon 1992 Plan expressly defines the operative phrase, as


CORRECTED] stamend . 728.new.wpd 17 Case No. C-99-2I072JF

2

3

4

5

6

7

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

"Continuous Status as an Employee or Consultant " shall mean theabsence of any interruption or termination of service as anEmployee or Consultant . Continuous Status as an Employee orConsultant shall not be considered interrupted in the case of sickleave, military leave, or any other leave of absence approved by theAdministrator ; provided that such leave is for a period of not morethan ninety (90) days or reemployment upon the expiration of suchleave is guaranteed by contract or statute.

93. Sub-Class B of the Class consists of those Class Members who were granted stock

options under the Icon 1992 Plan and whose options, based on the Defendants' material

misrepresentations and omissions, were later assumed and substituted by Imation into Imation

stock options and who have remained on or did remain on as uninterrupted and non-terminated

employees or consultants at Cemax-Icon at least through October 1. 3, 1998.

94. Similarly, yet again, Paragraph 9(b) of the Cemax-Icon 1996 Plan provides, in

full, as follows:

Termination of Employment or Consulting Relationship . In theevent of termination of an Optionee's Continuous Status as anEmployee or Consultant (but not in the event of an Optionee'schange of status from Employee to Consultant (in which. case anEmployee's Incentive Stock Option shall automatically convert to aNonstatutory Stock Option on the date three (3) months and oneday following such change of status) or from Consultant toEmployee), such Optionee may, but only within such period oftime is determined by the Administrator, of at least thirty (30) days,with such determination in the case of an Incentive Stock Optionnot exceeding three (3) months after the date of such termination(but in no event later than the expiration date of the term of suchOption as set forth in the Option Agreement), exercise his or herOption to the extent that the Optionee was entitled to exercise it atthe date of such termination. To the extent that the Optionee wasnot entitled to exercise the Option at the date of such termination,or if the Optionee does not exercise such Option to the extent soentitled within the time specified herein, the Option shallterminate.

95. Paragraph 2(i) of the Cemax-Icon 1996 Plan expressly defines the operative

phrase, as follows:

" Continuous Status as an Employee or Consultant" means that theemployment or consulting relationship with the Company, anyParent or Subsidiary is not interrupted or terminated. ContinuousStatus as an Employee or Consultant shall not be consideredinterrupted in the case of (i) any leave of absence approved by theCompany or (ii) transfers between locations of the Company or


CORRECTED Istamend. 728.new . wpd 18 Case No. C-99-21072JF

2

4

5

6

7

between the Company, its Parent, any Subsidiary, or any successor.A leave of absence approved by the Company shall include sickleave, military leave, or any other personal leave approved by anauthorized representative of the Company. For purposes ofIncentive Stock Options, no such leave may exceed 90 days, unlessreemployment upon expiration of such leave is guaranteed bystatute or contract, including Company policies. If re-employmentupon expiration of a leave of absence approved by the Company isnot so guaranteed, on the 91st day of such leave any IncentiveStock Option held by the Optionee shall cease to be treated as anIncentive Stock Option and shall be treated for tax purposes as aNonstatutory Stock Option.

96. Sub-Class C of the Class consists of those Class Members who were granted stock

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

options under the Cemax-Icon 1996 Plan and whose options, based on the Defendants' material

misrepresentations and omissions, were later assumed and substituted by Imation into Imation

stock options and who have remained on or did remain on as uninterrupted and non-terminated

employees or consultants at Cemax-Icon at least through October 13, 1998.

Imation Assumes And Substitutes Its Own Stock Options For TheOutstanding Cemax-Icon Options

97. Around the time of Imation's May, 1997 announcement of its acquisition of

Cemax-Icon, and thereafter, Imation assumed the obligations of Cemax-Icon in connection with

the stock options previously granted to the Class Members under the three Cemax-Icon stock

plans.

98. On May 14, 1997, Imation and Cemax-Icon announced their definitive merger

agreement. The transaction eventually closed on August 15, 1997 at which time Cemax-Icon

became a wholly-owned subsidiary of Imation by means of a "reverse merger" with a "merger

subsidiary" of Imation.

99. That agreement is formally entitled "Agreement and Plan of Merger by and among

Imation Corp., Cl Acquisition Corp. and Cemax-Icon, Inc. May 13, 1997 ("Merger Agreement"),

which Plaintiffs incorporate by reference hereto as Exhibit E. Paragraph 2.01(b)(i) of the Merger

Agreement expressly locked in the Cemax-Icon optionees' substantive rights in the post-merger

incarnation of Cemax-Icon, as follows:

CORRECTED FIRST AMENDED COMPLAINT FOR VIOLATIONS OF TIIE FEDERAL SECURITIES LAWS

CORRECTED Istamend.728.new. wpd 19 Case No. C-99-21072JF

(b) Effects on Stock Options and Warrants.

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

(i) Any option issued pursuant to the Cemax-Icon, Inc.1996 Stock Plan, the Icon Medical Systems, Inc. 1992 StockOption Plan and the Cemax/Icon, Inc. 1986 Amended IncentiveStock Plan (collectively, the "Option Plans") and outstandingimmediately prior to the Effective Time (an "Outstanding StockOption"), shall be converted into, without any further action on thepart of Parent, Merger Subsidiary, the Company, the SurvivingCorporation or the holder thereof, a substitute option (a "SubstituteOption") to purchase a number of shares of Parent equal to thenumber of shares subject to such Outstanding Stock Optionimmediately prior to the Effective Time multiplied by the CommonExchange Ratio (as defined below), and the exercise price of suchSubstitute Option shall be equal to the exercise price of suchOutstanding Stock Option immediately prior to the Effective Timedivided by the Common Exchange Ratio. Each Substitute Optionwill be subject to the existing terms and conditions of the OptionPlan and stock option agreement governing the Outstanding StockOption immediately prior to the Effective Time, exce t, that (A) noSubstitute Option will be intended to qualify as an incentive stockoption within the meaning of Section 422 of the Internal RevenueCode of 1986, as amended (the "Code"), (B) each SubstituteOption replacing an Outstanding Stock Option that vests at the rateof either (x) twenty-five percent (25%) per year during the firstyear and two percent (2%) per month thereafter or (y) two percent(2%) per month will vest at the rate of four percent (4%) per monthduring the first 12 months after the Effective Time, and (C) eachSubstitute Option replacing an Outstanding Stock Option held by aconsultant, contractor or non-employee director will not be subjectto early termination as a result of termination of status as aconsultant, contractor or director of the Company or SurvivingCorporation and in the event of such termination shall vest andbecome exercisable in full (including as to shares not otherwiseexercisable as of the date of such termination).

100. Thus, Imation and Cemax-Icon intended for the Class Members to become and

remain third party beneficiaries of the Merger Agreement, thereby causing the Class Members to

believe that, aside from a few inapplicable exceptions, their rights to their options would remain

"subject to the existing terms and conditions of [their respective] option Plan." Moreover, the

Defendants attached a copy of the Merger Agreement as "Exhibit A" to Imation's Form S-4

registration statement filing with the Securities and Exchange Commission ("SEC"), dated as of

June 9, 1997.



Imation Participates In And Causes Certain Senior Cemax-Icon Executives To Execute KeyManagement Agreements In Connection With Its Acquisition of Cemax-Icon

2

3

4

5

6

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

101. In early May, 1997, pursuant to and as a prerequisite for the pending acquisition,

Imation, by Cemax-Icon, entered into or, at least, caused the execution of a certain "boilerplate"

key management agreement ("KMA") by several senior Cemax-Icon executives. Imation did so

in order to retain these individuals' critically needed services after the acquisition closed.

Plaintiff Falkowski's KMA is a representative sample which Plaintiffs incorporate by reference

hereto as Exhibit F.

102. Among other things , the KMA explicitly treated the matter of the Cemax-Icon

stock options which were to be assumed and substituted by Imation in favor of these respective

individuals. Thus, the KMA provides that the substitute options would become fully vested in all

potential outcome states except for where the respective executive is terminated for cause or

where the respective executive elects to terminate the agreement.

103. Paragraph 4.05 of the KMA expressly provides, in pertinent part, as follows:

Substitute Options . At the Effective Time, an option to purchaseshares of the Company's common stock held by the Executive("Current Option") will be converted into options to purchaseshares of Imation's common stock ("Substitute Option") pursuantto Section 2.02 of the Merger Agreement. Notwithstandinganything in the Merger Agreement or the terms of the CurrentOption to the contrary, however, the Substitute Option will:

***

d) Become fully vested and exercisable for a period of45 days after termination of employment (but in noevent after expiration of the term of the SubstituteOption) upon termination of employment pursuantto Section 6.01(d) [i .e, termination without cause]or upon termination of employment after the term ofthis Agreement other than for the reasons set forthin Section 6.01(c) [i.e., termination for cause] orSection 6. 01(e) [i.e., executive terminatesemployment].

(Bracketed, explanatory text not contained in the original document)


CORRECTEDIstamend.728.new.wpd 21 Case No. C-99-2I072JF

1

2

3

4

5

6

7

8

9

10^

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

104. Sub-Class D of the Class consists of those Class Members who were granted

stock options under any and all of the three predecessor Cemax-Icon Stock Plans and who, based

on the Defendants' material misrepresentations and omissions, had subsequently entered into a

KMA, receiving substitute options thereunder, and who have remained on or did remain on as

employees or consultants at Cemax-Icon at least through October 13, 1998.

The Aftermath of Imation's Acquisition of Cemax-Icon

105. In August 1997, Imation consummated its acquisition and announced that it was

acquiring all of the outstanding common shares of Cemax-Icon for $51.8 million dollars,

consisting of $29.0 million dollars in cash (net of cash acquired) and non-cash amounts

consisting of $9.2 million dollars representing Imation's previous investment in Cemax-Icon

preferred shares and $13.6 million dollars related to the fair value of stock options and warrants

to acquire approximately 971,000 shares of Imation's common stock to replace stock options and

warrants previously granted by Cemax-Icon. In addition, Imation issued certain contingent

payment rights which were designed to allow Cemax-Icon shareholders to receive additional

payments of up to $44.8 million dollars if Cemax-Icon was to attain certain revenue targets in the

twelve month periods ending June 30, 1998 and June 30, 1999. At the election of the Cemax

shareholders, the contingent payments were to be payable in cash or the Company's common

stock.

106. On or about September 11, 1997, Imation issued and disseminated to Plaintiffs a

prospectus signed by Defendant Sauer introducing a plan related to the former Cemax-Icon stock

options that at that juncture had been converted or would be converted into options to purchase a

purportedly proportionate number of shares of Imation common stock.

107. Imation named its new umbrella plan as the "Imation. Corp. Stock Option Plans

for Employees of Cemax-Icon, Inc." ("Imation/Cemax-Icon Plans") which Plaintiffs incorporate

by reference hereto as Exhibit G. This new plan essentially adopted the terms and definitions of

its three predecessor Cemax-Icon Stock Plans, by amending the "Cemax-Icon" references



contained therein to become "Imation" references. Specifically, the only textual addition that this

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

new umbrella plan added to those predecessor plans was the following legend on its title page:

IMATION CORP.STOCK OPTION PLANS FOR EMPLOYEES OF

CEMAX-ICON, INC.

The Imation Corp. Stock Options Plans for Employees of Cemax-Icon,Inc. consist of (i) the Cemax-Icon, Inc. 1986 Amended Incentive Stock Plan, (ii)the Icon Medical Systems, Inc. 1992 Stock Option Plan, and (iii) the Cemax-Icon,Inc. 1996 Stock Plan (individually, a "Plan," collectively, the "Plans"), copies ofwhich are attached hereto. Each Plan is hereby amended in the followingrespects: (i) every reference to Cemax-Icon or the "Company" contained in eachPlan shall be a reference to Imation Corp.; and (ii) every reference to CommonStock contained in each Plan shall be a reference to Imation Corp. CommonStock, par value $.01 per share.

108. On September 12, 1997, the Defendants filed a Form S-8 ("Registration of

Securities to be Offered to Employees Pursuant to an Employee Benefit Plan") with the SEC

solely in reference to the ImationlCemax-Icon Plans. This Form S-8 recited that Defendants, in

connection with such Plans, were purportedly registering 579,111 shares of Imation common

stock at a proposed maximum offering price per share of $7.61 (purportedly equaling the

weighted average exercise price per share of the substitute options) and a proposed maximum

aggregate offering price (reflecting the multiplication of the previous two numbers) of

$4,404,761. Defendants Monahan and, through power of attorney, Defendant Burchill signed

this registration statement.

109. In and around August through October, 1997, and thereabouts, Imation

implemented its assumption and substitution of the options granted under the three (3) Cemax-

Icon Stock Plans by requiring the respective Cemax-Icon optionees to execute a stock option

amendment, structured in the form of a brief, "boilerplate" document, to be deemed effective as

of August 15, 1997 -- the date that the Imation/Cemax-Icon deal closed ("Stock Option

Amendment"). Plaintiffs incorporate by reference hereto as Exhibit H a redacted version of the

Stock Option Amendment.

110. Paragraph 4 of the Stock Option Amendment provides for the continuation, in


CORRECTED! statnend. 728.new.wpd 23 Case No. C-99-21072JF

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

substance, of the predecessor Cemax-Icon stock plans. That Paragraph 4 provides, in full, as

follows:

Continuation . Except as set forth above, the provisions of theOption Agreement, including without limitation, term andlimitations on transferability, shall remain in full force and effect.All capitalized terms used but not defined herein shall have themeanings given to them in the Option Agreement or the Plan.

111. The Defendants' aforementioned prospectuses , registration statements, oral

communications, and Stock Option Amendment falsely led the Class Members into believing

that they had received from Defendants fair consideration for the substitution of their options and

that the vesting of their substitute options would continue so long as they remained employed at

Cemax-I=con and materially omitted the truth that, in fact, the Defendants had not substituted

those options in a fair exchange and that the Defendants were planning to and shortly thereafter

would improperly deprive the Class Members of the full vesting rights in those options.

Imation Grants Illusory New Stock Options To Cemax-Icon Employees

112. In and around January, 1998 or thereabouts, Imation began granting various

Cemax-Icon personnel additional Imation stock options originating and sourced directly out of

Imation's own company-wide plan. That plan is entitled "1996 Employee Stock Incentive

Program of Imation Corp." ("Imation 1996 Option Plan"). The Imation 1996 Option Plan which

Plaintiffs incorporate by reference hereto as Exhibit I, was and is separate and distinct from the

Imation/Cemax Icon Plans.

113. Imation implemented these particular grants by issuing to the participating

Cemax-Icon personnel a document entitled "Stock Option Acknowledgment Imation 1996

Employee Stock Incentive Program ("Imation Stock Option Acknowledgment"). Defendant

Monahan executed this acknowledgment on behalf of Imation. This acknowledgment expressly

incorporated the terms and conditions of the Imation 1996 Option Plan. Plaintiff Falkowski's

Imation Stock Option Acknowledgment, including the cover letter signed in the name of

Defendant Monahan is a representative sample which Plaintiffs incorporate by reference hereto


CORRECTED I stamend . 728.new. wpd 24 Case No. C-99-21072JF

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

as Exhibit J.

114. Section 10(a) of the Imation 1996 Option Plan provides, in full, as follows:

Participation hereunder shall cease and all rights under the 1996Program are automatically forfeited by the Participant upon thedate of termination of employment for any cause other than: (i)retirement under a pension plan maintained by Imation, (ii)because of physical or mental disability as recognized under a planmaintained by Ilnation, or (iii) death.

115. Sub-Class E of the Class consists of those Class Members to whom Imation, in

1998, granted new stock options under the Imation 1996 Option Plan and who, based on the

Defendants' material misrepresentations and omissions, have remained on or did remain on as

non-terminated employees at Cemax-Icon at least through October 13, 1998.

116. The Imation Stock Option Acknowledgment also purportedly accelerated the

vesting schedule of the new options by making one-half of them exercisable one year after the

grant date and the remaining one-half exercisable one year later ("accelerated vesting schedule")

This schedule was out of the norm, in that, (a) it completely vested within two years of the grant

date, instead of the normal four to five-year vesting period, and (b) it did not vest on a monthly

basis, but rather on an annual basis. The illusory, accelerated vesting schedule conveyed the

false impression to the members of Sub-Class E that the new options were particularly valuable,

in that these options were designed to achieve full vesting in a shorter period of time than would

apply in the customary schedule.

117. Defendants, however, knew at the-time of their granting of these new options that

Imation would definitely, or was very likely to, soon sell off its Cemax-Icon subsidiary to Kodak

and that such sale would be consummated before the completion of the first one year period

when any of these new options would vest and become exercisable at all. Nonetheless,

Defendants employed the grants of these new options -- including the ostensibly attractive,

accelerated vesting schedule -- as a ploy to retain the critical services of the valuable Cemax-Icon

personnel base in order for the Imation-Kodak deal to close. To their detriment, the optionees

under these grants justifiably relied on Defendants' good faith and representations in issuing these


CORRECTED I stamend . 728. new.wpd 25 Case No. C-99-21072JF

1

2

3

4

5

6

71'

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

grants, which were a material part of their compensation package, and consequently elected to

remain employed at Cemax-Icon.

Imation "Flips" Cemax-Icon Over To Kodak

118. On August 3, 1998, Imation and Eastman Kodak Company announced their

agreement by which Imation would eventually sell to Kodak most of Imation's worldwide

medical imaging business for approximately $520 million dollars in cash at closing and the

assumption of certain Imation liabilities. This sale specifically included Imation's Cemax-Icon

subsidiary. As an additional benefit to Imation, Kodak and Imation, in connection with the sale,

also settled the civil litigation between them, initiated by Kodak, which involved certain

intellectual property disputes in the United States and Italy.

119. Defendants were aware at the time that the sale of Cemax-Icon played an

important role in Imation's closing of the Imation-Kodak deal. The importance of that role,

indeed, would be subsequently publicized when Kodak, in a February 11, 1999 press release,

announced its intention to consolidate its own pre-existing PACS business with that of its newly-

acquired Cemax-Icon subsidiary and to centralize the United States and Canadian operations of

those combined businesses at Cemax-Icon's Fremont headquarters.

120. On or about August 26, 1998, Imation's Director of Human Resources, Julia A.

Madden, circulated a memorandum company-wide at Cemax-Icon by electronic mail. This

memorandum was entitled "To: All Employees Transferring to Kodak." This memorandum

addressed several compensation and related issues of great concern to the Cemax-Icon employee

I roll who were awaiting their "transfer" to Kodak.

121. This memorandum expressly reiterated Imation's position that the Cemax-Icon

G employee roll would not be terminated from their employment status, but rather, would be

transferred en masse to Kodak. Thus , for example, this memorandum stated, under its

subheading entitled "SEVERANCE":


CORRECTEDIstamend728.new.wpd 26 Case No. C-99-21072JF

Q. Will a voluntary separation package be offered toemployees transferring to Kodak?

2

4

5

6

7

A. No. Imation is not offering a separation package to any employeedesignated for transfer to Kodak. This agreement between Imationand Kodak includes the transfer of employees necessary to run thisbusiness which includes all employees currently assigned toMedical Imaging.

Several Cemax-Icon Executives Unsuccessfully Demand That Imation Honor Their SubstituteOptions

122. On or about October 13, 1998, Imation circulated a memorandum in which it

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

announced its position with respect to the substitute options and the new options.

123. On or about October 23, 1998, Plaintiffs counsel, on behalf of seven (7) Cemax-

Icon key managers, transmitted a letter to Imation's General Counsel asking him to clarify

Imation's position with respect to the employment status of those executives, as well as their

substitute Imation options, in the wake of the Kodak transaction.

124. In a letter dated October 30, 1998, Imation's outside counsel, at Dorsey &

Whitney LLP, responded, in pertinent part, as follows:

Therefore, employees of Cemax-Icon immediately prior tothe [Imation-Kodak deal's] closing will be employees of Cemax-Icon immediately after the closing. There will be no "terminationand rehiring" of Cemax-Icon employees in connection with theKodak transaction.

(Bracketed, explanatory text not contained in the original document.)

125. Nevertheless, in that same letter, Imation's outside counsel stated Imation's

position as to the status of the substitute options, as follows:

... the "substitute" stock options held by your clients will, by theirterms, be exercisable only for a period of thirty days after theclosing of the Kodak transaction and only to the extent that suchoptions were exercisable on the date of such closing.

126. On or about November 13, 1998, Plaintiffs' counsel transmitted a letter to

Imation's outside counsel renewing the demand by those executives for Imation to honor the full

vesting of their options.


CORRECTED Istamend.728.new.wpd 27 Case No. C-99-2I072JF

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

127. On or about November 24, 1998, Imation's outside counsel responded by letter

that, essentially, its position with respect to these options had not changed.

128. On November 30, 1998, the Imation-Kodak deal closed.

129. On or about December 23, 1998, Plaintiffs counsel transmitted a final demand

letter to Imation's outside counsel with respect to the substitute options issue.

130. On or about January 18, 1999, Imation's counsel firmly rejected that final demand.

FACTUAL ALLEGATIONS COMMON TO THE CLASS REGARDINGIMATION'S FRAUDULENT CONDUCT IN CONNECTION WITH

ITS ACQUISITION AND SALE OF CEMAX-ICONAND ITS GRANTING OF THE

SUBSTITUTE OPTIONS AND NEW OPTIONS

131. At the time Imation began pursuing its acquisition of Cemax-Icon, Imation

0 maintained a substantial investment in Cemax-Icon and knew a lot about the value of Cemax-

Icon's products and personnel. At such time, however, Imation did not disclose to the concerned

parties at Cemax-Icon that Imation's business was in serious trouble.

132. Imation realized that Cemax-Icon would not have agreed to be acquired by

Imation if Cemax-Icon was aware of the true state of Imation's affairs. Imation particularly

realized that the true value of high technology companies like Cemax-Icon lies in its talented

human capital and intellectual property innovations and rights.

133. Unless Imation could retain Cemax-Icon's key management and personnel post-

merger, the acquisition would not be a success. Thus, Imation embarked on a scheme to induce

Cemax-Icon to permit itself to be acquired by Ilnation under terms which appeared favorable to

Cemax-Icon's key management, personnel and shareholders. In order to accomplish its scheme,

Imation knew that it could not pay cash up-front for the full value of Cemax-Icon. Instead, it

would have to defer the purchase price to be paid in order to induce current management to stay

on board. Thus, Imation had to structure its offer in such a way which provided that a substantial

portion of the purchase price for the Cemax-Icon shares would flow to Cemax-Icon shareholders

only as Cemax-Icon achieved its revenue targets.



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

134. In furtherance of its scheme, Imation therefore agreed, as part of the Merger

Agreement, to an "earn-out" whereby Cemax-Icon shareholders would receive payments of $2.50

per share in 1998 and $6.00 in 1999 based upon Cemax-Icon's achieving certain revenue goals.

For the earn-out portions of the purchase price to have any real apparent value to the Cemax-Icon

shareholders, the achievement of the Cemax-Icon revenue goals had to be appropriately

structured. Thus, the Cemax-Icon shareholders knew and Defendants realized that the way for

Cemax-Icon to actually achieve the stated revenue goals was for its current management and

employee base to remain in place. Accordingly, Imation promised these shareholders that

Cemax-Icon's key management would remain in substantially the same positions which they held

before the Imation acquisition.

135. In further pursuit of its scheme, and to win over Cemax-Icon's shareholders and

key management, Imation also agreed to assume the Cemax-Icon employee stock options and to

grant the Imation substitute options. Conveniently for Imation, granting substitute options based

on its pre-merger stock price was not a very costly proposition, in that on October 30, 1997 --

shortly after the merger -- it announced a $200 million dollar earnings write-off purportedly

reflecting a "restructuring charge." The basis of that write-off, however, was known, or in the

absence of deliberate recklessness, should have been known and disclosed by the Defendants at

the time that it offered the substitute options to the Plaintiffs.

136. Imation's representations regarding the retention of Cemax-Icon's key employees

and employee base, as well as those regarding the apparent value of the substitute options, were

material to Cemax-Icon's decision to permit the acquisition by Imation. These representations

also materially induced Cemax-Icon's key management and employee base to continue on with

the Company after the closing of the Imation acquisition.

137. Primarily because Irnation represented itself as a thriving business and

I communicated a willingness to invest in Cemax-Icon's future, as well as to ensure the stability

and welfare of its key management and employee base, the Cemax-Icon management and

shareholders agreed to merge with Imation under the terms set forth in the Merger Agreement. In


CORRECTEDIstamend,728.new.wpd 29 Case No. C-99-21072JF

lI2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

so doing, they elected to withdraw their already planned and registered initial public offering and

spurned the advances of other outside suitor(s).

138. In addition, Defendants, prior to and shortly after the close of the acquisition, had

communicated to the various Class Members that the value of the substitute options would

greatly increase over the ensuing years. By making those communications, the Defendants

misled these Class Members both as to the true value of the substitute options (which would soon

erode as a result of the $200 million dollar write-oft) and the true tenure of those options (which

Imation would unilaterally cut-off and/or deem forfeited in little over one year's time).

139. As a particular example of these false communications , Defendant Sauer

I addressed the Class Members at a party, welcoming them aboard to Imation, which was held in

the afternoon of August 15, 1997. On that occasion , Defendant Sauer emphasized , effectively,

how important the Cemax-Icon acquisition and its future, long-term success was to Imation.

140. As a further example, on September 16, 1997, Defendant Monahan, accompanied

by Defendant Burchill, who was at that time Imation's Chief Financial Officer, visited Cemax-

Icon. On that occasion, Defendant Monahan addressed Cemax-Icon's senior management and,

later on that date, a company-wide assembly, during which he echoed Defendant Sauer's

previously expressed remarks about Imation's long-term plans for Cemax-Icon, as alleged above,

and informed the Class Members, effectively, that he expected and projected Imation's stock

price to dramatically appreciate in the ensuing years.

141. To further reinforce upon the Class Members this false impression of their long-

term future with Imation, Defendants, through Defendant Sauer's administrative assistant, would

prominently display the daily trading price of Imation's common stock in the main lobby of

Cemax-Icon's corporate headquarters. Upon information and belief, this practice commenced at

or about the time of the closing of the Imation acquisition and continued until in and around

November, 1997 - a point when Imation's stock price dramatically began to drop.

142. In further continuance of the scheme, Defendants, in and around January, 1998,

p began granting various Class Members the new options. Defendants made themselves appear to



be extra generous to these Class Members by providing an ostensibly attractive , accelerated

vesting schedule for these new options . Defendants knew, or in the absence of deliberate

recklessness would have known, at the time of such grants that Imation would, or was likely to,

divest itself of Cemax-Icon by year's end -- that is, conveniently for Imation , before any of the

new options would even begin to vest in the first place.

143. Moreover, Imation had additional motivation to conclude a successful deal at that

8

9

101

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

time with Kodak. On December 2, 1997, Kodak had filed an action in the United States District

Court for the Western District of New York against Imation and others relating to the allegedly

improper receipt of Kodak trade secrets by certain Italian companies that would eventually

become Imation subsidiaries. Kodak, in that action, was seeking substantial relief in the form of

unspecified damages, treble damages, punitive damages and permanent injunctive relief. In

response, Imation and others commenced related litigation in Italy.

144. Imation subsequently announced that on May 15, 1998, Imation and Kodak

requested that those legal proceedings be stayed pending ongoing settlement discussions between

Imation and Kodak. On July 31, 1998, Imation and Kodak entered into an agreement providing

that upon closing of the Imation-Kodak deal, or should that deal not close due to Imation and

Kodak's failure to receive applicable regulatory approvals, those legal proceedings would end.

145. Ultimately, those legal proceedings did end as a result of the successful closing of

the Imation-Kodak deal.

146. Defendants knew, or, in the absence of deliberate recklessness, should have

known that had Imation not retained the services of the various Class Members by granting them

the apparently valuable, but, in fact, illusory new options, the value of Cemax-Icon might have

materially eroded. Such an event would have posed a material threat to Imation's closing of the

Imation-Kodak deal.



COUNT I (Amended)

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

For Violation Of Section 10(b) OfThe Exchange Act And Rule IOb-5

Promulgated Thereunder Against Imation and the Individual Defendants

147. Plaintiffs repeat and reallege each and every allegation contained above as if fully set

I forth herein.

148. During all relevant times Imation and the Individual Defendants, and each of them,

carried out a plan, scheme and course of conduct which was intended to and did deceive the

Plaintiffs and other Class members, as alleged herein, and cause Plaintiffs and other members ofthe

Class to purchase or otherwise acquire Imation stock options at artificially inflated prices and under

terms and conditions that were not as favorable to them as those that the Defendants had originally

represented would obtain.

149. In furtherance ofthis unlawful scheme, plan and course of conduct, Defendants, and

each of them, took the actions set forth herein.

150. Defendants (a) employed devices, schemes, and artifices to defraud; (b) made untrue

statements of material fact and/or omitted to state material facts necessary to make the statements

not misleading; and (c) engaged in acts, practices, and a course of business which operated as a

fraud and deceit upon the Plaintiffs and the other Class Members in an effort to maintain those

individuals as employees of Cemax-Icon and to substitute their options under terms and conditions

that were deceptively unfavorable, in violation of Section 10(b) ofthe Exchange Act and Rule 1 Ob-5.

All Defendants are sued either as primary participants in the wrongful and illegal conduct charged

herein or as controlling persons as alleged below.

151. In addition to the duties of full disclosure imposed on Defendants as a result of their

making of affirmative statements and reports, or participation in the making of affirmative

statements and reports to the Plaintiffs and other Class Members, Defendants had a duty to promptly

disseminate truthful information that would be material to investors in compliance with the

integrated disclosure provisions ofthe SEC as embodied in SEC Regulation S-X (17 C.F.R. Sections

210.01 et seq.) and Regulation S-K (17 C.F.R. Sections 229.10 et seq.) and other SEC regulations,



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

including accurate and truthful information with respect to Imation's operations, financial condition

and earnings so that the market price of Imation's securities would be based on truthful, complete

and accurate information.

152. Imation and the Individual Defendants, individually and in concert, directly and

indirectly, by the use, means or instrumentalities of interstate commerce and/or ofthe mails, engaged

and participated in a continuous course of conduct to conceal adverse material information about the

business, operations and true value of Imation's stock and stock options as specified herein.

153. These Defendants employed devices, schemes and artifices to defraud, while in

possession of material adverse non-public information and engaged in acts, practices, and a course

of conduct as alleged herein in an effort to assure the Plaintiffs and other Class Members of the

value oflmation's stock and stock options, which included the making of, or the participation in the

making of, untrue statements ofmaterial facts and omitting to state material facts necessary in order

to make the statements made in the light of the circumstances under which they were made, not

misleading, as set forth more particularly herein, and engaged in transactions, practices and a course

of business which operated as a fraud and deceit upon the Plaintiffs and other Class members.

154. Each of the Individual Defendants' primary liability, and controlling person liability,

arises from the following facts: (i) the Individual Defendants were high-level executives and/or

directors at or in connection with Imation during the relevant times and were members of Imation's

management team or had control thereof; (ii) each of these Defendants, by virtue of his or her

responsibilities and activities as a senior officer and/or director of Imation was privy to and

participated in the creation, development and reporting of Imation's internal budgets, plans,

projections and/or reports; (iii) each of these Defendants enjoyed significant personal contact and

familiarity with the other Defendants and was advised of and had access to other members of

Imation's management team, internal reports and other data and information about Imation's finances,

operations, and sales at all relevant times; and (iv) each of these Defendants was aware of Imation's

dissemination of information to Plaintiffs and the other Class Members which they knew or

recklessly disregarded was materially false and misleading.


CORRECTED I stamend . 728. new.wpd 33 Case No. C-99-2I 072JF

1

2

3

4

S

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

155. The Defendants had actual knowledge of the misrepresentations and omissions of

material facts set forth herein, or acted with reckless disregard for the truth in that they failed to

ascertain and to disclose such facts, even though such facts were available to them. Such

Defendants' material misrepresentations and/or omissions were done knowingly or recklessly and

for the purpose and effect of concealing from Plaintiffs and the other Class Members the true value

of Imation's stock and stock options.

156. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, as set forth above, the Defendants deceptively overstated the

value of Imation's stock and stock options, thereby achieving the employment and continued

employment ofPlaintiffs and the other Class Members at Cemax-Icon. In ignorance ofthe-true facts,

and relying directly or indirectly on the false and misleading statements made by Defendants, or upon

the integrity of the market in which the securities trade, and/or on the absence of material adverse

information that was known to or recklessly disregarded by Defendants yet not disclosed by them,

Plaintiffs and the other members ofthe CI ass purchased or otherwise acquired Imation stock options

at artificially high prices and deceptively unfavorable terms and were damaged thereby.

157. At the time of said misrepresentations and omissions , Plaintiffs and other members

ofthe Class were ignorant of their falsity, and believed them to be true. Had Plaintiffs and the other

members ofthe Class and the marketplace known the truth, which was not disclosed by Defendants,

Plaintiffs and other members of the Class would not have purchased or otherwise acquired their

Imation stock options, or, at least would have done so at a more favorable price and/or on more

favorable terms and conditions.

158. By virtue of the foregoing, Defendants have violated Section 10(b) of the Exchange

Act, and Rule 1 Ob-5 promulgated thereunder and, thereby, directly and proximately caused harm to

Plaintiffs and the other members of the Class.


CORRECTEDIstamend. 728.new.wpd 34 Case No. C-99-21072JF

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

2

25

26

27

28

COUNT II (Amended)

For Violation Of Section 20(a) OfThe Exchange Act Against the Individuals Defendants

159. Plaintiffs repeat and reallege each and every allegation contained above as if fully

set forth herein.

160, The Individual Defendants acted as controlling persons of Imation within the

meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level

positions, and their ownership and contractual rights, participation in and/or awareness of

Imation's operations, the Individual Defendants had the power to influence and control and did

influence and controls directly or indirectly, the decision-making of Imation, including the

content and dissemination of the various statements which Plaintiffs contend are false and mis-

leading. The Individual Defendants were provided with or had unlimited access to copies of

Imation's reports, press releases, public filings and other statements alleged by Plaintiffs to be

misleading prior to and/or shortly after these statements were issued and had the ability to

prevent the issuance of the statements or cause the statements to be corrected.

161. In particular, each of these Defendants had direct and supervisory involvement in

the day-to-day operations of Imation and, therefore, is presumed to have had the power to control

or influence the particular transactions giving rise to the securities violations as alleged herein,

and exercised the same.

162. As set forth above, Imation and the Individual Defendants each violated Section

10(b) and Rule I Ob-5 by their acts and omissions as alleged in this Complaint. By virtue of their

positions as controlling persons, the Individual Defendants are liable pursuant to Section. 20(a) of

the Exchange Act. As a direct and proximate result of Defendants' wrongful conduct, Plaintiffs

and other members of the Class suffered damages in connection with their purchases or

acquisition of Imation stock options during the relevant times.



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

COUNT III (Amended)

For Violation of Section 11 of the Securities Act Against Imationand Defendants Monahan and Burchill


set forth herein.

164. This Claim is brought pursuant to Section 11 of the Securities Act, 15 U.S.C.

§77k, on behalf of Plaintiffs, against Imation and Defendants Monahan and Burchill. This claim

is cumulative and/or alternative to the other claims set forth in this complaint.

165. The Registration Statement was materially inaccurate and misleading, contained

untrue statements of material facts, omitted to state other facts necessary to make the statements

made not misleading, and concealed and failed adequately to disclose material facts as described

above.

166. Imation is the registrant for the issuance of Imation common stock. The

Defendants named herein were responsible for the contents and dissemination of the Registration

Statement and signed their names on it.

167. As issuer of the shares and the grantor of the substitute options and new options,

Imation is strictly liable to Plaintiffs for the misstatements and omissions alleged herein.

168. Defendants issued, caused to be issued and participated in the issuance of

materially false and misleading written statements to the Plaintiffs which were contained in the

Registration Statement, which misrepresented or failed to disclose, inter alia, the material

adverse facts set forth above. By reason of the conduct herein alleged, each of the Defendants

violated and/or controlled a person who violated Section 11 of the Securities Act.

169. Plaintiffs purchased or otherwise acquired their substitute options and new

options pursuant to, traceable to, and in reliance on, the Registration Statement.

170. Plaintiffs have sustained damages. The value of the substitute options and new

options has declined substantially, if not completely, subsequent to and due to Defendants'

violations.


CORRECTED I stanzend .728.new.wpd 36 Case No. C-99-21072JF

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

COUNT IV (Amended)

For Violations of Section 12(a)(2 ) of the Securities ActAgainst All Defendants


set forth herein.

172. This claim is brought by Plaintiffs pursuant to Section 12(a)(2) of the Securities

Act in connection with their purchase or acquisition of Imation stock options pursuant to the

Prospectus(es) signed by and delivered to them on behalf of Imation by Defendants Monahan and

Sauer. This claim is cumulative and/or alternative to the other claims set forth herein.

173. These Defendants were sellers, offerors and/or solicitors of sales of Imation shares

offered pursuant to the prospectus(es) signed by Defendant Sauer and dated September 11, 1997,

or thereabouts, the prospectus(es) embodying the Stock Option Acknowledgment signed by

Defendant Monahan and dated in and about early 1998, and any and all oral communications as

alleged above.

174. These Prospectus(es) and oral communications contained untrue statements of

material facts, omitted to state other facts necessary to make the statements not misleading, and

concealed and failed to disclose material facts. Defendants' actions of solicitation included

participating in the preparation, dissemination and, as applicable, the signature of the false and

misleading prospectus(es) and oral communications.

175. Plaintiffs and other members of the Class purchased or otherwise acquired

Imation stock options pursuant to, traceable to and in reliance on the defective Prospectus(es) and

oral communications. Plaintiffs did not know, or in the exercise of reasonable diligence could

not have known, of the untruths and omissions contained in these Prospectus(es) and oral

communications.

176. By reason of the conduct alleged herein, these Defendants violated and/or

controlled a person who violated, § 12(a)(2) of the Securities Act. Accordingly, Plaintiffs and

other members of the Class have the right to rescind and recover the consideration paid for their


CORRECTED I stamend .728. new.wpd 37 Case No. C-99-21072JF

III

2

3

4

56

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Imation stock options or to be awarded any other applicable monetary damages.

COUNT V (Amended)

For Violations of Section 15 of the Securities ActAgainst the Individual Defendants


set forth herein. This Count is brought pursuant to Section 15 of the Securities Act against the

Individual Defendants.

178. Each of the Individual Defendants named in this Count was a control person of

Imation by virtue of his or her position as a director, senior officer and/or controlling shareholder

of Imation. Finally, Defendants each had a series of direct and/or indirect business and/or

personal relationships with other directors and/or major shareholders of Imation.

179. Each of the Individual Defendants also was a culpable participant in the violations

of Section 11 and 12(a)(2) of the Securities Act, alleged in Counts III and IV above, based on

their having signed and/or distributed the respective Registration Statement(s) and/or

Prospectus(es), their making of materially false and misleading oral communications and their

having otherwise participated in the process which allowed Imation's successful granting of the

substitute options and new options.

180. WHEREF0 , Plaintiffs pray for relief and judgment, as follows:

(i) Declaring this action to be a proper class action, pursuant to Rule 23 of the

Federal Rules of Civil Procedure, on behalf of the Class defined herein and Plaintiffs to be the

Class representatives;

(ii) Awarding compensatory damages in favor of Plaintiffs and the other Class

members against all Defendants, jointly and severally, for all damages sustained as a result of

Defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;


CORRECTEDIstamend.728.new.wpd 38 Case No, C-99-21072JF

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

(iii) Awarding Plaintiffs and the Class their reasonable costs and expenses

incurred in this action, including counsel fees and expert fees; and

(iv) Such other and further relief as the Court may deem just and proper.

DATED: July 28, 2000 LAW OFFICES OF LIONEL Z. GLANCY

Lionel Z. Glancy #134180Neal A. Dublinsky #1357121801 Avenue of the StarsSuite 311Los Angeles, CA 90067(310) 201-9150

JURY DEMAND

Plaintiffs, and behalf of themselves and all other Class Members, hereby demand

a trial by jury.

DATED: July 28, 2000 LAW OFFICES OF LIONEL Z. GLANCY

Lionel Z. Glancy #134180Neal A. Dublinsky #1357121801 Avenue of the StarsSuite 311Los Angeles, CA 90067(310) 201-9150



1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

PROOF OF SERVICE BY MAIL

I, the undersigned, say:

I am a citizen of the United States and am employed in the office of a member ofthe Bar of this Court. I am over the age of 18 and not a party to the within action. Mybusiness address is 1801 Avenue of the Stars, Suite 311, Los Angeles, California 90067

On July 28, 2000, I served the following:

1) FIRST AMENDED COMPLAINT FOR VIOLATIONS OF THE FEDERALSECURITIES LAWS - [CORRECTED SOLELY BY THE ATTACHMENT OFREFERENCED EXHIBITS ALREADY ON FILE WITH THE COURT];

on the parties shown below by placing a true copy thereof enclosed in. a sealed envelope

with postage thereon fully prepaid in the United States mail at Los Angeles, California.

James K. Langdon II

Timothy K. HowardDorsey & Whitney LLP220 South Sixth StreetMinneapolis, Minnesota 55402-1498

Juan C. Basombrio

Dorsey & Whitney LLP650 Town Center Drive #1850Costa Mesa, California 92626-1925

Executed on July 28, 2000, at Los Angel,,

I certify under penalty of perjury that is true. rid correct.

C. Rann