<PAGE>
PROSPECTUS
$40,000,000
[LOGO]
6 3/4% CONVERTIBLE SUBORDINATED NOTES DUE 2001
The Notes are convertible into Common Stock of the Company at the option of
the holder at any time after 60 days following the latest date of original
issuance thereof and at or before maturity, unless previously redeemed or
repurchased, at a conversion price of $19.75 per share (equivalent to a
conversion rate of approximately 50.63 shares per $1,000 principal amount of
Notes), subject to adjustment in certain events. See "Description of
Notes--Conversion of Notes." The Notes have been approved for listing on the
Nasdaq Stock Market under the symbol IOMGG. The Company's Common Stock is traded
on the Nasdaq National Market under the symbol IOMG. On March 7, 1996, the last
reported sale price of the Common Stock on the Nasdaq National Market was $17.06
per share.
Interest on the Notes is payable on March 15 and September 15 in each year
commencing on September 15, 1996. The Notes are redeemable at any time on or
after March 15, 1999, in whole or in part, at the option of the Company, at
declining redemption prices set forth herein, together with accrued interest. In
the event of a Repurchase Event (as defined), each holder of Notes may require
the Company to repurchase all or a portion of such holder's Notes at 100% of the
principal amount thereof plus accrued and unpaid interest. See "Description of
Notes--Optional Redemption by the Company" and "--Repurchase at Option of
Holders Upon Repurchase Event." The Notes are unsecured and subordinated to all
existing and future Senior Indebtedness (as defined on page 48) of the Company
and are effectively subordinated to all existing and future indebtedness and
other liabilities of subsidiaries of the Company. At January 28, 1996, (a) the
Company had approximately $60.3 million of outstanding indebtedness that would
have constituted Senior Indebtedness and (b) subsidiaries of the Company had
approximately $18.8 million of outstanding indebtedness and other liabilities
(excluding (i) intercompany liabilities, (ii) indebtedness included in Senior
Indebtedness because it is guaranteed directly or indirectly by the Company and
(iii) liabilities of a type not required to be reflected on the balance sheet of
such subsidiaries in accordance with generally accepted accounting principles),
as to which the Notes would have been effectively subordinated. The Indenture
pursuant to which the Notes will be issued contains no limitations on the amount
of additional indebtedness, including Senior Indebtedness, which the Company or
any of its subsidiaries can create, incur, assume or guaranty. See "Description
of Notes -- Subordination of Notes."
----------------
THE NOTES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC (1) DISCOUNT (2) COMPANY (3)
<S> <C> <C> <C>
Per Note...................................... 100% 4.75% 95.25%
Total (4)..................................... $40,000,000 $1,900,000 $38,100,000
</TABLE>
(1) Plus accrued interest, if any, from March 13, 1996.
(2) See "Underwriting" for indemnification arrangements with the Underwriter.
(3) Before deducting estimated expenses of $650,000 payable by the Company.
(4) The Company has granted to the Underwriter a 30-day option to purchase up to
an additional $6,000,000 principal amount of Notes on the terms set forth
above solely to cover over-allotments, if any. If all such Notes are
purchased, the total Price to Public, Underwriting Discount and Proceeds to
Company will be $46,000,000, $2,185,000 and $43,815,000, respectively. See
"Underwriting."
----------------
The Notes are offered by the Underwriter, subject to prior sale, receipt and
acceptance by it and subject to the right of the Underwriter to reject any order
in whole or in part and certain other conditions. It is expected that the Notes
will be available for delivery on or about March 13, 1996 at the office of the
agent of Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST
March 8, 1996
<PAGE>
[Picture of Company products]
Iomega and Bernoulli are registered trademarks of the Company and Zip, Jaz,
Ditto and the Iomega logo are trademarks of the Company. All other trademarks
used are the property of their respective owners.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OR THE
COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL
IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING "RISK FACTORS," APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
Iomega Corporation designs, manufactures and markets innovative data storage
solutions, based on removable-media technology, that help personal computer
users "manage their stuff." The Company's data storage solutions include disk
drives marketed under the tradenames Zip and Jaz and a family of tape drives
marketed under the tradename Ditto. The Company's Zip and Jaz disk drives are
designed to provide users with the benefits of high capacity and rapid access
generally associated with hard disk drives and the benefits of media
removability generally associated with floppy disk drives, including expandable
storage capacity and data transportability, management and security. The
Company's Ditto tape drives primarily address the market for backup data
storage. Iomega's objective is to establish its Zip, Jaz and Ditto products as
industry-standard data storage solutions for personal computer users and to
capture an increasing share of the overall personal computer data storage
market. The Company began shipping Zip drives in March 1995 and Jaz drives in
limited quantities in December 1995.
In recent years, advances in software, including memory-intensive graphical
operating systems, integrated suites of word processing, spreadsheet and
database applications, and multimedia applications, have dramatically increased
the storage needs of personal computer users. In addition, data-intensive,
multimedia files are increasingly being made available to personal computer
users via on-line services and the Internet. Largely as a result of these
trends, personal computer users increasingly need to expand the amount of their
available primary storage, which is typically provided by a hard disk drive.
Personal computer users are also increasingly seeking a reliable way to
transport large files between computers (such as between a work and home
computer), to organize and segregate files of different users of the same
computer, to secure sensitive files from unauthorized viewing or modification,
and to backup data. The Company believes that neither conventional hard disk
drives nor floppy disk drives are capable of adequately addressing all of the
information storage and management needs of personal computer users.
The Company believes its recently-introduced Zip, Jaz and Ditto drives
address emerging data storage needs and provide customers what they want at
affordable price points. Designed as a mass-market product, the Zip drive is an
affordable storage device for hard drive expansion, data transportability,
management and security and data backup. The Zip drive uses 100-megabyte ("MB")
disks to provide 70 times the capacity of traditional floppy disks. The external
model of the Zip drive is generally sold by retailers for under $200 and the
100-MB disks are typically sold for under $15 per disk in ten-packs. The Jaz
drive, which features 1-gigabyte ("GB") removable disks and performance
specifications comparable to most current hard disk drives, is designed to
address the high-performance needs of personal computer users in three areas:
multimedia applications (audio, video and graphics), personal data management
and hard drive upgrade. The external model of the Jaz drive is expected to be
sold by retailers for approximately $599, while the internal version is expected
to be sold by retailers for approximately $499. Each 1-GB Jaz disk is expected
to sell for approximately $99 in five-packs. The Company's Ditto family of tape
drives addresses the need of personal computer users for an easy-to-use,
dependable backup solution. The Company offers internal and external Ditto tape
drives based on leading industry standards ranging in capacity from 420 MBs to
3.2 GBs (using data compression).
The Company believes that broadening the distribution of its products
through strategic alliances with a variety of companies within the computer
industry is a crucial element in the Company's objective of establishing its
products as industry standards. The Company has OEM arrangements with personal
computer manufacturers such as Micron Electronics and Power Computing for the
incorporation of Zip, Jaz or Ditto drives into their computers, and is seeking
to establish additional OEM relationships. The Company has also entered into
private or co-branding arrangements with several companies, including Maxell,
Seiko Epson, Fuji and Reveal Computer Products, which are selling private or
co-branded versions of Zip drives and disks. In addition, the Company's products
are sold by most of the leading retailers of computer products in the United
States, including Best Buy, Circuit City, CompUSA, Computer City, Electronics
Boutique and PC Warehouse.
During 1994 and 1995, the Company's new management led the Company through a
significant restructuring and repositioned the Company as a customer-driven
vendor to the broad personal computer market. The Company's development and
introduction of its new products over the last 18 months was facilitated by the
experience in removable-media storage technology developed by the Company in
connection with its Bernoulli disk drives, which were first introduced in 1982
and won numerous awards for design and performance.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered................ $40,000,000 aggregate principal amount of 6 3/4%
Convertible Subordinated Notes due 2001 (the "Notes")
($46,000,000 if the Underwriter's over-allotment option
is exercised in full).
Interest.......................... Interest is payable semiannually on March 15 and
September 15 of each year at 6 3/4% per annum commencing
on September 15, 1996. See "Description of
Notes--General."
Maturity.......................... March 15, 2001.
Conversion Rights................. The Notes are convertible into Common Stock of the
Company at the option of the holder at any time after 60
days following the latest date of original issuance
thereof and at or before maturity, unless previously
redeemed or repurchased, at a conversion price of $19.75
per share (equivalent to a conversion rate of
approximately 50.63 shares per $1,000 principal amount
of Notes), subject to adjustment in certain events. See
"Description of Notes-- Conversion of Notes."
Redemption at Option of Company... The Notes are redeemable at any time on or after March
15, 1999, in whole or in part, at the option of the
Company, at declining redemption prices set forth
herein, together with accrued interest, if any, to the
redemption date. See "Description of Notes--Optional
Redemption by the Company."
Repurchase at Option of Holders
Upon Repurchase Event............ In the event any Repurchase Event (as defined) occurs,
each holder of Notes may require the Company to
repurchase all or any part of such holder's Notes at
100% of the principal amount thereof plus accrued
interest to the repurchase date. See "Description of
Notes--Repurchase at Option of Holders Upon Repurchase
Event."
Subordination..................... The Notes are unsecured and subordinated to all existing
and future Senior Indebtedness (as defined) and are
effectively subordinated to all existing and future
indebtedness and other liabilities of subsidiaries of
the Company. At January 28, 1996, (a) the Company had
approximately $60.3 million of outstanding indebtedness
that would have constituted Senior Indebtedness and (b)
subsidiaries of the Company had approximately $18.8
million of outstanding indebtedness and other
liabilities (excluding (i) intercompany liabilities,
(ii) indebtedness included in Senior Indebtedness
because it is guaranteed directly or indirectly by the
Company and (iii) liabilities of a type not required to
be reflected on the balance sheet of such subsidiaries
in accordance with generally accepted accounting
principles), as to which the Notes would have been
effectively subordinated. The Company intends to use a
portion of the net proceeds of this offering to repay a
portion of the amounts outstanding under its bank loan
agreements, which constitute Senior Indebtedness
(although it may subsequently borrow additional amounts
under such loan agreements). See "Use of Proceeds." The
Indenture contains no limitations on the incurrence of
additional indebtedness or other obligations by the
Company and its subsidiaries. See "Description of
Notes--Subordination of Notes."
Use of Proceeds................... Working capital needs and general corporate purposes,
including the repayment of a portion of the amounts
outstanding under the Company's bank loan agreements.
See "Use of Proceeds."
Trading Market.................... The Notes have been approved for listing on the Nasdaq
Stock Market under the symbol IOMGG. The Company's
Common Stock is traded on the Nasdaq National Market
under the symbol IOMG.
</TABLE>
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales....................................................................... $ 147,123 $ 141,380 $ 326,225
Cost of sales............................................................... 92,585 92,453 235,838
Gross margin................................................................ 54,538 48,927 90,387
Restructuring costs (reversal).............................................. 14,131 (2,491) --
Operating income (loss)..................................................... (17,427) (882) 13,622
Net income (loss)........................................................... (14,525) (1,882) 8,503
Net income (loss) per common share (1)...................................... $ (0.27) $ (0.03) $ 0.14
Weighted average common shares outstanding (1).............................. 54,318 55,419 60,180
Ratio of earnings to fixed charges (2)...................................... - 1.0 6.0
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------
ACTUAL AS ADJUSTED(3)
---------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................................... $ 1,023 $ 38,473
Working capital..................................................................... 12,623 50,073
Total assets........................................................................ 266,227 303,677
Stockholders' equity................................................................ 62,686 62,686
</TABLE>
- ------------------------
(1) See Note 1 of Notes to Consolidated Financial Statements.
(2) For purposes of determining the ratio of earnings to fixed charges, earnings
consist of net income (loss) before provision for income taxes and
cumulative effect of accounting change, plus fixed charges. Fixed charges
consist of interest expense and the estimated interest component of rental
expense. For 1993, earnings were insufficient to cover fixed charges by
$16.7 million.
(3) Adjusted to reflect the sale of the Notes offered hereby, after deducting
the underwriting discount and estimated offering expenses.
------------------------
EXCEPT AS OTHERWISE NOTED, (I) ALL SHARE AND PER SHARE INFORMATION IN THIS
PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO THE FIVE-FOR-FOUR STOCK SPLIT
(EFFECTED AS A 25% STOCK DIVIDEND) THAT OCCURRED IN NOVEMBER 1994 AND THE
THREE-FOR-ONE STOCK SPLIT (EFFECTED AS A 200% STOCK DIVIDEND) THAT OCCURRED IN
JANUARY 1996 AND (II) THE INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF
THE UNDERWRITER'S OVER-ALLOTMENT OPTION.
5
<PAGE>
RISK FACTORS
THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY, IN ADDITION TO
THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE PURCHASING THE NOTES
OFFERED HEREBY.
SHORTAGES OF CRITICAL COMPONENTS; ABSENCE OF SUPPLY CONTRACTS; DEPENDENCE ON
SUPPLIERS. Many components incorporated in, or used in the manufacture of, the
Company's products are currently only available from sole source suppliers.
Moreover, the Company has experienced difficulty in the past, is currently
experiencing difficulty and expects to continue to experience difficulty in the
future, in obtaining a sufficient supply of many key components. For example,
many of the integrated circuits used in the Company's Zip and Jaz drives are
currently available only from sole source suppliers. The Company has been unable
to obtain a sufficient supply of certain of these integrated circuits due to
industry-wide shortages. In addition, the Company has been advised by certain
sole source suppliers, including the manufacturers of critical integrated
circuits for Zip and Jaz, that they do not anticipate being able to fully
satisfy the Company's demand for components during 1996. These component
shortages have limited the Company's ability to produce sufficient Zip drives to
meet market demand and have limited the Company's ability to implement certain
cost reduction and productivity improvement plans, and the Company expects that
the shortage of components may limit production of Zip and Jaz products for the
foreseeable future. The Company also experienced difficulty during 1995 in
obtaining a sufficient supply of the servowriting equipment used in the
manufacture of Zip disks. Such equipment shortages in 1995 limited the Company's
production of Zip disks, and there can be no assurance that similar equipment
shortages will not occur in the future.
The Company purchases all of its sole and limited source components and
equipment pursuant to purchase orders placed from time to time and has no
guaranteed supply arrangements. The inability to obtain sufficient components
and equipment, to obtain or develop alternative sources of supply at competitive
prices and quality, or to avoid manufacturing delays could prevent the Company
from producing sufficient quantities of its products to satisfy market demand,
result in delays in product shipments, increase the Company's material or
manufacturing costs or cause an imbalance in the inventory level of certain
components. Moreover, difficulties in obtaining sufficient components may cause
the Company to modify the design of its products to use a more readily available
component, and such design modifications may result in product performance
problems. Any or all of these problems could in turn result in the loss of
customers, provide an opportunity for competing products to achieve market
acceptance and otherwise adversely affect the Company's business and financial
results. See "Business--Manufacturing."
RECENT INTRODUCTION OF ZIP AND JAZ; UNCERTAINTY OF MARKET ACCEPTANCE. Zip
products accounted for a substantial majority of the Company's sales in 1995 and
the Company expects that sales of Zip and Jaz products will account for a
substantial majority of the Company's sales in 1996. The Company's Zip products
commenced commercial shipment in March 1995. Although sales of Zip products were
the primary reason for the Company's revenue growth during 1995, such sales may
be attributable in large part to the novelty of the product and the initial
publicity surrounding the introduction of Zip, and may not be indicative of the
long-term demand for the product. In an effort to improve performance and reduce
costs, the Company continues to refine the product design for Zip, which could
result in shipment delays or performance problems. As a result of the Zip
drive's recent introduction and on-going supply shortages, it is difficult to
accurately assess the ultimate market acceptance of Zip because of uncertainty
concerning the size and characteristics of the market for Zip, the extent of the
market demand for Zip and the competition that Zip will confront. Accordingly,
investors should not assume that the sales growth experienced by the Company in
1995 is an indication of future sales.
The Company began shipping Jaz drives and disks in limited quantities in
December 1995. As is the case with Zip, the Company cannot yet accurately assess
the market acceptance Jaz will achieve due to uncertainties regarding the market
for Jaz and the competition it will confront. Moreover, the Company is
continuing to refine the product design for Jaz, which has not yet begun to ship
in volume, and there can be no assurance that the Company will not experience
problems or delays as it begins to manufacture and ship Jaz products in volume.
In addition, the Jaz drive incorporates hard disk technology that has not
previously been used in any other removable-media cartridge drives with similar
performance characteristics, and there can be no assurance that
6
<PAGE>
Jaz will perform as the Company expects or attain the lifespan the Company
anticipates. For the foregoing reasons, and because of differences in their
price and target markets, investors should not assume that Jaz will receive the
initial market acceptance that Zip has experienced.
In addition, the market acceptance Zip and Jaz will achieve is difficult to
assess because their product features are fundamentally different from the most
popular data storage devices today (hard disk drives, floppy disk drives and
CD-ROM drives). No new type of read/writable data storage device has achieved
widespread market acceptance in recent years, and there can be no assurance that
Zip and Jaz will achieve widespread market acceptance. Moreover, the two formats
of removable-media storage which have gained widespread market acceptance to
date--floppy disk drives and CD-ROM drives--are both used by software
manufacturers as a means of software distribution. The Company's products are
not intended for use in software distribution, and the Company does not expect
that its products will be so used. The market acceptance of Zip and Jaz will
also depend upon a number of other factors, including the ability of the Company
to produce a sufficient supply of Zip and Jaz products (see "Risk
Factors--Shortages of Critical Components; Absence of Supply Contracts;
Dependence on Suppliers" and "--Reliance on Non-Binding Contract Manufacturing
Relationships"), the price, performance and other characteristics of competing
solutions introduced by other vendors and the timing of such product
introductions (see "Risk Factors--Competition") and the success of the Company
in establishing OEM arrangements for Zip and Jaz with leading personal computer
manufacturers (see "Risk Factors-- Dependence on Non-Binding Strategic Marketing
Alliances; Need to Establish Additional Alliances"). The failure of Zip or Jaz
to achieve widespread commercial acceptance would have a material adverse effect
on the Company's business.
RISKS ASSOCIATED WITH GROWTH OF BUSINESS. The Company's business has grown
significantly in the past year, with sales increasing from $38.5 million in the
fourth quarter of 1994 to $148.8 million in the fourth quarter of 1995.
Moreover, the Company has significantly restructured its business over the past
two years, introducing the Zip drive in March 1995, the Jaz drive in December
1995 and several new Ditto products during 1995. Products introduced since
January 1, 1995 now generate the substantial majority of the Company's sales.
The growth and restructuring of the Company's business has placed significant
demands on the systems and management of the Company. For example, throughout
1995, demand for the Company's products, particularly its Zip disk drives,
exceeded the Company's manufacturing capacity. In addition, this business growth
and restructuring have resulted in additional personnel needs and an increased
level of responsibility for management personnel. To manage its growth
effectively, the Company will be required to continue to expand and improve its
internal operations and systems (including manufacturing, logistics, product
development, management information systems and sales and marketing) and to
expand and manage its employee base. The Company has recently added or expects
to add several key managers, including a new Senior Vice President, Operations,
and there can be no assurance as to the rate at which these managers will be
effectively assimilated into the Company's business or operate effectively as a
management team. The Company will also be required to effectively expand and
manage the independent contractors which the Company intends to use to
manufacture a majority of its products in the future. The Company's inability to
manage growth effectively could have a material adverse effect on the Company's
operating results. See "Selected Consolidated Financial Data,"
"Business--Employees" and "Management."
DECLINE IN LIQUIDITY; FUTURE CAPITAL NEEDS. The Company had cash and cash
equivalents of $1 million as of December 31, 1995 and $4.5 million as of January
28, 1996. During 1995, the Company used $27.0 million in operating activities
and an additional $45.2 million in the purchase of equipment and leasehold
improvements. Also during 1995, the Company experienced substantial increases in
its accounts receivable and inventories. Increases in these working capital
components have resulted in a significant decline in the Company's liquidity.
The Company expects the proceeds of this offering, together with current sources
of financing available to the Company, will be sufficient to fund the Company's
operations through at least June 30, 1996. Thereafter, the Company expects to
require additional funds to finance its operations. The precise amount and
timing of the Company's funding needs cannot be determined at this time, and
will depend upon a number of factors, including the market demand for the
Company's products, the availability of critical components, the Company's
strategic alliances for the manufacture of its products, the progress of the
Company's product development efforts, the Company's inventory management, the
Company's management of its cash and accounts
7
<PAGE>
payable, and the Company's ability to refinance its bank debt, a significant
portion of which matures in mid-1996. There can be no assurance that funds
required by the Company in the future will be available on terms satisfactory to
the Company. The inability to obtain needed funding on satisfactory terms may
require the Company to reduce planned capital expenditures, to reduce planned
levels of advertising and promotion, to scale back its manufacturing or other
operations or to enter into financing arrangements on terms which it would not
otherwise accept and would have a material adverse effect on the Company's
business and financial results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
RECENT OPERATING LOSSES; QUARTERLY FLUCTUATIONS IN OPERATING RESULTS; RISK
OF FAILURE TO SATISFY MARKET EXPECTATIONS. The Company incurred net losses in
1993 and 1994, as well as in the first two quarters of 1995. Although the
Company was profitable for 1995 as a whole, there can be no assurance it will be
able to remain profitable in the future. The Company has experienced and may
experience in the future significant fluctuations in its quarterly operating
results. Factors such as price reductions, the introduction and market
acceptance of new products, product returns, the availability of critical
components, the lower gross margins associated with the Company's newly
introduced products, seasonality and the condition of retail markets could
contribute to this variability. For example, as is common in the industry, it is
likely that the Company will reduce the prices of certain of its products in the
future. Moreover, the Company's expense levels are based in part on expectations
of future sales levels, and a shortfall in expected sales could therefore result
in a disproportionate decrease in the Company's net income. As a result of these
and other factors, it is likely that in some future period the Company's
operating results will be below the expectations of investors, which would be
likely to result in a significant reduction in the market price of the Common
Stock. In light of the Company's revenue growth in 1995 and the change in the
nature of its business over the past year, the Company believes that
period-to-period comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future performance.
The Company believes that its 1996 operating results are subject to a wide range
of possible outcomes because they will be heavily dependent on recently
introduced products and subject to a number of uncertainties. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company's recently introduced Ditto, Zip and Jaz products are targeted
primarily to the retail consumer market. This market is generally seasonal, with
a substantial portion of total sales typically occurring in the fourth quarter.
In addition, some retailers have been experiencing sales decreases and certain
analysts have predicted continued softening of this market. Accordingly, in
light of the seasonal nature and general uncertainty of the consumer market,
investors should not assume fourth quarter of 1995 revenues are necessarily
indicative of the revenues to be expected in any future quarter.
TECHNOLOGICAL CHANGE AND NEW PRODUCTS. The Company operates in an industry
that is subject to both rapid technological change and rapid change in consumer
demands. For example, over the last 10 years the typical hard disk drive
included in a new personal computer has increased in capacity from approximately
40 MBs to over 1 GB, while the price of a hard disk drive has remained constant
or even decreased. The Company's future success will depend in significant part
on its ability to continually develop and introduce, in a timely manner, new
removable-media disk drives and tape products with improved features, and to
develop and manufacture those new products within a cost structure that enables
the Company to sell such products at lower prices than those of comparable
products today. There can be no assurance that the Company will be successful in
developing, manufacturing and marketing new and enhanced products that meet both
the performance and price demands of the data storage market. See
"Business--Product Development."
DEPENDENCE ON NON-BINDING STRATEGIC MARKETING ALLIANCES; NEED TO ESTABLISH
ADDITIONAL ALLIANCES. The Company's business strategy depends in significant
part on establishing successful strategic alliances with a variety of key
companies within the computer industry. Among the types of alliances
contemplated by the Company's business strategy are: OEM arrangements with
personal computer manufacturers that will include Zip, Jaz and Ditto products as
a standard feature or factory-installed option in their personal computers;
reseller arrangements (including private and co-branding arrangements) with
major vendors of computer products covering the resale of the Company's products
by such companies; and licensing arrangements under which the Company grants
certain computer manufacturers on a royalty-bearing basis the right to
manufacture and sell
8
<PAGE>
Zip, Jaz and Ditto drives or media. The Company is a party to several such
strategic alliances, is currently in the process of negotiating additional
strategic alliances, and expects to continue to establish strategic alliances of
this nature in the future. Most of the strategic alliances to which the Company
is now a party have been established only recently, and there can be no
assurance that such relationships will produce the benefits anticipated by the
Company. Moreover, the Company believes that establishing additional strategic
alliances (especially OEM arrangements) is critical to the success of its
business, and there can be no assurance that the Company will be successful in
doing so. In addition, the Company's strategic alliances are generally not
covered by binding contracts and may be subject to unilateral termination by the
Company's strategic partners, and also may require the Company to share control
over its manufacturing and marketing programs and technologies. See
"Business--Company Strategy--Broadening Distribution Through Strategic
Alliances," "Business--Marketing and Sales."
RELIANCE ON NON-BINDING CONTRACT MANUFACTURING RELATIONSHIPS. The Company
plans to use independent parties to manufacture for the Company, on a contract
basis, a majority of the Company's products in the future. The Company currently
has manufacturing relationships with Seiko Epson (Zip drives), MegaMedia
Computer (Zip disks), Sequel (Jaz drives) and First Engineering Plastics (Ditto
drives). There can be no assurance that the Company will be successful in
maintaining such relationships or in establishing additional relationships in
the future, or in managing such manufacturing relationships. The Company's
manufacturing relationships are generally not covered by binding contracts and
may be subject to unilateral termination by the Company's manufacturing
partners. In addition, there can be no assurance that third-party manufacturers
will be able to meet the Company's quantity or quality requirements for
manufactured products. Moreover, the Company may grant certain of its
third-party manufacturers, among others, the right to sell significant
quantities of the Zip and Jaz drives they produce for their own account, thereby
potentially reducing the supply of such drives to the Company and increasing
competition. See "Business--Manufacturing."
COMPETITION. The data storage industry is highly competitive. The Company
believes that its Zip and Jaz products compete most directly with other
removable-media data storage devices, such as magnetic cartridge disk drives
offered by Syquest Technology, optical disk drives and "floptical" disk drives.
Although the Company believes that its Zip and Jaz products offer price,
performance or usability advantages over the other removable-media storage
devices available today, the Company believes that the price, performance and
usability levels of existing removable-media products will improve and that
other companies will introduce new removable-media storage devices. Accordingly,
the Company believes its Zip and Jaz products will face increasingly intense
competition. In particular, a consortium comprised of Compaq Computer, 3M and
MKE has announced the Floptical 120, a high-capacity floptical drive that is
compatible with conventional floppy disks. In addition, both Mitsumi and Swan
Instruments are expected to introduce high-capacity, removable-media disk drives
in 1996 that would also directly compete with Zip and Jaz. In addition, to the
extent that Zip and Jaz drives are used for incremental primary storage
capacity, they also compete with conventional hard disk drives. Also, the
leading suppliers of conventional hard disk drives could at any time determine
to enter the removable-media storage market.
As new and competing removable-media storage solutions are introduced, it is
possible that any such solution that achieves a significant market presence or
establishes a number of significant OEM relationships will emerge as an industry
standard and achieve a dominant market position. If such is the case, there can
be no assurance that the Company's products would achieve significant market
acceptance, particularly given the Company's size and market position vis-a-vis
other competitors. See "Risk Factors--Recent Introduction of Zip and Jaz;
Uncertainty of Market Acceptance."
The Company's Ditto products compete with tape drives from companies such as
Conner Peripherals, Inc. and Colorado Memory Systems, a division of
Hewlett-Packard Company, as well as vendors of other backup storage devices. The
Company may also compete in both the removable disk drive and the tape market
with licensees of the Company's products. Many of the Company's current and
potential competitors have significantly greater financial, manufacturing and
marketing resources than the Company. There can be no assurance that the Company
will be able to compete successfully against current and future sources of
competition or that the competitive pressures faced by the Company will not
adversely affect the Company's operating results. See "Business--Competition."
9
<PAGE>
DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's success is heavily
dependent upon the establishment and maintenance of proprietary technologies.
The Company relies on a combination of patent, copyright and trade secret law to
protect the technology in its Zip, Jaz and Ditto products. Although the Company
has filed over 40 U.S. and foreign patent applications relating to its Zip and
Jaz drives and disks, the majority of such applications were filed in late 1994
or 1995 and are at relatively early stages in the review process, no such
patents have as yet been issued and there can be no assurance that they will
issue in the future. For example, if some or all of the pending Zip and Jaz
patents are not granted, the Company may not be able to legally prevent others
from copying the technology incorporated in the Zip and Jaz drives and disks or
from producing and selling compatible products which compete with the Company's
products. If another party were to succeed in producing and selling Zip- or
Jaz-compatible disks, the Company's sales would be materially adversely
affected. Moreover, because the Company's Zip and Jaz disks have significantly
higher gross margins than the Zip and Jaz drives, the Company's net income would
be disproportionately affected by any such sales shortfall. In addition, there
can be no assurance that the steps taken by the Company to protect its
technology will be adequate to prevent misappropriation of its technology by
third parties, or that third parties will not be able to independently develop
similar technology.
From time to time the Company receives notices alleging that the Company's
products infringe third party proprietary rights. The Company, however, is not
currently aware of any threatened or pending legal challenge to the technology
which is incorporated in its products which it expects to have a material
adverse effect on its business or financial results. Patent and similar
litigation frequently is complex and expensive and its outcome can be difficult
to predict. There can be no assurance that the Company will prevail in any
proceedings that may be commenced against the Company. In addition, certain
technology used in the Company's products is licensed from third parties,
including the backup software included with the Company's Ditto products and
certain patent rights relating to Zip. The Company is in the process of
negotiating a definitive license agreement for the Ditto backup software and,
although it has entered into a letter agreement regarding the Zip patent rights,
is in the process of negotiating a more detailed license agreement for the Zip
patent rights. The failure to execute definitive agreements or the termination
of any such license arrangements could have a material adverse effect on the
Company's business and financial results. See "Business--Proprietary Rights."
INTERNATIONAL OPERATIONS. International sales generated a significant
portion of the Company's sales in 1994 and 1995 and the Company expects
international sales to continue to comprise a significant percentage of its
total sales in the future. The international portion of the Company's business
is subject to a number of inherent risks, including difficulties in building and
managing foreign operations and foreign reseller networks, the differing product
needs of foreign customers, fluctuations in the value of foreign currencies,
import/export duties and quotas, and unexpected regulatory, economic or
political changes in foreign markets. In addition, the Company relies on foreign
companies for the supply of certain critical components and is increasingly
relying on foreign companies for the manufacture of certain of its products, and
these relationships may be subject to some of the same risks affecting its
international sales. There can be no assurance that these factors will not
adversely affect the Company's international sales or its overall financial
performance. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--Marketing and Sales" and
"--Manufacturing."
The Company's international sales are predominantly denominated in foreign
currencies. Accordingly, a decrease in the value of foreign currencies relative
to the U.S. dollar could result in a significant decrease in U.S. dollar
revenues received by the Company for its international sales. Due to the number
of currencies involved in the Company's international sales and the volatility
of foreign currency exchange rates, the Company cannot predict the effect of
exchange rate fluctuations on future operating results. The Company enters into
forward exchange contracts to sell foreign currencies as a means of hedging its
currency translation exposure. In 1995, the Company recorded a net foreign
currency loss of $1.2 million in connection with the remeasurement to market
value of certain foreign currency contracts, which were purchased with the
intent of hedging operating cash flows. The majority of the loss was incurred in
the first quarter of 1995 as a result of the U.S. dollar weakening against
European currencies hedged by forward currency contracts in place at that time.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 4 of Notes to Consolidated Financial Statements.
10
<PAGE>
CERTAIN MARKETING AND SALES RISKS. As is common practice in its industry,
the Company's arrangements with its customers generally allow customers, in the
event of a price decrease, credit equal to the difference between the price
originally paid and the new decreased price on units in the customers'
inventories on the date of the price decrease. When a price decrease is
anticipated, the Company establishes reserves for amounts estimated to be
reimbursed to qualifying customers. There can be no assurance that these
reserves will be sufficient or that any future returns or price protection
charges will not have a material adverse effect on the Company's results of
operations, particularly because future results will be heavily dependent on
recently introduced products for which the Company has little or no operating
history. In addition, customers generally have the right to return excess
inventory within specified time periods. As a result, any build up of inventory
in the Company's distribution channels that does not sell through to end users
could result in product returns that have a material adverse effect on the
Company's operating results and financial condition.
The Company markets its products primarily through computer product
distributors and retailers. Distribution channels for personal computers and
accessories have been characterized by rapid change, including consolidation and
financial difficulties of distributors. The loss or ineffectiveness of any of
the Company's major distributors could have a material adverse effect on the
Company's results of operations. In addition, since the Company grants credit to
its customers, a substantial portion of outstanding accounts receivable are due
from computer product distributors and certain large retailers. At December 31,
1995, the customers with the ten highest outstanding accounts receivable
balances totaled $47.1 million or 43% of gross accounts receivable, with one
customer accounting for $15.2 million, or 14% of gross accounts receivable. If
any one or a group of these customers' receivable balances should be deemed
uncollectible, it would have a material adverse effect on the Company's results
of operations and financial condition. See "Business--Marketing and
Sales--Marketing."
SIGNIFICANT UNALLOCATED NET PROCEEDS. The Company has not yet quantified
the amount of the net proceeds of this offering that will be used for the
various purposes described under "Use of Proceeds." The exact uses of the net
proceeds, and the amount allocated for each use, will be subject to the
discretion of management. See "Use of Proceeds."
DEPENDENCE ON KEY PERSONNEL. The Company's success will depend in large
part upon the services of a number of key employees, including Kim B. Edwards,
its President and Chief Executive Officer. The loss of the services of one or
more of these key employees could have a material adverse effect on the Company.
The Company's success will also depend in significant part upon its ability to
attract and retain highly-skilled management and other personnel. Competition
for such personnel in the computer industry is intense, and the Company has from
time to time experienced difficulty in finding sufficient numbers of qualified
professional and production personnel in the greater Salt Lake City area. There
can be no assurance that the Company will be successful in attracting and
retaining the quantity and quality of personnel that it needs. See "Business--
Employees" and "Management."
MARKET VOLATILITY. There has been significant volatility in the market
price of securities of technology-based companies similar in size to the
Company. Factors such as announcements of new products by the Company or its
competitors, variations in the Company's quarterly operating results, or general
economic or stock market conditions unrelated to the Company's operating
performance may have a significant impact on the market price of the Common
Stock and the Notes. In addition, the Company believes that electronic bulletin
board postings regarding the Company on America Online and other similar
services, certain of which have in the past contained false information about
Company developments, including quotes falsely attributed to executive officers
of the Company, have in the past and may in the future contribute to volatility
in the market price of the Common Stock and the Notes. Any information
concerning the Company, including without limitation projections of future
operating results, appearing in such on-line bulletin boards or otherwise
emanating from a source other than the Company should not be relied upon as
having been supplied or endorsed by the Company. See "Price Range of Common
Stock and Dividend Policy."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS AND
SHAREHOLDER RIGHTS PLAN. The Company's Certificate of Incorporation and By-Laws
contain provisions permitting the Board of Directors to issue Preferred Stock
with rights senior to the Common Stock, limiting the right of stockholders to
act by written consent and requiring that special meetings of stockholders be
called only by the Board of Directors or the
11
<PAGE>
President. In addition, the Company has a Shareholder Rights Plan that may make
certain proposed acquisitions of the Company prohibitively expensive. These
charter and By-Law provisions and the Shareholder Rights Plan could make it more
difficult for a stockholder to effect certain actions and make it more difficult
for a third party to acquire, or discourage a third party from attempting to
acquire, control of the Company. As a result, they could limit the price that
certain investors might be willing to pay in the future for shares of the Common
Stock. See "Description of Capital Stock--Preferred Stock", "--Rights Plan" and
"--Delaware Law and Certain Charter and By-Law Provisions."
SUBORDINATION OF NOTES. The Notes will be unsecured and subordinated
obligations of the Company and will be subordinated in right of payment in full
of all Senior Indebtedness (as defined). The Notes will also be effectively
subordinated to all indebtedness and other liabilities of the subsidiaries of
the Company. At January 28, 1996, the Company had approximately $60.3 million of
outstanding indebtedness that would have constituted Senior Indebtedness. In
addition, at January 28, 1996, subsidiaries of the Company had outstanding an
aggregate of approximately $18.8 million of indebtedness and other liabilities
to which the Notes would have been effectively subordinated. The Indenture does
not limit the amount of additional indebtedness, including Senior Indebtedness,
which the Company or any of its subsidiaries can create, incur, assume or
guaranty. The Company anticipates that from time to time it and its subsidiaries
will incur additional indebtedness, including Senior Indebtedness. No payment on
account or principal, premium, if any, or interest on, or redemption or
repurchase of, the Notes may be made by the Company if there is a default in the
payment of principal, premium, if any, or interest (including a default under
any repurchase or redemption obligation) with respect to any Senior Indebtedness
or if any other event of default with respect to any Senior Indebtedness
permitting the holders thereof to accelerate the maturity thereof shall have
occurred and shall not have been cured or waived. Upon any acceleration of the
principal due on the Notes or payment or distribution of assets of the Company
to creditors upon any dissolution, winding-up, liquidation or reorganization,
all principal, premium, if any, and interest due on all Senior Indebtedness must
be paid in full before the holders of the Notes are entitled to receive any
payment. Moreover, the cash flow and consequent ability of the Company to
service debt, including the Notes, is partially dependent upon the earnings from
the Company's subsidiaries and the distribution of those earnings, or upon loans
or other payments of funds, by those subsidiaries to the Company. The
subsidiaries have no obligation to pay any amounts due pursuant to the Notes
(which are obligations exclusively of the Company), and their payment of
dividends or distributions and making of loans or other payments to the Company
could be subject to statutory or contractual restrictions, could be contingent
upon the subsidiaries' earnings and are subject to various business
considerations. See "Description of Notes--Subordination of Notes."
LIMITATION ON REPURCHASE OF NOTES. Upon the occurrence of a Repurchase
Event (as defined), each holder of Notes may require the Company to repurchase
all or a portion of such holder's Notes. If a Repurchase Event were to occur,
there can be no assurance that the Company would have sufficient financial
resources, or would be able to arrange financing, to pay the repurchase price
for all Notes tendered by holders thereof. In addition, the occurrence of
certain Repurchase Events would constitute an event of default under certain of
the Company's current debt agreements, and the Company's repurchase of Notes as
a result of the occurrence of a Repurchase Event may be prohibited or limited
by, or create an event of default under, the terms of future agreements relating
to borrowings of the Company, including agreements relating to Senior
Indebtedness. In the event a Repurchase Event occurs at a time when the Company
is prohibited from purchasing Notes, the Company could seek the consent of its
lenders to the purchase of the Notes or could attempt to refinance the
borrowings that contain such prohibition. If the Company does not obtain such a
consent or repay such borrowings, the Company would remain prohibited from
purchasing Notes. In such case, the Company's failure to purchase tendered Notes
would constitute an Event of Default under the Indenture which would, in turn,
constitute a further default under certain of the Company's existing debt
agreements and may constitute a default under the terms of other indebtedness
that the Company may incur from time to time. In such circumstances, the
subordination provisions in the Indenture would prohibit payments to the holders
of Notes. See "Description of Notes--Repurchase at Option of Holders Upon
Repurchase Event."
12
<PAGE>
THE COMPANY
Iomega Corporation was incorporated in Delaware in 1980. The Company's
principal executive offices are located at 1821 West Iomega Way, Roy, Utah
84067, and its telephone number is (801) 778-1000. As used in this Prospectus,
the terms the "Company" and "Iomega" refer to Iomega Corporation and its wholly
owned subsidiaries, unless the context otherwise requires.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Notes offered hereby
are estimated to be approximately $37,450,000 (approximately $43,165,000 if the
Underwriter's over-allotment option is exercised in full), after deducting the
underwriting discount and estimated offering expenses.
The Company intends to use the net proceeds primarily for working capital
needs and general corporate purposes, including the repayment of a portion of
the amounts outstanding under its bank loan agreements. In particular, the net
proceeds may be used to expand manufacturing capacity, fund sales and marketing
and research and development activities, purchase capital equipment, and finance
increases in accounts receivable and inventory that may result from continued
growth in the Company's business. The amounts actually expended by the Company
for these purposes will vary significantly depending upon a number of factors,
including the market demand for the Company's products, the availability of
critical components, the Company's strategic alliances for the manufacture of
its products, the progress of the Company's product development efforts and the
Company's inventory management. The Company does not believe it can at this time
accurately estimate the amounts to be used for each purpose. See "Risk
Factors--Significant Unallocated Net Proceeds."
Under its loan agreement with Wells Fargo Bank, N.A. ("Wells Fargo"), the
Company has outstanding revolving loans, which bear interest at the bank's prime
rate plus 1% and become due and payable on June 30, 1996, and term loans, which
bear interest at the bank's prime rate plus 1.25% and become due and payable on
June 30, 1996. As of January 28, 1996, borrowings under this loan agreement were
$43.7 million, consisting of $40.2 million under the revolving credit facility
and $3.5 million under the term loan facility. As of January 28, 1996, there was
$10.7 million of borrowings outstanding under the loan agreement between a
foreign subsidiary of the Company and a German commercial bank at interest rates
ranging from 7.75% to 15.00%. The agreement expires on November 30, 1996. In
January 1996, the Company entered into a $6 million revolving credit facility
with First Security Bank of Utah, N.A., all of which was outstanding at January
28, 1996. The line matures on April 12, 1996 and bears interest at the bank's
prime rate plus 2%. Amounts borrowed under these loan agreements have been used
for working capital purposes and purchases of capital equipment. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and Notes 5 and 13 of Notes to
Consolidated Financial Statements for a further description of the Company's
loan agreements.
The Company may also use a portion of the net proceeds to make one or more
acquisitions of businesses, products or technologies which enhance or broaden
the Company's current product offerings. However, except as described below, the
Company has no specific agreements or commitments and is not currently engaged
in any negotiations for any such acquisition. The Company is currently engaged
in negotiations for two technology acquisitions for a total purchase price (to
be paid over two years) of less than $2,500,000, which the Company does not
consider material to its business or financial condition.
Pending the uses described above, the net proceeds will be invested in
short-term, investment-grade, interest-bearing securities.
13
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol IOMG. The following table sets forth for the periods indicated the high
and low sales prices per share of the Common Stock as reported on the Nasdaq
National Market.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1994
- -----------------------------------------------------------------------------------------------
First Quarter.................................................................................. $ 0.83 $ 0.60
Second Quarter................................................................................. $ 0.70 $ 0.53
Third Quarter.................................................................................. $ 1.07 $ 0.70
Fourth Quarter................................................................................. $ 1.50 $ 0.77
<CAPTION>
1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
First Quarter.................................................................................. $ 2.61 $ 1.08
Second Quarter................................................................................. $ 8.71 $ 2.33
Third Quarter.................................................................................. $ 10.00 $ 6.79
Fourth Quarter................................................................................. $ 17.92 $ 5.50
<CAPTION>
1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
First Quarter (through March 7, 1996).......................................................... $ 20.00 $ 11.42
</TABLE>
The Company has never paid any cash dividends on its Common Stock and does
not anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain future earnings to fund the development and growth
of its business. The Company's loan agreements prohibit the payment of dividends
without the prior written consent of the banks.
14
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
December 31, 1995 and as adjusted to give effect to the sale by the Company of
the Notes offered hereby, after deducting the underwriting discount and
estimated offering expenses.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
6 3/4% Convertible Subordinated Notes due 2001............................................ $ -- $ 40,000
Stockholders' equity:
Preferred Stock, $.01 par value;
4,750,000 shares authorized; no
shares outstanding..................................................................... -- --
Series C Junior Participating Preferred
Stock, $.01 par value; 250,000 shares
authorized; no shares outstanding...................................................... -- --
Common Stock, $.03 1/3 par value;
150,000,000 shares authorized; 58,819,335
shares outstanding (1)................................................................. 1,960 1,960
Additional paid-in capital.............................................................. 51,473 51,473
Retained earnings....................................................................... 9,253 9,253
--------- -----------
Total stockholders' equity............................................................ 62,686 62,686
--------- -----------
Total capitalization.................................................................. $ 62,686 $ 102,686
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Number of authorized shares gives effect to an amendment to the Certificate
of Incorporation in January 1996 increasing the number of authorized shares
of Common Stock from 30,000,000 to 150,000,000. Numbers of outstanding
shares give effect to the 3-for-1 stock split (effected as a 200% stock
dividend) in January 1996, and excludes (i) an aggregate of 6,206,977 shares
of Common Stock reserved for issuance upon the exercise of stock options
outstanding as of December 31, 1995 with a weighted average exercise price
of $1.67 per share, and (ii) an aggregate of 2,025,316 shares issuable upon
conversion of the Notes.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data of the
Company for and as of the years ended December 31, 1991, 1992, 1993, 1994 and
1995. These selected consolidated financial data have been derived from the
Company's consolidated financial statements which have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports.
These data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1991 1992 1993 1994 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales......................................................... $ 136,566 $ 139,174 $ 147,123 $ 141,380 $ 326,225
Cost of sales............................................... 68,404 74,090 92,585 92,453 235,838
--------- --------- --------- --------- ---------
Gross margin.............................................. 68,162 65,084 54,538 48,927 90,387
Operating expenses:
Selling, general and administrative......................... 34,323 37,572 38,862 36,862 57,189
Research and development.................................... 17,939 21,959 18,972 15,438 19,576
Restructuring costs (reversal).............................. -- -- 14,131 (2,491) --
--------- --------- --------- --------- ---------
Total operating expenses.................................. 52,262 59,531 71,965 49,809 76,765
--------- --------- --------- --------- ---------
Operating income (loss)....................................... 15,900 5,553 (17,427) (882) 13,622
Interest and other income (expense)........................... 1,661 592 771 908 (1,983)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and cumulative effect of
accounting change............................................ 17,561 6,145 (16,656) 26 11,639
Provision for income taxes (1)................................ (5,236) (1,474) (206) (1,908) (3,136)
--------- --------- --------- --------- ---------
Net income (loss) before cumulative effect of accounting
change (1)................................................... 12,325 4,671 (16,862) (1,882) 8,503
Cumulative effect of accounting change (1).................... -- -- 2,337 -- --
--------- --------- --------- --------- ---------
Net income (loss)............................................. $ 12,325 $ 4,671 $ (14,525) $ (1,882) $ 8,503
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) per common share (2)........................ $ 0.20 $ 0.08 $ (0.27) $ (0.03) $ 0.14
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common shares outstanding (2)................ 61,767 60,795 54,318 55,419 60,180
Ratio of earnings to fixed charges (3)........................ 30.0 9.1 - 1.0 6.0
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1991 1992 1993 1994 1995
--------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and temporary investments.............. $ 31,611 $ 19,691 $ 18,804 $ 19,793 $ 1,023
Working capital............................................... 43,165 35,038 30,550 34,818 12,623
Total assets.................................................. 87,046 86,955 81,089 75,833 266,227
Stockholders' equity.......................................... 64,845 65,024 51,090 49,063 62,686
</TABLE>
- ------------------------------
(1) See Note 3 of Notes to Consolidated Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements.
(3) For purposes of determining the ratio of earnings to fixed charges,
earnings consist of net income (loss) before provision for income taxes and
cumulative effect of accounting change, plus fixed charges. Fixed charges
consist of interest expense and the estimated interest component of rental
expense. For 1993, earnings were insufficient to cover fixed charges by
$16.7 million.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
BACKGROUND
The Company's business has undergone a significant transition over the past
three years. During 1993, the Company recorded $14.1 million in restructuring
costs relating to the write-off of certain assets and the establishment of
accruals and reserves for future restructuring of the Company's business,
including the disposal of a portion of the Company's research and development
operations, workforce reductions and other consolidation of operations, and
other restructuring actions necessary to make the Company more customer-driven.
These restructuring reserves and accruals totaled approximately $11.5 million at
December 31, 1993.
1994 was a year of transition for the Company as operations were
restructured and redirected towards new development and marketing activities. On
January 1, 1994, Mr. Edwards joined the Company as President and Chief Executive
Officer. During the first quarter of 1994, the Company sold its thin-film head
development operations and discontinued its Floptical development operations.
During the third quarter of 1994, the Company sold certain assets of its
Floptical development operations and also abandoned a Bernoulli-type product in
the development stage. During the fourth quarter of 1994, the Company disposed
of tooling and other manufacturing equipment which had become obsolete due to
product design changes to make the Company's products more consumer friendly.
The Company also reduced its workforce and paid out severance and outplacement
costs in connection with two reductions in workforce, one of which occurred in
January 1994 and the other in June 1994. These actions were included in the 1993
restructuring accruals and therefore had no impact on 1994 results of
operations.
In addition to restructuring and streamlining much of its historical
business during 1994, the Company took several steps towards introducing the
products that are currently generating most of the Company's revenues. In 1994,
the Company began the consumer research and product development efforts that
would lead to the introduction of its Zip disk drive, which was announced in
October 1994. The Company also began the development work that would culminate
in the Jaz drive. In addition, the Company successfully expanded and enhanced
its family of tape drives in 1994, adopting the Ditto name for the first time
and introducing the Ditto 420.
The Company's efforts during 1994 began to yield results in 1995. The Zip
drive began commercial shipment in March 1995. The Jaz drive began commercial
shipment in limited quantities in December 1995. The Company continued to
enhance its tape drive family in 1995, introducing the Ditto Easy 800 and the
Ditto 3200. As a result of these new products, the Company's sales increased
from $40.1 million in the first quarter of 1995 to $148.8 million in the fourth
quarter of 1995.
In 1994, Bernoulli products accounted for almost two-thirds of the Company's
sales, with Ditto products accounting for most of the balance. In 1995, Zip was
the Company's largest selling product line, with Bernoulli products accounting
for only approximately 20% of the Company's sales. The Company expects that Zip
and Jaz products will account for a substantial majority of its sales in 1996.
The Company does not expect Bernoulli products to represent a significant
portion of the Company's revenues or net income in the future.
FUTURE OPERATING RESULTS
Because the Company is relying on its Zip and Jaz products for the
substantial majority of its sales in 1996, the Company's future operating
results will depend in large part on the ability of those products to attain
widespread market acceptance. Although the Company believes there is a market
demand for new personal computer data storage solutions, there can be no
assurance that the Company will be successful in establishing Zip and Jaz as
accepted solutions for that market need. The extent to which Zip and Jaz achieve
a significant market presence will depend upon a number of factors, including
the price, performance and other characteristics of competing solutions
introduced by other vendors, the timing of the introduction of such solutions,
and the success of the Company in establishing OEM arrangements for Zip and Jaz
with leading personal computer
17
<PAGE>
manufacturers. In addition, the component shortages confronting the Company
could continue to limit the Company's sales and provide an opportunity for
competing products to achieve market acceptance. See "Risk Factors--Recent
Introduction of Zip and Jaz; Uncertainty of Market Acceptance," "--Competition,"
"--Shortages of Critical Components; Absence of Supply Contracts; Dependence on
Suppliers," "--Dependence on Non-Binding Strategic Marketing Alliances; Need to
Establish Additional Alliances" and "--Reliance on Non-Binding Contract
Manufacturing Relationships" and "Business--The Need for New Data Storage
Solutions," "--Marketing and Sales," "--Manufacturing" and "--Competition."
A number of elements of the Company's business strategy may also directly
impact the Company's future operating results. Because the Company's marketing
strategy is based in significant part on generating consumer awareness of and
demand for its products, the Company plans to incur significantly increased
marketing and advertising expenses in 1996. In addition, a critical element of
the Company's distribution strategy is the establishment of OEM arrangements for
Zip, Jaz and Ditto. OEM sales generally provide lower gross margins than sales
to other channels. Moreover, reductions in the prices of the Company's Zip, Jaz
and Ditto products, which the Company believes is likely at some point in the
future, would likely have an adverse effect on gross margins for those products.
The Company's business strategy is substantially dependent on maximizing
sales of its proprietary Zip and Jaz disks, which generate significantly higher
margins than its disk drives. If this strategy is not successful, either because
the Company does not establish a sufficiently large installed base of Zip and
Jaz drives, because another party succeeds in producing disks that are
compatible with Zip and Jaz drives without infringing the Company's proprietary
rights, or for any other reason, the Company's sales would be adversely
affected, and its net income would be disproportionately adversely affected. See
"Risk Factors--Dependence on Proprietary Technology."
Although sales of Zip drives and disks were the primary reason for the
Company's revenue growth during 1995, sales of such products may be attributable
in large part to the novelty of such products and the initial publicity
surrounding the introduction of Zip, and may not be indicative of the long-term
demand for such products. Moreover, the retail market to which the Company's
products are targeted is seasonal, with a substantial portion of total sales
typically occurring in the fourth quarter, and may be subject to continued
softening in 1996. Accordingly, investors should not assume that the sales
growth experienced by the Company in 1995 is an indication of future sales.
Moreover, in light of the Company's revenue growth in 1995 and the change in the
nature of its business over the past year, the Company believes that
period-to-period comparisons of its financial results are not necessarily
meaningful. In addition, the Company has experienced and may experience
significant fluctuations in its quarterly operating results. See "Risk
Factor--Recent Operating Losses; Quarterly Fluctuations in Operating Results;
Risk of Failure to Satisfy Market Expectations."
The Company's European sales are predominantly denominated in foreign
currencies. In addition, the Company purchases certain components in foreign
currencies. The Company enters into forward exchange contracts to sell and
purchase foreign currencies as a means of hedging its foreign operating cash
flows. Fluctuations in the value of foreign currencies relative to the U.S.
dollar would result in foreign currency gains and losses. See "Risk
Factors--International Operations."
18
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of
sales for the years ended December 31, 1993, 1994 and 1995:
<TABLE>
<CAPTION>
PERCENTAGE OF SALES
-------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Sales............................................................................ 100.0% 100.0% 100.0%
Cost of sales.................................................................... 62.9 65.4 72.3
----- ----- -----
Gross margin................................................................... 37.1 34.6 27.7
----- ----- -----
Operating expenses:
Selling, general and administrative............................................ 26.4 26.1 17.5
Research and development....................................................... 12.9 10.9 6.0
Restructuring costs (reversal)................................................. 9.6 (1.8) --
----- ----- -----
Total operating expenses..................................................... 48.9 35.2 23.5
----- ----- -----
Operating income (loss).......................................................... (11.8) (0.6) 4.2
Interest and other income (expense).............................................. 0.5 0.6 (0.6)
----- ----- -----
Income (loss) before income taxes and cumulative effect of accounting change..... (11.3) -- 3.6
Provision for income taxes....................................................... (0.2) (1.3) (1.0)
----- ----- -----
Net income (loss) before cumulative effect of accounting change.................. (11.5) (1.3) 2.6
Cumulative effect of accounting change........................................... 1.6 -- --
----- ----- -----
Net income (loss)................................................................ (9.9)% (1.3)% 2.6%
----- ----- -----
----- ----- -----
</TABLE>
1995 AS COMPARED TO 1994
SALES. Sales increased by $185 million, or 131%, in 1995 when compared to
1994. The primary reason for the increased sales was the introduction of the new
Zip product line, which began shipping at the end of the first quarter of 1995.
Increased sales of Ditto products also contributed to the increased sales. In
addition, the Company began shipping Jaz products in limited quantities in
December 1995. These sales increases were partially offset by reduced sales of
Bernoulli products.
In 1995, sales of Zip and Jaz products accounted for $174.2 million, or 53%,
of sales. Ditto products accounted for $86.5 million, or 27%, of sales in 1995
as compared to $42.1 million, or 30%, of sales in 1994. Bernoulli and other
product sales totaled $65.5 million, or 20%, of sales in 1995 as compared to
$99.3 million, or 70%, of 1994 sales. In the fourth quarter of 1995, sales of
Zip and Jaz increased to 68% of sales, Ditto represented 22% of sales and
Bernoulli and other products were 10% of sales.
Sales to the U.S. market increased by $133.5 million, or 149%, in 1995 when
compared to 1994. International sales, primarily to customers located in Europe,
increased by $51.3 million, or 99%, in 1995 when compared to 1994. In total,
sales outside of the United States represented 31.7% of sales in 1995 as
compared to 36.7% in 1994.
Management expects increased sales of Zip, Jaz and Ditto products in 1996,
which it expects to be partially offset by significant declines in sales of
Bernoulli products. However, the Company is experiencing component shortages
which may continue to limit production and therefore sales. Accordingly, there
can be no assurance that future sales will materialize as expected.
GROSS MARGIN. The Company's gross margin percentage in 1995 was 27.7%, as
compared to 34.6% in 1994. The decline in gross margin percentage was primarily
attributable to a shift in sales mix away from higher margin Bernoulli products
to lower margin Zip products. Start-up costs associated with the introduction of
Zip and Jaz products also contributed to the decline in gross margin percentage.
The Company's gross margin
19
<PAGE>
percentage increased from 25.4% in the third quarter of 1995 to 30.6% in the
fourth quarter of 1995, which is primarily attributable to an increase in sales
of Zip disks, which have significantly higher margins than drives, as a
percentage of total sales.
Gross margins in 1996 will depend in large part on sales of Zip and Jaz
disks, which generate significantly higher gross margin than the corresponding
drives, and on the sales mix between disks and drives. Historically, the gross
margin of Bernoulli products has generally been in excess of 40%; the gross
margins of the Zip, Jaz and Ditto product lines during 1995 were significantly
lower than that. Although the Company expects the gross margins of Zip and Jaz
products to increase as production increases, it does not expect them to achieve
the levels historically achieved by Bernoulli. In addition, gross margins will
be affected by the level of sales through OEMs, the Company's ability to achieve
planned cost reductions and by any future price reductions. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by 55% in 1995 as compared to 1994. As a
percentage of sales, these expenses declined from 26.1% in 1994 to 17.5% in
1995. The decline in percentage is due to the increased sales volume in 1995.
The actual selling, general and administrative expenses increased by $20.3
million in 1995 as compared to 1994. The increased expenses were primarily the
result of advertising and promotion expenses incurred to launch new products,
variable selling expenses, and increased salaries and wages resulting from
increased headcount in all areas of sales, marketing and administration.
Management expects selling, general and administrative expenses to increase
further in 1996 in absolute dollars due to advertising and promotion expenses
expected to be incurred to help create demand for Zip, Jaz and Ditto products,
as well as increased variable selling expenses and increased fixed
administrative expenses.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
6.0% of sales in 1995, compared to 10.9% in 1994. The decline in percentages is
due to the increased sales volumes in 1995. The actual research and development
expenses increased by $4.1 million in 1995 compared to 1994. This increase was
primarily the result of expenditures related to the development of the Zip,
Ditto and Jaz products. Management expects continued increases in research and
development expenses in 1996 in absolute dollars as the result of the continued
growth in the resources needed for future product development and enhancement.
OTHER. In 1995, the Company recorded a net foreign currency loss of $1.2
million. This loss was primarily a result of losses incurred in connection with
the remeasurement of forward exchange contracts to market values. The majority
of the loss was incurred in the first quarter of 1995 as the U.S. dollar
weakened against foreign currencies (primarily European currencies) that were
hedged by the forward contracts in place at March 31, 1995. In the first quarter
of 1995, the Company bought more than its customary three months of forward
exchange contracts with the intent of hedging operating cash flows through the
remainder of the year and in anticipation of a strengthening dollar. However,
the dollar continued to weaken against the currencies that were hedged,
resulting in a $1.5 million charge to operations. The loss on the remeasurement
of forward exchange contracts was partially offset by translation gains recorded
in remeasurement of its foreign subsidiary's financial statements to the U.S.
dollar.
The Company recorded interest expense of $1.7 million in 1995 due to
borrowings on short-term credit lines as well as capital leases. Interest income
declined from $.9 million in 1994 to $.5 million in 1995 due to declining cash
balances. Other income of $.4 million recorded in 1995 is primarily attributable
to royalty payments received related to the Company's Ditto products.
For 1995, the Company recorded a tax provision of $3.1 million representing
an effective income tax rate of 27%. The Company expects the effective income
tax rate to increase in the future to the statutory rate of 35% for federal
income tax and approximately 5% for state income taxes. The timing of the rate
increase will depend on future taxable income, the utilization of available tax
credits, and changes in the valuation allowance associated with the deferred tax
assets.
1994 AS COMPARED TO 1993
Sales decreased by 4% in 1994 when compared to 1993. Significant declines in
sales of 5 1/4-inch 44- and 90-MB Bernoulli drive products were partially offset
by increased sales of 5 1/4-inch 150- and 230-MB Bernoulli
20
<PAGE>
drive products. Bernoulli drive sales dollars in total declined in 1994 as
compared to 1993. Unit sales of Bernoulli drives were relatively flat in 1994
versus 1993, but price reductions resulted in lower sales dollars. Bernoulli
disk sales also declined in 1994 as compared to 1993 in both dollars and units.
These declines in Bernoulli sales were partially offset by increased sales of
tape products. Tape drive unit sales doubled in 1994 as compared to 1993, while
sales dollars increased at a slightly lower rate due to a lower average price on
tape products in 1994. Sales of the Company's SyQuest-compatible removable hard
disk cartridges (which have been discontinued) increased in 1994, which offset a
decline in Floptical product sales.
Sales to the U.S. market declined in 1994 when compared to 1993 as a result
of decreasing sales of Bernoulli products, which were only partially offset by
increases in tape product sales. International sales, including export sales,
increased by approximately 25% and represented 37% of total consolidated sales
in 1994 compared to 28% in 1993. Substantial increases in sales of tape products
in Europe were the primary reason for the increased sales in the international
channels.
Cost of sales increased as a percentage of sales from 62.9% in 1993 to 65.4%
in 1994. The decline in the gross margin percentage was partially due to a
higher mix of tape products which have lower gross margins than the Bernoulli
products. In addition, all product lines continued to experience competitive
price pressures which resulted in lower selling prices in 1994 when compared to
1993. Partially offsetting these factors, both the Bernoulli and tape product
lines benefitted from significant production cost reductions which were realized
throughout 1994.
Selling, general and administrative expenses decreased by $2.0 million and
decreased slightly as a percentage of sales from 26.4% to 26.1%. Decreases in
selling, general and administrative expenses resulted from restructuring actions
which occurred in January and June of 1994, including the closing down of the
Floptical product line, as well as streamlining operations in both the U.S. and
Europe. Sales and marketing expenses were increased in the latter part of 1994
to introduce the Zip product line and to reposition the Company's marketing
strategy worldwide. In addition, selling, general and administrative expenses
increased in 1994 due to the payment of management bonuses.
Research and development expenses decreased by $3.5 million and declined as
a percentage of sales from 12.9% in 1993 to 10.9% in 1994. The major decline in
research and development expenses resulted from the sale of the Company's thin
film head development operation located in Fremont, California in the first
quarter of 1994 and from closing its Floptical development laboratory located in
Boulder, Colorado in the first quarter of 1994. Offsetting these decreases were
increased development spending on the Company's tape product line and
development costs for the Company's Zip product line.
The Company's operating expenses were reduced in 1994 due to the reversal of
restructuring reserves totaling $2.5 million. The Company had previously
recorded restructuring reserves totaling $11.5 million at December 31, 1993.
During 1993 and 1994, the Company effected most of the restructuring actions
that had been planned, but due to changing conditions, it elected to change the
scope and focus of other previously planned activities. As a result, the Company
no longer required $2.5 million of the previously recorded reserves and reversed
the unneeded reserves in the fourth quarter of 1994. The Company had no
remaining restructuring reserves on its balance sheet at December 31, 1994.
Interest income increased by $0.3 million in 1994 as compared to 1993 due to
a slight increase in cash and temporary investments, as well as higher interest
rates earned on available balances. Other income consisted primarily of
royalties received, offset in part by losses incurred on the writedown of
computer systems and foreign currency losses.
In 1993, the Company increased its deferred tax assets as required by
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" (SFAS No. 109). The deferred tax assets net value at December 31, 1993
was $5.0 million. The realizability of deferred tax assets was reevaluated
throughout 1994 in light of changing business conditions and uncertainties
regarding previously contemplated strategies. As a result, the Company recorded
a tax provision of $3.3 million to increase the valuation allowance to cover the
realizability of the deferred tax assets to its estimated realizable value as of
December 31, 1994. In addition to this tax provision which was recorded in 1994,
the Company recognized a tax benefit of $1.4 million in the third
21
<PAGE>
quarter of 1994 as a result of a change in an estimate on the Company's 1993 tax
return due to a change in the transfer price on products between the Company and
its German subsidiary. The change in transfer price was a result of an
independent economic study. The above items resulted in a tax provision for 1994
totaling $1.9 million.
SELECTED QUARTERLY OPERATING RESULTS
The following table sets forth certain unaudited quarterly results of
operations of the Company for each quarter of 1995. In the opinion of
management, these financial data have been prepared on the same basis as the
audited consolidated financial statements of the Company and include all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the results of operations for these periods. These financial
data should be read in conjunction with the Consolidated Financial Statements
and the Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------
APRIL 2, JULY 2, OCTOBER 1, DECEMBER 31,
1995 1995 1995 1995
--------- --------- ----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Sales......................................................... $ 40,112 $ 52,594 $ 84,721 $ 148,798
Cost of sales................................................. 28,395 40,907 63,225 103,311
--------- --------- ----------- -------------
Gross margin................................................ 11,717 11,687 21,496 45,487
Operating expenses:
Selling, general and administrative......................... 9,349 10,162 13,878 23,800
Research and development.................................... 4,126 3,976 4,691 6,783
--------- --------- ----------- -------------
Total operating expenses.................................... 13,475 14,138 18,569 30,583
--------- --------- ----------- -------------
Operating income (loss)....................................... (1,758) (2,451) 2,927 14,904
Interest and other income (expense)........................... (20) (55) (230) (1,678)
--------- --------- ----------- -------------
Income (loss) before income taxes............................. (1,778) (2,506) 2,697 13,226
Provision for income taxes.................................... 280 559 (672) (3,303)
--------- --------- ----------- -------------
Net income (loss)............................................. $ (1,498) $ (1,947) $ 2,025 $ 9,923
--------- --------- ----------- -------------
--------- --------- ----------- -------------
Net income (loss) per common share............................ $ (0.03) $ (0.03) $ 0.03 $ 0.16
--------- --------- ----------- -------------
--------- --------- ----------- -------------
Weighted average common shares outstanding.................... 56,301 57,018 63,618 63,780
</TABLE>
Sales in the first quarter of 1995 consisted primarily of sales of Bernoulli
and Ditto drives and media. Zip products, which began shipping late in the first
quarter of 1995, accounted for an increasing portion of sales over each of the
remaining three quarters of 1995. Sales of Zip products throughout 1995 were
affected by component shortages which limited production. The Company began
shipping Jaz drives in limited quantities during December 1995.
The losses incurred in the first and second quarters of 1995 were
predominantly a result of the start-up costs associated with the introduction of
Zip, component shortages relating to Zip and anticipated declines in sales of
Bernoulli products. Bernoulli products, which accounted for more than 60% of
total sales in the fourth quarter of 1994, declined to less than 10% of total
sales by the fourth quarter of 1995. In the fourth quarter of 1995, sales of Zip
and Jaz accounted for 68% of sales, a large portion of which occurred in the
final month of the quarter, and Ditto represented 22% of sales.
Quarterly fluctuations in gross margin percentages were primarily related to
the mix of products sold and start-up costs associated with the introduction of
new products. Gross margins declined from 29% in the first quarter to 22% in the
second quarter, primarily due to start-up costs associated with the introduction
of Zip products and a decline in sales of higher margin Bernoulli products.
Gross margins improved to 25% in the third quarter primarily due to the impact
of increased sales of Zip products, which more than offset the decline in sales
of higher margin Bernoulli products. In the fourth quarter, gross margins
improved to 31%, which was primarily attributable to an increase in sales of Zip
disks, which have significantly higher margins than drives, as
22
<PAGE>
a percentage of total sales. The increase in margins in the third and fourth
quarters, together with continued management of fixed costs, resulted in the
Company's profitability in the second half of 1995 and for the total year.
Although sales of Zip products were the primary reason for the Company's
revenue growth during 1995, such sales may be attributable in large part to the
novelty of the product and the initial publicity surrounding the introduction of
Zip, and may not be indicative of the long-term demand for the product.
Accordingly, investors should not assume that the sales growth experienced by
the Company in 1995 is an indication of future sales. Moreover, in light of the
Company's revenue growth in 1995 and the change in the nature of its business
over the past year, the Company believes that period-to-period comparisons of
its financial results are not necessarily meaningful. See "Risk Factors--Recent
Introduction of Zip and Jaz; Uncertainty of Market Acceptance" and "-- Recent
Operating Losses; Quarterly Fluctuations in Operating Results."
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company had cash and cash equivalents of $1.0
million, working capital of $12.6 million and a ratio of current assets to
current liabilities of 1.1 to 1. During 1995, the Company used $15.8 million in
cash and cash equivalents consisting of $27.0 million used in operating
activities, and $42.5 million in investing activities, offset by $53.7 million
provided by financing activities.
On July 5, 1995, the Company entered into a loan agreement with the
Commercial Finance Division of Wells Fargo. The agreement permits revolving
loans, term loans and letters of credit up to an aggregate outstanding principal
amount equal to the lesser of $60 million or 80% of eligible accounts
receivable, with a 10% overadvance provision through April 12, 1996. There is an
aggregate sublimit of $10 million for letters of credit. The revolving credit
line bears interest at the bank's prime rate plus 1%, and the Wells Fargo term
loans bear interest at the bank's prime rate plus 1.25%. The agreement expires
June 30, 1996. Certain covenants within the agreement require the Company to
maintain minimum levels of working capital and net worth. Under the agreement
with Wells Fargo, the Company may also secure financing of equipment purchases
from third parties up to a maximum of $25 million, less term loans outstanding
to Wells Fargo. In November 1995, a foreign subsidiary of the Company entered
into an agreement with a German commercial bank for up to DM 50 million
(approximately $35 million), which involves the sale of a portion of the foreign
subsidiary's accounts receivable to the bank. In January 1996, the Company
entered into a $6.0 million short-term revolving credit facility with First
Security Bank of Utah. This facility matures on April 12, 1996 and contains
covenants similar to those contained in the Wells Fargo loan agreement. In
addition, the Company has entered into various agreements to provide capital
lease financing and other term loans for the purchase of certain manufacturing
equipment. The Company intends to refinance its loan with Wells Fargo upon its
maturity. There can be no assurance, however, that the Company will be able to
refinance such loan at acceptable terms.
The Company's balance sheet at December 31, 1995 reflected current notes
payable of $47.6 million, representing utilization of the revolving credit line
with Wells Fargo of $33.2 million, term loans with Wells Fargo of $3.6 million,
borrowings under the German loan agreement of $9.8 million and the short-term
portion of other term loans of $1.0 million. In addition, the short-term and
long-term portion of capital lease obligations totaled $0.8 million and $1.5
million, respectively, at December 31, 1995, and the long-term portion of notes
payable totaled $2.6 million at December 31, 1995. The borrowings have been used
to finance working capital needs, including increases in inventory and accounts
receivable and capital expenditures related to production volume increases.
Accounts receivable increased by $87.1 million at December 31, 1995 compared
to December 31, 1994, due to increased sales, particularly in the last portion
of the fourth quarter. Inventory increased by $81.4 million during 1995 due to
build-ups in manufacturing capacity at both the Company's facilities and those
of manufacturing partners. The Company's inventory is currently somewhat
imbalanced, with more than sufficient quantities of certain goods and
insufficient quantities of other goods, due in part to difficulties in obtaining
certain components. The increases in receivables and inventory were partially
offset by increases in accounts payable and accrued liabilities of $120.4
million.
23
<PAGE>
Cash expenditures for fixed asset additions for 1995 totaled $45.2 million.
These additions are primarily related to increased manufacturing capacity for
Zip, Ditto and Jaz products. The Company expects capital expenditures in future
quarters to continue to be significant as production capacity is added at the
Company's current manufacturing facility, as well as tooling at vendor
facilities and third-party manufacturing facilities.
The Company expects that the proceeds of this offering, together with the
current sources of financing available to the Company, will be sufficient to
fund the Company's operations at least through June 30, 1996, including any
planned expense increases or capital expenditures discussed above. Thereafter,
the Company anticipates that it will require additional funds to finance its
operations. The precise amount and timing of the Company's funding needs cannot
be determined at this time, and will depend upon a number of factors, including
the market demand for the Company's products, the availability of critical
components, the Company's strategic alliances for the manufacture of its
products, the progress of the Company's product development efforts and the
Company's inventory management. The Company currently expects that it would seek
to obtain such funds from additional borrowing arrangements and/or a public
offering of debt or equity securities. There can be no assurance that funds
required by the Company in the future will be available on terms satisfactory to
the Company. See "Risk Factors--Decline in Liquidity; Future Capital Needs."
RECENT ACCOUNTING PRONOUNCEMENT
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS No. 121).
SFAS No. 121 is effective for financial statement periods beginning after
December 31, 1995. Management does not expect that the adoption of SFAS No. 121
will have a material impact on the Company's financial position or results of
operations.
24
<PAGE>
BUSINESS
The Company designs, manufactures and markets innovative data storage
solutions, based on removable-media technology, that help personal computer
users "manage their stuff." The Company's data storage solutions include disk
drives marketed under the tradenames Zip and Jaz and a family of tape drives
marketed under the tradename Ditto. The Company's Zip and Jaz disk drives are
designed to provide users with the benefits of high capacity and rapid access
generally associated with hard disk drives and the benefits of media
removability generally associated with floppy disk drives, including expandable
storage capacity and data transportability, management and security. The
Company's Ditto tape drives primarily address the market for backup data
storage. The Company began shipping Zip drives in March 1995 and Jaz drives in
limited quantities in December 1995.
Designed as a mass-market product, the Zip drive addresses the needs of
personal computer users for an affordable storage device for hard drive
expansion, data transportability, management and security and data backup. The
drive uses 100-MB disks to provide 70 times the capacity of traditional floppy
disks. See "Business--Products--Zip." The external model of the Zip drive is
generally sold by retailers for under $200 and the 100-MB disks are typically
sold for under $15 per disk in ten-packs. The Jaz drive also provides hard drive
expansion, data transportability, management and security and data backup.
However, the Jaz drive, which features 1-GB removable disks and offers data
transfer rates comparable to those of most current hard disk drives, is targeted
to address the high-performance needs of computer users storing, transporting
and playing demanding multimedia applications, such as full-screen, full-motion
video. The external model of the Jaz drive is expected to be sold by retailers
for approximately $599, while the internal version is expected to be sold by
retailers for approximately $499. Each 1-GB Jaz disk is expected to sell for
approximately $99 in five-packs. The Company's Ditto family of tape drives
addresses the need of personal computer users for an easy-to-use, dependable
backup solution. The Company offers internal and external Ditto tape drives
based on leading industry standards ranging in capacity from 420 MBs to 3.2 GBs
(using data compression).
INDUSTRY OVERVIEW
The Company believes, based upon information in a 1995 report from
International Data Corporation ("IDC"), that there are in excess of 150 million
personal computers in use worldwide. Many of these personal computers
(particularly those in the home) are used by more than one person. Moreover,
many people make regular use of more than one personal computer; for example, an
individual may use one computer in his or her office, another at home, and a
laptop computer while traveling. Issues that each user of a personal computer
must confront are how to store, transport, share, manage, secure and backup
computer files and applications.
The vast majority of personal computers in use today incorporate both a
conventional hard disk drive (which is also known as a rigid disk drive or a
"Winchester" disk drive) and a floppy disk drive for data storage. Hard disk
drives use magnetic technology to store data on rigid rotating disks that are
generally fixed permanently in the drive mechanism. Hard disk drives are
characterized by their large storage capacities--capacities ranging from 540 MBs
to 1.6 GBs are becoming increasingly common in new personal computers--and fast
performance. Hard disk drives are the primary data storage device on most
personal computers. Floppy disk drives, which are also based on magnetic
technology, store data on thin plastic disks that are removable from the drive.
Floppy disk drives are typically used for software distribution and transporting
and sharing data. Most floppy disk drives in use today utilize 1.44-MB disks,
which is not sufficient capacity to store many files and programs on a single
disk.
In addition to hard disk drives and floppy disk drives, a number of other
data storage devices have come into use in recent years. In particular, a
growing number of new personal computers incorporate a CD-ROM (compact disk-read
only memory) drive. CD-ROM disks, which are read by the CD-ROM drive using
optical technology, are capable of storing up to 650 MBs of data and are
well-suited for distribution of information and software applications. However,
CD-ROM drives are not capable of recording the user's data. A variety of other
lesser-known removable storage technologies which are capable of reading and
recording data are also available for use with personal computers, including
disk drives systems using removable "hard" magnetic cartridge disks, which
generally either employ similar technology to hard disk drives or the Company's
proprietary Bernoulli technology; writable optical disk drives, which use
various technologies to read and record data in a
25
<PAGE>
digital format that can be read by laser light; "floptical" disk drives, which
store data on a magnetic disk similar to a conventional floppy disk and use an
optical pattern for servotracking; and flash memory cards, which store data on
computer chips.
The Company estimates, based on information from 1995 reports of IDC and
Dataquest and its knowledge of the industry, that approximately 210 million data
storage devices for personal computers, representing approximately $30 billion
in revenue at the OEM level, were sold in 1995. Included in these sales figures
are hard disk drives, floppy disk drives, CD-ROM drives, removable disk drives
and tape drives. This market is principally comprised of conventional hard disk
drives, which the Company estimates represented over 40% of unit sales and
approximately two-thirds of dollar sales, and floppy disk drives, which the
Company estimates represented approximately 40% of unit sales but less than 10%
of dollar sales.
THE NEED FOR NEW DATA STORAGE SOLUTIONS
In recent years, advances in software, including memory-intensive graphical
operating systems, integrated suites of word processing, spreadsheet and
database applications, and multimedia applications, have dramatically increased
the storage needs of personal computer users. For example, a popular CD version
of Windows 95 (which includes certain pre-packaged software applications in
addition to the Windows 95 operating system) includes 629 MBs of data, which is
greater than the capacity of most hard drives in use today. In addition, data-
intensive, multimedia files are increasingly being made available to personal
computer users via on-line services and the Internet. For example, CD-quality
sound generally requires 2 MBs of storage capacity per minute, using data
compression software, and 9 MBs per minute without compression; and MPEG1
compressed DSS-satellite quality video generally requires approximately 8 MBs of
storage capacity per minute, while broadcast-quality video requires 250 MBs per
minute. Largely as a result of these trends, it has been estimated that the data
storage needs of personal computer users are doubling every year. Accordingly,
personal computer users increasingly need to expand the amount of their
available primary storage.
Personal computer users demand data storage solutions that do more than
simply provide additional storage capacity. For example, personal computer users
are increasingly seeking a reliable way to transport large files between
computers, thus allowing them to work on the same files using different
computers, and also enabling information to be provided to other computer users.
In addition, with many personal computers (particularly home computers) being
used by more than one person, many personal computer users are looking for an
effective means of organizing and segregating the files of different users of
the same computer. Personal computer users also need a reliable method of
securing sensitive files from unauthorized viewing or modification. Finally, the
increase in the data being used and stored on personal computers has heightened
the need for a practical method of backing up this data.
The Company believes that neither conventional hard disk drives nor floppy
disk drives are capable of adequately addressing all of the information storage
and management needs of personal computer users. A hard disk drive is an
effective product for primary data storage. However, using an additional hard
disk drive to provide additional storage capacity is an unattractive solution to
many personal computer users because the installation of the additional hard
drive (which generally involves selecting a compatible hard disk drive, opening
the computer case, and internally connecting the hard disk drive to the
appropriate controller card) may be difficult. More importantly, once the drive
is installed, the amount of additional available space is limited to the size of
the new hard disk drive. Furthermore, a new hard drive does not address the
issues of data transportability, management and security.
Removable-media storage devices, such as floppy disk drives, offer many of
the advantages that hard disk drives do not, such as future expandability
through the purchase of additional removable-media cartridges or disks; and data
transportability, management and security, since the media storing the data can
be removed from the drive, used in other computers and stored in a secure
location. However, the Company believes that expanding storage capacity through
conventional floppy disks, while inexpensive (floppy disks are generally sold by
retailers at less than $1.00 per disk in multi-packs), is not an adequate
solution because it is too slow and because each disk only stores up to 1.44 MBs
of data, making it too small for many of today's personal computer
26
<PAGE>
files and programs. Floppy disks are also not well-suited for backup purposes,
since approximately 70 floppy disks would be required for each 100 MBs of data
to be backed up and the user would have to be present during the backup
procedure in order to insert and remove each floppy disk.
Other types of removable-media data storage devices are now available for
use with personal computers, including magnetic cartridge disk drives, optical
disk drives, "floptical" disk drives and flash memory cards. However, these
devices, while popular in certain niche markets, have not gained widespread
market acceptance, in part because the Company believes that they have not been
able to match the price/performance levels offered by hard disk drives and
floppy disk drives.
The following table sets forth certain of the principal advantages and
disadvantages of various storage technologies currently available for users of
personal computers:
<TABLE>
<CAPTION>
TECHNOLOGY ADVANTAGES DISADVANTAGES
- --------------------- ---------------------------------------------- ----------------------------------------------
<S> <C> <C>
Hard Disk Drives - Very fast average access time - Fixed capacity
(generally 8 to 20 msec) and data - Disks storing data are not removable
transfer rate (generally 2 to 6 or transportable
MB/sec) - Less attractive aftermarket solution
- Large storage capacity (generally due to difficulty of installation
from 800MB to 4 GB)
- Inexpensive cost per MB of storage
- Proven technology/industry standard
Floppy Disk Drives - Inexpensive drives and media - Capacity is limited to 1.44 MB
- Disks are removable and per disk
transportable - Slow average access time (165 msec)
- Proven technology/industry standard and data transfer rate
CD-ROM Drives - High capacity (650 MB) - Read-only; users cannot store data
- Unlimited expansion - Very slow average access time
- Disks are removable and (230 msec)
transportable
- Inexpensive drives and media
- High durability
- Emerging industry standard for
multimedia applications
Optical Drives - Media is inexpensive - Drives are expensive
- Unlimited expansion - Several different formats exist, not
- Disks are removable and all of which are compatible
transportable - Some formats are not erasable
- Some formats are capable of reading - Average access times for
CD-ROM disks some formats are significantly
slower than hard disk drives
Floptical Drives - Capable of reading and writing to - Currently available in low capacities
traditional floppy disks (although a 120MB Floptical has
- Unlimited expansion been announced)
- Disks are removable and
transportable
Tape Drives - High capacity for backup purposes - Not capable of random access
- Tapes are removable and - Very slow average access time
transportable
- Inexpensive media
- Very low cost per MB of storage
Flash Cards - Fastest access time and data transfer - Very expensive
rate
- Removable and transportable
</TABLE>
27
<PAGE>
The Company believes, based on its consumer research, that the market for
personal computer data storage solutions can be roughly divided into two market
segments, based on the characteristics computer users demand of a data storage
solution and the relative importance they place on the advantages and
disadvantages listed above. The first, referred to by the Company as the "mass
market", is characterized by computer users who are often uninterested in the
detailed technical specifications of a data storage solution and who simply want
a data storage solution to "manage their stuff." For these computer users, an
affordable price is generally the most important criterion. The second, referred
to by the Company as the "power user" or "high-performance market," is
characterized by persons who use their personal computers for demanding
applications and who are more focused on capacity, speed and other
state-of-the-art performance features than on price.
IOMEGA SOLUTIONS
The Company believes its recently introduced Zip and Jaz disk drives address
key information storage and management needs of today's personal computer users
by providing affordable, easy-to-use storage solutions that combine the high
capacity and rapid access of hard disk drives with the benefits of media
removability generally associated with floppy disk drives. Specifically, the
Company's products offer the following benefits to personal computer users.
EXPANDABLE STORAGE CAPACITY. As personal computer users are increasingly
forced to expand their primary storage capacity (generally provided by the hard
disk drive incorporated in the computer), Zip and Jaz provide an easy and
efficient way to do so. Both the Zip and the Jaz drive can be easily connected
or installed and offer unlimited additional storage capacity, in increments of
100 MBs (in the case of Zip) and 1 GB (in the case of Jaz).
MEDIA REMOVABILITY. Both Zip and Jaz store data on high-capacity removable
disks, thus enabling computer users to:
-take programs and files from an office computer and work with them on a
home or laptop computer;
-share programs and files with other personal computer users;
-organize data by storing different files on different disks;
-create a "separate personal computer" for each person using the computer
(such as different family members)--each user can store all of his or
her software and data on a single disk that can be removed from the
computer and privately stored when that person is not using the
computer; and
-remove particularly sensitive or valuable information from the computer
for storage in a different location, thus protecting it against viewing
or modification by another user of the computer and against damage to
the computer.
DATA BACKUP. The Company's family of Ditto tape drives, as well as the Zip
and the Jaz drive, offer a convenient and effective way for personal computer
users to create backup copies of their programs and files.
ATTRACTIVE PRICE, PERFORMANCE AND FEATURES. The Company believes that its
Zip and Jaz drives provide a combination of price, performance and features that
makes them attractive data storage solutions for their target markets. Zip
offers data access times and transfer rates and storage capacity that greatly
exceeds that offered by conventional floppy disk drives, along with the benefits
of removable media, at a price that is attractive to mass-market customers. Jaz
offers many performance features comparable to those of most other data storage
devices (including conventional hard disk drives), at a lower price than other
currently available comparably performing removable-media storage devices.
COMPANY STRATEGY
Iomega's objective is to establish its Zip, Jaz and Ditto products as
industry-standard data storage solutions for personal computer users and to
capture an increasing share of the overall personal computer data storage
market. The Company's strategy to achieve this objective includes the following
key elements:
UNDERSTANDING AND PROVIDING WHAT CUSTOMERS WANT. Iomega's product strategy
is based on identifying the product characteristics that personal computer users
desire and developing and marketing products that
28
<PAGE>
satisfy these demands. In developing and introducing the Zip and Jaz drives, the
Company undertook a consumer research program to determine the performance and
price characteristics of storage solutions demanded by personal computer users.
For example, this program revealed to Iomega the need for both the mass-market
Zip drive, which was cost-engineered by the Company to sell at a price level
attractive to casual users and the small office/home office market, and the
high-performance Jaz drive, which is primarily targeted at power users.
DELIVERING INTEGRATED SOLUTIONS. The Company's products are designed to
provide customers with a complete, easy-to-use solution to their data storage
needs. The Company's drives are shipped with everything needed to install or
connect the drive, including easy-to-use software which aids in set-up and
enhances the drive's functionality, and generally also include a media cartridge
for use in the drive.
BROADENING DISTRIBUTION THROUGH STRATEGIC MARKETING ALLIANCES. The Company
believes that broadening the distribution of its products through strategic
alliances with a variety of companies within the computer industry is a critical
element in establishing its products as industry standards. The Company has
recently established OEM arrangements with personal computer manufacturers such
as Micron Electronics (a mail-order manufacturer of IBM PC-compatible personal
computers) and Power Computing (the first Macintosh clone manufacturer) for the
incorporation of Zip, Jaz or Ditto drives into their computers, and is seeking
to establish additional OEM relationships. The Company also has entered into
private or co-branding arrangements with several companies, including Maxell,
Seiko Epson, Fuji and Reveal Computer Products, who are selling private or
co-branded versions of Zip drives and disks. In addition, the Company's products
are sold by most of the leading retailers of computer products in the United
States, including Best Buy, Circuit City, CompUSA, Computer City, Electronics
Boutique and PC Warehouse.
MAXIMIZING SALES OF REMOVABLE DISKS. The Company seeks to maximize sales of
its proprietary disks because they generate significantly higher margins than
its disk drives. The Company plans to accomplish this in part by increasing the
installed base of the Company's removable-media disk drives, through such
initiatives as OEM arrangements, licensing third-party manufacturers of drives
on a royalty-bearing basis and increasing the Company's own output of drives
both for sale by the Company and by others under private branding arrangements.
Also, the multimedia demonstration software included with the Zip and Jaz drives
informs users of the various applications for additional disks (such as
security, personal workspaces, backup) and suggests the number of additional
disks the user may need in response to questions the user answers as part of the
interactive demonstration.
CONTINUING TO ENHANCE PRODUCT FEATURES AND TECHNOLOGY. The Company plans to
use its experience in Bernoulli, tape, magneto-optical, floptical and thin-film
head technologies for the ongoing enhancement of existing products and the
development of new products. During 1994 and 1995, the Company's product
development efforts were primarily devoted to the development of its Zip and Jaz
products, which began commercial shipment in March 1995 and December 1995,
respectively. During 1996, the Company expects that its development efforts will
be primarily focused on enhancing the features, developing higher capacity
versions and reducing the production costs of its Zip, Jaz and Ditto products.
LEVERAGING MANUFACTURING CAPABILITIES THROUGH PARTNERING. In addition to
manufacturing or assembling a portion of each of the Company's products at its
Roy, Utah manufacturing facility, the Company has established strategic
relationships with various suppliers and manufacturers to increase the
production capacity of its new products and to establish a second source of
drive and disk production. The Company intends to continue to use third-party
manufacturing as a means of increasing the availability and market penetration
of the Company's drive products, to reduce costs of production, and to benefit
from the expertise of experienced high-volume manufacturing companies. The
Company plans to use third-party manufacturers to produce a majority of its
products in the future.
EXPANDING INTERNATIONAL SALES. The Company began offering its Zip products
in Europe in August 1995 and its Jaz products in Europe, in limited quantities,
in February 1996. The Company believes that it is the leading vendor of tape
drives in Europe, and that its existing European distribution channel is
well-suited to selling the Zip and Jaz removable-media drive products. During
the third quarter of 1995, Maxell, Seiko Epson
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<PAGE>
and Fuji began selling co-branded versions of the Zip drive in Japan, and the
Company plans to expand its presence in the Far East by opening a Singapore
sales office in 1996. The Company expects international sales to increase as a
result of its introduction of Zip and Jaz into international markets.
PRODUCTS
The Company offers products targeted at both the mass market and the
high-performance market. The Zip drive and the Ditto 420 and Ditto Easy 800 tape
drives were designed to achieve price levels which the Company determined are
critical to mass-market consumers. The Jaz drive and Ditto 3200 tape drive, on
the other hand, are principally targeted to more technically demanding, high-end
customers, who the Company believes are less price sensitive than typical
mass-market consumers.
The following table lists the principal data storage devices currently being
offered by the Company:
<TABLE>
<CAPTION>
TYPICAL RETAIL
PRODUCT (YEAR PRICE
INTRODUCED)* MEDIA AND CAPACITY DRIVE/DISK** TECHNOLOGY
- ------------------------- -------------------- ------------------ ----------------------------------
<S> <C> <C> <C>
Zip (1995) 100-MB Zip Disks $199/$14.99 Drive: Winchester heads
Disks: Advanced flexible media
Jaz (1995) 1-GB Jaz Disks $599/$99.99 Drive: Thin-film heads
540-MB Jaz Disks Disks: Two rigid disk platters
Ditto 420 (1994) Ditto Tape $99 Drive: Direct drive mechanism
Ditto Easy 800 (1995) minicartridges $149 Media: Industry standard quarter
Ditto Easy 3200 (1996) (420-MB, 800-MB, $299 inch cartridges
3200-MB)
</TABLE>
- ------------------------
* Drives are available in internal and external versions. The indicated
capacities for Ditto drives represent the maximum capacity using data
compression.
** Indicates the typical price at which the external version of the drive and
the highest capacity media for that drive is sold at retail. Prices for the
internal version of a drive and for smaller capacity media are generally
lower. The price for the Ditto 420 is the internal version price. Disk
prices represent per unit purchase price in multi-packs. Media prices for
tape are not presented because revenues from tape minicartridge sales are
not material to the Company.
ZIP
The Company began shipping external Zip drives and 100-MB Zip disks in March
1995. Designed as an affordable mass-market product, the Zip drive addresses
multiple needs of personal computer users: hard drive expansion, data
transportability, management and security and data backup. The drive uses
interchangeable 100-MB Zip disks to provide users of IBM-compatible and Apple
Macintosh personal computers with 70 times the capacity of, and superior
performance to, traditional floppy disks. Zip drives were designed with 100-MB
disks based on the results of the Company's market research, which showed that
85% of the files stored on personal computers are 100 MBs or less.
Zip drives use durable, high-capacity flexible media and Winchester-style
nanoslide heads with a special airbearing surface combined with a linear voice
coil motor. The Zip drive provides high capacity and rapid access and can be
used for a number of data storage purposes. The SCSI version of the Zip drive,
which offers faster performance than the parallel port version of the drive,
features 29 millisecond average seek time and an average sustained data transfer
rate of 1.00 MB per second. Software included with the Zip drive provides a
total data storage solution by helping users organize and copy their data and
offers software read/write protect, which further enables users to secure and
protect their data.
The external, portable version of the Zip drive weighs approximately one
pound and is offered in a parallel port version for use with IBM PC-compatible
computers and a SCSI version for use with Apple Macintosh computers or IBM
PC-compatible computers which have a SCSI adapter board. The parallel port
version features printer pass through to allow normal operation of a printer in
the same port. The SCSI version has two connectors allowing it to be connected
with other SCSI devices. The external Zip drive has a unique compact
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<PAGE>
design, including a royal blue color, a window allowing visibility of the label
on the cartridge being used, rubber feet for positioning the drive flat or on
its side, operation lights and a finger slot for easy cartridge insertion and
removal.
In September 1995, Power Computing, the first Macintosh clone manufacturer,
began offering internal 5 1/4-inch Zip SCSI drives as a $159 option on its
computers. The Company has also designed an internal version of the Zip drive
which incorporates a conventional 3 1/2-inch floppy disk drive. In addition, the
Company has developed an internal 3 1/2-inch IDE version of the Zip drive, which
it expects will be available in the first quarter of 1996.
During 1995, Zip received numerous awards from industry publications in
select categories including: PC/ COMPUTING'S Most Valuable Product; PUBLISH
magazine's 1995 Publish Impact Award; CADENCE magazine's Editor's Choice Award;
the International Digital Imaging Association's "Best New Hardware" award; and,
listing in COMPUTER LIFE magazine's "Best of Everything" list.
The Zip drive carries a one-year warranty and Zip disks are sold with a
limited lifetime warranty.
JAZ
The Company began shipping Jaz drives and 1-GB Jaz disks in limited
quantities in December 1995. Jaz addresses the high-performance needs of
personal computer users in three areas: multimedia applications (audio, video
and graphics), personal data management, and hard drive upgrade. The Jaz drive
offers data transfer rates comparable to those of most current hard disk drives,
with an average sustained transfer rate of 5.4 MBs per second, 12 millisecond
average seek time and 17.5 millisecond average access time. Jaz disks are
currently available in a capacity of 1 GB, which the Company's market research
indicated was a capacity that many high-performance computer users demand, and
540-MB Jaz disks are expected to be available in the first half of 1996. Using
1-GB disks, Jaz is capable of storing and playing up to two hours of MPEG1
compressed DSS satellite quality video, up to eight hours of CD-quality audio,
more than 20,000 scanned documents for document imaging or up to four minutes of
full-screen, full-motion broadcast-quality video. The Jaz drive will be
available in an external SCSI version, which is expected to be sold by retailers
for approximately $599, and is available in an internal SCSI version, which is
expected to be sold by retailers for approximately $499. Each 1-GB and 540-MB
Jaz cartridge is expected to sell for approximately $99 and $69, respectively,
in five-packs. The Company expects an internal IDE version of the Jaz drive to
be available beginning in the second half of 1996.
The Jaz drive incorporates many innovative technological features including
tri-pad, thin-film recording heads, dynamic head loading and drag and drop
motorized cartridge ejection. Jaz disks feature a dual rigid platter cartridge
and a proprietary disk capture system which secures the dual disk platters when
not installed in a drive, eliminating rattle and reducing the possibility of
losing valuable information. The drive operates with leading operating systems
for personal computers and workstations, including Windows 95, Windows NT,
Windows 3.x, Macintosh and OS/2.
The external version of the drive, which weighs approximately two pounds,
features design enhancements similar to those introduced with the external Zip
drive, including a unique jade colored casing, a window to allow visibility of
the label on the cartridge being used, operating lights and a finger slot for
easy cartridge insertion and removal. Additional features include an
auto-switching power supply to allow operation in different countries,
auto-sensing SCSI termination and anti-gyro disk locking to increase durability.
The Jaz drive carries a one-year warranty and Jaz disks are sold with a
limited lifetime warranty.
DITTO
The Company's Ditto family of tape drives addresses the need of personal
computer users for an easy-to-use, dependable backup solution. In response to
the information learned from consumers regarding the characteristics demanded
from backup storage devices, beginning in 1994 the Company redesigned its family
of tape drives, which had first been introduced in 1992. The Company offers
internal and external models based on leading industry standards ranging in
capacity from 420 MBs to 3.2 GBs (using data compression). The tape drives are
primarily designed to backup and protect against loss of data stored on hard
disk drives in IBM PC-
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<PAGE>
compatible computers. Iomega's tape drives have a patented beltless design which
the Company believes enhances reliability. The storage media used by Iomega's
tape products is the industry-standard QIC-compatible minicartridge. In
addition, the Ditto Easy 800 and Ditto Easy 3200 support new high-capacity
Travan cartridge technology.
The Ditto family of tape drives has achieved several industry firsts. In
April 1992, the Iomega Tape 250 (later renamed the Ditto 250) became the
industry's first commercially available QIC-standard, one-inch high tape drive
and in March 1995 became the industry's first internal 250-MB tape drive to sell
for under $100. In June 1995, the Ditto 420 became the industry's first internal
420-MB tape drive to sell for under $100. In October 1995, the Company
introduced the Ditto Easy 800, which the Company believes was the industry's
first external parallel port 800-MB tape drive to sell for under $150. The Ditto
Easy 800 features an enhanced design similar to, and is stackable with, the Zip
and Jaz drives.
The Company's tape products are generally available in either internal or
external models. The internal versions attach to the standard floppy drive
interface in IBM PC-compatible computers, while the external versions attach to
the parallel printer port on IBM PC-compatible computers and offer pass-through
capability for a printer. The drives are shipped with backup software for both
DOS and Windows.
In connection with the introduction of the Ditto Easy 800 in October 1995,
the Company also introduced new 1-Step software designed to permit the backup of
an entire hard disk in a single step while the user continues working.
The Ditto Easy 800 and the Ditto Easy 3200 carry a two-year warranty and the
Ditto 420 carries a five-year warranty. Ditto media is sold with a two-year
warranty.
BERNOULLI
These 5 1/4-inch half-height drives are removable-media storage devices
based on the Company's proprietary Bernoulli technology. The Company's Bernoulli
drives and the associated disks are sold both in the form of a complete storage
subsystem for leading personal computers and workstations and in the form of
components for integration into larger systems by OEMs or value-added resellers
("VARs"). The Bernoulli MultiDisk-TM- 150 drive began shipping in October 1992
and was Iomega's first drive to use multiple capacity disks - 35, 65, 105 and
150 MBs. The Company began shipping the Bernoulli 230 drive in September 1994.
The Bernoulli drives are sold in internal and transportable versions.
The Company is now focusing its development and marketing efforts on its
Zip, Jaz and Ditto products, and does not expect Bernoulli products to represent
a significant portion of the Company's revenues in the future.
MARKETING AND SALES
The Company believes that broadening the distribution of its products
through strategic marketing alliances with a variety of key companies within the
computer industry is a critical element in establishing its products as industry
standards. The Company's initial marketing strategy for the introduction of its
new products during 1995 was to generate consumer awareness of and demand for
such products by focusing on aftermarket sales to existing users of personal
computers through leading computer retail channels. As the next step in its
strategy of promoting its products as new industry standards, the Company is
increasingly focusing its efforts on establishing OEM relationships with leading
personal computer manufacturers who will include the Company's products on a
factory-installed basis to purchasers of new personal computers.
RETAIL DISTRIBUTION
Retail outlets for the Company's products include mail order catalogs,
computer superstores, office supply superstores, consumer electronics
superstores and specialty computer stores. The Company sells its products to
32
<PAGE>
retail channels directly, as well as indirectly through distributors. The
Company's products are sold at a retail level by most of the leading retailers
of computer products in the United States. The following is a partial listing of
the retail chains carrying the Company's products.
<TABLE>
<S> <C>
Best Buy Electronics Boutique
CDW Computer Center Elek-Tek
Circuit City Fry's Electronics
CompUSA MicroCenter
Computer City NeoStar
Creative Computer OfficeMax
Egghead Software PC Warehouse
</TABLE>
STRATEGIC MARKETING ALLIANCES
In addition to sales through these retail channels, the Company has entered
into a number of strategic marketing alliances with a variety of companies
within the computer industry. These alliances include OEM arrangements providing
for certain of the Company's products to be incorporated in new computer systems
at the time of purchase. For example, Power Computing, the first Macintosh clone
manufacturer, is offering Zip drives as an option in certain of its new
computers, and Micron Electronics, a mail-order manufacturer of IBM
PC-compatible personal computers, has announced plans to offer Zip, Ditto and
Jaz drives as a factory-installable option in certain of its new computers. The
Company's strategic alliances also include private-branding and co-branding
arrangements with major vendors of computer products covering the resale of the
Company's products by such companies. For example, the Company has entered into
co-branding arrangements with Seiko Epson, Maxell and Fuji, which offer Zip
drives in Japan in packages which feature Iomega's name in addition to the
partner's name, and has entered into a private-branding arrangement with Reveal
Computer Products, which sells Zip drives and disks under Reveal's tradename.
INTERNATIONAL
The Company sells its products outside of North America primarily through
international distributors. The Company has increased its sales efforts in the
European market in the past several years. Sales are accomplished primarily
through offices located in Germany, Austria, Belgium, France, Ireland, Italy,
Norway, Spain and the United Kingdom. The Company plans to open a Singapore
office in 1996. The Company has been invoicing predominantly in foreign
currencies since January 1992.
MARKETING
The Company's marketing group is responsible for positioning and promoting
the Company's products. The Company participates in various industry tradeshows,
including MacWorld and COMDEX, and seeks to generate coverage of its products in
a wide variety of trade publications. Although the Company did not engage in
significant direct consumer marketing in 1995 in light of the large number of
favorable articles about the Company's products which appeared in newspapers and
computer magazines and constraints on the Company's ability to further increase
production levels, the Company expects marketing and advertising expenses to
increase significantly as the Company seeks to expand market awareness of its
products.
As is common practice in the industry, the Company's arrangements with its
customers generally allow customers, in the event of a price decrease, credit
equal to the difference between the price originally paid and the new decreased
price on units in the customers' inventories on the date of the price decrease.
When a price decrease is anticipated, the Company establishes reserves for
amounts estimated to be reimbursed to qualifying customers. In addition,
customers generally have the right to return excess inventory within specified
time periods. There can be no assurance that these reserves will be sufficient
or that any future returns or price protection charges will not have a material
adverse effect on the Company's results of operations.
The Company markets its products primarily through computer product
distributors and retailers. Accordingly, since the Company grants credit to its
customers, a substantial portion of outstanding accounts receivable are due from
computer product distributors and certain large retailers. At December 31, 1995,
the customers with the ten highest outstanding accounts receivable balances
totaled $47.1 million or 43% of gross accounts
33
<PAGE>
receivable, with one customer accounting for $15.2 million, or 14% of gross
accounts receivable. If any one or a group of these customers' receivable
balances should be deemed uncollectible, it would have a material adverse effect
on the Company's results of operations and financial condition.
During the year ended December 31, 1994, sales to Ingram Micro D, Inc., a
distributor, accounted for 11% of sales. No other single customer accounted for
more than 10% of the Company's sales in 1994 or 1995.
See "Risk Factors--Certain Marketing and Sales Risks" for a discussion of
certain risks relating to the marketing and sales of the Company's products.
MANUFACTURING
The Company's products are manufactured both by the Company at its
facilities in Roy, Utah and by independent parties manufacturing products for
the Company on a contract basis. Manufacturing activity generally consists of
assembling various components, subcomponents and prefabricated parts
manufactured by the Company or outside vendors. The Company currently has
third-party manufacturing relationships with Seiko Epson (Zip drives), MegaMedia
Computer (Zip disks), Sequel (Jaz drives) and First Engineering Plastics (Ditto
drives). Although the Company substantially increased its manufacturing capacity
(through both internal expansion and arrangements with third-party
manufacturers) during 1995, the Company was not able to produce enough Zip
drives and Zip disks in 1995 to fill all orders for such products due to
component supply constraints and normal manufacturing start-up issues. To
minimize its manufacturing costs, to take maximum advantage of its available
personnel and facilities and to benefit from the expertise of experienced
high-volume manufacturing companies, the Company plans to use third-party
manufacturers to produce a majority of its products in the future. There can be
no assurance that the Company will be successful in establishing and managing
such third-party manufacturing relationships, or that third-party manufacturers
will be able to meet the Company's quantity or quality requirements for
manufactured products. Moreover, the Company may grant certain of its
third-party manufacturers, among others, the right to sell significant
quantities of the Zip and Jaz drives they produce for their own account, thereby
reducing the supply of such drives to the Company and increasing competition.
See "Risk Factors--Reliance on Non-Binding Contract Manufacturing
Relationships."
Many components incorporated in, or used in the manufacture of, the
Company's products are currently only available from sole source suppliers.
Moreover, the Company has experienced difficulty in the past, is currently
experiencing difficulty, and expects to continue to experience difficulty in the
future, in obtaining a sufficient supply of many key components. For example,
many of the integrated circuits used in the Company's Zip and Jaz drives are
currently available only from sole source suppliers. The Company has been unable
to obtain a sufficient supply of certain of these integrated circuits due to
industry-wide shortages. In addition, the Company has been advised by certain
sole source suppliers, including the manufacturers of critical integrated
circuits for Zip and Jaz, that they do not anticipate being able to fully
satisfy the Company's demand for components during 1996. These component
shortages have limited the Company's ability to produce sufficient Zip drives to
meet market demand and have limited the Company's ability to implement certain
cost reduction and productivity improvement plans, and the Company expects that
the shortage of components may limit production of Zip and Jaz products for the
foreseeable future. The Company also experienced difficulty during 1995 in
obtaining a sufficient supply of the servowriting equipment used in the
manufacture of Zip disks. Such equipment shortages in 1995 limited the Company's
production of Zip disks, and there can be no assurance that similar equipment
shortages will not occur in the future.
The Company purchases all of its sole and limited source components and
equipment pursuant to purchase orders placed from time to time and has no
guaranteed supply arrangements. The inability to obtain sufficient components
and equipment, or to obtain or develop alternative sources of supply at
competitive prices and quality or to avoid manufacturing delays, could prevent
the Company from producing sufficient quantities of its products to satisfy
market demand, result in delays in product shipments, increase the Company's
material or manufacturing costs or cause an imbalance in the inventory level of
certain components. Moreover, difficulties in obtaining sufficient components
may cause the Company to modify the design of its products to use a more readily
available component, and such design modifications may result in product
performance problems. Any or all of these problems could in turn result in the
loss of customers, provide an opportunity for competing
34
<PAGE>
products to achieve market acceptance and otherwise adversely affect the
Company's business and financial results. See "Risk Factors--Shortages of
Critical Components; Absence of Supply Contracts; Dependence on Suppliers."
The Company had a backlog as of January 28, 1996 of approximately $157
million, compared to a backlog at the end of January 1995 of approximately $5
million. Substantially all of the January 28, 1996 backlog was related to the
Company's Zip and Jaz products, for which the Company has experienced component
shortages. Based in part on the Company's current estimates regarding the
expected availability of components (which estimates are based on information
provided to the Company by its suppliers, the Company's current inventory of
components, sales recorded since January 28, 1996 and the Company's experience
in its business) and the Company's manufacturing capabilities, the Company
believes that it will be able to fill all orders in the January 28, 1996 backlog
during the first half of the current fiscal year, unless such orders are
scheduled for delivery outside the first half of 1996 or first cancelled or
rescheduled. However, there can be no assurance that the Company's current
estimates regarding the expected availability of components will in fact turn
out to be correct. See "Risk Factors -- Shortages of Critical Components;
Absence of Supply Contracts; Dependence on Suppliers." In addition, the purchase
agreements or purchase orders pursuant to which orders are made generally allow
the customer to cancel orders without penalty, and the Company has experienced
some cancellations or reschedulings of orders in backlog. Moreover, it is common
in the industry during periods of product shortages for customers to engage in
practices such as double ordering in order to increase a customer's allowance of
available product. Accordingly, the Company's backlog as of any particular date
should not be relied upon as an indication of the Company's actual sales for any
future period.
PRODUCT DEVELOPMENT
An important element of the Company's business strategy is the ongoing
enhancement of existing products and the development of new products. During
1994 and 1995, the Company's product development efforts were primarily devoted
to the development of its Zip and Jaz products, which began commercial shipment
in March 1995 and December 1995, respectively. During 1996 the Company expects
that its development efforts will be primarily focused on enhancing the
features, developing higher capacity versions and reducing the production costs
of its existing Zip, Jaz and Ditto products. In particular, there are projects
underway to develop higher capacity removable-media disk drives and tape
products, to develop different system interfaces for the Company's
removable-media disk drive products, such as IDE interface versions of Zip and
Jaz, and to develop smaller subsystem versions of the Company's products,
including a version of Zip which could be installed in laptop computers.
During 1993, 1994 and 1995, the Company's research and development expenses
were $18,972,000, $15,438,000 and $19,576,000, respectively (or 12.9%, 10.9% and
6.0%, respectively, of sales). The decline in research and development spending
from 1993 to 1994 was the result of the Company's decision to discontinue
certain research and development projects relating to floptical technology,
digital audiotape technology, and thin-film head development. Research and
development spending in 1995 was primarily related to efforts focused on the
Company's Zip, Jaz and Ditto product lines. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company operates in an industry that is subject to both rapid
technological change and rapid change in consumer demands. For example, over the
last 10 years the typical hard disk drive included in a new personal computer
has increased in capacity from approximately 40 MBs to over 1 GB while the price
of a hard disk drive has remained constant or even decreased. The Company's
future success will depend in significant part on its ability to continually
develop and introduce, in a timely manner, new removable disk drives and tape
products with improved features, and to develop and manufacture those new
products within a cost structure that enables the Company to sell such products
at lower prices than those of comparable products today. There can be no
assurance that the Company will be successful in developing, manufacturing and
marketing new and enhanced products that meet both the performance and price
demands of the data storage market.
COMPETITION
The Company believes that its Zip and Jaz products compete most directly
with other removable-media data storage devices, such as magnetic cartridge disk
drives, optical disk drives and "floptical" disk drives.
35
<PAGE>
Current suppliers of removable-media data storage devices include Syquest
Technology (which offers magnetic disk drives with removable cartridges based on
hard drive technology), Panasonic (which offers the Power Drive, a removable
optical drive) and Sony (which offers the MD-DATA drive, a disk drive based on
removable magneto-optical technology). Although the Company believes that its
Zip and Jaz products offer price, performance or usability advantages over the
other removable-media storage devices available today, the Company believes that
the price, performance and usability of existing removable-media products will
improve and that other companies will introduce new removable-media storage
devices. Accordingly, the Company believes its Zip and Jaz products will face
increasingly intense competition. In particular, a consortium comprised of
Compaq Computer, 3M and MKE has announced the Floptical 120, a high-capacity
floptical drive that is compatible with conventional floppy disks. In addition,
both Mitsumi and Swan Instruments are expected to introduce high-capacity,
removable-media disk drives in 1996 that would also directly compete with Zip
and Jaz. As new and competing removable-media storage solutions are introduced,
it is possible that any such solution that achieves a significant market
presence or establishes a number of significant OEM relationships will emerge as
an industry standard and achieve a dominant market position. If such is the
case, there can be no assurance that the Company's products would achieve
significant market acceptance, particularly given the Company's size and market
position vis-a-vis other competitors.
To the extent that Zip and Jaz drives are used for incremental primary
storage capacity, they also compete with conventional hard disk drives, which
are offered by companies such as Seagate Technology, Western Digital
Corporation, Quantum Corporation, Conner Peripherals (which has announced its
pending acquisition by Seagate Technology), Micropolis Corporation and Maxtor
Corporation, as well as integrated computer manufacturers such as
Hewlett-Packard, IBM, Fujitsu, Hitachi and Toshiba. In addition, the leading
suppliers of conventional hard disk drives could at any time determine to enter
the removable-media storage market.
The Company believes that it is currently the only source of supply for the
disks used in its disk drives. However, this situation may change either as a
result of another party succeeding in producing disks that are compatible with
Zip and Jaz drives without infringing the Company's proprietary rights, or as a
result of licenses granted by the Company to other parties.
The Company's tape drives compete in the market for backup data storage with
other QIC and DC2000-type products (which includes QIC and Irwin), including
parallel port interface products. DC2000-type products currently offer
capacities up to 4 GBs with compression. The Company's two major competitors in
the tape drive market are Conner Peripherals and Colorado Memory Systems, a
division of Hewlett-Packard. Tape drives may in the future encounter increased
competition from other forms of removable-media storage devices. The tapes used
in the Company's tape drives are available from a number of sources and the
Company is not the primary source of supply for these tapes.
In the OEM market for both its disk drives and tape drives, the Company
competes with the vendors mentioned above, as well as with the manufacturers of
personal computers, who may elect to manufacture data storage devices
themselves.
The Company intends to license its products or technology to other computer
manufacturers on a royalty-bearing basis in order to increase market use and
acceptance of its products and help promote them as industry standards.
Accordingly, the Company expects to compete in the future with licensees of the
Company's products.
The Company believes that most consumers distinguish among competitive data
storage products on the basis of some or all of the following criteria: price
(cost per unit and cost per megabyte of storage capacity), performance (speed
and capacity), functionality (reliability, product size and removability), ease
of installation and use, and security of data. Price is a particularly important
factor with respect to the Company's mass-market products (the Zip drive and the
Ditto 420 and Ditto Easy 800 tape drives). An additional competitive
consideration, particularly in the OEM market, is the size (form factor) of the
drive. Winchester drives are available in 5 1/4-inch, 3 1/2-inch, 2 1/2-inch and
1.8-inch form factors. The most common form factor for Winchester and floppy
drives is 3 1/2-inches. The Company currently offers 3 1/2-inch Zip, Jaz and
Ditto drives and 5 1/4-inch Bernoulli disk drives.
36
<PAGE>
The data storage industry is highly competitive, and the Company expects
that competition will substantially increase in the future. In addition, the
data storage industry is characterized by rapid technological development. The
Company competes with a number of companies that have greater financial,
manufacturing and marketing resources than the Company. The introduction by a
competitor of products with superior performance or substantially lower prices
would adversely affect the Company's business.
PROPRIETARY RIGHTS
The Company relies on a combination of patent, copyright and trade secret
laws to protect its technology. The Company has filed approximately 40 U.S. and
foreign patent applications relating to its Zip and Jaz drives and disks,
although there can be no assurance that such patents will issue. The Company
holds over 50 U.S. and foreign patents, three of which relate to its Ditto
products and the remainder of which relate to its Bernoulli products. Although
the Company believes that a combination of patent rights (pursuant to a number
of pending patent applications) and copyright protection should prevent another
party from manufacturing and selling disks that work effectively with the
Company's Zip and Jaz drives (except pursuant to a license from the Company),
there can be no assurance that the steps taken by the Company to protect such
technology will be successful. If another party were to succeed in producing and
selling Zip- or Jaz-compatible disks, the Company's sales would be materially
adversely affected. Moreover, because the Company's Zip and Jaz disks have
significantly higher gross margins than the Zip and Jaz drives, the Company's
net income would be disproportionately affected by any such sales shortfall. Due
to the rapid technological change that characterizes the Company's industry, the
Company believes that the success of its disk drives will also depend on the
technical competence and creative skill of its personnel than on the legal
protections afforded its existing drive technology.
As is typical in the data storage industry, from time to time the Company
has been, and may in the future be, notified that it may be infringing certain
patents and other intellectual property rights of others. The Company, however,
is not currently aware of any threatened or pending legal challenge to the
technology which is incorporated in its products which it expects to have a
material adverse effect on its business or financial results. The Company has in
the past been engaged in several patent infringement lawsuits, both as plaintiff
and defendant. There can be no assurance that future claims will not result in
litigation. If infringement were established, the Company could be required to
pay damages or be enjoined from selling the infringing product. In addition,
there can be no assurances that the Company will be able to obtain any necessary
licenses on satisfactory terms. See "Risk Factors--Dependence on Proprietary
Technology."
Certain technology used in the Company's products is licensed on a
royalty-bearing basis from third parties, including the backup software included
with the Company's Ditto products and certain patent rights relating to Zip. The
Company is in the process of negotiating a definitive license agreement for the
Ditto backup software and, although it has entered into a letter agreement
regarding the Zip patent rights, is in the process of negotiating a more
detailed license agreement for the Zip patent rights. The failure to execute
definitive agreements or the termination of any such license arrangements could
have a material adverse effect on the Company's business and financial results.
EMPLOYEES
As of December 31, 1995, the Company employed 1,667 persons (1,645 full-time
and 22 part-time), including 143 in research and development, 1,209 in
manufacturing, 139 in sales, marketing and service, 103 in general management
and administration, and 73 in its European operations.
The Company's business growth during 1995 has resulted in additional
personnel needs and an increased level of responsibility for management
personnel and the Company anticipates hiring a substantial number of new
employees in the near future. There can be no assurance that the Company will be
successful in hiring, integrating or retaining such personnel.
PROPERTIES
The Company currently leases an aggregate of approximately 210,000 square
feet of space in seven buildings located in Roy, Utah, where its executive
offices, manufacturing and distribution facilities, and primary research and
development facilities are located. The leases for these buildings expire at
various dates from 1998 to 2000 and provide for an aggregate base rent of
approximately $1,100,000 for 1996.
37
<PAGE>
The Company expects to lease an additional 70,000 square feet of space in
the Roy area, which it estimates will cost an additional $765,000 in annual
rent, by the end of 1996. Pending the availability of that space, the Company
may rent additional space in the Roy area in 1996 on a temporary basis.
The Company leases an 11,000 square foot facility in San Diego, California
and a 10,000 square foot facility in San Jose, California, each for certain
research and development activities. The Company may seek to increase its leased
space in San Jose to approximately 50,000 square feet during 1996. The Company
has also rented a 20,000 square foot facility in Freiburg, Germany for use as
its European headquarters. In addition, the Company leases small sales offices,
typically on a short-term basis, at 11 locations in the United States and in
Canada, Austria, Belgium, France, Ireland, Italy, Spain and the United Kingdom.
LEGAL PROCEEDINGS
There are no legal proceedings, other than ordinary routine litigation
incidental to its business, to which the Company or its subsidiaries is a party
or of which any of their property is the subject.
38
<PAGE>
MANAGEMENT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --------- -------------------------------------------------------------
<S> <C> <C>
Kim B. Edwards (1) 48 President, Chief Executive Officer and Director
Leonard C. Purkis 47 Senior Vice President, Finance, and Chief Financial Officer
Srini Nageshwar 53 Senior Vice President, Europe
Anton J. Radman, Jr. 43 Senior Vice President, Strategic Business Development
Leon J. Staciokas 68 Senior Vice President and Chief Internal Operating Officer
M. Wayne Stewart 50 Senior Vice President, Operations
Edward D. Briscoe 33 Vice President, Sales
Reed M. Brown 42 Vice President, Manufacturing
Timothy L. Hill 37 Vice President, Marketing
Willard C. Kennedy 49 Vice President, Worldwide Logistics and Materials
Donald R. Sterling 59 Vice President, Corporate Counsel and Secretary
John G. Thompson 55 Vice President, Outsourcing
David J. Dunn (1)(2) 65 Chairman of the Board of Directors
Willem H.J. Andersen (3) 55 Director
Robert P. Berkowitz (4) 60 Director
Anthony L. Craig (1)(3) 50 Director
Michael J. Kucha (1)(2)(4) 54 Director
John R. Myers (1)(3) 59 Director
John E. Nolan, Jr. (4) 68 Director
The Honorable John E. Sheehan (3) 66 Director
</TABLE>
- ------------------------
(1) Member of the Executive Committee
(2) Member of the Nominating Committee
(3) Member of the Compensation Committee
(4) Member of the Audit Committee.
Kim B. Edwards joined the Company as President and Chief Executive Officer
on January 1, 1994. Mr. Edwards served as President and Chief Executive Officer
of Gates Energy Products Inc., a manufacturer of rechargeable batteries and the
successor of General Electric Battery Division, from March 1993 to December
1993. From January 1987 until March 1993, Mr. Edwards served in various other
executive positions for Gates Energy Products Inc., including Vice President and
General Manager of its Consumer Business Unit and Vice President of Marketing
and Sales. Prior to that Mr. Edwards was employed for 18 years at General
Electric Company in various marketing and sales positions.
Leonard C. Purkis joined the Company as Senior Vice President, Finance and
Chief Financial Officer in March 1995. Mr. Purkis also served as Treasurer of
the Company from March 1995 until January 1996. Mr. Purkis joined Iomega
following 12 years at General Electric Company, where his most recent assignment
was as Senior Vice President of Finance at GE Capital Fleet Services. He also
held positions in the Financial Services, Lighting and Plastics businesses, with
assignments in Europe and the U.S.
39
<PAGE>
Srini Nageshwar was promoted to Senior Vice President, Europe in April 1991.
Mr. Nageshwar joined the Company in January 1991 as Vice President, Europe.
Prior to joining the Company, Mr. Nageshwar was Executive Vice President for
Marketing, Sales and Operations of OAZ Communications, a network fax server
company, from February 1990 to December 1990. Prior to that, he was President
and Chief Operating Officer of Cumulus Corp., a memory peripherals manufacturing
company, from January 1989 to February 1990. Prior to that, Mr. Nageshwar spent
24 years in marketing and general management positions with Hewlett-Packard, a
computer company, most recently as Value-Added Business Manager.
Anton J. Radman, Jr., has been Senior Vice President, Strategic Business
Development since April 1995. Mr. Radman joined the Company in April 1980 and
his previous positions with the Company have included Senior Vice President,
Sales and Marketing, Senior Vice President, Corporate Development, President of
the Bernoulli Optical Systems Co. (BOSCO) subsidiary of the Company, Vice
President, Research and Development, Vice President, OEM Products and Sales
Manager, and Senior Vice President, Micro Bernoulli Division.
Leon J. Staciokas has been Senior Vice President and Chief Internal
Operating Officer since April 1993. Mr. Staciokas joined the Company in August
1987 as Senior Vice President - Operations. He served as acting Chief Executive
Officer of the Company from October 1993 until January 1994. Mr. Staciokas plans
to retire during 1996, although he may continue with the Company for some period
of time in a consulting role.
M. Wayne Stewart joined the Company as Senior Vice President, Operations in
January 1996. Prior to that, Mr. Stewart was Vice President of Global
Manufacturing Concepts and Engineering Services at Whirlpool Corporation, a
consumer appliance company, from January 1995 to December 1995. From September
1970 to December 1994, Mr. Stewart was Manufacturing Manager for
Hewlett-Packard.
Edward D. Briscoe joined the Company as Vice President, Sales in January
1995. From May 1993 to January 1995, Mr. Briscoe was Director of Sales and
Marketing for Apple Computer's Personal Interactive Electronics Division. Prior
to that, Mr. Briscoe was Executive Assistant to the President of Apple USA. From
July 1987 to April 1992, he held various sales management positions with Apple
Computer, Inc. Previously, Mr. Briscoe was an Account Marketing Representative
for IBM, Inc. from June 1984 to July 1987.
Reed M. Brown joined the Company as Vice President, Manufacturing in
February 1996. Prior to that, Mr. Brown was Director of Manufacturing at Quantum
Corporation, a manufacturer of hard disk drives, from March 1994 to January
1996. From January 1979 to February 1994, Mr. Brown was Production Manager for
Hewlett-Packard Company.
Timothy L. Hill joined the Company as Vice President, Marketing in July
1994. Mr. Hill was Vice President, Marketing of Falcon Microsystems, a federal
reseller and systems integrator, from August 1993 to July 1994. Prior to that,
Mr. Hill was Director of Marketing and Sales for the Consumer Business Division
of Gates Energy Products from January 1988 to August 1993. Prior to January
1988, Mr. Hill was Marketing Manager for the Consumer Camera Products Division
of Polaroid Corporation, a producer of photography equipment and supplies.
Willard C. Kennedy joined the Company as Vice President, Worldwide Logistics
and Materials in November 1995. From January 1994 to November 1995, he was
Senior Vice President and General Manager of the Digital Videocommunications
Systems for Philips Consumer Electronics. He also held positions at Philips
Consumer Electronics as Vice President of Logistics from October 1992 to January
1994 and Vice President of Purchasing from September 1990 to October 1992.
Before joining Philips, Mr. Kennedy held a variety of management positions in
manufacturing, purchasing and engineering over a period of 20 years with General
Electric Company.
Donald R. Sterling was promoted to Vice President, Corporate Counsel and
Secretary in April 1994. Prior to that, he was Vice President for Legal Affairs
and Secretary from August 1993 to March 1994. Mr. Sterling joined the Company in
September 1988.
40
<PAGE>
John G. Thompson has been Vice President, Outsourcing since January 1996. He
was Vice President, Corporate Manufacturing from January 1993 to January 1996.
Prior to that, Mr. Thompson was Vice President, Materials, Procurement and
Engineering Services from March 1988 until January 1992. Mr. Thompson was Vice
President/Controller of the Company from January 1988 until March 1988.
David J. Dunn has been Chairman of the Board of Directors since 1980. Mr.
Dunn has been Managing General Partner of Idanta Partners Ltd., a venture
capital firm, since 1971.
Willem H.J. Andersen has been a director of the Company since 1994. Mr.
Andersen has been a private consultant since February 1995. From June 1992 until
February 1995, he was Chief Executive Officer and a director of Comlinear
Corporation, a semi-conductor manufacturer. From November 1986 until June 1992,
he was Chief Executive Officer of Laser Magnetic Storage International Company,
a designer and manufacturer of optical and tape mass-storage equipment. Mr.
Andersen is a director of Analytical Survey, Inc.
Robert P. Berkowitz has been a director of the Company since 1983. Mr.
Berkowitz has been a private consultant since March 1992. From August 1991 until
March 1992, he was President and Chief Executive Officer of CimTelligence
Systems, a developer of process planning software for the manufacturing
industry. Previously, he had been a private investor and a writer since August
1988.
Anthony L. Craig has been a director of the Company since 1990. Mr. Craig
has been President and Chief Executive Officer of Global Knowledge Network
Incorporated, a worldwide provider of learning services for corporate
information systems and technology, since February 1996. From October 1993 to
January 1996, he was Vice President, Worldwide Sales Operations of Digital
Equipment Corporation, a computer manufacturer. He was Senior Vice President,
International of Oracle Corporation, a computer software company, from June 1992
until June 1993. From March 1992 until June 1992, he was a private investor.
Previously, from June 1990 until February 1992, he was President and Chief
Executive Officer of C3 Inc., a manufacturer of custom computing workstations.
He is a director of Bell Industries, Inc.
Michael J. Kucha has been a director of the Company since 1980. Mr. Kucha
has been President and CEO of ERISS Corporation, an information services
company, since January 1996. He has also been President of Melvin C. Dill Co.,
Inc., a manufacturer of industrial labels, since October 1990. He was a private
investor from May 1989 until October 1990. He served as Chief Executive Officer
of the Company from January 1987 until May 1989.
John R. Myers has been a director of the Company since April 1994. Since
July 1994, Mr. Myers has been Chairman of Garrett Aviation Services, a provider
of modification and upgrade services for corporate jet aircraft. From December
1993 to July 1994, he was a private consultant. From June 1992 until October
1993, he was an executive officer of Thiokol Corporation, a manufacturer of
rocket motors and specialty fastener devices, initially serving as Chief
Operating Officer and later as Chief Executive Officer. From 1980 until 1992, he
was President of Textron Lycoming, a producer of piston and turbine engines. He
is a director of Curtiss-Wright Corporation.
John E. Nolan, Jr. has been a director since 1993. Mr. Nolan has been a
Partner at the law firm of Steptoe & Johnson since 1963. He is a director of
Hooper Holmes, Inc.
The Honorable John E. Sheehan has been a director of the Company since 1990.
Mr. Sheehan, an entrepreneur since 1976, is a director and the principal
stockholder of several of the privately owned enterprises which he founded. He
is Chairman and Chief Executive Officer of Rhome Management Co., which provides
oversight to his various corporate interests. He is also a member of the Board
of Trustees for the Harvard Business School Alumni Association and Chairman of
the Board of Trustees of the U.S. Naval Academy Alumni Association. Mr. Sheehan
is a former member, Board of Governors of the Federal Reserve System.
41
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of January 31, 1996 by (i)
each person or entity known to the Company to beneficially own 5% or more of the
outstanding shares of Common Stock, (ii) each of the Company's directors and
(iii) all directors and executive officers as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF
BENEFICIALLY OUTSTANDING
OWNED (1) SHARES (2)
-------------------- ---------------
<S> <C> <C>
Idanta Partners Ltd. (3)..................................................... 7,989,678 13.6%
4660 La Jolla Village Drive
Suite 775
San Diego, CA 92122
Willem H.J. Andersen (4)..................................................... 21,510 *
Robert P. Berkowitz.......................................................... 0 --
Anthony L. Craig............................................................. 63,750 *
David J. Dunn (5)............................................................ 8,331,414 14.1
Kim B. Edwards (6)........................................................... 735,525 1.2
Michael J. Kucha (7)......................................................... 37,758 *
John R. Myers (8)............................................................ 21,750 *
John E. Nolan, Jr. (9)....................................................... 67,500 *
The Honorable John E. Sheehan (10)........................................... 306,000 *
All current directors and executive officers as a group
(20 persons) (11).......................................................... 11,736,798 19.2
</TABLE>
- ------------------------
* Less than 1%.
(1) The inclusion herein of any shares of Common Stock as beneficially owned
does not constitute an admission of beneficial ownership of those shares.
Unless otherwise indicated, each person listed above has sole investment and
voting power with respect to the shares listed. In accordance with the rules
of the Securities and Exchange Commission (the "SEC"), each person is deemed
to beneficially own (i) any shares issuable upon the exercise of stock
options held by such person that are currently exercisable or that become
exercisable within 60 days after January 31, 1996 (and any reference in
these footnotes to shares subject to stock options held by the stockholder
in question refers only to such shares) and (ii) any shares issuable to such
person under the Company's 1991 Stock Purchase Plan within 60 days after
January 31, 1996 (and any reference in these footnotes to shares issuable to
the stockholder in question under the 1991 Stock Purchase Plan refers to
only such shares).
(2) Number of shares deemed outstanding for purposes of calculating these
percentages is comprised of the 58,923,372 shares outstanding as of January
31, 1996, plus any shares subject to stock options held by the person in
question and any shares issuable to the person in question under the 1991
Stock Purchase Plan.
(3) David J. Dunn, a director of the Company, Dev Purkayastha and Perse Failey
are the general partners of Idanta Partners Ltd. and share voting and
dispositive power with respect to such shares.
(4) Includes 18,750 shares subject to a stock option held by Mr. Andersen.
(5) Includes 7,989,678 shares held by Idanta Partners Ltd., of which Mr. Dunn
is Managing General Partner, and 341,736 shares held by a family trust, of
which Mr. Dunn is trustee.
(6) Includes 496,875 shares subject to stock options held by Mr. Edwards. Also
includes 3,000 shares held by Mr. Edwards' wife, as to which shares Mr.
Edwards disclaims beneficial ownership.
(7) Includes 7,500 shares held by Mr. Kucha as custodian for his children, as
to which shares Mr. Kucha disclaims beneficial ownership. Also includes 258
shares held as co-trustee with his wife, as to which shares Mr. Kucha has
shared voting and investment power, and 30,000 shares subject to stock
options held by Mr. Kucha.
(8) Includes 18,750 shares subject to a stock option held by Mr. Myers.
(9) Includes 37,500 shares subject to a stock option held by Mr. Nolan.
42
<PAGE>
(10) Includes 93,750 shares subject to a stock option held by Mr. Sheehan. Also
includes 66,000 shares held by Mr. Sheehan's wife, as to which shares Mr.
Sheehan disclaims beneficial ownership.
(11) Includes 7,989,678 shares of Common Stock held by Idanta Partners Ltd. Also
includes an aggregate of 2,280,030 shares subject to stock options and an
aggregate of 1,191 shares issuable under the 1991 Stock Purchase Plan.
DESCRIPTION OF NOTES
The Notes are to be issued under an Indenture, to be dated as of March 13,
1996 (the "Indenture"), between the Company and State Street Bank and Trust
Company, as Trustee (the "Trustee"), a copy of which is filed as an exhibit to
the Registration Statement. The following summaries of certain provisions of the
Notes and the Indenture, though accurate, do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all the
provisions of the Indenture, including the definitions therein of certain terms.
As used in this "Description of Notes," the "Company" refers to Iomega
Corporation and does not include its subsidiaries.
GENERAL
The Notes will represent unsecured general obligations of the Company
subordinate in right of payment to certain other obligations of the Company as
described under "Subordination of Notes" and convertible into Common Stock as
described under "Conversion of Notes." The Notes will be limited to $40,000,000
aggregate principal amount ($46,000,000 if the Underwriter's over-allotment
option is exercised in full), will be issued only in denominations of $1,000 or
any integral multiple thereof and will mature on March 15, 2001, unless earlier
redeemed at the option of the Company or repurchased upon a Repurchase Event (as
defined). The Notes will be issued only in fully registered form, without
coupons.
The Indenture does not contain any financial covenants or restrictions on
the payment of dividends, the incurrence of Senior Indebtedness or issuance or
repurchase of securities of the Company. The Indenture contains no covenants or
other provisions to afford protection to holders of Notes in the event of a
highly leveraged transaction or a change in control of the Company except to the
extent described under "Repurchase at Option of Holders Upon Repurchase Event"
below.
The Notes will bear interest at the annual rate set forth on the front cover
of this Prospectus from March 13, 1996, payable semiannually on March 15 and
September 15 of each year, commencing on September 15, 1996, to the holders of
record at the close of business on the preceding March 1 or September 1, as the
case may be (other than with respect to a Note or portion thereof redeemed on a
redemption date or repurchased in connection with a Repurchase Event after the
record date and prior to (but excluding) the next succeeding interest payment
date, in which case accrued interest shall be payable to the extent required as
part of the redemption or repurchase price). Principal of, and premium, if any,
and interest on the Notes will be payable at the offices or agencies of the
Company in New York, New York, and the Notes may be presented for registration
of transfer and exchange, conversion or redemption at the office of the Trustee
in New York, New York. In addition, payment of interest may, at the option of
the Company, be made by check mailed to the address of the registered holder of
the Note, provided that a holder of Notes with an aggregate principal amount
equal to or in excess of $5,000,000 will be paid by wire transfer in immediately
available funds at the election of such holder. Interest will be computed on the
basis of a 360-day year comprised of twelve 30-day months.
No service charge will be made for any registration of transfer or exchange,
conversion or redemption of Notes, but the Company may require payment of a sum
sufficient to cover any tax, assessment or other governmental charge that may be
imposed in connection therewith (other than any tax solely in respect of the
issue of Common Stock upon conversion).
CONVERSION OF NOTES
The holders of Notes will be entitled at any time after 60 days following
the latest date of original issuance of the Notes through the close of business
on the final maturity date of the Notes, subject to prior redemption or
repurchase, to convert the principal amount of any Notes or portions thereof (in
denominations of $1,000 or integral multiples thereof) into Common Stock of the
Company, at the conversion price set forth on the cover
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<PAGE>
page of this Prospectus, subject to adjustment as described below. Except as
described below, no adjustment will be made on conversion of any Notes for
interest accrued thereon or for dividends on any shares of Common Stock issued
upon conversion of such Notes. If any Notes not called for redemption are
surrendered for conversion after a record date for the payment of interest and
prior to the next succeeding interest payment date, such Notes must be
accompanied by funds payable to the Company equal to the interest payable on
such succeeding interest payment date on the principal amount being converted.
The Company is not required to issue fractional shares of Common Stock upon
conversion of Notes and, in lieu thereof, will pay a cash adjustment based upon
the market price of Common Stock on the last business day prior to the date of
conversion. In the case of Notes called for redemption, conversion rights will
expire at the close of business on the second business day preceding the date
fixed for redemption unless the Company defaults in payment of the redemption
price. In the case of a Note in respect of which a holder is exercising its
option to require repurchase upon a Repurchase Event, the conversion right will
expire at the close of business on the repurchase date unless the Company
defaults in payment of the repurchase price.
The initial conversion price of $19.75 per share of Common Stock is subject
to adjustment (under formulae set forth in the Indenture) in certain events,
including: (i) the issuance of Common Stock as a dividend or distribution on
Common Stock of the Company; (ii) certain subdivisions and combinations of the
Common Stock; (iii) the issuance to all holders of Common Stock of certain
rights or warrants to purchase Common Stock at less than the Current Market
Price (as defined) of the Common Stock; (iv) the distribution to all holders of
Common Stock of shares of capital stock of the Company (other than Common Stock)
or evidences of indebtedness of the Company or assets (including securities, but
excluding those rights, warrants, dividends and distributions referred to above
and dividends and distributions in connection with the liquidation, dissolution
or winding up of the Company or paid in cash); (v) distributions consisting of
cash, excluding any quarterly cash dividend on the Common Stock to the extent
that the aggregate cash dividend per share of Common Stock in any quarter does
not exceed the greater of (x) the amount per share of Common Stock of the next
preceding quarterly cash dividend on the Common Stock to the extent that such
preceding quarterly dividend did not require an adjustment of the conversion
price pursuant to this clause (v) (as adjusted to reflect subdivisions or
combinations of the Common Stock) and (y) 3.75% of the average of the daily
Closing Prices (as defined) of the Common Stock for the ten consecutive Trading
Days (as defined) immediately prior to the date of declaration of such dividend,
and excluding any dividend or distribution in connection with the liquidation,
dissolution or winding up of the Company; (vi) payment in respect of a tender or
exchange offer made by the Company or any subsidiary of the Company for the
Common Stock to the extent that the cash and the value of any other
consideration included in such payment per share of Common Stock exceeds the
Current Market Price per share of Common Stock on the Trading Day next
succeeding the last date on which tenders or exchanges may be made pursuant to
such tender or exchange offer; and (vii) payment in respect of a tender offer or
exchange offer by a person other than the Company or any subsidiary of the
Company in which, as of the closing date of the offer, the Board of Directors is
not recommending rejection of the offer. If an adjustment is required to be made
as set forth in clause (v) above as a result of a distribution that is a
quarterly dividend, such adjustment would be based upon the amount by which such
distribution exceeds the amount of the quarterly cash dividend permitted to be
excluded pursuant to such clause (v). The adjustment referred to in clause (vii)
above will only be made if the tender offer or exchange offer is for an amount
which increases that person's ownership of Common Stock to more than 25% of the
total shares of Common Stock outstanding and if the cash and value of any other
consideration included in such payment per share of Common Stock exceeds the
Current Market Price per share of Common Stock on the business day next
succeeding the last date on which tenders or exchanges may be made pursuant to
such tender or exchange offer. The adjustment referred to in clause (vii) above
will not be made, however, if, as of the closing of the offer, the offering
documents with respect to such offer disclose a plan or an intention to cause
the Company to engage in a consolidation or merger of the Company or a sale of
all or substantially all of the Company's assets.
Upon conversion of the Notes, the holders will receive, in addition to the
Common Stock issuable upon such conversion, an appropriate number of Common
Stock purchase rights issuable under the Company's Rights Plan (as defined) and
described under "Description of Capital Stock -- Rights Plan"), whether or not
such rights have separated from the Common Stock at the time of conversion. In
addition, the Indenture provides that if the Company implements a new
stockholders' rights plan, such new plan must provide that upon
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<PAGE>
conversion of the Notes the holders will receive, in addition to the Common
Stock issuable upon such conversion, the rights issuable under such plan
(whether or not such rights have separated from the Common Stock at the time of
conversion).
In the case of (i) any reclassification or change of the Common Stock (other
than one described in clause (ii) of the first sentence of the second preceeding
paragraph) or (ii) a consolidation, merger or combination involving the Company
or a sale or conveyance to another person of the property and assets of the
Company as an entirety or substantially as an entirety, in each case as a result
of which holders of Common Stock shall be entitled to receive stock, securities,
or other property or assets (including cash) with respect to or in exchange for
such Common Stock, the holders of the Notes then outstanding will be entitled
thereafter to convert such Notes into the kind and amount of shares of stock,
other securities or other property or assets (including cash) which they would
have owned or been entitled to receive upon such reclassification, change,
consolidation, merger, combination, sale or conveyance had such Notes been
converted into Common Stock immediately prior to such reclassification, change,
consolidation, merger, combination, sale or conveyance, assuming that a holder
of Notes would not have exercised any rights of election as to the stock, other
securities or other property or assets receivable in connection therewith.
In the event of a taxable distribution to holders of Common Stock (or other
transaction) which results in any adjustment of the conversion price, the
holders of the Notes may, in certain circumstances, be deemed to have received a
distribution subject to United States federal income tax as a dividend; in
certain other circumstances, the absence of such an adjustment may result in a
taxable dividend to the holders of Common Stock.
The Company, from time to time and to the extent permitted by law, may
reduce the conversion price by any amount for any period of at least 20 days, in
which case the Company shall give at least 15 days notice of such reduction, if
the Board of Directors has made a determination that such reduction would be in
the best interests of the Company, which determination shall be conclusive. The
Company may, at its option, make such reductions in the conversion price, in
addition to those set forth above, as the Board of Directors deems advisable to
avoid or diminish any income tax to holders of Common Stock resulting from any
dividend or distribution of stock (or rights to acquire stock) or from any event
treated as such for United States federal income tax purposes.
No adjustment in the conversion price will be required unless such
adjustment would require a change of at least 1% in the conversion price then in
effect; provided that any adjustment that would otherwise be required to be made
shall be carried forward and taken in account in any subsequent adjustment.
Except as stated above, the conversion price will not be adjusted for the
issuance of Common Stock or any securities convertible into or exchangeable for
Common Stock or carrying the right to purchase any of the foregoing.
OPTIONAL REDEMPTION BY THE COMPANY
The Notes are not entitled to any sinking fund. At any time on or after
March 15, 1999, the Notes will be redeemable at the Company's option on at least
30 and not more than 60 days' notice as a whole or, from time to time, in part
at the following prices (expressed as percentages of the principal amount),
together with accrued interest to, but excluding, the date fixed for redemption:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ----------------------------------------------------------------------- ------------
<S> <C>
1999................................................................... 102.70 %
2000................................................................... 101.35 %
</TABLE>
If fewer than all the Notes are to be redeemed, the Trustee will select the
Notes to be redeemed by lot or, in its discretion, on a pro rata basis with such
adjustments up to $1,000 in order to maintain the minimum denominations of the
Notes. If any Note is to be redeemed in part only, a new Note or Notes in
principal amount equal to the unredeemed principal portion thereof will be
issued. If a portion of a holder's Notes are selected for partial redemption and
such holder converts a portion of such Notes, such converted portion shall be
deemed (so far as may be) to be taken from the portion selected for redemption.
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<PAGE>
REPURCHASE AT OPTION OF HOLDERS UPON REPURCHASE EVENT
The Indenture provides that if a Repurchase Event (as defined) occurs, each
holder of Notes shall have the right to require the Company to repurchase all of
such holder's Notes, or any portion of the principal amount thereof that is an
integral multiple of $1,000, on the date (the "Repurchase Date") that is 30 days
after the date of the Company Notice (as defined), at a price in cash equal to
100% of the principal amount thereof (the "Repurchase Price"), plus accrued and
unpaid interest to, but excluding, the Repurchase Date (subject to the right of
holders of record on the relevant record date to receive interest due on an
interest payment date that is on the Repurchase Date).
Within 30 days after the occurrence of a Repurchase Event, the Company or,
at the Company's request, the Trustee is obligated to give all holders of record
of the Notes a notice (the "Company Notice") of the occurrence of such
Repurchase Event and of the repurchase right arising as a result thereof (unless
the Company shall have theretofore called for redemption all of the outstanding
Notes). The Company must also deliver a copy of the Company Notice to the
Trustee. To exercise the repurchase right, a holder of Notes must deliver on or
before the 30th day after the date of the Company Notice written notice of the
holder's exercise of such right, together with the Notes with respect to which
the right is being exercised, duly endorsed for transfer to the Company.
A "Repurchase Event" shall be deemed to have occurred at such time as:
(i) any Person (including any syndicate or group which would be deemed
to be a "person" under Section 13(d)(3) of the Exchange Act), other than the
Company, any subsidiary of the Company, or any employee benefit plan of the
Company or any such subsidiary, is or becomes the beneficial owner, directly
or indirectly, through a purchase or other acquisition transaction or series
of transactions (other than a merger or consolidation involving the
Company), of shares of capital stock of the Company entitling such Person to
exercise in excess of 50% of the total voting power of all shares of capital
stock of the Company entitled to vote generally in elections of directors;
or
(ii) there occurs any consolidation of the Company with, or merger of
the Company into, any other Person, any merger of another Person into the
Company or any sale or transfer of all or substantially all of the assets of
the Company to another Person (other than (a) any such transaction pursuant
to which the holders of the Common Stock immediately prior to such
transaction have, directly or indirectly, shares of capital stock of the
continuing or surviving corporation immediately after such transaction which
entitle such holders to exercise in excess of 50% of the total voting power
of all shares of capital stock of the continuing or surviving corporation
entitled to vote generally in the election of directors and (b) any merger
(1) which does not result in any reclassification, conversion, exchange or
cancellation of outstanding shares of Common Stock of the Company, or (2)
which is effected solely to change the jurisdiction of incorporation of the
Company and results in a reclassification, conversion or exchange of
outstanding shares of Common Stock solely into shares of common stock);
provided, however, that a Repurchase Event shall not be deemed to have occurred
if either (a) the Closing Price per share of the Common Stock for any five
Trading Days within the period of ten consecutive Trading Days ending
immediately before the Repurchase Event shall equal or exceed 105% of the
conversion price of the Notes in effect on each such trading day or (b) at least
90% of the consideration (excluding cash payments for fractional shares) in the
transaction or transactions constituting the Repurchase Event consists of shares
of common stock traded on a national securities exchange or quoted on the Nasdaq
National Market (or which will be so traded or quoted when issued or exchanged
in connection with such Repurchase Event) and as a result of such transaction or
transactions the Notes become convertible solely into such common stock. The
term "beneficial owner" shall be determined in accordance with Rule 13d-3
promulgated by the Commission under the Exchange Act.
To the extent applicable, the Company will comply with the provisions of
Rule 13e-4 or any other tender offer rules, and will file a Schedule 13E-4 or
any other schedule required under such rules, in connection with any offer by
the Company to repurchase Notes at the option of the holders thereof upon a
Repurchase Event.
The Repurchase Event feature of the Notes may in certain circumstances make
more difficult or discourage a takeover of the Company and, thus, the removal of
incumbent management. The repurchase right is not the
46
<PAGE>
result of management's knowledge of any effort to accumulate Common Stock or to
obtain control of the Company by means of a merger, tender offer, solicitation,
or otherwise, or part of a plan by management to adopt a series of anti-takeover
provisions. Instead, this right is the result of negotiations between the
Company and the Underwriter.
The foregoing provisions would not necessarily afford holders of the Notes
protection in the event of a highly leveraged transaction, a change in control
of the Company or other transactions involving the Company that may adversely
affect holders of the Notes.
The Company's ability to repurchase Notes upon the occurrence of a
Repurchase Event is subject to limitations. If a Repurchase Event were to occur,
there can be no assurance that the Company would have sufficient financial
resources, or would be able to arrange financing, to pay the repurchase price
for all Notes tendered by holders thereof. In addition, the occurrence of
certain Repurchase Events would constitute an event of default under certain of
the Company's current debt agreements, and the Company's repurchase of Notes as
a result of the occurrence of a Repurchase Event may be prohibited or limited
by, or create an event of default under, the terms of future agreements relating
to borrowings of the Company, including agreements relating to Senior
Indebtedness. In the event a Repurchase Event occurs at a time when the Company
is prohibited from purchasing Notes, the Company could seek the consent of its
lenders to the purchase of the Notes or could attempt to refinance the
borrowings that contain such prohibition. If the Company does not obtain such a
consent or repay such borrowings, the Company would remain prohibited from
purchasing Notes. Any failure by the Company to repurchase the Notes when
required following a Repurchase Event would result in an Event of Default under
the Indenture whether or not such repurchase is permitted by the subordination
provisions of the Indenture. Any such default may, in turn, cause a default
under Senior Indebtedness of the Company. As a result, in each case, any
repurchase of the Notes would, absent a waiver, be prohibited under the
subordination provisions of the Indenture until the Senior Indebtedness is paid
in full. See "Subordination of Notes" below and "Risk Factors -- Subordination."
SUBORDINATION OF NOTES
The indebtedness evidenced by the Notes is subordinated, to the extent
provided in the Indenture, to the prior payment in full of all Senior
Indebtedness (as defined on page 48). In addition, as described more fully
below, the Notes are effectively subordinated to all existing and future
indebtedness and other liabilities of subsidiaries of the Company. At January
28, 1996, (a) the Company had approximately $60.3 million of outstanding
indebtedness that would have constituted Senior Indebtedness and (b)
subsidiaries of the Company had approximately $18.8 million of outstanding
indebtedness and other liabilities (excluding (i) intercompany liabilities, (ii)
indebtedness included in Senior Indebtedness because it is guaranteed directly
or indirectly by the Company and (iii) liabilities of a type not required to be
reflected on the balance sheet of such subsidiaries in accordance with generally
accepted accounting principles), as to which the Notes would have been
effectively subordinated.
Upon any payment by the Company or distribution of assets of the Company
resulting from any dissolution, winding up, liquidation or reorganization, the
payment of the principal of, or premium, if any, or interest on the Notes is
subordinated, to the extent provided in the Indenture, in right of payment to
the prior payment in full in cash of all Senior Indebtedness. In the event of
any acceleration of the Notes because of an Event of Default (as defined), the
holders of any Senior Indebtedness then outstanding would be entitled to payment
in full in cash of all obligations in respect of such Senior Indebtedness before
the holders of the Notes are entitled to receive any payment or distribution in
respect thereof. The Indenture will require that the Company promptly notify
holders of Senior Indebtedness if payment of the Notes is accelerated because of
an Event of Default.
The Company also may not make any payment upon or in respect of the Notes if
(i) a default in the payment of the principal of, premium, if any, interest,
rent or other obligations in respect of Senior Indebtedness occurs and is
continuing beyond any applicable period of grace or (ii) any other default
occurs and is continuing with respect to Designated Senior Indebtedness (as
defined) that permits holders of the Designated Senior Indebtedness as to which
such default relates to accelerate its maturity and the Trustee receives a
notice of such default (a "Payment Blockage Notice") from the Company or other
person permitted to give such notice under the Indenture. Payments on the Notes
may and shall be resumed (a) in case of a payment default, upon the date on
47
<PAGE>
which such default is cured or waived and (b) in case of a nonpayment default,
the earlier of the date on which such nonpayment default is cured or waived or
179 days after the date on which the applicable Payment Blockage Notice is
received if the maturity of such Designated Senior Indebtedness has not been
accelerated, unless the Indenture otherwise prohibits the payment at the time of
such payment. No new period of payment blockage may be commenced pursuant to a
Payment Blockage Notice unless and until (i) 365 days have elapsed since the
effectiveness of the immediately prior Payment Blockage Notice and (ii) all
scheduled payments of principal of, premium, if any, and interest on the Notes
that have become due have been paid in full in cash. No nonpayment default that
existed or was continuing on the date of delivery of any Payment Blockage Notice
to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage
Notice.
By reason of the subordination provisions described above, holders of Senior
Indebtedness may, in the event of the Company's bankruptcy, dissolution or
reorganization, receive more, ratably, and holders of the Notes may receive
less, ratably, than the other creditors of the Company. Such subordination will
not prevent the occurrence of any Event of Default under the Indenture.
The term "Senior Indebtedness" means the principal of, premium, if any,
interest (including all interest accruing subsequent to the commencement of any
bankruptcy or similar proceeding, whether or not a claim for post-petition
interest is allowable as a claim in any such proceeding) and rent payable on or
in connection with, and all fees, costs, expenses and other amounts accrued or
due on or in connection with, Indebtedness of the Company, whether outstanding
on the date of the Indenture or thereafter created, incurred, assumed,
guaranteed or in effect guaranteed by the Company (including all deferrals,
renewals, extensions or refundings of, or amendments, modifications or
supplements to the foregoing), unless in the case of any particular Indebtedness
the instrument creating or evidencing the same or the assumption or guarantee
thereof expressly provides that such Indebtedness shall not be senior in right
of payment to the Notes or expressly provides that such Indebtedness is "pari
passu" or "junior" to the Notes. Notwithstanding the foregoing, Senior
Indebtedness shall not include any Indebtedness of the Company to any subsidiary
of the Company, a majority of the voting stock of which is owned, directly or
indirectly, by the Company. The term "Indebtedness" means, with respect to any
Person, and without duplication, (a) all indebtedness, obligations and other
liabilities (contingent or otherwise) of such Person for borrowed money
(including obligations of the Company in respect of overdrafts, foreign exchange
contracts, currency exchange agreements, interest rate protection agreements,
and any loans or advances from banks, whether or not evidenced by notes or
similar instruments) or evidenced by bonds, debentures, notes or similar
instruments (whether or not the recourse of the lender is to the whole of the
assets of such Person or to only a portion thereof) (other than any account
payable or other accrued current liability or obligation incurred in the
ordinary course of business in connection with the obtaining of materials or
services), (b) all reimbursement obligations and other liabilities (contingent
or otherwise) of such Person with respect to letters of credit, bank guarantees
or bankers' acceptances, (c) all obligations and liabilities (contingent or
otherwise) in respect of leases of such Person as lessee required, in conformity
with generally accepted accounting principles, to be accounted for as
capitalized lease obligations on the balance sheet of such Person, and all
obligations and other liabilities (contingent or otherwise) under any lease or
related document (including a purchase agreement) in connection with any lease
of real property which provides that such Person is contractually obligated to
purchase or cause a third party to purchase the leased property and thereby
guarantee a minimum residual value of the leased property to the lessor and the
obligations of such Person under such lease or related document to purchase or
to cause a third party to purchase such leased property, (d) all obligations of
such Person (contingent or otherwise) with respect to an interest rate or other
swap, cap or collar agreement or other similar instrument or agreement or
foreign currency hedge, exchange, purchase or similar instrument or agreement,
(e) all direct or indirect guaranties or similar agreements by such Person in
respect of, and obligations or liabilities (contingent or otherwise) of such
Person to purchase or otherwise acquire or otherwise assure a creditor against
loss in respect of, indebtedness, obligations or liabilities of another Person
of the kind described in clauses (a) through (d), (f) any indebtedness or other
obligations described in clauses (a) through (d) secured by any mortgage,
pledge, lien or other encumbrance existing on property which is owned or held by
such Person, regardless of whether the indebtedness or other obligation secured
thereby shall have been assumed by such Person and, (g) any and all deferrals,
renewals, extensions and refunding of, or amendments, modifications or
supplements to, any indebtedness, obligation or liability of the kind described
in clauses (a) through (f). The term "Designated Senior Indebtedness" means
Indebtedness under the Company's existing
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<PAGE>
loan agreements with Wells Fargo and First Security Bank of Utah, and any other
Senior Indebtedness if the instrument creating or evidencing the same or the
assumption or guarantee thereof (or related agreements or documents to which the
Company is a party) expressly provides that such Indebtedness shall be
"Designated Senior Indebtedness" for purposes of the Indenture (provided that
such instrument, agreement or other document may place limitations and
conditions on the right of such Senior Indebtedness to exercise the rights of
Designated Senior Indebtedness).
The Notes are obligations exclusively of the Company. Since the operations
of the Company are partially conducted through its subsidiaries, the cash flow
and the consequent ability to service debt, including the Notes, of the Company
are partially dependent upon the earnings of such subsidiaries and the
distribution of those earnings, or upon loans or other payments of funds, by
those subsidiaries to the Company. The subsidiaries are separate and distinct
legal entities and have no obligation, contingent or otherwise, to pay any
amounts due pursuant to the Notes or to make any funds available therefor,
whether by dividends, distributions, loans or other payments. In addition, the
payment of dividends or distributions and the making of loans and other payments
to the Company by any such subsidiaries could be subject to statutory or
contractual restrictions, could be contingent upon the earnings of those
subsidiaries, and are subject to various business considerations.
Any right of the Company to receive any assets of any of its subsidiaries
upon their liquidation or reorganization (and the consequent right of the
holders of the Notes to participate in those assets) will be effectively
subordinated to the claims of that subsidiary's creditors (including trade
creditors), except to the extent that the Company is itself recognized as a
creditor of such subsidiary, in which case the claims of the Company would still
be subordinate to any security interest in the assets of such subsidiary and any
indebtedness of such subsidiary senior to that held by the Company.
At January 28, 1996, the Company had approximately $60.3 million of
outstanding indebtedness which would have constituted Senior Indebtedness and
subsidiaries of the Company had approximately $18.8 million of outstanding
indebtedness and other liabilities (excluding (i) intercompany liabilities, (ii)
indebtedness included in Senior Indebtedness because it is guaranteed directly
or indirectly by the Company and (iii) liabilities of a type not required to be
reflected on the balance sheet of such subsidiaries in accordance with generally
accepted accounting principles) to which the Notes would have been effectively
subordinated. The Company intends to use a portion of the net proceeds of this
offering to repay a portion of the outstanding amounts under its bank loan
agreements, which constitute Senior Indebtedness (although it may subsequently
borrow additional amounts under such loan agreements). See "Use of Proceeds".
The Indenture contains no limitations on either (i) the amount of additional
indebtedness, including Senior Indebtedness, which the Company may create,
incur, assume or guarantee, or (ii) the amount of indebtedness and other
liabilities which any subsidiary may create, incur, assume or guarantee.
In the event that, notwithstanding the foregoing, the Trustee or any holder
of Notes receives any payment or distribution of assets of the Company of any
kind in contravention of any of the subordination provisions of the Indenture,
whether in cash, property or securities, including, without limitation, by way
of set-off or otherwise, in respect of the Notes before all Senior Indebtedness
is paid in full, then such payment or distribution will be held by the recipient
in trust for the benefit of and shall be paid over to the holders of Senior
Indebtedness or their representative or representatives to the extent necessary
to make payment in full of all Senior Indebtedness remaining unpaid, after
giving effect to any concurrent payment or distribution, or provision therefor,
to or for the holders of Senior Indebtedness.
The Company is obligated to pay reasonable compensation to the Trustee and
to indemnify the Trustee against any losses, liabilities or expenses incurred by
it in connection with its duties relating to the Notes. The Trustee's claims for
such payments will be senior to claims of holders of the Notes in respect of all
funds collected or held by the Trustee.
EVENTS OF DEFAULT AND REMEDIES
An Event of Default is defined in the Indenture as being: default in payment
of the principal of or premium, if any, on the Notes (including, without
limitation, any redemption price or repurchase price payable with respect to any
Note); default for 30 days in payment of any installment of interest on the
Notes; default by the
49
<PAGE>
Company for 60 days after notice in the observance or performance of any other
covenants in the Indenture; failure of the Company or any subsidiary to make any
payment at maturity in respect of Money Indebtedness (as defined) in an amount
in excess of $25,000,000 and continuance of such failure for 30 days; default by
the Company or any subsidiary with respect to any Money Indebtedness, which
default results in the acceleration of Money Indebtedness in an amount in excess
of $25,000,000 without such Money Indebtedness having been discharged or such
acceleration having been cured, waived, rescinded or annulled within 30 days
after notice as provided in the Indenture; or certain events involving
bankruptcy, insolvency or reorganization of the Company. The Indenture provides
that the Trustee may withhold notice to the holders of Notes of any default
(except in payment of principal, premium, if any, or interest with respect to
the Notes) if the Trustee in good faith determines it in the interest of the
holders of the Notes to do so.
The Indenture provides that if an Event of Default shall have occurred and
be continuing, the Trustee or the holders of not less than 25% in principal
amount of the Notes then outstanding may declare the principal of and accrued
interest on the Notes to be due and payable immediately, but if the Company
shall cure all defaults (except the nonpayment of principal of, premium, if any,
and interest on any of the Notes which shall have become due by acceleration)
and certain other conditions are met, with certain exceptions, such declaration
may be canceled and past defaults may be waived by the holders of a majority of
the principal amount of the Notes then outstanding. In the case of certain
events of bankruptcy, insolvency or reorganization, the principal of and accrued
interest on the Notes shall automatically become and be immediately due and
payable.
The holders of a majority in principal amount of the Notes then outstanding
shall have the right to direct the time, method and place of conducting any
proceedings for any remedy available to the Trustee, subject to certain
limitations specified in the Indenture.
MODIFICATIONS OF THE INDENTURE
The Indenture contains provisions permitting the Company and the Trustee,
with the consent of the holders of not less than a majority in principal amount
of the Notes at the time outstanding, to modify the Indenture or any
supplemental indenture or the rights of the holders of the Notes, except that no
such modification shall (i) extend the fixed maturity of any Note, reduce the
rate or extend the time for payment of interest thereon, reduce the principal
amount thereof or premium, if any, thereon, reduce any amount payable upon
redemption thereof, change the obligation of the Company to repurchase any Note
upon the happening of a Repurchase Event in a manner adverse to holders of
Notes, impair the right of a holder to institute suit for the payment thereof,
change the currency in which the Notes are payable, impair the right to convert
the Notes into Common Stock subject to the terms set forth in the Indenture or
modify the provisions of the Indenture with respect to the subordination of the
Notes in a manner adverse to the holders of the Notes in any material respect,
without the consent of the holder of each Note so affected, or (ii) reduce the
aforesaid percentage of Notes without the consent of the holders of all of the
Notes then outstanding.
SATISFACTION AND DISCHARGE
The Company may discharge its obligations under the Indenture while Notes
remain outstanding if (i) all outstanding Notes will become due and payable at
their scheduled maturity within one year or (ii) all outstanding Notes are
redeemed within one year, and, in either case, the Company has deposited with
the Trustee an amount sufficient to pay and discharge all outstanding Notes on
the date of their scheduled maturity or the scheduled date of redemption.
GOVERNING LAW
The Indenture and the Notes provide that they are to be governed in
accordance with the laws of the Commonwealth of Massachusetts.
THE TRUSTEE
The Trustee under the Indenture has been appointed by the Company as the
paying agent, conversion agent, registrar and custodian with regard to the
Notes. The Trustee or its affiliates may from time to time in the future provide
banking and other services to the Company in the ordinary course of their
business.
50
<PAGE>
The Indenture contains certain limitations on the rights of the Trustee, in
the event it or any of its affiliates becomes a creditor of the Company, to
obtain payment of claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise. The Trustee and
its affiliates will be permitted to engage in other transactions with the
Company; provided, however, that if the Trustee or any such affiliate acquires
any conflicting interest (as defined), it must eliminate such conflict or
resign.
In case an Event of Default shall occur (and shall not be cured), the
Trustee will be required to use the same degree of care and skill as a prudent
person would use under the circumstances in the conduct of his own affairs.
Subject to such provisions, the Trustee will be under no obligation to exercise
any of its rights or powers under the Indenture at the request of any of the
holders of Notes, unless they shall have offered to the Trustee reasonable
security or indemnity.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 150,000,000 shares
of Common Stock, $.03 1/3 par value per share, and 5,000,000 shares of Preferred
Stock, $.01 par value per share. As of December 31, 1995, there were outstanding
58,819,335 shares of Common Stock held by 2,634 stockholders of record. Of the
5,000,000 authorized shares of Preferred Stock, 250,000 shares have been
designated as Series C Junior Participating Preferred Stock (none of which are
outstanding), and 4,750,000 shares remain available for designation by the Board
of Directors in the future.
The following summary of certain provisions of the Company's Common Stock,
Preferred Stock, Certificate of Incorporation and By-laws is not intended to be
complete and is qualified by reference to the provisions of applicable law and
to the Company's Certificate of Incorporation and By-laws included as exhibits
to the Registration Statement of which this Prospectus is a part. See "Available
Information."
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the outstanding shares of Common
Stock entitled to vote in any election of directors may elect all of the
directors standing for election. Holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared by the Board of Directors out
of funds legally available therefor, subject to any preferential dividend rights
of the holders of any outstanding Preferred Stock. Upon the liquidation,
dissolution or winding-up of the Company, holders of Common Stock are entitled
to receive ratably the net assets of the Company available for distribution
after the payment of all debts and other liabilities of the Company and subject
to the prior rights of the holders of any outstanding Preferred Stock. Holders
of Common Stock have no preemptive, subscription, redemption or conversion
rights. The outstanding shares of Common Stock are, and the shares offered
hereby will be, when issued and paid for, fully paid and nonassessable. The
rights, preferences and privileges of holders of Common Stock are subject to,
and may be adversely affected by, the rights of holders of any shares of
Preferred Stock that the Company may issue in the future.
PREFERRED STOCK
The Board of Directors is authorized, subject to any limitations prescribed
by law, without further stockholder approval, to issue from time to time up to
4,750,000 shares of Preferred Stock, in one or more series. Each such series of
Preferred Stock shall have such number of shares, designations, preferences,
voting powers, qualifications and special or relative rights or privileges as
shall be determined by the Board of Directors, which may include, among others,
dividend rights, voting rights, redemption and sinking fund provisions,
liquidation preferences, conversion rights and preemptive rights.
The stockholders of the Company have granted the Board of Directors
authority to issue the Preferred Stock and to determine its rights and
preferences in order to eliminate delays associated with a stockholder vote on
specific issuances. The rights of the holders of Common Stock will be subject to
the rights of holders of any Preferred Stock issued in the future. The issuance
of Preferred Stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more
51
<PAGE>
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, a majority of the outstanding voting stock of the
Company. The Company has no present plans to issue any shares of Preferred
Stock.
RIGHTS PLAN
In July 1989, the Company adopted a Shareholder Rights Plan and declared a
dividend of four-fifteenths of one preferred stock purchase right (a "Right")
for each outstanding share of Common Stock. Under certain conditions, each Right
may be exercised to purchase one one-hundredth of a share of Series C Junior
Participating Preferred Stock ("Series C Preference Stock") at an exercise price
of $15. The Rights will be exercisable only if a person or group has acquired
beneficial ownership of 20% or more of the Common Stock of the Company or
announced a tender or exchange offer that would result in such a person or group
owning 30% or more of the Common Stock. The Company generally will be entitled
to redeem the Rights at $.01 per Right at any time until the tenth day following
public announcement that a 20% stock position has been acquired and in certain
other circumstances.
If any person or group becomes a beneficial owner of 25% or more of the
Common Stock (except pursuant to a tender or exchange offer for all shares at a
fair price as determined by the outside members of the Board of Directors) or if
a 20% stockholder consolidates or merges into or engages in certain self-dealing
transactions with the Company, each Right not owned by a 20% stockholder will
enable its holder to purchase such number of shares of Common Stock as is equal
to the exercise price of the Right divided by one-half of the market price of
the Common Stock on the date of the occurrence of the event. In addition, if the
Company engages in a merger or other business combination with another person or
group in which it is not the surviving corporation or in connection with which
its Common Stock is changed or converted, or if the Company sells or transfers
50% or more of its assets or earning power to another person, each Right that
has not previously been exercised will entitle its holder to purchase such
number of shares of Common Stock of such other person as is equal to the
exercise price of the Right divided by one-half of the market price of such
Common Stock on the date of the occurrence of the event.
Because of the nature of the Series C Preferred Stock's dividend,
liquidation and voting rights, the value of four fifteen-hundredths of a share
of Series C Preferred Stock purchasable upon exercise of the four-fifteenths of
a Right associated with each share of Common Stock should approximate the value
of one share of Common Stock.
The Rights have certain anti-takeover effects. The Rights may cause
substantial dilution to a person or group that attempts to acquire the Company
on terms not approved by the Board of Directors of the Company, except pursuant
to an offer conditioned on a substantial number of Rights being acquired. The
Rights should not interfere with any merger or other business combination
approved by the Board of Directors.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. In general, Section 203 prohibits a publicly-held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
an "interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
The Company's Certificate of Incorporation and By-Laws provide that any
action required or permitted to be taken by the stockholders of the Company may
be taken only at a duly called annual or special meeting of stockholders or by a
written consent signed by all holders of outstanding voting stock, and that
special meetings of stockholders may be called only by the Board of Directors or
the President of the Company. These provisions could have the effect of delaying
until the next stockholders' meeting stockholder actions which are favored by
the holders of a majority of the outstanding voting securities of the Company.
These provisions may also discourage another person or entity from making a
tender offer for the Common Stock, because such person or
52
<PAGE>
entity, even if it acquired a majority of the outstanding voting securities of
the Company, would be able to take action as a stockholder (such as electing new
Directors or approving a merger) only at a duly called stockholders meeting, and
not by written consent.
The Company's Certificate of Incorporation contains certain provisions
permitted under the General Corporation Law of Delaware relating to the
liability of Directors. The provisions eliminate a Director's liability to
stockholders for monetary damages for a breach of fiduciary duty, except in
certain circumstances involving wrongful acts, such as the breach of a
Director's duty of loyalty or acts or omissions which involve intentional
misconduct or a knowing violation of law. The Company's Certificate of
Incorporation also contains provisions obligating the Company to indemnify its
Directors and officers to the fullest extent permitted by the General
Corporation Law of Delaware. The Company believes that these provisions will
assist the Company in attracting and retaining qualified individuals to serve as
Directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriter, Hambrecht & Quist LLC, has agreed to purchase all of the Notes from
the Company. The Underwriting Agreement provides that the obligations of the
Underwriter are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company, its counsel and the
Company's independent auditors. The nature of the Underwriter's obligation is
such that it is committed to purchase all of the Notes offered hereby if any of
such Notes are purchased. The Underwriter proposes to offer the Notes directly
to the public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $15.00 per Note. The Underwriter may allow, and such dealers may reallow, a
concession not in excess of $5.00 per Note to certain other dealers. After the
offering contemplated hereby, the offering price and other selling terms may be
changed by the Underwriter.
The Company has granted to the Underwriter an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to an additional
$6,000,000 principal amount of Notes at the public offering price, less the
underwriting discount, set forth on the cover page of this Prospectus. The
Company will be obligated, pursuant to the option, to sell such Notes to the
Underwriter to the extent the option is exercised. The Underwriter may exercise
such option only to cover over-allotments made in connection with the sale of
Notes offered hereby.
The offering of the Notes is made for delivery when, as and if accepted by
the Underwriter and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriter reserves the right
to reject an order for the purchase of Notes in whole or in part.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act of 1933, and to
contribute to payments the Underwriter may be required to make in respect
thereof.
The executive officers and directors of the Company have agreed, with
certain limited exceptions, that they will not, without the prior written
consent of the Underwriter, offer, sell, or otherwise dispose of any shares of
Common Stock or options to acquire shares of Common Stock owned by them during
the 90-day period following the date of this Prospectus. The Company has agreed
that it will not, without the prior written consent of the the Underwriter,
offer, sell, grant any option to purchase or otherwise dispose of any shares of
Common Stock during the 90-day period following the date of this Prospectus
(except pursuant to employee and director stock plans).
53
<PAGE>
LEGAL MATTERS
The validity of the Notes offered hereby and the shares of Common Stock
issuable upon conversion thereof will be passed upon for the Company by Hale and
Dorr, Boston, Massachusetts. Partners of Hale and Dorr beneficially own 93,750
shares of Common Stock of the Company. Certain legal matters will be passed upon
for the Underwriter by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian,
LLP, Palo Alto, California.
EXPERTS
The consolidated financial statements and schedule included or incorporated
by reference in this Prospectus and elsewhere in the Registration Statement, to
the extent and for the periods indicated in their reports, have been audited by
Arthur Andersen LLP, independent public accountants, and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the SEC.
Such documents can be inspected and copied at the public reference facilities
maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the following Regional Offices of the SEC: Seven World Trade Center, 13th Floor,
New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and copies of such material may be obtained from the SEC's
Public Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. The Common Stock is quoted on the Nasdaq Stock Market. Reports
and other information concerning the Company may be inspected at the office of
Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the SEC a Registration Statement on Form S-3
under the Securities Act of 1933 with respect to the Notes offered hereby and
the Common Stock issuable upon conversion thereof. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. For further information with respect to the
Company, the Notes and its Common Stock, reference is hereby made to such
Registration Statement, exhibits and schedules. Statements contained in this
Prospectus as to the contents of any contract or any other document are not
necessarily complete, and in each instance reference is hereby made to the copy
of such contract or document (if any) filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. The Registration Statement and the exhibits and schedules thereto may
be examined without charge at the Public Reference Section of the SEC at 450
Fifth Street, N.W., Washington, D.C. 20549 and copies of such materials may be
obtained from the SEC at prescribed rates.
54
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the SEC are incorporated
herein by reference:
(1) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994;
(2) the Company's Quarterly Reports on Form 10-Q for the quarters ended
April 2, July 2 and October 1, 1995;
(3) the Company's Current Report on Form 8-K dated February 1, 1996;
(4) the Company's Form 10-C filed on February 6, 1996; and
(5) the Company's Registration Statement on Form 8-A registering the Common
Stock under Section 12(g) of the Exchange Act.
All documents filed by the Company with the SEC pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to March 7, 1996 and prior to
the termination of the offering of the Common Stock registered hereby shall be
deemed to be incorporated by reference into this Prospectus and to be a part
hereof from the date of filing such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy of
any or all of the foregoing documents incorporated by reference into this
Prospectus (without exhibits to such documents other than exhibits specifically
incorporated by reference into such documents). Requests for such copies should
be directed to the Secretary of the Company, 1821 West Iomega Way, Roy, Utah
84067 (telephone: (801) 778-1000).
55
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.............................................. F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995.......................... F-3
Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and
1995................................................................................. F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993,
1994 and 1995........................................................................ F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and
1995................................................................................. F-9
Notes to Consolidated Financial Statements............................................ F-10
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Iomega Corporation:
We have audited the accompanying consolidated balance sheets of Iomega
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1994
and 1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Iomega
Corporation and subsidiaries as of December 31, 1994 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1995 in conformity with generally accepted accounting
principles.
As explained in Note 3 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for income taxes.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
January 26, 1996
F-2
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................... $ 16,861 $ 1,023
Temporary investments................................... 2,932 --
Trade receivables, less allowance for doubtful accounts
of $1,627 and $1,861, respectively..................... 18,892 105,955
Inventories............................................. 17,318 98,703
Deferred tax assets..................................... 477 2,778
Other current assets.................................... 4,077 3,673
--------- ---------
Total current assets................................ 60,557 212,132
--------- ---------
Equipment and leasehold improvements, at cost:
Machinery and equipment................................. 45,585 67,812
Leasehold improvements.................................. 6,034 6,475
Furniture and fixtures.................................. 4,737 4,805
Equipment and construction in process................... 2,837 24,057
--------- ---------
59,193 103,149
Less: Accumulated depreciation and amortization......... (43,917) (49,779)
--------- ---------
15,276 53,370
--------- ---------
Deferred tax assets....................................... -- 520
--------- ---------
Other assets.............................................. -- 205
--------- ---------
$ 75,833 $ 266,227
--------- ---------
--------- ---------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-3
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1994 1995
-------- ---------
<S> <C> <C>
Current liabilities:
Notes payable............................................ $ -- $ 47,640
Accounts payable......................................... 7,228 94,782
Bank overdraft........................................... -- 11,833
Accrued payroll and bonus................................ 3,047 6,777
Deferred revenue......................................... 1,947 3,207
Accrued vacation......................................... 1,954 2,939
Accrued warranty......................................... 3,943 4,652
Other accrued liabilities................................ 7,620 21,756
Income taxes payable..................................... -- 5,141
Current portion of capitalized lease obligations......... -- 782
-------- ---------
Total current liabilities............................ 25,739 199,509
-------- ---------
Capitalized lease obligations, net of current portion...... -- 1,481
-------- ---------
Notes payable, net of current portion...................... -- 2,551
-------- ---------
Commitments and contingencies (Note 4)
Redeemable Series A Convertible Preferred Stock;
outstanding 258,816 shares................................ 1,031 --
-------- ---------
Stockholders' equity:
Preferred Stock, $0.01 par value; authorized 4,750,000
shares.................................................. -- --
Series C Junior Participating Preferred Stock; authorized
250,000 shares, none issued............................. -- --
Common Stock, $.03 1/3 par value; authorized 150,000,000
shares; issued 55,559,247 and 58,819,335 shares,
respectively............................................ 1,852 1,960
Notes receivable from stockholders....................... (597) --
Additional paid-in capital............................... 47,023 51,473
Retained earnings........................................ 785 9,253
-------- ---------
Total stockholders' equity........................... 49,063 62,686
-------- ---------
-------- ---------
$ 75,833 $ 266,227
-------- ---------
-------- ---------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-4
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Sales.......................................... $ 147,123 $ 141,380 $ 326,225
Cost of sales.................................. 92,585 92,453 235,838
--------- --------- ---------
Gross margin................................... 54,538 48,927 90,387
--------- --------- ---------
Operating expenses:
Selling, general and administrative.......... 38,862 36,862 57,189
Research and development..................... 18,972 15,438 19,576
Restructuring costs (reversal)............... 14,131 (2,491) --
--------- --------- ---------
Total operating expenses................. 71,965 49,809 76,765
--------- --------- ---------
Operating income (loss)........................ (17,427) (882) 13,622
Foreign currency gain (loss)................. 328 353 (1,243)
Interest income.............................. 620 871 537
Interest expense............................. (70) (15) (1,652)
Other income (expense)....................... (107) (301) 375
--------- --------- ---------
Income (loss) before income taxes and
cumulative effect of accounting change........ (16,656) 26 11,639
Provision for income taxes..................... (206) (1,908) (3,136)
--------- --------- ---------
Net income (loss) before cumulative effect of
accounting change............................. (16,862) (1,882) 8,503
Cumulative effect of accounting change......... 2,337 -- --
--------- --------- ---------
Net income (loss)............................ $ (14,525) $ (1,882) $ 8,503
--------- --------- ---------
Net income (loss) per common share:
Net income (loss) before cumulative effect of
accounting change........................... $ (0.31) $ (0.03) $ 0.14
Cumulative effect of accounting change....... 0.04 -- --
--------- --------- ---------
Net income (loss)............................ $ (0.27) $ (0.03) $ 0.14
--------- --------- ---------
--------- --------- ---------
Weighted average common chares outstanding..... 54,318 55,419 60,180
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK RECEIVABLE ADDITIONAL
------------------ FROM PAID-IN RETAINED TREASURY
SHARES AMOUNT STOCKHOLDERS CAPITAL EARNINGS STOCK TOTAL
---------- ------ ------------ ---------- ----------- --------- --------
Balances at December 31, 1992................. 53,632,656 $1,788 $ -- $57,746 $ 17,347 $ (11,857) $ 65,024
<S> <C> <C> <C> <C> <C> <C> <C>
Sale of shares to employees at an average
price of $0.69 cash per share................ 570,888 19 -- 373 -- -- 392
Sale of shares to officer at an average price
of $0.68 per share for a note receivable..... 882,000 29 (597) 568 -- -- --
Accretion of Series A Convertible Preferred
Stock redemption premium..................... -- -- -- (51) -- -- (51)
Dividends on Series A Convertible Preferred
Stock........................................ -- -- -- -- (78) -- (78)
Tax benefit from early dispositions of
employee stock............................... -- -- -- 214 -- -- 214
Recognition of compensation from Employee
Stock Purchase Plan.......................... -- -- -- 84 -- -- 84
Issuance of 34,563 treasury shares under
Employee Stock Purchase Plan................. -- -- -- (30) -- 60 30
Net loss...................................... -- -- -- -- (14,525) -- (14,525)
---------- ------ ------ ---------- ----------- --------- --------
Balances at December 31, 1993................. 55,085,544 $1,836 $ (597) $58,904 $ 2,744 $ (11,797) $ 51,090
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-6
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE ADDITIONAL
FROM PAID-IN RETAINED TREASURY
SHARES AMOUNT STOCKHOLDERS CAPITAL EARNINGS STOCK TOTAL
---------- ------ ------------ ---------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Sale of shares to employees at an average
price of $0.56 cash per share................ 473,703 16 -- 240 -- -- 256
Purchase of 390,000 shares at an average cost
of $0.78 cash per share...................... -- -- -- -- -- (305) (305)
Accretion of Series A Convertible Preferred
Stock redemption premium..................... -- -- -- (55) -- -- (55)
Dividends on Series A Convertible Preferred
Stock........................................ -- -- -- -- (77) -- (77)
Tax benefit from early dispositions of
employee stock............................... -- -- -- 28 -- -- 28
Recognition of compensation from Employee
Stock Purchase Plan.......................... -- -- -- 8 -- -- 8
Issuance of 15,171 treasury shares under
Employee Stock Purchase Plan................. -- -- -- (17) -- 17 --
Five-for-four Common Stock split effected in
the form of a 25% stock dividend............. -- -- -- (12,085) -- 12,085 --
Net loss...................................... -- -- -- -- (1,882) -- (1,882)
---------- ------ ------ ---------- ----------- --------- --------
Balances at December 31, 1994................. 55,559,247 $1,852 $ (597) $47,023 $ 785 $ -- $ 49,063
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-7
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTES
RECEIVABLE ADDITIONAL
FROM PAID-IN RETAINED TREASURY
SHARES AMOUNT STOCKHOLDERS CAPITAL EARNINGS STOCK TOTAL
---------- ------ ------------ ---------- ----------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Sale of shares to employees at an average
price of $0.83 cash per share................ 2,429,751 81 -- 1,945 -- -- 2,026
Sale of shares to an officer at an average
price of $0.57 per share for a note
receivable................................... 496,875 16 (283) 267 -- -- --
Accretion of Series A Convertible Preferred
Stock redemption premium..................... -- -- -- (14) -- -- (14)
Dividends on Series A Convertible Preferred
Stock........................................ -- -- -- -- (35) -- (35)
Tax benefit from early dispositions of
employee stock............................... -- -- -- 860 -- -- 860
Recognition of compensation from Employee
Stock Purchase Plan.......................... -- -- -- 185 -- -- 185
Conversion of Series A Convertible Preferred
Stock to Common Stock........................ 318,600 11 -- 1,194 -- -- 1,205
Issuance of Common Shares under Employee Stock
Purchase Plan................................ 14,862 -- -- 13 -- -- 13
Collection of notes receivable from
stockholders................................. -- -- 880 -- -- -- 880
Net income.................................... -- -- -- -- 8,503 -- 8,503
---------- ------ ------ ---------- ----------- --------- --------
Balances at December 31, 1995................. 58,819,335 $1,960 $ -- $51,473 $ 9,253 $ -- $ 62,686
---------- ------ ------ ---------- ----------- --------- --------
---------- ------ ------ ---------- ----------- --------- --------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-8
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
--------- -------- ---------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash Flows from Operating Activities:
Net Income (Loss)........................... $ (14,525) $ (1,882) $ 8,503
Non-Cash Revenue and Expense Adjustments:
Depreciation and amortization expense... 8,472 6,853 8,943
Cumulative effect of accounting
change................................ (2,337) -- --
Deferred income tax provision
(benefit)............................. -- 4,508 (2,821)
Change in restructuring reserves........ 5,554 1,590 --
Other................................... (751) (314) 926
Changes in Assets and Liabilities:
Trade receivables (net)................. (6,203) 2,793 (87,063)
Inventories............................. 3,786 (3,747) (81,385)
Income taxes payable.................... -- -- 6,823
Other current assets.................... (694) (1,135) (1,278)
Accounts payable........................ 1,696 161 87,554
Accrued liabilities..................... 6,333 (3,516) 32,808
--------- -------- ---------
Net cash provided from (used in)
operating activities.............. 1,331 5,311 (26,990)
--------- -------- ---------
Cash Flows from Investing Activities:
Purchase of equipment and leasehold
improvements.............................. (6,567) (7,083) (45,232)
Purchase of temporary investments........... -- (8,825) (2,090)
Sale of temporary investments............... -- 5,893 5,022
Prepayment of royalties..................... (1,000) -- --
Proceeds from sale of property held for
resale.................................... 4,461 -- --
Proceeds from sale of research and
development assets........................ -- 2,792 --
Net (increase) decrease in other assets..... 343 (10) (205)
--------- -------- ---------
Net cash used in investing
activities........................ (2,763) (7,233) (42,505)
--------- -------- ---------
Cash Flows from Financing Activities:
Proceeds from sales of Common Stock......... 402 256 2,028
Proceeds from issuance of notes payable..... -- -- 259,667
Payments on notes payable and capitalized
lease obligations......................... (11) -- (209,748)
Tax benefit from early dispositions of
employee stock............................ 214 28 860
Redemption of Preferred Stock............... (2) -- (30)
Purchase of treasury stock.................. -- (305) --
Utilization of treasury stock for Stock
Purchase Plan............................. 20 -- --
Payment of dividends on Preferred Stock..... (78) -- --
Proceeds from notes receivable from
stockholders.............................. -- -- 880
--------- -------- ---------
Net cash provided from (used in)
financing activities.............. 545 (21) 53,657
--------- -------- ---------
Net Change in Cash and Cash Equivalents......... (887) (1,943) (15,838)
Cash and Cash Equivalents at Beginning of the
Year............................................ 19,691 18,804 16,861
--------- -------- ---------
Cash and Cash Equivalents at End of the Year.... $ 18,804 $ 16,861 $ 1,023
--------- -------- ---------
--------- -------- ---------
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Net receivable (payable) associated with
revaluation of forward exchange
contracts................................. $ 49 $ (111) $ (1,113)
--------- -------- ---------
--------- -------- ---------
Sale of Common Stock for a Note............. $ 597 $ -- $ 283
--------- -------- ---------
--------- -------- ---------
Conversion of Series A Preferred Stock to
Common Stock.............................. $ -- $ -- $ 1,205
--------- -------- ---------
--------- -------- ---------
Machinery and equipment financed under
capitalized lease obligations............. $ -- $ -- $ 2,535
--------- -------- ---------
--------- -------- ---------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-9
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company designs, manufactures and markets innovative data storage
solutions, based on removable-media technology, that help personal computer
users "manage their stuff." The Company's data storage solutions include disk
drives marketed under the tradenames Zip and Jaz, a family of tape drives
marketed under the tradename Ditto, and a line of removable drives marketed
under the tradename Bernoulli. Retail outlets for the Company's products include
mail order catalogs, computer superstores, office supply superstores and
speciality computer stores. The Company sells its products to retail channels
directly as well as indirectly through distributors. The Company's products are
sold at the retail level by most of the leading retailers of computer products
in the United States. In addition to sales through these retail channels, the
Company has entered into a number of strategic marketing alliances with a
variety of companies within the computer industry. These alliances include OEM
arrangements providing for certain of the Company's products to be incorporated
in new computer systems at the time of purchase.
The Company's business has grown significantly in the past year, with sales
increasing from $141.4 million in 1994 to $326.2 million in 1995. This business
growth has resulted in substantial increases in accounts receivable and
inventories. Increases in these working capital components have resulted in a
significant decline in the Company's liquidity. The Company expects that
proceeds from an anticipated note offering, together with current sources of
financing available to the Company, will be sufficient to fund the Company's
operations through at least June 30, 1996. Thereafter, the Company anticipates
that it will require additional funds to finance its operations.
SOURCES OF SUPPLY
Many components incorporated in, or used in the manufacture of, the
Company's products are currently only available from sole source suppliers. The
Company purchases all of its sole source and limited source components and
equipment pursuant to purchase orders placed from time to time and has no
guaranteed supply arrangements. Supply shortages resulting from a change in
suppliers could cause a delay in manufacturing and a possible loss of sales,
which would have an adverse effect on operating results.
MANUFACTURING RELATIONSHIPS
The Company uses independent parties to manufacture for the Company, on a
contract basis, a substantial portion of the Company's products. The Company's
manufacturing relationships are generally not covered by binding contracts and
may be subject to unilateral termination by the Company's manufacturing
partners. Shortages resulting from a change in manufacturing partners could
cause a delay in manufacturing and a possible loss of sales, which would have an
adverse affect on operating results.
PERVASIVENESS OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries after elimination of all material intercompany
accounts and transactions.
REVENUE RECOGNITION
Revenue is recognized when units are shipped to customers. However, revenue
recognition is deferred on shipments to customers with right of return
privileges whose inventory is in excess of estimated normal customers' inventory
requirements. The gross margin associated with deferral of sales in excess of
estimated
F-10
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
normal customers' inventory requirements totaled $1,494,000, $1,947,000 and
$3,207,000 at December 31, 1993, 1994 and 1995, respectively, and is included in
deferred revenue in the accompanying consolidated balance sheets.
In addition, the Company records reserves at the time of shipment for
estimated volume rebates and price protection credits to be issued to customers.
These reserves totalled $169,000 and $1,633,000 at December 31, 1994 and 1995,
respectively, and are netted against accounts receivable in the accompanying
consolidated balance sheets.
PRICE PROTECTION
The Company has agreements with certain of its customers which, in the event
of a price decrease, allow those customers (subject to certain limitations)
credit equal to the difference between the price originally paid and the reduced
price on units in the customers' inventories at the date of the price decrease.
When a price decrease is anticipated, the Company establishes reserves for
amounts estimated to be reimbursed to the qualifying customers.
INVENTORIES
Inventories include direct materials, direct labor, and manufacturing
overhead costs and are recorded at the lower of cost (first-in, first-out) or
market and consist of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1994 1995
------- -------
<S> <C> <C>
Raw materials........................................... $ 7,524 $89,030
Work-in-process......................................... 4,839 5,680
Finished goods.......................................... 4,955 3,993
------- -------
$17,318 $98,703
------- -------
------- -------
</TABLE>
EQUIPMENT AND LEASEHOLD IMPROVEMENTS
When property is retired or otherwise disposed of, the book value of the
property is removed from the asset and related accumulated depreciation and
amortization accounts, and the net gain or loss is included in the determination
of net income. Depreciation is provided based on the straight-line method over
the following estimated useful lives of the property.
<TABLE>
<S> <C>
Machinery and equipment.................................... 2 - 5 years
Leasehold improvements..................................... 5 years
Furniture and fixtures..................................... 10 years
</TABLE>
The Company has certain specialized manufacturing equipment used in its
operations.
PRODUCT DEVELOPMENT
Product research and development costs are expensed as incurred.
ADVERTISING
The Company expenses the cost of advertising the first time the advertising
takes place, except cooperative advertising with customers, which is accrued at
the time of sale. For the years ended December 31, 1993, 1994 and 1995,
advertising expenses totaled approximately $5,574,000, $6,348,000 and
$10,612,000, respectively.
BANK OVERDRAFT
The bank overdraft represents those checks which have been disbursed to
vendors but have not been presented to the bank for clearance. Upon presentment
to the bank, the bank overdraft will be funded by the revolving line of credit,
thereby reducing the availability under the line. (See Note 5.)
F-11
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
WARRANTY COSTS
A one-year limited warranty is generally provided on the Company's Zip and
Jaz drives. Zip and Jaz disks carry a limited lifetime warranty. A two to
five-year limited warranty is generally provided on Bernoulli disk drives and
disk drive subsystems. A two to five-year limited warranty is generally provided
on the tape drives and tape media.
NET INCOME (LOSS) PER COMMON SHARE
Net income (loss) per common share is based on the weighted average number
of shares of Common Stock and dilutive common stock equivalent shares
outstanding during the year. Common stock equivalent shares consist primarily of
stock options and convertible preferred stock that have a dilutive effect when
applying the treasury stock method. In periods where losses are recorded, common
stock equivalents would decrease the loss per share and are therefore not added
to weighted average shares outstanding. The outstanding shares and earnings per
share have been restated for all periods presented to reflect the impact of the
stock splits described in Note 2.
FOREIGN CURRENCY TRANSLATION
For purposes of consolidating foreign operations, the Company has determined
the functional currency for its foreign operations is the U.S. dollar.
Therefore, translation gains and losses are included in the determination of
income.
INCOME TAXES
The Company recognizes a liability or asset for the deferred tax
consequences of temporary differences between the tax bases of assets or
liabilities and their reported amounts in the financial statements. These
temporary differences will result in taxable or deductible amounts in future
years when the reported amounts of the assets or liabilities are recovered or
settled.
General business tax credits are accounted for using the "liability" method,
which reduces Federal income tax expense in the year in which these credits are
generated.
CASH EQUIVALENTS AND TEMPORARY INVESTMENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with maturities of three or fewer
months to be cash equivalents. Instruments with maturities in excess of three
months are classified as temporary investments. At December 31, 1994, all
temporary investments had maturities of less than six months. Cash equivalents
and temporary investments primarily consist of certificates of deposit,
investments in money market mutual funds, commercial paper and bankers'
acceptances and are recorded at cost which approximates market.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The book value of the Company's financial instruments approximates fair
value. The estimated fair values have been determined using appropriate market
information and valuation methodologies.
RECLASSIFICATIONS
Certain reclassifications have been made in prior periods' consolidated
financial statements to conform to the current presentation.
(2) STOCK SPLITS
On October 27, 1994, the Company's Board of Directors declared a 5-for-4
stock split which was effected in the form of a 25% Common Stock dividend paid
on November 23, 1994 to stockholders of record at the close of business on
November 9, 1994. The Company paid cash in lieu of issuing fractional shares.
The transaction has been accounted for as a stock split. Of the shares of Common
Stock distributed by the Company in connection with the November 1994 stock
split, approximately 9,051,000 were treasury shares and the remainder were
F-12
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) STOCK SPLITS (CONTINUED)
authorized but unissued shares. The cost of the treasury shares and authorized
but unissued shares were recorded as a reduction in additional paid-in capital.
All earnings per share and outstanding shares have been retroactively restated
in the financial statements for all periods presented.
In December 1995, the Board of Directors approved a 3-for-1 Common Stock
split, to be effected in the form of a 200% Common Stock dividend, subject to
stockholder approval of an increase in the authorized Common Stock to
150,000,000 shares at $.03 1/3 par value per share. On January 26, 1996, the
stockholders approved the charter amendment to increase the authorized Common
Stock. The stock dividend will be paid on or about January 31, 1996 to
stockholders of record at the close of business on January 15, 1996. This stock
split has been retroactively reflected in the accompanying consolidated
financial statements.
In connection with each stock split, proportional adjustments were made to
outstanding stock options and other outstanding obligations of the Company to
issue shares of Common Stock.
(3) INCOME TAXES
Income (loss) before income taxes and cumulative effect of accounting change
consisted of the following:
<TABLE>
<CAPTION>
December 31, 1993 1994 1995
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S..................................... $ (7,338) $ 208 $ 10,761
Non-U.S................................. (9,318) (182) 878
--------- -------- --------
$ (16,656) $ 26 $ 11,639
--------- -------- --------
--------- -------- --------
</TABLE>
The income tax provision consists of the following:
<TABLE>
<CAPTION>
December 31, 1993 1994 1995
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current Income Taxes:
Federal............................... $ (164) $ 1,217 $ (4,158)
State................................. (22) 208 (805)
Foreign............................... -- -- (156)
--------- -------- --------
(186) 1,425 (5,119)
--------- -------- --------
Deferred Taxes:
Federal............................... 5,989 (6) 189
State................................. 1,497 -- 47
Change in Valuation Allowance......... (7,506) (3,327) 1,747
--------- -------- --------
(20) (3,333) 1,983
--------- -------- --------
Provision for Income Taxes.............. $ (206) $ (1,908) $ (3,136)
--------- -------- --------
--------- -------- --------
</TABLE>
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). In
accordance with the provisions of SFAS No. 109, the Company recognized the
cumulative effect of this accounting change totaling $2.3 million in the
consolidated statement of operations for the year ended December 31, 1993.
F-13
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities are determined based on the differences
between the financial reporting and tax basis of assets and liabilities. They
are measured by applying the enacted tax rates and laws in effect for the years
in which such differences are expected to reverse. The significant components of
the Company's deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable reserves.............................. $ 482 $ 1,158
Inventory reserves........................................ 940 2,378
Fixed asset reserves...................................... 36 64
Accrued expense reserves.................................. 4,596 7,188
Unrealized foreign currency loss.......................... -- 438
Inventory unicap adjustment............................... 160 375
Foreign net operating loss carryover...................... 1,493 1,921
Tax credit carryover...................................... 5,365 1,273
Intercompany profit in inventory.......................... 86 84
Other..................................................... 45 30
------------ ------------
Total deferred tax assets................................... 13,203 14,909
Valuation allowance......................................... (12,585) (11,341)
------------ ------------
Deferred tax asset net of valuation allowance............... 618 3,568
Deferred tax liabilities:
Accelerated depreciation.................................. (141) (270)
------------ ------------
Net deferred tax assets..................................... $ 477 $ 3,298
------------ ------------
------------ ------------
</TABLE>
Management believes that, based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the deferred tax asset such that a valuation allowance has been recorded. Such
factors include lack of cumulative operating profits in the previous three
years, recent increases in expense levels to support the Company's growth, and
the fact that the market in which the Company competes is intensely competitive
and characterized by rapidly changing technology. Accordingly, the deferred tax
assets have been reduced by a $11.3 million valuation allowance at December 31,
1995. This allowance has been established for the foreign net operating loss
carryforward and temporary differences which are not expected to be realized
through an income tax loss carryback to a prior period.
Although the realization of the net deferred tax assets are not assured,
management believes that it is more likely than not that all of the net deferred
tax assets will be realized. The amount of the net deferred tax assets
considered realizable, however, could be reduced in the near term based on
changing conditions.
F-14
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INCOME TAXES (CONTINUED)
The differences between the provision for income taxes at the U.S. statutory
rate and the effective rate, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
Benefit (provision) at U.S. statutory
rate..................................... $ 5,663 $ (9) $ (3,957)
Utilization of tax credits................ 947 4 --
Change in transfer price.................. -- 1,400 --
Non-Deductible items...................... 21 -- (95)
State income taxes........................ 669 (22) (596)
(Increase) decrease in deferred asset
valuation allowance...................... (7,506) (3,327) 1,747
Foreign income taxes...................... -- -- (156)
Other..................................... -- 46 (79)
-------- -------- --------
Provision for income taxes................ $ (206) $ (1,908) $ (3,136)
-------- -------- --------
-------- -------- --------
</TABLE>
Cash paid for income taxes was $1,322,000 in 1993, $94,000 in 1994, and
$71,000 in 1995. The Company received cash refunds of $2,247,000 in 1994 and
$1,592,000 in 1995.
For income tax purposes, the Company has approximately $5,056,000 in foreign
net operating loss carryforwards and $1,273,000 of tax credit carryforwards. The
tax credit carryforwards will begin expiring in 2008.
(4) COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is involved in lawsuits and claims generally incidental to its
business. It is the opinion of management, after discussions with legal counsel,
that the ultimate dispositions of these lawsuits and claims will not have a
material adverse effect on the Company's financial statements.
LEASE COMMITMENTS
The Company conducts its operations from leased facilities and leases
certain equipment used in its operations. Aggregate lease commitments under
non-cancelable operating leases in effect at December 31, 1995 are as follows
(in thousands):
<TABLE>
<CAPTION>
LEASE
YEARS ENDING DECEMBER 31, COMMITMENTS
------------------------------------------------------------ -----------
<S> <C>
1996........................................................ $ 3,063
1997........................................................ 2,456
1998........................................................ 2,108
1999........................................................ 1,683
2000........................................................ 1,289
Thereafter.................................................. 97
-----------
$10,696
-----------
-----------
</TABLE>
Total rent expense for the years ended December 31, 1993, 1994 and 1995 was
approximately $2,336,000, $1,989,000 and $1,981,000, respectively.
F-15
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) COMMITMENTS AND CONTINGENCIES (CONTINUED)
The following is a schedule of future minimum lease payments under capital
leases together with the present value of net minimum lease payments at December
31, 1995 (in thousands):
<TABLE>
<CAPTION>
FUTURE MINIMUM
YEARS ENDING DECEMBER 31, LEASE PAYMENTS
-------------------------------------------------------- --------------
<S> <C>
1996.................................................... $ 973
1997.................................................... 973
1998.................................................... 640
------
Total net minimum lease payments........................ 2,586
Less amount representing interest....................... (323)
------
Present value of net minimum lease payments............. 2,263
Less: current portion................................... (782)
------
$1,481
------
------
</TABLE>
BONUS PLAN
The Company has adopted a bonus plan that provides for bonus payments to
officers and key employees. The payment of the 1995 bonuses was contingent upon
the Company and the employees achieving certain objectives. At December 31,
1995, the Company has accrued $3,000,000 for management bonuses which will be
paid in March 1996 or after the First Security Bank Loan Agreement is paid in
full (see Note 13). At December 31, 1994, approximately $1,400,000 was accrued
for management bonuses, the majority of which was paid in February and March of
1995.
EXECUTIVE COMPENSATION AGREEMENT
In 1995, the Company adopted a bonus plan for the Chief Executive Officer
that provides for bonus payments of cash and up to 60,000 shares of stock,
subject to a three year vesting, contingent upon the achievement of certain
objectives. At December 31, 1995, the cash payment is fully accrued. In January
1996, the Compensation Committee approved the issuance of the full 60,000 shares
of stock. The shares will be issued at a cost equal to par value.
PROFIT SHARING PLAN
In 1991, the Company adopted a profit sharing plan that provided for
payments to all eligible employees of their share of a pool that equaled 6.0% of
the Company's annual income before income taxes. In 1994, the plan was amended
to 5.0% of the Company's annual income before income taxes. Employees must
complete one year of continuous employment to be eligible. Employees receive a
share of the profit sharing pool based upon their annual salary as a ratio to
total annual salaries of all eligible employees. The Company has accrued
approximately $600,000 for the 1995 profit sharing plan, which will be paid in
January 1996. There were no profit sharing payments for fiscal 1993 and 1994.
FOREIGN EXCHANGE CONTRACTS
The Company has commitments to sell foreign currencies relating to forward
exchange contracts in order to hedge against future currency fluctuations. In
addition, the Company purchases components denominated in Yen and has purchased
forward contracts to buy Yen.
F-16
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) COMMITMENTS AND CONTINGENCIES (CONTINUED)
The outstanding forward exchange sale and purchase contracts at December 31,
1995 are as follows. The contracts mature in January and February 1996.
<TABLE>
<CAPTION>
CONTRACTED
FORWARD
AMOUNT CURRENCY RATE
--------------- -------- ---------------
<S> <C> <C> <C>
French Franc........ 1,939,000 FRF 5.169
Spanish Peseta...... 64,524,000 ESP 134.45
Italian Lira........ 363,000,000 ITL 1692.0
Japanese Yen........ (1,109,678,923) YEN 100.60 - 101.0
</TABLE>
Gains and losses on foreign currency contracts intended to be used to hedge
operating requirements are reported currently in income. Gains and losses on
foreign currency contracts intended to meet firm commitments are deferred and
are recognized as part of the cost of the underlying transaction being hedged.
At December 31, 1994 and 1995, all of the Company's foreign currency contracts
are being used to hedge operating requirements. The Company's theoretical risk
in these transactions is the cost of replacing, at current market rates, these
contracts in the event of default by the counterparty.
(5) NOTES PAYABLE
LINE OF CREDIT
On July 5, 1995, the Company entered into a loan agreement with the
Commercial Finance Division of Wells Fargo Bank, N.A. The agreement permits
revolving loans, term loans and letters of credit up to an aggregate outstanding
principal amount equal to the lesser of $60 million or 80% of eligible accounts
receivable, with a 10% overadvance provision through April 12, 1996. Amounts
outstanding are collateralized by accounts receivable and equipment. The
revolving credit line bears interest at the bank's prime rate plus 1% and the
term loans bear interest at the bank's prime rate plus 1.25%. The Company has
segregated $25 million of the revolving line into a 60 day LIBOR loan to achieve
a lower interest rate. Total availability under the Wells Fargo agreement at
December 31, 1995 was $56.1 million, of which $36.8 million (exclusive of bank
overdrafts of $11.8 million) had been drawn. See Note 1. The agreement expires
June 30, 1996. Among other restrictions, covenants within the agreement require
the Company to maintain minimum levels of working capital and net worth. The
weighted average outstanding balance was $23,327,000 during 1995. The maximum
amount outstanding during 1995 was $38,184,000. The weighted average interest
rate was 10.6% for the year ended December 31, 1995.
Loss of Wells Fargo Bank as a lender would require the Company to find an
alternative source of funding, which could have a material adverse affect on
business and financial results.
OTHER TERM NOTES
During 1995, the Company has entered into term notes with financial
institutions. The proceeds from these notes were used to purchase manufacturing
equipment. The term notes have 36-month terms which mature at various dates from
November 1998 to January 1999. Principal and interest payments are payable
monthly. Interest rates are fixed and range from 8.89% to 9.11%. The notes are
secured by the equipment purchased. The term notes require the Company to
maintain minimum levels of working capital, net worth, and quarterly operating
income.
FINANCING OF EUROPEAN ACCOUNTS RECEIVABLE
In November 1995, a foreign subsidiary of the Company entered into an
agreement with a German commercial bank for up to DM 50 million (approximately
$35 million) which involves the sale of a portion of the foreign subsidiary's
accounts receivable to the bank. The agreement expires in November 1996. Such
sales of receivables are limited to 90% of eligible accounts receivable subject
to certain credit limits. The Company has retained the bad debt risk on the
receivables up to DM 1 million per customer. The interest rate varies
F-17
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) NOTES PAYABLE (CONTINUED)
depending on the currency and ranges from 7.75% to 15% at December 31, 1995. The
loan is denominated in several different European currencies and is dependent on
the underlying receivable. The weighted average interest rate was 11% for the
year ended December 31, 1995. During 1995, the Company received a total of
$17,849,000 in proceeds under the arrangement. At December 31, 1995, $9.8
million was outstanding and is included in notes payable in the accompanying
December 31, 1995 consolidated balance sheet.
The following table summarizes the notes payable outstanding at December 31,
1995 (in thousands):
<TABLE>
<S> <C>
LIBOR loan
(8.875% fixed interest rate)............................... $ 25,000
Revolving credit line
(9.5% interest rate at 12/31/95)........................... 8,241
Term loan
(9.75% interest rate at 12/31/95).......................... 3,612
Other term notes............................................ 3,537
European agreement.......................................... 9,801
---------
50,191
Less: Current portion....................................... (47,640)
---------
$ 2,551
---------
---------
</TABLE>
Maturities of notes payable by year are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
--------------------------------------------------------------
<S> <C>
1996.......................................................... $47,640
1997.......................................................... 1,119
1998.......................................................... 1,187
1999.......................................................... 245
-------
$50,191
-------
-------
</TABLE>
Cash paid for interest was $970,000 in 1995, including interest on capital
leases. There was no outstanding debt in 1993 and 1994. Included in interest
expense for 1995 was $267,000 of amortization of deferred charges associated
with obtaining the debt.
(6) PREFERRED STOCK
The Company has authorized the issuance of up to 5,000,000 shares of
Preferred Stock, $.01 par value per share. The Company's Board of Directors has
the authority, without further shareholder approval, to issue Preferred Stock in
one or more series and to fix the rights and preferences thereof. As of December
31, 1995, 250,000 shares were designated as Series C Junior Participating
Preferred Stock and the remaining 4,750,000 shares were undesignated.
SERIES A CONVERTIBLE PREFERRED STOCK
During 1987, in connection with the settlement of litigation, the Company
designated 1,200,000 shares of Preferred Stock as Redeemable Series A
Convertible Preferred Stock. These shares were issued in 1989.
Effective June 16, 1995, the Company exercised its right to require the
conversion of all outstanding Series A Stock into the Company's Common Stock
pursuant to the original conversion terms. Upon conversion, 318,600 shares of
Common Stock were issued to the Series A Stock shareholders. Any fractional
shares were paid with cash in lieu of stock.
Common shares issued on conversion of the Series A Stock shares were
recorded at the net carrying value of the Series A Convertible Preferred Stock,
plus accrued dividends.
F-18
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) PREFERRED STOCK (CONTINUED)
SERIES C JUNIOR PARTICIPATING PREFERRED STOCK
In July 1989, the Company designated 250,000 shares of Preferred Stock as
Series C Junior Participating Preferred Stock in connection with its Shareholder
Rights Plan (see Note 7). Each share of Series C Junior Participating Preferred
Stock (Series C Stock) will: (1) have a liquidation preference of $375 per
share; (2) have rights to dividends, subject to the rights of any series of
Preferred Stock ranking prior and superior to the Series C Stock, when and if
declared by the Board of Directors; (3) not be redeemable; and (4) have voting
rights which entitle the holder to 375 votes per share.
(7) PREFERRED STOCK PURCHASE RIGHTS
In July 1989, the Company adopted a Shareholder Rights Plan and declared a
dividend of four-fifteenths of one preferred stock purchase right for each
outstanding share of Common Stock. Under certain conditions, each right may be
exercised to purchase one one-hundredth of a share of Series C Stock at an
exercise price of $15. The rights will be exercisable only if a person or group
has acquired beneficial ownership of 20% or more of the Common Stock or
announced a tender or exchange offer that would result in such a person or group
owning 30% or more of the Common Stock. The Company generally will be entitled
to redeem the rights at $.01 per right at any time until the tenth day following
public announcement that a 20% stock position has been acquired and in certain
other circumstances.
If any person or group becomes a beneficial owner of 25% or more of the
Common Stock (except pursuant to a tender or exchange offer for all shares at a
fair price as determined by the outside members of the Board of Directors) or if
a 20% stockholder consolidates or merges into or engages in certain self-dealing
transactions with the Company, each right not owned by a 20% stockholder will
enable its holder to purchase such number of shares of Common Stock as is equal
to the exercise price of the right divided by one-half of the current market
price of the Common Stock on the date of the occurrence of the event. In
addition, if the Company engages in a merger or other business combination with
another person or group in which it is not the surviving corporation or in
connection with which its Common Stock is changed or converted, or if the
Company sells or transfers 50% or more of its assets or earning power to another
person, each right that has not previously been exercised will entitle its
holder to purchase such number of shares of Common Stock of such other person as
is equal to the exercise price of the right divided by one-half of the current
market price of such Common Stock on the date of the occurrence of the event.
(8) STOCK OPTIONS
STOCK OPTION PLANS
The Company has a 1981 Stock Option Plan (the "1981 Option Plan") and a 1987
Stock Option Plan (the "1987 Option Plan"). The 1981 Option Plan has expired and
no further options may be granted under this plan; however, outstanding options
previously granted under this plan remain in effect. Both plans permit the
granting of incentive and nonstatutory stock options. The plans cover an
aggregate of 20,625,000 shares of Common Stock. The exercise price of options
granted under the 1987 Option Plan may not be less than 100% of the fair market
value of the Common Stock at the date of grant in the case of incentive stock
options, and may not be less than 25% of the fair market value of the Common
Stock at the date of grant in the case of nonstatutory stock options.
Options under both plans must be exercised within ten years from the date of
grant in the case of incentive stock options and within ten years and one month
from the date of grant in the case of nonstatutory stock options, or sooner if
so specified within the option agreement. At December 31, 1995, the Company had
reserved an aggregate of 11,134,590 shares for issuance upon exercise of options
granted or to be granted under these plans.
F-19
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) STOCK OPTIONS (CONTINUED)
The following table presents the aggregate options granted, forfeited, and
exercised under the 1981 and 1987 Option Plans for the years ended December 31,
1993, 1994 and 1995 at their respective exercise price ranges. All options and
option prices have been restated for the stock splits (see Note 2).
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
OPTIONS PER SHARE
---------- ---------------
<S> <C> <C>
Options outstanding at December 31, 1992... 8,934,153 $0.11 to $2.92
Granted.................................... 305,034 $0.70 to $1.90
Exercised.................................. (1,816,110) $0.11 to $1.00
Forfeited.................................. (373,908) $0.27 to $2.90
----------
Options outstanding at December 31, 1993... 7,049,169 $0.27 to $2.92
Granted.................................... 2,204,625 $0.60 to $1.06
Exercised.................................. (474,141) $0.27 to $0.80
Forfeited.................................. (1,418,391) $0.41 to $2.92
----------
Options outstanding at December 31, 1994... 7,361,262 $0.27 to $2.92
Granted.................................... 1,000,800 $1.13 to $14.21
Exercised.................................. (2,473,053) $0.27 to $2.92
Forfeited.................................. (57,032) $0.42 to $2.10
----------
Options outstanding at December 31, 1995... 5,831,977 $0.27 to $14.21
----------
----------
</TABLE>
Options to purchase 5,660,850, 4,886,061 and 4,754,094 shares were
exercisable at December 31, 1993, 1994 and 1995, respectively.
Options to purchase 5,302,613 shares were reserved for future grant at
December 31, 1995.
DIRECTOR STOCK OPTION PLANS
The 1987 Director Stock Option Plan (the "Director Plan") covered 750,000
shares of Common Stock. The Director Plan provided for the grant to each
non-employee director of the Company, on his initial election as a director, an
option to purchase 93,750 shares of Common Stock. The exercise price per share
of the option is equal to the fair market value of the Company's Common Stock on
the date of grant of the option. Options become exercisable in five equal annual
installments, commencing one year from the date of grant, provided the holder
continues to serve as a director of the Company. Any option granted under the
Director Plan must be exercised no later than ten years from the date of grant.
All options granted under the Director Plan are nonstatutory options. In 1995
the Board adopted, and the stockholders approved, the 1995 Director Stock Option
Plan. This Plan covers 600,000 shares of Common Stock and provides for the grant
to each non-employee director of the Company, on his initial election as a
director, an option to purchase 75,000 shares of Common Stock.
F-20
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) STOCK OPTIONS (CONTINUED)
The following table presents the aggregate options granted, forfeited and
exercised under the Director Plans for the years ended December 31, 1993, 1994
and 1995, at their respective exercise price ranges. All options and option
prices have been restated for the stock splits (see Note 2).
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
OPTIONS PER SHARE
--------- --------------
<S> <C> <C>
Options outstanding at December 31, 1992.... 412,500 $0.57 to $0.92
Granted..................................... 93,750 $1.17
Exercised................................... 0
Forfeited................................... 0
---------
Options outstanding at December 31, 1993.... 506,250 $0.57 to $1.17
Granted..................................... 187,500 $0.53
Exercised................................... (93,750) $0.57
Forfeited................................... 0
---------
Options outstanding at December 31, 1994.... 600,000 $0.53 to $1.17
Granted..................................... 0
Exercised................................... (225,000) $0.73 to $0.87
Forfeited................................... 0
---------
Options outstanding at December 31, 1995.... 375,000 $0.53 to $1.17
---------
---------
</TABLE>
Options to purchase 281,250, 300,000 and 300,000 shares were exercisable at
December 31, 1993, 1994 and 1995, respectively.
Options to purchase 600,000 shares were reserved for future grant at
December 31, 1995.
OTHER STOCK OPTIONS
In December 1987, the Company granted to each of five of the six members of
the Board of Directors an option to purchase 93,750 shares of Common Stock. The
exercise price of these options was $0.40 per share in the case of four options,
and $0.47 per share in the case of the other option. Each option is exercisable
in increments of 18,750 shares per year beginning one year from the date of
grant and must be exercised no later than ten years and one month from the date
of grant. During 1995, options to purchase 243,750 shares were exercised at
$0.40 and $0.47 per share. At December 31, 1994, options for the purchase of
243,750 shares were outstanding and exercisable at $0.40 and $0.47 per share.
There were no options outstanding at December 31, 1995.
(9) STOCK PURCHASE PLAN
1991 STOCK PURCHASE PLAN
On January 25, 1991, the Company's Board of Directors approved an employee
stock purchase plan for 1991, 1992, and 1993. Eligible employees were allowed to
purchase Common Stock at market value on the date coincident with the
distribution of the semiannual profit sharing payments. The employee will earn a
premium equal to 25% of their original purchase on each of the first four
anniversaries of purchase provided the employee is still employed by the Company
and the shares are still held by the Company. A total of 4,500,000 shares were
approved for the three-year plan with 750,000 shares plus the premium of 750,000
shares approved for each year. Employees participating in the profit sharing
plan used up to 66 2/3% of their profit sharing payment to purchase stock. As of
December 31, 1995, a total of 130,923 shares have been purchased pursuant to
this plan and a total of 41,370 of premium shares have been issued under this
plan.
F-21
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(10) RETIREMENT PLAN
The Iomega Retirement and Investment Savings (IRIS) Plan permits eligible
employees to make tax deferred investments through payroll deductions. Each year
the Company may contribute to the IRIS Plan at the discretion of the Board of
Directors, based on the prior year's earnings of the Company. The IRIS Plan is
subject to compliance with Section 401(k) of the Internal Revenue Code and the
Employee Retirement Income Securities Act of 1974. Under the terms of the IRIS
Plan, all employee contributions and certain employer contributions are
immediately vested in full. Certain employer matching contributions become
vested over five years. The Company contributed approximately $398,000 and
$319,000 to the IRIS Plan for the years ended December 31, 1993 and 1994,
respectively. The Company has accrued $671,000 for contribution to the IRIS Plan
for the year ended December 31, 1995.
(11) OPERATIONS BY GEOGRAPHIC REGION
The Company has two primary geographic regions: domestic and European.
Domestic operations include all U.S. and export operations, primarily Canada and
Asia. Domestic export sales for the years ended December 31, 1993, 1994 and 1995
were $7,534,000, $6,133,000 and $18,160,000, respectively. European operations
are comprised of a subsidiary in Germany and sales offices located in France,
Belgium, the United Kingdom, Spain, Italy, Germany, Ireland and Austria. The
sales offices are branches of U.S. subsidiaries. All European sales and
substantially all identifiable assets and operating expenses are recorded on the
books of the German subsidiary. Export sales from the European operation for the
years ended December 31, 1993, 1994 and 1995 were approximately $23,868,000,
$29,903,000 and $49,526,000, respectively, primarily to European countries other
than Germany. Sales to European countries other than Germany are distributed
relatively evenly across countries in which sales offices are located. The
characteristics of sales to Germany and all other European countries are
similar. The sales offices are compensated through commission agreements.
Inventory is transferred from domestic operations to the German subsidiary at an
arms-length price as determined by an independent economic study. Following is a
summary of the Company's operations by geographic location.
FOR THE YEAR ENDED DECEMBER 31, 1993:
<TABLE>
<CAPTION>
DOMESTIC EUROPEAN INTERCOMPANY
OPERATIONS OPERATIONS TRANSACTIONS CONSOLIDATED
---------- ---------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net Sales:
Unaffiliated
Customers........ $112,961 $ 34,162 $ -- $147,123
Affiliates........ 26,750 -- (26,750) --
Cost of Sales....... (89,984) (29,997) 27,396 (92,585)
---------- ---------- ------------ ------------
Gross Margin........ 49,727 4,165 646 54,538
---------- ---------- ------------ ------------
Operating
Expenses........... 58,454 13,511 -- 71,965
---------- ---------- ------------ ------------
Net Income (Loss)... $ (4,147) $(11,024) $ 646 $(14,525)
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
Identifiable
Assets............. $ 68,004 $ 13,214 $ (129) $ 81,089
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
Capital
Expenditures....... $ 4,920 $ 1,647 $ -- $ 6,567
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
</TABLE>
F-22
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) OPERATIONS BY GEOGRAPHIC REGION (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1994:
<TABLE>
<CAPTION>
DOMESTIC EUROPEAN INTERCOMPANY
OPERATIONS OPERATIONS TRANSACTIONS CONSOLIDATED
---------- ---------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net Sales:
Unaffiliated
Customers........ $ 95,554 $ 45,826 $ -- $141,380
Affiliates........ 26,393 -- (26,393) --
Cost of Sales....... (87,305) (31,522) 26,374 (92,453)
---------- ---------- ------------ ------------
Gross Margin........ 34,642 14,304 (19) 48,927
---------- ---------- ------------ ------------
Operating
Expenses........... 45,049 4,760 -- 49,809
---------- ---------- ------------ ------------
Net Income (Loss)... $ (9,729) $ 7,866 $ (19) $ (1,882)
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
Identifiable
Assets............. $ 61,696 $ 14,228 $ (91) $ 75,833
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
Capital
Expenditures....... $ 5,894 $ 1,189 $ -- $ 7,083
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
</TABLE>
FOR THE YEAR ENDED DECEMBER 31, 1995:
<TABLE>
<CAPTION>
DOMESTIC EUROPEAN INTERCOMPANY
OPERATIONS OPERATIONS TRANSACTIONS CONSOLIDATED
---------- ---------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net Sales:
Unaffiliated
Customers........ $241,128 $ 85,097 $ -- $326,225
Affiliates........ 65,644 -- (65,644) --
Cost of Sales....... (229,134) (72,357) 65,653 (235,838)
---------- ---------- ------------ ------------
Gross Margin........ 77,638 12,740 9 90,387
---------- ---------- ------------ ------------
Operating
Expenses........... 66,072 10,693 -- 76,765
---------- ---------- ------------ ------------
Net Income.......... $ 8,475 $ 19 $ 9 $ 8,503
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
Identifiable
Assets............. $226,696 $ 39,473 $ 58 $266,227
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
Capital
Expenditures....... $ 44,223 $ 1,009 $ -- $ 45,232
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
</TABLE>
(12) OTHER MATTERS
SIGNIFICANT CUSTOMERS
During 1993, sales to Ingram Micro D, Inc. accounted for 14% of the
Company's sales. During 1994, sales to Ingram Micro D, Inc. accounted for 11% of
the Company's sales. In 1995, no single customer accounted for 10% or more of
consolidated sales.
CONCENTRATION OF CREDIT RISK
The Company markets its products primarily through computer product
distributors and retailers. Accordingly, as the Company grants credit to its
customers, a substantial portion of outstanding accounts receivable are due from
computer product distributors and certain large retailers. At December 31, 1994,
the customers with the ten highest outstanding accounts receivable balances
totaled $7.1 million or 34% of the gross accounts receivable. At December 31,
1994, the outstanding accounts receivable balance from one customer was $3.1
million or 15% of gross accounts receivable. At December 31, 1995, the customers
with the ten highest
F-23
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) OTHER MATTERS (CONTINUED)
outstanding accounts receivable balances totaled $47.1 million or 43% of gross
accounts receivable. At December 31, 1995, the outstanding accounts receivable
balance from one customer was $15.2 million or 14% of gross accounts receivable.
If any one or a group of these customers' receivable balances should be deemed
uncollectible, it would have a material adverse effect on the Company's results
of operations and financial condition.
PURCHASES FROM RELATED PARTIES
The Company purchased inventory items totaling $372,000, $398,000 and
$1,130,000 for the years ended December 31, 1993, 1994 and 1995, respectively,
from a vendor having a common director with the Company.
NOTES RECEIVABLE FROM RELATED PARTIES
In September 1993, the Company loaned an executive officer approximately
$679,000 as part of the officer's severance package; a portion of the loan was
used by the executive to exercise stock options. This amount of the loan is
included in notes receivable from shareholders in the accompanying consolidated
balance sheet at December 31, 1994. The Company received a note from the officer
which bore interest at an annual rate of 4.5% and was payable in two equal
annual installments of $340,000 which were due on or before January 1995 and
January 1996. The note was with full recourse and was collateralized by the
stock purchased. The loan was paid in full with accrued interest during the
first quarter of 1995.
In January 1995, the Company loaned another executive officer approximately
$283,000 as part of the officer's severance package. A portion of the loan was
used by the executive to exercise stock options. The Company received a note
from the officer which bore interest at an annual rate of 7.75% and was payable
in full on or before January 1996. The note was with full recourse and was
collateralized by the stock purchased. The loan was paid in full with accrued
interest during the second quarter of 1995.
(13) SUBSEQUENT EVENTS
REVOLVING CREDIT FACILITY
In January 1996, the Company entered into a $6 million revolving credit
facility with First Security Bank of Utah, N.A. The line matures on April 12,
1996 and bears interest at prime plus 2%. Interest is payable monthly and
principal is due at maturity. The facility is secured by accounts receivable and
inventory subject to a priority lien by Wells Fargo Bank, N.A. In addition, the
agreement prohibits the payment of certain bonuses until the facility expires or
is paid in full.
F-24
<PAGE>
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD
BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 6
The Company.................................... 13
Use of Proceeds................................ 13
Price Range of Common Stock and Dividend
Policy........................................ 14
Capitalization................................. 15
Selected Consolidated Financial Data........... 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 17
Business....................................... 25
Management..................................... 39
Principal Stockholders......................... 42
Description of Notes........................... 43
Description of Capital Stock................... 51
Underwriting................................... 53
Legal Matters.................................. 54
Experts........................................ 54
Available Information.......................... 54
Incorporation of Certain Documents by
Reference..................................... 55
Index to Consolidated Financial Statements..... F-1
</TABLE>
$40,000,000
[LOGO]
6 3/4% CONVERTIBLE SUBORDINATED NOTES DUE 2001
--------------
PROSPECTUS
--------------
HAMBRECHT & QUIST
MARCH 8, 1996
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