SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
1-12333
(Commission file number)
Iomega Corporation
(Exact name of registrant as specified in its charter)
Delaware 86-0385884
(State of Incorporation) (IRS employer identification number)
1821 West Iomega Way, Roy, UT 84067
(Address of principal executive offices) (ZIP Code)
(801) 778-1000
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------------------- -----------------------------------------
Common Stock, par value
$.03-1/3 per share New York Stock Exchange
Rights to Purchase Series C
Junior Participating
Preferred Stock, $0.01 par
value per share New York Stock Exchange
6-3/4% Convertible Subordinated
Notes due 2001 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
----- -----
Indicate by check mark if disclosure of delinquent fliers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
-----
The aggregate market value of Common Stock held by non-affiliates of the
registrant at January 31, 1997 was $2,015,680,000, based upon the last
reported sales price of the Common Stock as reported by the New York Stock
Exchange. The number of shares of the registrant's Common Stock oustanding
at January 31, 1997 was 128,392,814.
Documents incorporated by reference:
- - Specifically identified portions of the Company's Annual Report to
Stockholders for the year ended December 31, 1996 into Part I and Part II of
Form 10-K.
- - Specifically identified portions of the Company's Definitive Proxy
Statement for its 1997 annual meeting of stockholders into Part III of Form
10-K .
<PAGE>
This Annual Report on Form 10-K contains a number of forward-looking
statements, including information with respect to the Company's plans to
position its products as industry standards, establish OEM relationships
and license its Zip and Jaz technologies to third parties, the Company's
manufacturing strategies and relationships with third parties, the
availability of key components, current and future product development
projects, including the anticipated availability and specifications of
n-hand, and efforts to protect its intellectual property rights. For this
purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes", "anticipates", "plans",
"expects" and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause
actual events or the Company's actual results to differ materially from
those indicated by such forwarding-looking statements. These factors
include, without limitation, those set forth under the caption "Factors
Affecting Future Operating Results" included under "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in Part II
of this Annual Report on Form 10-K.
PART I
ITEM 1. BUSINESS:
Iomega Corporation ("Iomega" or the "Company") designs, manufactures
and markets innovative data storage solutions, based on removable-media
technology, for personal computer users. The Company's primary data
storage solutions include disk drives marketed under the trademarks Zip
and Jaz and a family of tape drives marketed under the trademark 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 December
1995.
Iomega Solutions
The Company believes its 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 Jaz drive can be easily
connected or installed and offer unlimited additional storage capacity, in
increments of 100 megabytes (MBs), in the case of Zip, and 1 gigabyte
(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 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 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, Jaz and Ditto 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 exceed 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 competitive price. Ditto offers high backup capacities (up
to 3.2 GBs compressed) more suitable to today's larger hard disks, at prices
competitive with low-capacity tape drives while incorporating simple
"one-step" software that allows users to backup while they continue working.
Products
The Company offers products targeted at both the mass market and the
high-performance market. The Zip drive and the Ditto 2GB tape drives were
designed to achieve price levels which the Company deems crucial 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, while still offering affordability. Iomega's Zip, Jaz and Ditto
products continued to be recognized by industry publications and trade groups
during 1996, receiving a number of prestigious awards, including: Computer
Shopper's "Best Removable Backup Drive" (Zip); Gadget Guru's "Product of the
Year" (Jaz); Home Office Computing's "Editors' Choice Award" (Zip); Mobile
Computing's "Best Product of 1996" (Ditto 2GB); PC Magazine's "World Class
Award Finalist" (Jaz); PC World's "Best Products of 1996 - Best Portable
Drive"(Zip); PC Computing's "MVP" (Jaz); Windows Magazine's "Win 100 Product
of the Year" (Jaz); Windows Sources' "Stellar Award" (Jaz); and Macworld's
"World Class Award - Storage" (Jaz).
The following table lists the principal data storage devices currently
being offered by the Company:
Product
(Year Introduced) * Media and Capacity** Technology
- ------------------- -------------------- -----------------------
Zip (1995) 100-MB Zip Disks Drive: Winchester heads
Disks: Advanced flexible
media
Jaz (1995) 1-GB Jaz Disks Drive: Thin-film heads
Disks: Two rigid disk
platters
Ditto 2GB (1996) Ditto Tape Drive: Direct drive
minicartridges mechanism
Ditto 3200 (1995) (2GB and 3.2GB) Media: Industry standard
quarter inch
cartridges
* Drives are available in internal and external versions.
** The indicated capacities for Ditto drives represent the maximum capacity
using data compression.
Zip
Over 4 million Zip drives have been shipped since its introduction in
March 1995 through the end of 1996. Designed as an affordable mass-market
product, the Zip drive addresses multiple needs of personal computer users:
hard drive expansion, data transportability, data security and backup. The
drive uses interchangeable 100-MB Zip disks to provide users of IBM-
compatible and Apple Macintosh-compatible 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 a substantial majority of the
files stored on personal computers are 100 MBs or less.
Zip drives use durable, high-capacity flexible media and Winchester-type
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 and IDE
interface versions of the Zip drive, which offer faster performance than
the parallel port version of the drive, feature 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, copy, move and backup their data and offers
software read/write protection, 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-compatible 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
distinctive, compact 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. Internal versions of the Zip drive
include SCSI interface and IDE interface models. During 1996, Iomega
introduced an internal 3.5 inch SCSI interface Zip drive which fits in most
standard drive bays.
As of March 1997, the following PC and consumer electronics companies
incorporate, or have announced plans to incorporate, Zip drives in selected
models of their lines of personal desktop computers as a standard or optional
feature: Apple, Canon, Compaq, Dell, Gateway 2000, Hewlett-Packard, IBM,
Micron Electronics, NEC, Packard Bell, Power Computing and Unisys.
The Zip drive carries a one-year limited warranty and Zip disks are sold
with a limited lifetime warranty.
Jaz
The Company began shipping Jaz drives and 1-GB Jaz disks in December 1995.
Jaz addresses the high-performance needs of personal computer and other system
users in three areas: multimedia applications (audio, video and graphics),
personal data management, and hard drive upgrade and expansion. 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 available in a capacity of 1 GB, which the Company's market research
indicated was a capacity that many high-performance computer users demand.
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, two hours of digital audio with real-time playback, 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 is available in both
external and internal SCSI versions.
The Jaz drive's technical features include 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. Software included with the Jaz drive provides a total
data storage solution by helping users organize, copy, move and backup their
data and offers software read/write protection, which further enables users
to secure and protect their data.
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 and operating lights.
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.
As of March 1997, Micron Electronics, Power Computing and Gateway 2000
offer the Company's Jaz drives as built-in options in selected models of
their lines of personal desktop computers.
The Jaz drive carries a one-year limited 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, affordable and dependable backup solution.
In response to information learned from consumers regarding the characteristics
demanded from backup storage devices, the Company redesigned its family of tape
drives, which had originally been introduced in 1992. The Company offers
internal and external models ranging in capacity from 2 GBs 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-compatible
computers and offer storage capacities large enough to protect all of the data
on most hard drives, not just selected files. Iomega's tape drives have a
patented beltless design which the Company believes enhances reliability.
The Ditto 2GB is specifically designed to read and write Ditto 2GB cartridges,
a proprietary tape format introduced in 1996 that offers 2.5 times the
capacity of Travan 800 cartridges for approximately two-thirds the price and
are available only from the Company and Sony, the manufacturer of the
cartridges. The Ditto 3200 reads and writes Travan TR-3 and QW-3020XLF
cartridges and reads certain QIC and Travan cartridges.
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 and subsequent models feature an enhanced design
similar to, and are 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. The Company's tape products include
1-Step software designed to permit the backup of an entire hard disk in a
single step while the user continues working.
As of March 1997, Micron Electronics and Gateway 2000 offer the Company's
Ditto drives as built-in options in selected models of their lines of
personal desktop computers.
The Ditto 2GB and the Ditto 3200 carry a two-year limited warranty.
Ditto media is also sold with a two-year limited warranty.
Bernoulli
During late 1996, the Company discontinued production of its Bernoulli
drives. These 5-1/4 inch half-height drives were removable-media storage
devices based on the Company's proprietary Bernoulli technology. The
Bernoulli MultiDisk 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
Company plans to continue to produce its multiple capacity disks, as well as
provide warranty and repair support to its Bernoulli customers.
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 the Company's strategic goal
of establishing its products as industry standards. The Company's initial
marketing strategy for the introduction of its new products has been 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. The next step in the Company's strategy is to
position its products as industry standards. To accomplish this, the Company
plans to continue its focus on establishing and maintaining OEM relationships
with leading personal computer manufacturers as well as granting royalty-
based licenses that allow third party manufacturers to produce and sell the
Company's drives to OEMs and consumers for their own accounts.
During 1996, the Company introduced a number of promotions designed to
expand the size of the market for its products. The Company also decreased
the suggested retail prices of its Jaz and Ditto drives and announced a
series of rebate programs for its Zip products, which offered qualifying
purchasers of Zip products the choice of receiving a cash rebate or certain
merchandise. During the summer of 1996, the Company engaged a third party
firm (the "Administrator") to administer the Company's rebate programs. Many
consumers have complained about delays in receiving their rebate checks or
merchandise and difficulties in obtaining timely responses to rebate inquiries
and certain customers have initiated litigation relating to the rebate
programs. See "Item 3 -- Legal Proceedings." The Company has also received
a number of letters from State Attorneys General, Consumer Protection Agencies
and other governmental bodies concerning complaints about the rebate programs.
In light of the difficulties experienced in managing the volume of 1996 rebate
requests, the Company has added resources to assist the administrator in
processing rebate requests and responding to rebate inquiries more quickly.
The Company is monitoring the progress in achieving faster turnaround on
issuing rebate checks and merchandise, and in answering rebate related
questions.
Since July 1996, the Administrator has received several hundred thousand
Zip rebate requests. The Company will, and has always intended to, pay every
qualifying rebate request. In March 1997, the Company was informed by the
Administrator of certain recently discovered shortcomings in the procedures
relied on to process rebate requests. As a result of these shortcomings, a
substantial number of customers whose rebate requests (for between $50 and
$70) had been approved were not promptly paid by the Administrator. The
Company has taken immediate steps to rectify this problem and rebate checks
have been sent or will shortly be sent to all of these customers. The
Company was also recently informed by the Administrator that a substantial
number of customers whose 1996 rebate request submissions (or resubmissions
after an initial determination of ineligibility) have not been notified of the
status of their submissions. The Company is in the process of notifying each
of these customers, as well as a group of customers whose requests for certain
rebate merchandise (a carry-bag) have been delayed due to a supply shortage.
The delays in fulfilling the Company's rebate obligations and in notifying
customers of the status of their requests have resulted in customer
dissatisfaction and frustration. Despite the Company's efforts to improve
the administration of its rebate programs, customer dissatisfaction arising
from thes programs could adversely affect the Company's reputation and its
future marketing and sales efforts. The Company knows its future success
depends in large measure on the loyalty of its customers -- in particular, the
users of the more than 5,000,000 Zip drives shipped to date -- and is
determined to preserve, or where necessary rebuild, that loyalty.
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 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 and can be found in more
than 10,000 storefronts around the world. Retailers carrying the Company's
products include Best Buy, Circuit City, Computer City and CompUSA in the
U.S., and Vobis, FNAC, MicroWarehouse and Dixons in Europe. Distributors
include Ingram Micro, Merisel, MicroAge and Tech Data in the U.S.; Ingram
Micro Europe, Computer 2000 and Actebis in Europe; and Gennett Technologies,
Sunkyong Distribution Ltd. and Q*Soft Australia Pty. Ltd. in Asia.
Strategic Marketing Alliances
In addition to sales through 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. During 1996, the Company
continued to gain significant industry support from major PC and consumer
electronics companies that began or announced plans to begin to incorporate
Zip, Jaz and/or Ditto drives into their computer systems as standard or
optional features. At the end of 1996, the Company's OEM customers
included: Hewlett-Packard, Micron Electronics, Packard Bell, IBM, Canon,
NEC, Power Computing, Unisys and Gateway 2000. In early 1997, the
Company announced OEM arrangements with Compaq, Dell and Apple.
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 as Maxell, Sony
and Fuji, who distribute Zip disks in packages which feature Iomega's name
in addition to the partner's name. In addition, Fuji offers private-branded
Zip drives in Japan.
International
The Company sells its products outside of North America primarily
through international distributors and retailers. The Company has increased
its sales and marketing efforts in the European and Asian markets in the
past several years. Sales are accomplished primarily through sales offices
located throughout Europe and Asia/Pacific. The Company has been invoicing
predominantly in foreign currencies in Europe since January 1992. Sales to
Asian customers are denominated in U.S. dollars. In total, sales outside
of the United States represented 34%, 32% and 37% for the years ended
December 31, 1996, 1995 and 1994, respectively. Information regarding the
Company's operations by geographic region appears in Note 12 of the
Company's Consolidated Financial Statements filed as a part of this Form
10-K and is incorporated herein by reference.
Marketing
The Company's worldwide marketing group is responsible for positioning
and promoting the Company's products. The Company participates in various
industry tradeshows, including MacWorld, CeBIT and COMDEX, and seeks to
generate coverage of its products in a wide variety of trade publications.
During 1996, the Company conducted significant print advertising campaigns
for its Zip, Jaz and Ditto products and television advertising campaigns in
support of its Zip and Ditto products. The Company expects marketing and
advertising expenses to increase in the future as the Company seeks to expand
market awareness of its products and educate consumers about the many
possible uses for Zip and Jaz disks.
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. During 1996, the Company began offering limited-time, mail-in
rebates for certain of its drives and disks. In addition, customers
generally have the right to return excess inventory within specified time
periods. The Company establishes reserves for anticipated rebate redemptions
and inventory returns. There can be no assurance that these reserves will be
sufficient or that any future returns, rebates 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, 1996, the customers with the ten highest outstanding accounts
receivable balances totaled $81.2 million, or 32% of gross accounts
receivable, with one customer accounting for $29.4 million, or 12% 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, 1996, sales to Ingram Micro, Inc., a
distributor, accounted for 15% of sales. No other single customer accounted
for more than 10% of the Company's sales in 1995 or 1996.
Seasonality
The Company's Zip, Jaz and Ditto products are targeted primarily to the
retail consumer market. This market is generally seasonal, with a substantial
portion of total sales occurring in the fourth quarter and sales slowdowns
commonly occurring during the summer months. Accordingly, in light of the
seasonal nature, revenues for any prior quarter may not necessarily be
indicative of the revenues to be expected in any future quarter.
Manufacturing
The Company's products are manufactured by the Company at facilities in
Roy, Utah and Penang, Malaysia 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.
During 1995, the Company was unable to produce enough of its products
to fill all of its orders and, therefore, turned to third-party manufacturers
to help satisfy demand. During 1996, the Company entered into an agreement
to purchase a 376,000 square-foot, manufacturing facility in Penang, Malaysia
to initially serve as an additional manufacturing site for the Company's Jaz
drives and disks. The Company's success in ramping up operations in Penang
and the cost-saving opportunities provided by closer proximity to the
Company's storage component suppliers led the Company to re-evaluate several
of its contract manufacturing relationships and in December 1996 the Company
announced plans to move substantial portions of its Zip, Jaz and Ditto drive
production away from third-party manufacturers, as well as its own
manufacturing operations in Roy, Utah, to this new facility. Although the
Company believes it is positioned to produce the majority of its products
in the future, it still intends to use certain third-party manufacturers for
the foreseeable future. There can be no assurance that the Company will be
successful in managing its own operations or those of such third-party
relationships, or that third-party manufacturing will be able to meet the
Company's quantity or quality requirements for manufactured products. The
Company currently has third-party manufacturing relationships with
Electronics Assembly, Inc. in the Philippines (Zip drives), and MegaMedia
Computer at their locations in Taiwan, Malaysia and California and
Sentinel N.V. in Belgium (Zip disks).
During 1996, the Company granted a non-exclusive worldwide license to
Matsushita Communication Industrial Co., Ltd. of Japan (MCI) to manufacture
and sell Zip drives under MCI's brand names, as well as to OEM's. MCI
commenced production in the fourth quarter of 1996. This agreement increases
competition and may increase price competition since the Company does not
set the price at which MCI sells its products. The Company receives
royalties on units sold to third parties by MCI.
Many components incorporated in, or used in the manufacture of, the
Company's products are currently available only from single or sole source
suppliers. The Company has experienced difficulty in the past, and may
experience difficulty in the future, in obtaining a sufficient supply of
many key components on a timely basis. During 1995 and early 1996, the
Company was unable to obtain a sufficient supply of certain integrated
circuits used in the Company's Zip and Jaz drives. During 1996, the Company
established agreements with Motorola, Texas Instruments and Symbios Logic
(leading industry component suppliers) to commit design teams and utilize
their wafer fabrication capacity for the development and manufacture of
the various integrated circuit technologies used in the Company's personal
storage products. Starting in January 1997, these companies joined Adaptec
and Atmel as suppliers who provide silicon solutions to assist the Company
in meeting its demands. The Company believes these relationships will
help secure high-volume manufacturing capabilities and help drive down the
overall cost of current and future models of the Company's products;
however, there can be no assurance that the Company will be able to obtain
a sufficient supply to fully satisfy the Company's demands for such
integrated circuits or realize any future cost savings.
The Company purchases a substantial portion of its sole and limited
source components and equipment pursuant to purchase orders without
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 products to achieve market acceptance and
otherwise adversely affect the Company's business and financial results.
The Company had a backlog at the end of December 1996 of approximately
$76 million, compared to a backlog at the end of December 1995 of
approximately $188 million. The backlog at the end of December 1996 was
related primarily to orders with scheduled shipment dates in future months;
whereas substantially all of the December 1995 backlog was related to
significant component shortages related to the Company's Zip and Jaz
products. 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 and the Company's experience in its business) and the Company's
manufacturing capacities, the Company believes that it will be able to fill
all orders in the December 1996 backlog during the first quarter of 1997,
unless such orders are scheduled for delivery outside the first quarter of
1997 or canceled 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. 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 rescheduling 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's efforts were primarily focused on reducing the
production costs of its existing Zip, Jaz and Ditto products, enhancing
the features, developing different system interfaces, developing higher
capacity and performance versions, and enhancing and expanding compatibility
with various computers and operating systems. In particular, there are
projects underway to develop higher capacity and performance drives and
media, to create and provide necessary software support that will allow
computers to be started (or booted) from Zip drives, and to develop smaller
subsystem versions of the Company's products, as well as lower profile
versions of the Zip drive which could be installed in laptop computers, a
rapidly growing segment of the computer industry. Moreover, the Company
is looking at advanced head/media systems for future platforms beyond the
current family of Jaz products and plans to increase its efforts in the
areas of software utilities and solutions, which will continue to emphasize
"ease of use" functionality.
In addition to the development and enhancements to its Zip, Jaz and
Ditto products, the Company is developing a new storage device called n-hand,
which is designed to be built into hand-held consumer electronics devices
ranging from digital cameras and game devices to cellular phones and personal
digital assistants. N-hand is expected to provide a single, affordable means
of capturing, moving and storing information across multiple products. The
Company expects n-hand, with an announced price of less than $10 per disk,
to be the first affordable personal storage solution of its kind. Each
disk will be approximately half the size of a business card and is expected
to hold 20 MB of data. N-hand has the potential to open up several new
markets for removable magnetic recording devices and is expected to be
available beginning in late 1997 or early 1998. Development of the n-hand
product is ongoing and there can be no assurance that the Company will be
successful in developing, manufacturing and marketing this product or that
it will be able to do so within in the desired time frame or at the desired
price point.
During 1996, 1995 and 1994, the Company's research and development
expenses were $42,101,000, $19,576,000 and $15,438,000, respectively (or
3.5%, 6.0% and 10.9%, respectively) of net sales. Research and development
spending in 1996 was primarily related to efforts focused on the Company's
Zip, Jaz and Ditto product lines, as well as the recently announced n-hand
product.
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 2 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.
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. Current
suppliers of removable-media data storage devices include Syquest Technology
(which offers SyJet, a 1.5 GB removable cartridge hard disk drive), a
consortium comprised of Compaq Computer, Imation and MKE (which has
introduced the LS 120, a 120 MB floptical drive that is compatible with
conventional floppy disks), Panasonic (which offers the Power Drive, a
removable optical drive), Nomai (which offers the MCD family of drives,
including 540 MB and 750 MB removable cartridge hard disk drives), and Sony
(which offers the MD-DATA drive, a disk drive based on removable magneto-
optical technology). In addition, Mitsumi and Swan Instruments together
are expected to introduce a high-capacity, removable-media disk drive in
1997 that will also directly compete with Zip and Jaz. Although the Company
believes that its Zip and Jaz products offer advantages over the other
removable-media storage devices available today, the Company believes that
the price, performance and usability levels of competing removable-media
products have improved and will continue to improve and that existing as well
as new competitors will introduce new removable-media storage devices.
Accordingly, the Company believes that its Zip and Jaz products will face
increasingly intense competition.
The Company believes that in order to compete successfully against
current and future sources of competition, it will be necessary to further
reduce the manufacturing costs of its products, thus enabling the Company to
sell its products at lower prices. 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 and Maxtor Corporation, as well as
integrated computer manufacturers such as NEC, 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 disks used in the Company's Zip drives are currently available from
the Company and from Fuji, Maxell and Sony, who sell Zip disks in packages
which feature Iomega's name in addition to the partner's name with
authorization from the Company. The disks used in the Company's Jaz drives
are currently available only from the Company. The Company believes that it
and its authorized manufacturers are currently the sole manufacturing source
for Zip- and Jaz-compatible disks. Additional sources of supply of disks
designed for use with Zip and/or Jaz drives may emerge either as a result of
another party succeeding in producing compatible disks without infringing
or violating the Company's proprietary rights, or as a result of licenses
granted by the Company to other parties. Accordingly, the Company's Zip
and Jaz disks may face increasing competition in the future, including the
possibility of competition from parties not licensed by the Company.
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 Seagate Technology and Hewlett-
Packard. Tape drives may in the future encounter increased competition
from other forms of removable-media storage devices. With the exception of
a proprietary tape format for the Ditto 2GB, which is available only from
the Company and Sony, the tapes used in the Company's tape drives are
available from a number of sources, including Imation and Verbatim, 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
share and acceptance of its products and help promote them as industry
standards. In 1996, the Company entered into a license agreement with
Matsushita Communication Industrial Co., Ltd. of Japan (MCI) authorizing MCI
to manufacture and sell Zip drives. Accordingly, the Company expects to
compete in the future with licensees of the Company's products. In addition,
the Company has granted certain companies the right to purchase drives or
disks from the Company (generally at a discount to the price paid by retail
channels) and resell such products under private brand names, and the
Company's products may become subject to increased price competition from
such private branded resellers. Price competition from other resellers of
the Company's products, whether or not the Company has a manufacturing
relationship with such party, may result in increased pressure on the Company
to reduce the prices at which its products are sold to such resellers or
others or to offer rebates. The Company continually evaluates its prices and
may elect to reduce prices or offer rebates in the future. Reductions in
the prices at which the Company sells its products or any rebates offered by
the Company could adversely affect gross margin and would adversely effect
gross margin percentage to the extent such reductions or rebates are not
offset by reductions in the cost of manufacturing such 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, and size of installed base of users), 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 and Ditto 2GB drives).
Additional competitive considerations, particularly in the OEM market, are
the size (form factor) of the drive and the interface type with which the
drive is compatible. 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. The most common system interface for
the OEM market is IDE. The Company currently offers internal Zip drives in
IDE and SCSI interface models, internal Jaz drives in SCSI interface models,
and internal Ditto drives in floppy interface models.
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 more than 200 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, nine of which relate to its Zip
products, six of which relate to its Jaz products, three of which relate to
its Ditto products and most of the remainder of which relate to its Bernoulli
products. The Company believes that a combination of patent rights (pursuant
to various issued patents and a number of pending patent applications),
copyright and trade secret protection should prevent another party from
legally manufacturing and selling disks that work effectively and reliably
with the Company's Zip and Jaz drives (except pursuant to a license from the
Company). However, there can be no assurance that the steps taken by the
Company to protect such technology will be successful, or that such efforts
will succeed in all countries. If another party were to succeed in producing
and selling Zip- or Jaz-compatible disks without infringing or violating the
Company's proprietary rights, the Company's sales would be materially
adversely affected, and the price at which the Company sells disks could also
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 in addition to legal protections afforded its existing drive
technology. See "Item 3 -- Legal Proceedings."
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 such 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
by the Company were established, the Company could be required to pay damages
or be enjoined from selling the infringing product, or both. In addition,
there can be no assurances that the Company will be able to obtain any
necessary licenses on satisfactory terms or that the Company when appearing
as a plaintiff in litigation will prevail or recover meaningful damages or
relief.
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 products. The Company has entered into a letter agreement regarding
the Zip patent rights and is in the process of negotiating a more detailed
license agreement for these rights. The failure to execute a definitive Zip
patent agreement or the termination of the Company's existing license
arrangements could have a material adverse effect on the Company's business
and financial results.
Employees
As of December 31, 1996, the Company employed 2,926 persons worldwide,
including 165 in research and development, 2,257 in manufacturing, 265 in
sales, marketing and service, and 239 in general management and
administration. None of the Company's employees are subject to a collective
bargaining agreement, and the Company has never experienced a work stoppage.
During December 1996, the Company announced its plans to shift a
substantial portion of its high volume production to Penang, Malaysia. As
a result, during 1997 the Company expects to reduce its work force in Roy,
Utah by approximately 500 to 700 employees in the manufacturing and
distribution areas.
Government Contracts
No material portion of the Company's business is subject to
renegotiation of profits or termination of contracts at the election of
the United States government.
Environmental Matters
Compliance with federal, state and local environmental protection laws
had no material effect on the Company in 1996 and is not expected to have a
material effect in 1997.
ITEM 2. PROPERTIES:
The Company's executive offices, certain research and development
facilities, and certain manufacturing and distribution facilities are
located in leased offices and warehouses in the Roy, Utah area. In
addition, the Company also leases office space in various locations
throughout North America for local sales, marketing and technical support
personnel, as well as other locations used for research and development
activities.
Additionally, the Company leases office space in Geneva, Switzerland for
use as its international headquarters, and in Utrecht, the Netherlands for
use by its European logistics and distribution personnel. The Company also
leases office space throughout Europe and Asia/Pacific for local sales,
marketing and technical support personnel. In September 1996, the Company
entered into an agreement with Quantum Corporation to purchase a 376,000
square foot manufacturing facility in Penang, Malaysia. The closing of the
purchase is expected to occur in the first half of 1997.
The Company owns substantially all equipment used in its facilities
through either outright purchases or capital leases.
ITEM 3. LEGAL PROCEEDINGS:
Except as set forth below, in management's opinion, there are no
material pending legal proceedings, other than ordinary routine litigation
incidental to its business, to which the Company or any of its subsidiaries
is a party or of which any of their property is subject.
The Company has been named as a defendant in Pizzimenti, et al.
v. Iomega Corporation, a class action filed in the Chancery Court of the
State of Delaware in and for New Castle County on March 10, 1997. The named
plaintiffs purport to represent all persons in the United States who bought
Iomega Zip drives or Zip disks since July 1, 1996 and who were allegedly
not paid timely rebates. The complaint alleges that the Company breached
contracts with those consumers and violated the Delaware Consumer Fraud Act
by failing to send rebates to them within the time period specified in the
Company's rebate offer. The complaint seeks immediate payment of the
rebates (which are in an amount of $50 per Zip drive purchased, up to $20
per 10-pack of Zip disks purchased and/or, at the customer's election,
certain merchandise) plus interest to each putative class member, together
with payment of plaintiffs' attorneys' fees. An adverse outcome in this
class action suit would not, in the opinion of management, have a material
adverse effect in financial terms on the Company's financial condition or
results of operations. However, an adverse outcome, particularly if
accompanied by negative publicity, could have an adverse effect on the
Company's business by harming the Company's reputation and goodwill with
current or prospective customers.
During March 1997, the Company became aware that a French
competitor, Nomai S.A. (the "Defendant"), was allegedly informing customers
that it planned to announce a disk product claimed to be compatible with
the Company's Zip drive. The Company has not licensed the Defendant to
manufacture or sell Zip products, and believes the Defendant's planned
product would infringe the Company's copyrights, patents and other
intellectual property rights, and constitute unfair competition.
Accordingly, the Company took immediate steps to protect its rights and
obtained from the Landgericht Court in Hannover, Germany, a preliminary
injunction against the Defendant. The injunction was served on the
Defendant on March 19, 1997, and prohibits the Defendant, for an initial
period of six months (unless earlier canceled by the court), from
manufacturing or offering its planned product in Germany. To the Company's
knowledge, the Defendant has not to date announced or offered its planned
product for sale, in Germany or elsewhere. In support of the Company's
claims against the Defendant, the Company's French counsel obtained
materials from the Defendant's premises on March 19, 1997, in a seizure
process permitted by a French Court. The Company then filed suit against
the Defendant on March 25, 1997, in the District Court in Paris, France,
alleging unfair competition, copyright infringement and patent infringement.
An adverse outcome in these proceedings could result in the introduction by
the Defendant in one or more countries of a Zip-compatible disk product. Any
such introduction could have a material adverse effect on the Company's future
sales and operating results, depending upon, among other things, the quality,
reliability, time to market and competitiveness of any product ultimately
introduced by the Defendant, and the Defendant's ability to manufacture its
product in volume, market and distribute it effectively, and deliver future
enhanced versions of the product. See "Item 1 -- Business -- Proprietary
Rights". The Company intends to vigorously protect and enforce its
intellectual property rights in these proceedings against the Defendant.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matters were submitted to a vote of the Company's security holders
during the quarter ended December 31, 1996.
<PAGE>
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company as of March 1997 are as follows:
Name Age Position
Kim B. Edwards 49 President, Chief Executive Officer and
Director
Leonard C. Purkis 48 Senior Vice President, Finance and Chief
Financial Officer
M. Wayne Stewart 51 Senior Vice President and Chief Operating
Officer
Laurie B. Keating 43 Senior Vice President, General Counsel
and Secretary
Srini Nageshwar 54 Senior Vice President, Europe
Anton J. Radman, Jr. 44 Senior Vice President, Strategic Business
Development
Edward D. Briscoe 34 Vice President and General Manager,
Personal Storage Division
Reed M. Brown 43 Vice President, Manufacturing
Douglas M. Clifford 53 Vice President, Research and Development
Timothy L. Hill 38 Vice President, Worldwide Marketing and Sales
James C. Kelly 39 Vice President and General Manager, Tape
Business Products
Willard C. Kennedy 50 Vice President, Customer Satisfaction and
Logistics
Kevin O'Connor 39 Vice President, Human Resources
Robert J. Simmons 34 Treasurer
Dan E. Strong 38 Corporate Controller
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.
M. Wayne Stewart was appointed Senior Vice President and Chief Operating
Officer in August 1996. Mr. 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.
Laurie B. Keating joined the Company as Senior Vice President, General
Counsel and Secretary in January 1997. Previously, Ms. Keating served as
Senior Vice President, General Counsel and Secretary of Sybase, Inc., a
software company, which she joined in March 1989 as General Counsel and
Secretary. Prior to that Ms. Keating served as Group Counsel at Tandem
Computers Incorporated, a fault-tolerant computer maker and software
provider from May 1987 to March 1989.
Srini Nageshwar was promoted to Senior Vice President, Europe in April
1991 after joining the Company in January 1991 as Vice President, Europe.
Prior to joining the Company, Mr. Nageshwar held various senior management
and marketing positions with technology companies.
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.
Edward D. Briscoe was appointed Vice President and General Manager,
Personal Storage Division in January 1997. Mr. 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.
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.
Douglas M. Clifford joined the Company as Vice President, Research and
Development in October 1996. Prior to that, Mr. Clifford worked 28 years
in various research and development and general management positions for
Hewlett-Packard. His last assignment at Hewlett-Packard was the Information
Storage Group Research and Development Manager where he was responsible for
coordinating the research and development activities of five divisions and
their supporting laboratories.
Timothy L. Hill was appointed Vice President, Worldwide Marketing and
Sales in January 1997. Mr. 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.
James C. Kelly was appointed Vice President and General Manager, Tape
Business Products in January 1997. Mr. Kelly joined the Company in June
1991 and his previous positions with the Company have included Vice
President of Tape Engineering and Director of Tape Engineering.
Willard C. Kennedy was appointed Vice President, Customer Satisfaction
and Logistics in January 1997. Mr. 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.
Kevin O'Connor joined the Company as Vice President, Human Resources in
January 1997. Mr. O'Connor joins the Company from Dell Computer Corporation
where he held several senior human resource positions. From October 1995 to
December 1996, he was Vice President, Human Resources Asia Pacific., from
July 1994 to September 1995, he was Vice President, Human Resources North
America, and from May 1993 to June 1994, he was Director, Human Resources
Worldwide Operations. Prior to his employment with Dell, Mr. O'Connor spent
six years as a Senior Group Manager of Human Resources with the Frito Lay
Division of Pepsico.
Robert J. Simmons has been Treasurer since January 1996. He was
Assistant Treasurer of Oracle Corporation, a software company, from June
1989 to January 1996.
Dan E. Strong was promoted to Corporate Controller in January 1997. Mr.
Strong has held various management positions within the finance and
accounting organization of the Company from January 1985 to June 1994 and
from September 1995 to December 1996. From June 1994 through September 1995
Mr. Strong was Vice President and Chief Financial Officer of Pro Image Inc.,
a retailer of licensed sports apparel.
Executive Officers are elected on an annual basis and serve at the
discretion of the Board of Directors.
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS:
Except as set forth below, the information required by this item is found
in the section entitled "Securities" of the Company's 1996 Annual Report to
Stockholders, which section is incorporated herein by reference.
During the fourth quarter of 1996, the Company issued 1,113 shares of
Common Stock upon conversion of its 6-3/4% Convertible Subordinated Notes
due 2001 in reliance upon the exemption from registration set forth in
Section 3(a)(9) of the Securities Act. No underwriters were engaged in
connection with such issuances. The Company did not sell any other equity
securities during 1996 that were not registered under the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA:
The information required by this item is found in the tables entitled
"Trends in Operations" and "Financial Conditions and Trends" of the Company's
1996 Annual Report to Stockholders, which tables are incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
The information required by this item is found in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" of the Company's 1996 Annual Report to Stockholders, which
section is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
The information required by this item is contained in the sections
entitled "Financial Highlights" and "Quarterly Financial Information" of the
Company's 1996 Annual Report to Stockholders, which section is incorporated
herein by reference, and in the financial statements and schedule referred
to in the Index to Consolidated Financial Statements and Consolidated
Financial Statement Schedule, filed as a part of this Annual Report on Form
10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
Not applicable.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
The information required by this item appears in the sections of the
Company's Proxy Statement for its 1997 annual meeting of stockholders
entitled "ELECTION OF DIRECTORS - Nominees", "ELECTION OF DIRECTORS - Board
and Committee Meetings", and "ELECTION OF DIRECTORS - Section 16(a)
Beneficial Ownership Reporting Compliance", which sections are incorporated
herein by reference. Information regarding the executive officers of the
Company is furnished in Part I of this Annual Report on Form 10-K under the
heading "Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION:
The information required by this item appears in the sections of the
Company's Proxy Statement for its 1997 annual meeting of stockholders
entitled "ELECTION OF DIRECTORS - Director's Compensation", "ELECTION OF
DIRECTORS - Executive Compensation", "ELECTION OF DIRECTORS - Employment
and Severance Agreements" and "ELECTION OF DIRECTORS - Certain Business
Relationships", which sections are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
The information required by this item is contained in the section of the
Company's Proxy Statement for its 1997 annual meeting of stockholders entitled
"Beneficial Ownership of Common Stock", which section is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
The information required by this item is contained in the sections of the
Company's Proxy Statement for its 1997 annual meeting of stockholders
entitled "ELECTION OF DIRECTORS - Employment and Severance Agreements" and
"ELECTION OF DIRECTORS - Certain Business Relationships", which sections
are incorporated herein by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
(a) The following documents are filed as part of or are included in this
Annual Report on Form 10-K:
1. The financial statements listed in the Index to Consolidated Financial
Statements and Consolidated Financial Statement Schedule, filed as a
part of this Annual Report on Form 10-K.
2. The financial statement schedule listed in the Index to Consolidated
Financial Statements and Consolidated Financial Statement Schedule,
filed as a part of this Annual Report on Form 10-K.
3. The exhibits listed in the Exhibit Index filed as a part of this
Annual Report on Form 10-K.
(b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company
during the last quarter of the year ended December 31, 1996.
(c) Exhibits - See Item 14(a)3 above.
(d) Financial Statements Schedule - See Item 14(a)2 above.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
IOMEGA CORPORATION
By: /s/ Kim B. Edwards
------------------
Kim B. Edwards
Chief Executive Officer
Date: March 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ Kim B. Edwards Chief Executive Officer and Director March 26, 1997
Kim B. Edwards (Principal executive officer)
/s/ Leonard C. Purkis Senior Vice President - Finance and March 26, 1997
Leonard C. Purkis Chief Financial Officer (Principal
financial and accounting officer)
/s/ David J. Dunn Chairman of the Board of Directors March 26, 1997
David J. Dunn
Director
Willem H.J. Andersen
Director
Robert P. Berkowitz
/s/ Michael J. Kucha Director March 26, 1997
Michael J. Kucha
/s/ John R. Myers Director March 20, 1997
John R. Myers
/s/ John E. Nolan Director March 20, 1997
John E. Nolan
/s/ John E. Sheehan Director March 22, 1997
The Honorable
John E. Sheehan
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED
FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements appear in the Company's
1996 Annual Report to Stockholders and are incorporated herein by reference:
Description
Report of Independent Public Accountants
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
The following schedule is included in this Annual Report on Form 10-K:
Description Page Reference
Report of Independent Public Accountants on
Consolidated Financial Statement Schedule 24
II - Valuation and Qualifying Accounts 25
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
To Iomega Corporation:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in Iomega Corporation's annual
report to stockholders incorporated by reference in this Form 10-K, and have
issued our report thereon dated January 24, 1997. Our audit was made for the
purpose of forming an opinion on those statements taken as a whole. The
schedule listed in the index on page 23 is the responsibility of the Company's
management and is presented for the purpose of complying with Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
January 24, 1997
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
<TABLE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at charged to Balance
beginning costs and at end
Description of period expenses Deductions of period
- ------------------------------ ---------- --------- ---------- ----------
(in thousands)
ALLOWANCE FOR DOUBTFUL
ACCOUNTS:
<S> <C> <C> <C> <C>
Year ended December 31, 1996 $1,861 $ 9,022 $(1,891) * $ 8,992
Year ended December 31, 1995 $1,627 $ 799 $ (565) * $ 1,861
Year ended December 31, 1994 $1,547 $ 323 $ (243) * $ 1,627
PRICE PROTECTION AND
VOLUME REBATES:
Year ended December 31, 1996 $1,633 $ 24,480 $(9,072) ** $ 17,041
Year ended December 31, 1995 $ 169 $ 7,103 $(5,639) ** $ 1,633
Year ended December 31, 1994 $ 67 $ 1,143 $(1,041) ** $ 169
ACCRUED RESTRUCTURING COSTS:
Year ended December 31, 1994 $6,818 $ 875 $(7,693) $ -
OTHER RESTRUCTURING RESERVES:
Year ended December 31, 1994 $4,649 $ 2,063 $(6,712) $ -
* Represents write-offs of Accounts Receivable
** Payments to customers and credits granted against Accounts Receivable
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included or incorporated by reference in this Form 10-K into
the Company's previously filed Registration Statements on Form S-8, File Nos.
2-87671, 33-13083, 33-20432, 33-23822, 33-41083, 33-54438, 33-59027, 33-62029
and 333-15335.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
March 26, 1997
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report on
Form 10-K:
Exhibit
Number Description
3(i).1 (17) Restated Certificate of Incorporation of the Company, as
amended
3(ii).1 (1) By-Laws of the Company, as amended
4.1 (17) Indenture, dated March 13, 1996, between the Company and
State Street Bank and Trust Company
4.2 (7) Rights Agreement dated as of July 28, 1989 between the
Company and The First National Bank of Boston, as Rights
Agent
4.2 (a) (8) Amendment No. 1 dated September 24, 1990 to Rights
Agreement dated as of July 28, 1989 between the Company
and The First National Bank of Boston
4.3 Instruments with respect to other long-term debt of the
Company and its consolidated subsidiaries are omitted
pursuant to Item 601(b)(4)(iii) of Regulation S-K since
the total amount authorized under each such omitted
instrument does not exceed 10 percent of the total assets
of the Company and its subsidiaries on a consolidated
basis. The Company hereby agrees to furnish a copy of
any such instrument to the Securities and Exchange
Commission upon request.
10.1 (11) Lease dated January 6, 1993 between the Company and
Damson/Birtcher Realty Income Fund-II, Limited Partnership
relating to Iomega Park Building No. 1
10.1 (a)(19) Amendment to Lease dated August 14, 1995 between the
Company and Damson/Birtcher Realty Income Fund-II, Limited
Partnership relating to Iomega Park Building No. 1
10.2 (19) Lease dated August 14, 1995 between the Company and
Damson/Birtcher Realty Income Fund-II, Limited Partnership
relating to Iomega Park Building No. 2
10.3 (3) Lease dated November 9, 1992 between the Company and
Damson/Birtcher Realty Income Fund-II, Limited Partnership
relating to Iomega Park Building No. 3
10.3 (a)(19) Amendment to Lease dated August 14, 1995 between the
Company and Damson/Birtcher Realty Income Fund-II, Limited
Partnership relating to Iomega Park Building No. 3
10.4 (3) Lease dated November 9, 1992 between the Company and
Damson/Birtcher Realty Income Fund-II, Limited Partnership
relating to Iomega Park Building No. 4
10.4 (a)(19) Amendment to Lease dated August 14, 1995 between the
Company and Damson/Birtcher Realty Income Fund-II, Limited
Partnership relating to Iomega Park Building No. 4
10.5 (4) Lease Agreement dated October 29, 1984 between the Company
and Damson/Birtcher Realty Income Fund-II, Limited
Partnership (formerly with Western Mortgage Loan
Corporation)(including an Amendment thereto dated January
30, 1985) relating to Iomega Park Building (Parking Lot)
No. 5
10.6 (11) Lease dated January 6, 1993 between the Company and
Damson/Birtcher Realty Income Fund-II, Limited Partnership
relating to Iomega Park Building No. 6
10.6 (a)(19) Amendment to Lease dated August 14, 1995 between the
Company and Damson/Birtcher Realty Income Fund-II, Limited
Partnership relating to Iomega Park Building No. 6
10.7 (2) Lease dated June 21, 1991 between the Company and Damson/
Birtcher Realty Income Fund-II, Limited Partnership
relating to Iomega Park Building No. 7
10.7 (a)(13) Amendment to Lease dated May 20, 1994 between the Company
and Damson/Birtcher Realty Income Fund-II, Limited
Partnership relating to Iomega Park Building No. 7
10.8 (3) Lease dated November 9, 1992 between the Company and
Damson/Birtcher Realty Income Fund-II, Limited Partnership
relating to Iomega Park Building No. 8
10.8 (a)(19) Amendment to Lease dated August 14, 1995 between the
Company and Damson/Birtcher Realty Income Fund-II, Limited
Partnership relating to Iomega Park Building No. 8
10.9 (19) Lease Agreement dated January 25, 1996 between the Company
and Boyer Iomega LLC, by the Boyer Company, L.C., its
Manager
** 10.10 (2) 1981 Stock Option Plan of the Company, as amended
** 10.11 (2) 1987 Stock Option Plan of the Company, as amended
** 10.12 (2) 1987 Director Stock Option Plan of the Company, as
amended
** 10.13 1995 Director Stock Option Plan of the Company, as
amended
** 10.14 (2) Employment Letter dated January 11, 1991 between the
Company and Srini Nageshwar
** 10.15 (13) Employment Letter dated November 29, 1993 between the
Company and Kim Edwards
** 10.16 (3) Expatriate Agreement dated January 1, 1992 between the
Company and Srini Nageshwar
10.17 (3) Form of Indemnification Agreement between the Company
and each of its directors
10.18 (7) Rights Agreement dated as of July 28, 1989 between the
Company and The First National Bank of Boston, as Rights
Agent
10.18(a) (8) Amendment No. 1 dated September 24, 1990 to Rights
Agreement dated as of July 28, 1989 between the Company
and The First National Bank of Boston
10.19 (13) Indemnity Agreement, dated April 21, 1994 between the
Company and Srini Nageshwar
** 10.20 (11) Letter Agreement, dated April 13, 1993, between the
Company and Anton J. Radman, Jr.
10.21 (16) Iomega Incentive Plan for Kim B. Edwards
10.22 (16) Loan Agreement, dated July 1995, between the Company and
Wells Fargo Bank, N.A., Commercial Finance Division
10.22(a)(16) Security Agreement, dated July 5, 1995, between the
Company and Wells Fargo Bank, N.A. Commercial Finance
Division
10.22(b)(16) Wells Fargo Continuing Commercial Letter of Credit
Agreement, dated July 5, 1995
10.22(c)(19) First Amendment to Loan Agreement, dated August 24, 1995,
between the Company and Wells Fargo Bank, N.A.,
Commercial Finance Division
10.22(d)(19) Second Amendment to Loan Agreement, dated October 16, 1995,
between the Company and Wells Fargo Bank, N.A., Commercial
Finance Division
10.22(e)(19) Third Amendment to Loan Agreement, dated November 30, 1995,
between the Company and Wells Fargo Bank, N.A., Commercial
Finance Division
10.22(f)(19) Fourth Amendment to Loan Agreement, dated January 12, 1996,
between the Company and Wells Fargo Bank, N.A., Commercial
Finance Division
10.22(g)(20) Fifth Amendment to Loan Agreement, dated March 12, 1996,
between the Company and Wells Fargo Bank, N.A., Commercial
Finance Division
10.22(h)(20) Sixth Amendment to Loan Agreement, dated May 13, 1996,
between the Company and Wells Fargo Bank, N.A., Commercial
Finance Division
10.22(i)(22) Seventh Amendment to Loan Agreement, dated July 31, 1996,
between the Company and Wells Fargo Bank, N.A., Commercial
Finance Division
10.23 (19) Master Lease Agreement, dated August 29, 1995, between the
Company and USL Capital Corporation
10.24 (19) Loan Commitment Agreement, dated October 23, 1995, between
the Company and Heller Financial, Inc., Commercial
Equipment Finance Division
10.25 (19) Factoring Agreement, dated November 10, 1995, between
Iomega Europe GmbH and Heller Bank, AG
10.26 (19) Revolving Loan Agreement, dated January 12, 1996, between
the Company and First Security Bank of Utah, N.A.
10.27 (17) Indenture, dated March 13, 1996, between the Company and
State Street Bank and Trust Company
10.28 (20) Lease dated December 8, 1995, between the Company and John
Arrillaga, Trustee and Richard T. Peery, Trustee relating
to Milpitas Bldg. 8
10.29 (21) Lease dated April 9, 1996, between the Company and Security
Capital Industrial Trust
10.30 (22) Agreement for the Sale and Purchase of Assets in Malaysia,
dated September 13, 1996, between the Company and Quantum
Corporation.
10.30(a)(22) Exhibit A to the Agreement for the Sale and Purchase of
Assets in Malaysia, dated September 13, 1996, between the
Company and Quantum Corporation - Preliminary Form of
Secured Promissory Note
10.30(b)(22) Exhibit B to the Agreement for the Sale and Purchase of
Assets in Malaysia, dated September 13, 1996, between the
Company and Quantum Corporation - The Indemnification
Agreement
10.31 1996 Bonus Plan
13.1 Portions of the Company's 1996 Annual Report (which is
not deemed to be "filed" except to the extent that
portions thereof are expressly incorporated by reference
in this Annual Report of Form 10-K)
21.1 Subsidiaries of the Company
23.1 Consent of Independent Public Accountants (appears on page
26 of this Annual Report on Form 10-K)
27.1 Financial Data Schedule (only filed as part of electronic
copy)
- --------------------------
** Management contract or compensation plan or arrangement
required to be filed as an exhibit pursuant to Item 14(c) of
Form 10-K
(1) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the period ended July 4, 1993 (File
No. 0-11963).
(2) Incorporated herein by reference to the exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1991 (File
No. 0-11963)
(3) Incorporated herein by reference to the exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1992 (File
No. 0-11963).
(4) Incorporated herein by reference to the exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1990 (File
No. 0-11963).
(5) Incorporated herein by reference to the exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1989 (File
No. 0-11963).
(6) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-1 (File No. 2-96209).
(7) Incorporated herein by reference to the exhibits to the Company's
Current Report on Form 8-K filed on August 12, 1989 (File No. 0-11963).
(8) Incorporated herein by reference to the exhibits to the Company's
Amendment No. 1 to Current Report on Form 8-K filed on
September 25, 1990 (File No. 0-11963).
(9) Incorporated herein by reference to the exhibits to the Company's
Amendment No. 1 to Annual Report on Form 10-K for the year
ended December 31, 1992 (File No. 0-11963).
(10) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the period ended October 3, 1993
(File No. 0-11963).
(11) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-K for the year ended December 31, 1993
(File No. 0-11963).
(12) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the period ended October 2, 1994
(File No. 0-11963).
(13) Incorporated herein by reference to the exhibits to the Company's
Annual Report on Form 10-K for the period ended December 31, 1994
(File No. 0-11963).
(14) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the period ended April 2, 1995 (File
No. 0-11963).
(15) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the period ended July 2, 1995 (File
No. 0-11963).
(16) Incorporated herein by reference to the Exhibits to the Company's
Quarterly Report on Form 10-Q for the period ended October 1, 1995
(File No. 0-11963).
(17) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-3 (File No. 33-64995).
(18) Incorporated by reference to Appendix to the Company's definitive
Proxy Statement for the 1995 Annual Meeting of Stockholders (File No.
0-11963).
(19) Incorporated herein by reference to the exhibits to the Company's
Annual Report on Form 10-K for the period ended December 31, 1995
(File No. 0-11963).
(20) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the period ended March 31, 1996 (File
No. 0-11963).
(21) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the period ended June 30, 1996 (File
No. 0-11963).
(22) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the period ended September 29, 1996
(File No. 0-11963).
EXHIBIT 10.13
IOMEGA CORPORATION
1995 DIRECTOR STOCK OPTION PLAN
(AS AMENDED)
1. PURPOSE
The purpose of this 1995 Director Stock Option Plan (the
"Plan") of Iomega Corporation (the "Company") is to encourage
ownership in the Company by outside directors of the Company whose
continued services are considered essential to the Company's
continued progress and thus to provide them with a further
incentive to continue as directors of the Company.
2. ADMINISTRATION
(a) The Board of Directors, or a Committee (the "Committee")
consisting of two or more directors of the Company, shall
supervise and administer the Plan. Grants of stock options under
the Plan and the amount and nature of the awards to be granted
shall be automatic in accordance with Section 5. However, all
questions of interpretation of the Plan or of any options issued
under it shall be determined by the Board of Directors or the
Committee and such determination shall be final and binding upon
all persons having an interest in the Plan.
(b) The Plan is intended to comply with all applicable
conditions of Rule 16b-3 or its successors under Section 16 of the
Securities Exchange Act of 1934, as amended ("Rule 16b-3"). To
the extent any provision of the Plan or action by the Board of
Directors fails to so comply, it shall be deemed null and void,
to the extent permitted by law and deemed advisable by the Board of
Directors.
3. PARTICIPATION IN THE PLAN
Directors of the Company who are not employees of the Company
or any subsidiary of the Company shall be eligible to participate
in the Plan.
4. STOCK SUBJECT TO THE PLAN
(a) The maximum number of shares which may be issued under
the Plan shall be one million two-hundred thousand (1,200,000) shares
of the Company's Common Stock, subject to adjustment as provided in
Section 9 of the Plan.
(b) If any outstanding option under the Plan for any reason
expires or is terminated without having been exercised in full,
the shares allocable to the unexercised portion of such option
shall again become available for grant pursuant to the Plan.
(c) All options granted under the Plan shall be nonstatutory
options not entitled to special tax treatment under Section 422 of
the Internal Revenue Code of 1986, as amended to date and as it
may be amended from time to time (the "Code").
(d) Shares issued under the Plan may consist in whole or in
part of authorized but unissued shares or treasury shares.
5. TERMS, CONDITIONS AND FORM OF OPTIONS
Each option granted under the Plan shall be evidenced by a
written agreement in such form as the Board of Directors or
Committee shall from time to time approve, which agreements shall
comply with and be subject to the following terms and conditions:
(a) OPTION GRANTS. Each person who first becomes a member
of the Board of Directors of the Company from and after the
adoption of the Plan by the Board of Directors of the Company
shall be granted, on the date that he is first elected to serve as
such a director, an option to purchase 37,500 shares of Common
Stock under the Plan.
(b) OPTION EXERCISE PRICE. The option exercise price for
each option granted under the Plan shall equal the last reported
sales price of the Company's Common Stock on the Nasdaq National
Market on the date of grant of such option.
(c) OPTIONS NON-TRANSFERABLE. Subject to Section 10(b),
each option granted under the Plan by its terms shall not be
transferable by the optionee otherwise than by will, or by the
laws of descent and distribution, and shall be exercised during
the lifetime of the optionee only by the optionee. Subject to
Section 10(b), no option or interest therein may be transferred,
assigned, pledged or hypothecated by the optionee during the
optionee's lifetime, whether by operation of law or otherwise, or
be made subject to execution, attachment or similar process.
(d) PERIOD OF OPTIONS. No option shall be exercisable after
the expiration of ten (10) years from the date upon which such
option is granted. Each option shall be subject to termination
before its date of expiration as hereinafter provided.
(e) EXERCISE OF OPTIONS. Options shall become exercisable in five
equal annual installments, commencing one year from the date of grant, provided
the holder of such option continues to serve as a director of the Company.
Options may be exercised only by written notice to the Company at its principal
office accompanied by (i) payment in cash or by certified or bank check of the
full consideration for the shares as to which they are exercised, (ii) delivery
of outstanding shares of the Company's Common Stock (which, in the case of
shares acquired from the Company, have been outstanding for at least six
months) having a fair market value on the last business day preceding the date
of exercises equal to the option exercise price, or (iii) an irrevocable
undertaking, in a form satisfactory to the Company, by a broker to deliver
promptly to the Company sufficient funds to pay the exercise price or delivery
of irrevocable instructions, in a form satisfactory to the Company, by the
optionholder to a broker to deliver promptly to the Company cash or a check
sufficient to pay the exercises price.
(f) EXERCISE BY REPRESENTATIVE FOLLOWING DEATH OF DIRECTOR. A
director, by written notice to the Company, may designate one or more persons
(and from time to time change such designation) including his legal
representative, who, by reason of his death, shall acquire the right to
exercise all or a portion of the option. If the person or persons so
designated wish to exercise any portion of the option, they must do do within
the term of the option as provided herein. Any exercise by a representative
shall be subject to the provisions of the Plan.
6. ASSIGNMENTS
The rights and benefits under the Plan may not be assigned except for
the designation of a beneficiary as provided in Section 5.
7. TIME FOR GRANTING OPTIONS
All options for shares subject to the Plan shall be granted, if at all,
not later than ten (10) years after the approval of the Plan by the Company's
stockholders.
8. LIMITATION OF RIGHTS
(a) NO RIGHT TO CONTINUE AS A DIRECTOR. Neither the Plan, nor the
granting of an option nor any other action taken pursuant to the Plan, shall
constitute or be evidence of any agreement or understanding, express or
implied, that the Company will retain a director for any period of time,
or at any particular rate of compensation.
(b) NO STOCKHOLDERS' RIGHTS FOR OPTIONS. An optionee shall
have no rights as a stockholder with respect to the shares covered
by such optionee's options until the date of the issuance to such
optionee of a stock certificate therefor, and no adjustment will
be made for dividends or other rights for which the record date is
prior to the date such certificate is issued.
(c) COMPLIANCE WITH SECURITIES LAWS. Each option shall be
subject to the requirement that if, at any time, counsel to the
Company shall determine that the listing, registration or
qualification of the shares subject to such option upon any
securities exchange or under any state or federal law, or the
consent or approval of any governmental or regulatory body, or the
disclosure of non-public information or the satisfaction of any
other condition is necessary as a condition to, or in connection
with, the issuance or purchase of shares thereunder, such option
may not be exercised, in whole or in part, unless such listing,
registration, qualification, consent or approval, or satisfaction
or such condition shall have been effected or obtained on
conditions acceptable to the Board of Directors.
9. CHANGES IN COMMON STOCK
(a) If the outstanding shares of Common Stock are increased,
decreased or exchanged for a different number or kind of shares or
other securities of the Company, or if additional shares or new or
different shares or other securities of the Company or other non-
cash assets are distributed with respect to such shares of Common
Stock or other securities, through or as a result of any merger,
consolidation, sale of all or substantially all of the assets of
the Company, reorganization, recapitalization, reclassification,
stock dividend, stock split, reverse stock split or other
distribution or transaction with respect to such shares of Common
Stock, or other securities, an appropriate and proportionate
adjustment may be made in (i) the maximum number and kind of
shares reserved for issuance under the Plan, (ii) the number and
kind of shares or other securities subject to then outstanding
options under the Plan and (iii) the price for each shares subject
to any then outstanding options under the Plan, without changing
the aggregate purchase price as to which such options remain
exercisable. No fractional shares will be issued under the Plan
on account of any such adjustments.
(b) In the event that the Company is merged or consolidated into or
with another corporation (in which consolidation or merger the stockholders of
the Company receive distributions of cash or securities of another issuer as a
result thereof), or in the event that all or substantially all of the assets of
the Company are acquired by any other person or entity, or in the event of a
reorganization or liquidation of the Company, the Board of Directors of the
Company, or the board of directors of any corporation assuming the obligations
of the Company, shall, as to outstanding options, either (i) provide that such
options shall be assumed, or equivalent options shall be substituted, by the
acquiring or successor corporation (or an affiliate thereof), or (ii) upon
written notice to the optionees, provide that all unexercised options will
terminate immediately prior to the consummation of such merger, consolidation,
acquisition, reorganization or liquidation unless exercised by the optionee
within a specified number of days following the date of such notice.
10. AMENDMENT OF THE PLAN
(a) The Board of Directors or Committee may suspend or discontinue the
Plan or revise or amend it in any respect whatsoever; provided, however, that
without approval of the stockholders of the Company no revision or amendment
shall change the number of shares subject to the Plan (except as provided in
Section 9), change the designation of the class of directors eligible to
receive options, or materially increase the benefits accruing to participants
under the Plan and further provided that the provisions of the Plan regarding
the directors eligible to receive options or which state the amount and price
of securities to be awarded under the Plan, specify the timing of awards under
the Plan or set forth a formula that determines the amount, price and timing
may not be amended more than once in any six-month period, except to comport
with changes in the Code, the Employee Retirement Income Security Act, or the
rules thereunder.
(b) In the event Rule 16b-3 shall at any time be amended to permit
options intended to qualify under Rule 16b-3 to be transferable to a greater
extent than is permitted on the date of adoption of the Plan by the Board of
Directors, then the Board of Directors or the Committee shall be authorized,
without any requirement for further stockholder approval, to amend the Plan
and/or any options then outstanding under the Plan to permit options granted
under the Plan to be transferable to the full extent permitted by Rule 16b-3,
as so amended.
11. NOTICE
Any written notice to the Company required by any of the provisions of
the Plan shall be addressed to the Treasurer of the Company and shall become
effective when it is received.
12. GOVERNING LAW
The Plan and all determinations made and actions taken pursuant hereto
shall be governed by the laws of the State of Delaware.
EXHIBIT 10.31
IOMEGA CORPORATION
1996 Bonus Plan
The 1996 Bonus Plan ("Plan") for the corporate officers, senior
executives and key contributors of Iomega Corporation (the
"Company") is as follows:
1. Definitions.
For purposes of the Plan, the following terms shall have the
meanings ascribed to them in this Section 1:
(a) "NATP" means the consolidated net after-tax profits of the
Company for fiscal 1996, as reported by the Company in its audited
financial statements for 1996.
(b) "Excess NATP" means that amount of NATP which is in excess of
$35 million.
(c) "Senior Executives" shall mean the 13 individuals initially
listed on Schedule A annexed hereto and such additional individuals
as the Chief Executive Officer of the Company shall designate.
(d) "Key Contributors" shall mean the 90 employees initially
listed on Schedule B annexed hereto and such additional employees
as the Chief Executive Officer of the Company shall designate.
2. Bonus for Chief Executive Officer.
If NATP is less than $35 million, no bonus shall be paid to the
Chief Executive Officer. If NATP is $35 million or more, the
Company shall pay a bonus to the Chief Executive Officer for 1996,
determined as follows:
For the first $35 million of NATP, a bonus of $275,000, plus
For Excess NATP, a bonus equal to one-half of one percent of
Excess NATP.
provided, however, that no bonus shall be payable if NATP is less
than 5% of the Company's 1996 sales.
In addition, the Company is authorized to pay the Chief Executive
Officer a discretionary bonus of up to $250,000, as determined by
the Board of Directors, based on the Chief Executive Officer's
performance with respect tot he following non-financial
objectives:
Successful financing of the enterprise,
Strategic partnering,
Organization staffing,
Establishing production capacity, and
Product development and time to market of products developed.
3. Bonus for Senior Executives.
If NATP is less than $35 million, no bonus shall be paid to the
Senior Executives. If NATP is $35 million or more, the Company
shall pay aggregate bonuses to Senior Executives for 1996,
determined as follows:
For the first $35 million of NATP, a bonus of $700,000, plus
For Excess NATP, a bonus equal to 2.36% of Excess NATP,
provided, however, that (i) the aggregate of the bonuses payable
to the Senior Executives for 1996 shall not exceed $2.0 million,
and (ii) no bonus shall be payable if NATP is less than 5% of the
Company's 1996 sales.
4. Bonus for Key Contributors.
If NATP is less than $35 million, no bonus shall be paid to the
Key Contributors. If NATP is $35 million or more, the Company
shall pay aggregate bonuses to Key Contributors for 1996,
determined as follows:
For the first $35 million of NATP, a bonus of $1.4 million,
plus
For Excess NATP, a bonus equal to 4.72% of Excess NATP,
provided, however, that (i) the aggregate of the bonuses payable
to the Key Contributors for 1996 shall not exceed $4.0 million,
and (ii) no bonus shall be payable if NATP is less than 5% of the
Company's 1996 sales.
The Chief Executive Officer of the Company shall have the
authority to allocate bonuses payable pursuant to the Plan among
the Senior Executives and Key Contributors participating in the
Plan, including the authority to award less than the maximum
amount of bonuses payable under the Plan if he determines, in
his discretion, that such action is in the best interest of the
Company. The Chief Executive Officer is also authorized to pay
a discretionary bonus up to a maximum aggregate amount of $1
million to professional personnel of Level 15 and below and
"spot awards" primarily to employees who are not vice presidents
or directors as special recognition awards for outstanding
performance by the selected recipients, provided that no such
discretionary bonuses shall be payable in the event that the
Company is not profitable. Notwithstanding anything herein to the
contrary, no Senior Executive or Key Contributor shall receive
aggregate bonus payments pursuant to the Plan which exceed 135%
of his annual base salary for the applicable year.
The Chief Executive Officer of the Company shall report, at least
quarterly, to the Board of Directors and the Compensation
Committee of the Company any discretionary special recognition
bonuses awarded to employees for outstanding performance.
EXHIBIT 13.1
<TABLE>
IOMEGA CORPORATION AND SUBSIDIARIES
FINANCIAL AND OPERATING HIGHLIGHTS
FINANCIAL HIGHLIGHTS
For years ended December 31 1996 1995
(in thousands, except per share
and employee data)
<S> <C> <C>
Sales $1,212,769 $ 326,225
Cost of sales 879,989 235,838
Operating expenses 232,820 76,765
Net income $ 57,328 $ 8,503
========== ==========
Net income per common share <F1> $ 0.43 $ 0.07
========== ==========
Weighted average number of
shares outstanding <F1> 133,738 120,360
========== ==========
Share price <F1> : high $ 55.13 $ 8.96
low $ 5.71 $ 0.54
Employees 2,926 1,667
</TABLE>
<TABLE>
QUARTERLY FINANCIAL INFORMATION
For year ended December 31, 1996 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Total Year
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Sales $ 221,988 $ 283,638 $ 310,085 $ 397,058 $1,212,769
Gross margin 59,900 76,195 81,661 115,024 332,780
Net income 10,121 14,082 12,766 20,359 57,328
Net income per common share <F1> $ 0.08 $ 0.11 $ 0.09 $ 0.15 $ 0.43
For year ended December 31, 1995 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Total Year
(in thousands, except per share data)
Sales $ 40,112 $ 52,594 $ 84,721 $ 148,798 $ 326,225
Gross margin 11,717 11,687 21,496 45,487 90,387
Net income (loss) (1,498) (1,947) 2,025 9,923 8,503
Net income (loss) per common share <F1>$ (0.01) $ (0.02) $ 0.02 $ 0.08 $ 0.07
<FN>
<F1> Net income per common share, outstanding shares and share prices
have been retroactively adjusted to reflect stock splits (see
Note 2 to Consolidated Financial Statements).
</FN>
</TABLE>
IOMEGA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
TRENDS IN OPERATIONS
The following table indicates the trends in certain components of the
consolidated statements of operations for each of the last five years.
Years ended December 31, 1996 1995 1994 1993 1992
(in thousands, except per share and employee data)
<S> <C> <C> <C> <C> <C>
Sales $1,212,769 $ 326,225 $ 141,380 $ 147,123 $ 139,174
Cost of sales 879,989 235,838 92,453 92,585 74,090
---------- --------- --------- --------- ---------
Gross margin 332,780 90,387 48,927 54,538 65,084
---------- --------- --------- --------- ---------
Operating expenses:
Selling, general and administrative 190,719 57,189 36,862 38,862 37,572
Research and development 42,101 19,576 15,438 18,972 21,959
Restructuring costs (reversal) - - (2,491) 14,131 -
---------- --------- --------- --------- ---------
Total operating expenses 232,820 76,765 49,809 71,965 59,531
---------- --------- --------- --------- ---------
Operating income (loss) 99,960 13,622 (882) (17,427) 5,553
Interest and other income (expense) (5,977) (1,983) 908 771 592
---------- --------- --------- --------- ---------
Income (loss) before income taxes and
cumulative effect of accounting change 93,983 11,639 26 (16,656) 6,145
Provision for income taxes 36,655 3,136 1,908 206 1,474
---------- --------- --------- --------- ---------
Net income (loss) before cumulative
effect of accounting change 57,328 8,503 (1,882) (16,862) 4,671
Cumulative effect of accounting change - - - 2,337 -
---------- --------- --------- --------- ---------
Net income (loss) $ 57,328 $ 8,503 $ (1,882) $ (14,525) $ 4,671
========== ========= ========= ========= =========
Net income (loss) per common share <F1> $ 0.43 $ 0.07 $ (0.02) $ (0.13) $ 0.04
========== ========= ========= ========= =========
Weighted average common
shares outstanding <F1> 133,738 120,360 110,838 108,636 121,590
Total employees 2,926 1,667 886 1,077 1,270
<FN>
<F1> See Notes 1 and 2 of Notes to Consolidated Financial Statements.
</FN>
</TABLE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage
of sales for the years ended December 31, 1996, 1995 and 1994:
<TABLE>
1996 1995 1994
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales 72.6 72.3 65.4
----- ----- -----
Gross margin 27.4 27.7 34.6
----- ----- -----
Operating expenses:
Selling, general and administrative 15.7 17.5 26.1
Research and development 3.5 6.0 10.9
Restructuring accrual reversal - - (1.8)
----- ----- -----
Total operating expenses 19.2 23.5 35.2
----- ----- -----
Operating income (loss) 8.2 4.2 (0.6)
Interest and other income (expense) (0.5) (0.6) 0.6
----- ----- -----
Income before income taxes 7.7 3.6 -
Provision for income taxes 3.0 1.0 1.3
----- ----- -----
Net income (loss) 4.7% 2.6% (1.3)%
===== ===== =====
</TABLE>
Seasonality
The Company's 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 occurring in the fourth quarter
and sales slowdowns commonly occurring during the summer months.
Accordingly, in light of the seasonal nature, revenues for any prior
quarter are not necessarily indicative of the revenues to be expected
in any future quarter.
1996 As Compared to 1995
Sales. Sales increased by $886.5 million, or 272%, in 1996 when
compared to 1995. This increase was due primarily to higher sales of
Zip products, which began shipping late in the first quarter of 1995,
and Jaz products, which began shipping in limited quantities in
December 1995. Combined Zip and Jaz sales totaled $1.1 billion, or
87% of total sales, in 1996 as compared to $174 million, or 53% of
total sales, in 1995. Ditto product sales also increased in 1996, as
total Ditto sales were $128 million, or 10% of sales, in 1996, as
compared to $87 million, or 27% of sales, in 1995. Bernoulli sales
declined to $34 million, or 3% of total sales, in 1996, as compared to
$65 million, or 20% of sales, in 1995.
International sales, primarily to customers located in Europe and
Asia, were $410 million, or 34% of total sales, in 1996. In 1995,
international sales, which were primarily to customers located in
Europe, totaled $103 million, or 32% of total sales, in 1995.
Sales to the U.S. market increased from $223 million, or 68% of total
sales, in 1995, to $803 million, or 66% of total sales, in 1996.
Gross Margin. The Company's gross margin percentage was 27.4% in
1996, as compared to 27.7% in 1995. Gross margins on Zip products
improved in 1996, as compared to 1995, due primarily to reductions in
per unit manufacturing overhead costs and component material costs
during 1996, and the absence of manufacturing start-up costs
associated with Zip products which were incurred in 1995. These cost
improvements were partially offset by price reductions on Zip products
resulting from a rebate program which began in July of 1996. The
ratio of disk sales to drive sales on Zip products was relatively
similar in 1996, as compared to 1995. Jaz product gross margins in
1996 were lower than those of Zip products, due primarily to a lower
ratio of disk sales to drive sales. Comparisons of Jaz gross margins
in 1996 to 1995 are not meaningful due to the introduction of Jaz
products in late 1995. Gross margins on Ditto products were similar
in 1996, as compared to 1995, as material and overhead cost reductions
were offset by price reductions.
Gross margins in 1997 will depend in large part on sales of Zip and
Jaz disks, which generate significantly higher gross margins than the
corresponding drives, and on the sales mix between disks and drives,
and between Zip, Ditto and Jaz products. Although the Company expects
the costs of Zip, Jaz and Ditto products to decline in the future as
production increases and the start-up costs associated with Jaz
products decrease, the gross margin percentages will depend in large
part on the Company's ability to achieve planned cost reductions, as
well as on recent and any future pricing actions. The Company's
ability to achieve planned cost reductions will depend in large part
on the success of the Company's efforts to shift manufacturing
capacity from the United States to Malaysia. Also, future gross
margin percentages will be impacted by the mix between OEM sales,
which generally provide lower gross margins than sales through other
channels, and retail sales, as well as other factors.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $133.5 million in 1996, as
compared to 1995, but declined as a percentage of sales from 17.5% in
1995 to 15.7% in 1996. Included in selling, general and
administrative expenses in 1996 was a one-time charge of $9.1 million
representing expenses associated with the transition of manufacturing
capacity currently in Roy, Utah to Penang, Malaysia and the relocation
of the Company's European headquarters to Geneva, Switzerland and its
European logistics and distribution function to Utrecht, the
Netherlands. Excluding this charge, selling, general and
administrative expenses would have increased by $124.4 million and
would have represented 15.0% of sales. The increased expenses in 1996
were primarily the result of advertising expenses incurred to increase
market awareness of Zip, Jaz and Ditto products, variable selling
expenses, and increased salaries and wages associated with increased
headcount in all areas of sales, marketing and administration.
Management expects selling, general and administrative expenses to
increase further in 1997 in absolute dollars due primarily to
increased advertising and promotional expenses in the United States,
Europe and Asia, as well as increased variable selling expenses and
increased fixed administrative expenses.
Research and Development Expenses. Research and development expenses
were 3.5% of sales in 1996, as compared to 6.0% in 1995. The decline
in percentages was due to the significant sales increase. The actual
dollar amount of research and development expenses increased by $22.5
million in 1996 as compared to 1995. This increase was primarily the
result of expenditures related to the development and enhancement of
Zip, Jaz and Ditto products, as well as development expenses related
to the recently announced "n(hand" product. Management expects
continued increases in research and development expenses in dollar
terms in 1997 as the result of planned increases in resources
dedicated to future product development and enhancement.
Other. The Company recorded interest income of $3.1 million in 1996,
as compared to $0.5 million in 1995, due to increased available cash
balances in 1996. Interest expense was $8.9 million in 1996, compared
to $1.7 million in 1995. This increase was due to the additional
interest expense associated with the convertible subordinated notes
issued in March 1996, increased borrowings under a financing agreement
in Europe, a promissory note financing a portion of the purchase price
of a manufacturing facility in Malaysia, and several new capitalized
lease obligations.
Income Taxes. For 1996, the Company recorded an income tax provision
of $36.7 million, representing an effective income tax rate of 39%.
The effective tax rate increased from 27% in 1995 due to the full
utilization of available tax credits and foreign net operating loss
carryforwards during 1996. The Company expects the effective income
tax rate to decline slightly in 1997, as compared to 1996, due to tax
advantages associated with the move of manufacturing capacity to
Malaysia and the move of its European headquarters from Germany to
Switzerland. However, differences between the currently anticipated
mix of foreign income versus domestic income, and the actual mix, will
have an impact on the effective tax rate that is recorded in future
years.
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.
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 percentage increased from 25.4% in the
third quarter of 1995 to 30.6% in the fourth quarter of 1995, which
was primarily attributable to an increase in sales of Zip disks, which
have significantly higher margins than drives, as a percentage of
total sales.
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 percentage decline 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.
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.
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 April 2, 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 and royalty payments received related to the Company's
Ditto products.
The Company recorded interest expense of $1.7 million in 1995 due to
borrowings on short-term credit lines, as well as capitalized lease
obligations. Interest income declined from $.9 million in 1994 to $.5
million in 1995 due to declining cash balances.
For 1995, the Company recorded a tax provision of $3.1 million
representing an effective income tax rate of 27%, which reflects
utilization of available tax credits and foreign net operating loss
carryforwards.
Liquidity and Capital Resources
At December 31, 1996, the Company had cash and cash equivalents of
$108.3 million, working capital of $269.7 million, and a ratio of
current assets to current liabilities of 1.94 to 1. During 1996, the
Company used $55.8 million to fund operations. The primary uses of
funds in operating activities were the growth in trade receivables of
$104.8 million and the growth in inventories of $73.2 million offset
by increases in accounts payable and accrued liabilities of $98.0
million. The Company used an additional $69.9 million in investing
activities during 1996, primarily for the purchase of property and
equipment. Cash generated from financing activities totaled $233.0
million in 1996.
Included in cash and cash equivalents provided from financing
activities was $43.1 million in net proceeds from the issuance of
convertible subordinated notes which were issued in March 1996 and
$191.2 million in net proceeds from a public offering of Common Stock
which was completed in June 1996. Also included in cash and cash
equivalents provided from financing activities was a $24.3 million
tax benefit for dispositions of employee stock. These proceeds were
offset by $23.8 million in net payments on notes payable and capital
lease obligations and $4.4 million used to repurchase 300,000 shares
of the Company's Common Stock. The primary component of cash used in
investing activities was $73.5 million used for the purchase of
property, plant and equipment. Net cash used in operating activities
included an increase of $104.8 million in trade receivables, $73.2
million in inventories and $24.0 million in other current assets.
These uses of cash and cash equivalents were offset by an increase in
accounts payable and accrued liabilities of $98.0 million.
On July 5, 1995, the Company entered into a loan agreement with Wells
Fargo Bank. Effective May 13, 1996, the Company renewed and amended
its loan agreement with Wells Fargo Bank. The amended agreement
permits revolving loans, term loans and letters of credit up to an
aggregate outstanding principal amount equal to the lesser of $100
million or 80% of eligible accounts receivable. Amounts outstanding
are collateralized by accounts receivable, inventory, equipment,
general intangibles and certain other assets. The Wells Fargo
revolving line bears interest at the bank's prime rate plus 0.5% and
the term loans bear interest at the bank's prime rate plus 0.75%.
This agreement expires June 30, 1997. Under this agreement, the
Company may also secure financing of equipment purchases from third
parties up to a maximum of $75 million, less term loans outstanding
to Wells Fargo Bank. Among other restrictions, covenants within the
agreement require the Company to maintain minimum levels of working
capital and net worth.
The Company is currently in the process of negotiating a $200 million
Senior Secured Credit Facility (Credit Facility) with J.P. Morgan
Securities, Inc., Citibank, N.A. and a syndicate of other lenders to
replace the current loan agreement with Wells Fargo Bank. This Credit
Facility is expected to be a three-year revolving line of credit
secured by U.S. and Canadian accounts receivable and a pledge of 66%
of the stock of the Company's subsidiaries. Borrowings under the
Credit Facility are expected to be limited to the lesser of 70% of
eligible accounts receivable or $200 million. The Credit Facility is
expected to initially bear interest at the LIBOR rate plus 1.25%.
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 amounts
outstanding under this agreement are due in March 1997.
The Company's balance sheet at December 31, 1996 reflected current
notes payable of $33.8 million, consisting of borrowings under the
German loan agreement of $26.7 million, term loans of $1.1 million,
and the short-term portion of financing to be entered into in
connection with the purchase of a manufacturing facility in Malaysia
of $6.0 million. At December 31, 1996, long-term notes payable
totaled $13.5 million, consisting of the long-term portion of the
financing agreement for the purchase of the facility in Malaysia of
$12.0 million, and other term loans of $1.5 million. The current and
long-term portions of capitalized lease obligations at December 31,
1996 were $4.1 million and $5.7 million, respectively.
The Company had $45.7 million of convertible subordinated notes
outstanding at December 31, 1996, which bear interest at 6.75% per
year and mature on March 15, 2001.
Net accounts receivable increased by $104.8 million in 1996, due
primarily to increased sales. Inventory increased by $73.2 million
due primarily to build-ups in manufacturing capacity in the United
States and Malaysia. The increase in inventory was almost entirely
reflected in increased finished goods as raw materials and
work-in-process remained relatively flat at the end of 1996 when
compared to the end of 1995. Other current assets increased by $24.0
million due primarily to an increase in value-added taxes receivable
in Europe resulting from higher shipments and inventory levels in
Europe. The value-added taxes are expected to be received in early
1997.
Additions to property and equipment during 1996 totaled $101.8
million, offset by $10.4 million in proceeds from capital leases and
$18.0 million in seller financing for the manufacturing facility in
Malaysia. These additions were primarily related to increased
manufacturing capacity for Zip, Jaz and Ditto products, including
$28.0 million for the manufacturing facility in Malaysia. The Company
expects property and equipment additions to be less significant in
future quarters.
The Company expects that its balance of cash and cash equivalents,
together with current and future sources of available financing, will
be sufficient to fund the Company's operations during 1997.
Thereafter, the Company may require additional funds to finance its
operations. The precise amount and timing of the Company's future
financing needs cannot be determined at this time, and will depend on
a number of factors, including the market demand for the Company's
products, the success of the Company's strategy to transfer
manufacturing capacity to Malaysia, the availability of critical
components, the progress of the Company's product development efforts,
the success of the Company in improving its inventory management, the
Company's management of its cash and accounts payable, and the
Company's ability to renew or replace its currently available debt.
Factors Affecting Future Operating Results
This Annual Report contains a number of forward-looking statements,
including, without limitation, statements contained in this report
relating to management's capability to lead the Company in the future,
the desire to build a multi-billion dollar company and achieve greater
accomplishments than Iomega has achieved historically, the ability to
extend Iomega's competitive position, the anticipated availability of
n-hand late in 1997, and the expected pricing of that product, the
planned production of Zip drives for laptop computers, planned
improvements in inventory management, improvements in customer
satisfaction, the expected adequacy of cash resources, the anticipated
decline in the Company's effective tax rate and any other statements
contained herein to the effect that the Company or its management
"believes", "expects", "anticipates", "plans" and similar expressions.
There are a number of important factors that could cause actual events
or the Company's actual results to differ materially from those
indicated by such forward-looking statements. These factors include,
without limitation, those set forth below.
Because the Company is relying on its Zip and Jaz products for the
substantial majority of its sales in 1997, 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 the preferred 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, including the LS-120
(product of the consortium of Compaq Computer, Imation and MKE) and EZ
Flyer 230 and SyJet 1.5 GB (products of Syquest Technology, Inc.), the
success of the Company in establishing OEM arrangements, the
willingness of OEMs to promote the products containing the Company's
drives, the ability of the Company to create demand for Zip and Jaz
with leading personal computer manufacturers, the success of the
Company in educating consumers about the existence and possible uses
of Zip and Jaz products as storage devices, and the success of the
Company's plans to improve customer satisfaction and provide quicker
turnaround on its rebate programs. In addition, component shortages
or other factors affecting the supply of the Company's products,
including any difficulties encountered during the transfer of
manufacturing capacity to the Company's new facility in Malaysia,
could limit the Company's sales and provide an opportunity for
competing products to achieve market acceptance.
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 the
sales mix between disks and drives is below levels anticipated by the
Company, 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.
Future market demand for the Company's products cannot be predicted
with certainty. Sales of Zip products in 1995, and Zip and Jaz
products in 1996, were the primary reasons for the Company's revenue
growth in these periods. However, these sales may not be indicative
of the long-term demand for such products. Accordingly, the sales
growth experienced by the Company in 1995 and 1996 should not be
assumed to be an indication of future sales. Moreover, in light of
the Company's revenue growth in 1995 and 1996, 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 Conmpany has experienced and
may in the future experience significant fluctuations in its
quarterly operating results.
The Company's European sales are predominantly denominated in foreign
currencies. The Company enters into forward exchange contracts to
sell foreign currencies as a means of hedging its foreign operating
requirements. Fluctuations in the value of foreign currencies
relative to the U.S. dollar could result in foreign currency gains and
losses.
Other factors that could cause actual events or actual results to
differ materially from those indicated by such forward-looking
statements include the ability of management to manage growth and an
increasingly complex business, market demand for personal computers
with which the Company's products are used, manufacturing capacity,
component availability, transportation and quality issues, product
and component pricing, competition, intellectual property rights,
litigation, and general economic conditions.
<TABLE>
Financial Conditions and Trends
December 31, (in thousands) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and temporary
investments $108,312 $ 1,023 $ 19,793 $ 18,804 $ 19,691
Trade receivables, net 210,733 105,955 18,892 21,685 15,482
Inventories 171,920 98,703 17,318 13,572 18,546
Total assets 686,142 266,227 75,833 81,089 86,955
Current portion of notes payable 33,770 47,640 - - -
Accounts payable and accrued liabilities 249,099 151,087 25,739 29,023 20,994
Current portion of capital lease obligations 4,114 782 - - 11
Working capital 269,685 12,623 34,818 30,550 35,038
Long-term obligations 19,176 4,032 1,031 976 926
Convertible subordinated notes 45,733 - - - -
Property, plant and equipment
additions during year 73,457 45,232 7,083 6,567 12,980
-------- -------- -------- -------- --------
</TABLE>
Securities
Iomega Common Stock is traded on the New York Stock Exchange under the
symbol IOM (prior to November 8, 1996, the Company's Common Stock was
traded on the Nasdaq National Market under the symbol of IOMG). As of
December 31, 1996, there were 5,003 holders of record of Common Stock.
The Company has not paid dividends on its Common Stock in the past and
has no present intention to do so in the future. The following table
reflects the high and low sales prices for 1996 and 1995,
retroactively adjusted for stock splits (see Note 2 to Consolidated
Financial Statements). The Company's loan agreements prohibit the
payment of dividends without the prior written consent of the banks.
<TABLE>
Price Range of Common Stock
1996 1995
High Low High Low
<S> <C> <C> <C> <C>
1st Quarter $13.63 $ 5.71 $ 1.30 $ 0.54
2nd Quarter 55.13 12.31 4.35 1.16
3rd Quarter 30.38 12.63 5.00 3.39
4th Quarter 26.88 15.50 8.96 2.75
</TABLE>
<PAGE>
<TABLE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
December 31, December 31,
1996 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 108,312 $ 1,023
Trade receivables, less allowance
for doubtful accounts of $8,992
and $1,861, respectively 210,733 105,955
Inventories 171,920 98,703
Deferred tax assets 38,059 2,778
Other current assets 27,644 3,673
---------- ----------
Total current assets 556,668 212,132
---------- ----------
Property, plant and equipment, at cost:
Machinery and equipment 133,146 67,812
Building 21,517 -
Leasehold improvements 12,334 6,475
Furniture and fixtures 9,155 4,805
Construction in process 10,973 24,057
---------- ----------
187,125 103,149
Less: Accumulated depreciation and
amortization (61,083) (49,779)
---------- ----------
126,042 53,370
---------- ----------
Other assets 3,432 725
---------- ----------
$ 686,142 $ 266,227
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets.
<TABLE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands, except share data)
December 31, December 31,
1996 1995
<S> <C> <C>
Current liabilities:
Current portion of notes payable $ 33,770 $ 47,640
Accounts payable 145,844 94,782
Bank overdraft - 11,833
Accrued payroll, vacation and bonus 17,731 9,716
Deferred revenue 15,677 3,207
Other accrued liabilities 69,847 31,549
Current portion of capitalized lease
obligations 4,114 782
---------- ----------
Total current liabilities 286,983 199,509
---------- ----------
Capitalized lease obligations, net of current
portion 5,711 1,481
---------- ----------
Notes payable, net of current portion 13,465 2,551
---------- ----------
Convertible subordinated notes, 6.75%,
due 2001 45,733 -
---------- ----------
Commitments and contingencies (Note 4)
Stockholders' equity:
Preferred Stock, $0.01 par value;
authorized 4,750,000 shares, none
issued - -
Series C Junior Participating Preferred
Stock; authorized 250,000 shares,
none issued - -
Common Stock, $.03( par value; authorized
150,000,000 shares; issued
128,277,426 and 117,638,670 shares,
respectively 4,275 3,921
Additional paid-in capital 268,426 49,512
Less: 300,000 Common Stock treasury shares,
at cost (4,363) -
Deferred compensation (669) -
Retained earnings 66,581 9,253
---------- ----------
Total stockholders' equity 334,250 62,686
---------- ----------
$ 686,142 $ 266,227
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets.
<TABLE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Sales $1,212,769 $ 326,225 $ 141,380
Cost of sales 879,989 235,838 92,453
---------- ---------- ----------
Gross margin 332,780 90,387 48,927
---------- ---------- ----------
Operating expenses:
Selling, general and administrative 190,719 57,189 36,862
Research and development 42,101 19,576 15,438
Restructuring accrual reversal - - (2,491)
---------- ---------- ----------
Total operating expenses 232,820 76,765 49,809
---------- ---------- ----------
Operating income (loss) 99,960 13,622 (882)
Interest income 3,080 537 871
Interest expense (8,875) (1,652) (15)
Other income (expense) (182) (868) 52
---------- ---------- ----------
Income before income taxes 93,983 11,639 26
Provision for income taxes 36,655 3,136 1,908
---------- ---------- ----------
Net income (loss) $ 57,328 $ 8,503 $ (1,882)
========== ========== ==========
Net income (loss) per common share $ 0.43 $ 0.07 $ (0.02)
========== ========== ==========
Weighted average common shares
outstanding 133,738 120,360 110,838
========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<TABLE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Notes
Receivable Additional
Common Stock From Paid-In Deferred Retained Treasury
Shares Amount Stockholders Capital Compensation Earnings Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 110,171,088 $ 3,672 $ (597) $ 57,068 $ - $ 2,744 $(11,797) $ 51,090
Sale of shares pursuant to
exercise of stock options
at an average price of
$0.28 cash per share 947,406 32 - 224 - - - 256
Purchase of 780,000 shares at
an average price of $0.39
cash per share - - - - - - (305) (305)
Accretion of Series A Convert-
ible Preferred Stock
redemption premium - - - (55) - - - (55)
Dividends on Series A Convert-
ible Preferred Stock - - - - - (77) - (77)
Tax benefit from dispositions
of employee stock - - - 28 - - - 28
Recognition of compensation
from Employee Stock
Purchase Plan - - - 8 - - - 8
Issuance of 30,342 treasury
shares under Employee
Stock Purchase Plan - - - (17) - - 17 -
Five-for-four Common Stock
split effected in the
form of a 25% stock div-
idend - - - (12,085) - - 12,085 -
Net loss - - - - - (1,882) - (1,882)
----------- ------- ------ -------- ------ -------- -------- ---------
Balances at December 31, 1994 111,118,494 3,704 (597) 45,171 - 785 - 49,063
Sale of shares pursuant to
exercise of stock options
at an average price of
$0.42 cash per share 4,859,502 162 - 1,864 - - - 2,026
Sale of shares to an officer
at an average price of
$0.29 per share for a
note receivable 993,750 33 (283) 250 - - - -
Accretion of Series A Convert-
ible Preferred Stock
redemption premium - - - (14) - - - (14)
Dividends on Series A Convert-
ible Preferred Stock - - - - - (35) - (35)
Tax benefit from dispositions
of employee stock - - - 860 - - - 860
Recognition of compensation
from Employee Stock
Purchase Plan - - - 185 - - - 185
Conversion of Series A Convert-
ible Preferred Stock to
Common Stock 637,200 22 - 1,183 - - - 1,205
Issuance of Common Shares
under Employee Stock
Purchase Plan 29,724 - - 13 - - - 13
Collection of notes receivable
from stockholders - - 880 - - - - 880
Net income - - - - - 8,503 - 8,503
----------- ------- ------ -------- ------ -------- -------- ---------
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<TABLE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
(In thousands, except share data)
Notes
Receivable Additional
Common Stock From Paid-In Deferred Retained Treasury
Shares Amount Stockholders Capital Compensation Earnings Stock Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 117,638,670 $ 3,921 $ - $ 49,512 $ - $ 9,253 $ - $ 62,686
Sale of shares pursuant to
exercise of stock options
at an average price of
$0.51 cash per share 4,845,704 161 - 2,307 - - - 2,468
Tax benefit from dispositions
of employee stock - - - 24,335 - - - 24,335
Deferred compensation related
to Executive Compensation
Agreement - - - 1,005 (1,005) - - -
Amortization of deferred
compensation - - - - 336 - - 336
Purchase of 300,000 Common
Shares at an average
price of $14.54 cash per
share - - - - - - (4,363) (4,363)
Net proceeds from public
offering of Common Stock 5,750,000 192 - 190,958 - - - 191,150
Conversion of convertible
subordinated notes to
Common Shares 27,034 1 - 266 - - - 267
Recognition of compensation
from Employee Stock
Purchase Plan - - - 43 - - - 43
Issuance of Common Shares
under Employee Stock
Purchase Plan 16,018 - - - - - - -
Net income - - - - - 57,328 - 57,328
----------- ------- ------ --------- ------ -------- -------- ---------
Balances at December 31, 1996 128,277,426 $ 4,275 $ - $ 268,426 $ (669) $ 66,581 $ (4,363) $ 334,250
=========== ======= ====== ========= ====== ======== ======== =========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<TABLE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 57,328 $ 8,503 $ (1,882)
Non-cash revenue and expense adjustments:
Depreciation and amortization expense 24,650 8,943 6,853
Deferred income tax provision (benefit) (34,761) (2,821) 4,508
Change in restructuring reserves - - 1,590
Other 975 926 (314)
Changes in assets and liabilities:
Trade receivables (net) (104,778) (87,063) 2,793
Inventories (73,217) (81,385) (3,747)
Other current assets (23,971) (1,278) (1,135)
Accounts payable 51,062 87,554 161
Accrued liabilities 46,950 39,631 (3,516)
Net cash provided by (used in) ---------- ---------- ----------
operating activities (55,762) (26,990) 5,311
---------- ---------- ----------
Cash flows from investing activities:
Purchase of property, plant and equipment (73,457) (45,232) (7,083)
Proceeds from sale of assets 3,906 - 2,792
Purchase of temporary investments - (2,090) (8,825)
Sale of temporary investments - 5,022 5,893
Net increase in other assets (358) (205) (10)
Net cash used in investing ---------- ---------- ----------
activities (69,909) (42,505) (7,233)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from sales of Common Stock 2,468 2,028 256
Proceeds from issuance of notes payable 834,473 259,667 -
Payments on notes payable and capitalized
lease obligations (858,234) (209,748) -
Proceeds from issuance of convertible
subordinated notes, net of offering
costs of $2,869 43,131 - -
Proceeds from issuance of public offering
of Common Stock, net of offering
costs of $10,099 191,150 - -
Tax benefit from dispositions of employee
stock 24,335 860 28
Redemption of Preferred Stock - (30) -
Purchase of Common Stock (4,363) - (305)
Proceeds from notes receivable from
stockholders - 880 -
Net cash provided by (used in) ---------- ---------- ----------
financing activities 232,960 53,657 (21)
---------- ---------- ----------
Net change in cash and cash equivalents 107,289 (15,838) (1,943)
Cash and cash equivalents at beginning
of year 1,023 16,861 18,804
---------- ---------- ----------
Cash and cash equivalents at end of year $ 108,312 $ 1,023 $ 16,861
========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
<TABLE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
Years Ended December 31,
1996 1995 1994
<S> <C> <C> <C>
Supplemental schedule of non-cash
investing and financing activities:
Sale of Common Stock for a note $ - $ 283 $ -
========== ========== ==========
Conversion of Series A Preferred Stock
to Common Stock $ - $ 1,205 $ -
========== ========== ==========
Property, plant and equipment financed
under note payable and capitalized
lease obligations $ 28,367 $ 2,535 $ -
========== ========== ==========
Conversion of convertible subordinated
notes to Common Stock $ 267 $ - $ -
========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Operations
The Company designs, manufactures and markets innovative data storage
solutions, based on removable-media technology, for personal computer
users. The Company's primary data storage solutions include disk
drives marketed under the trademarks Zip and Jaz and a family of tape
drives marketed under the trademark Ditto. Retail outlets for the
Company's products include mail order catalogs, computer superstores,
office supply superstores and specialty 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 and value added reseller arrangements that
provide for certain of the Company's products to be incorporated in
new computer and other systems at the time of purchase.
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 a portion of its sole source and
limited source components and equipment pursuant to purchase orders
without 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 a material adverse effect on
operating results.
Manufacturing Relationships
The Company uses independent parties to manufacture for the Company,
on a contract basis, a 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 arrangements could cause a delay in manufacturing and
a possible loss of sales, which would have a material adverse effect
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
The Company's customers include original equipment manufacturers, end
users, retailers and distributors. Revenue, less reserves for returns,
is generally recognized upon shipment to the customer.
In addition to reserves for returns, the Company defers recognition of
revenue on estimated excess inventory in the distribution and retail
channels. For this purpose, excess inventory is the amount of
inventory which exceeds the channels' 30 day requirements as
estimated by management. The gross margin associated with deferral of
revenue for returns and estimated excess channel inventory totaled
$15.7 million, $3.2 million and $1.9 million at December 31, 1996, 1995
and 1994, respectively, and is included in deferred revenue in the
accompanying consolidated balance sheets.
Price Protection and Volume Rebates
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.
In addition, the Company records reserves at the time of shipment for
estimated volume rebates. These reserves for volume rebates and price
protection credits totaled $17.0 million, $1.6 million and $0.2 million
at December 31, 1996, 1995 and 1994, respectively, and are netted
against accounts receivable in the accompanying consolidated balance
sheets.
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>
December 31,
1996 1995
<S> <C> <C>
Raw materials $ 88,728 $ 89,030
Work-in-process 14,004 5,680
Finished goods 69,188 3,993
---------- ----------
$ 171,920 $ 98,703
========== ==========
</TABLE>
Property, Plant and Equipment
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 resulting gain or
loss is included in the determination of income. Depreciation is
provided based on the straight-line method over the following estimated
useful lives of the property:
Machinery and equipment 2 - 5 years
Leasehold improvements 5 years
Furniture and fixtures 10 years
Buildings 25 years
Advertising
The Company expenses the cost of advertising the first time the
advertising takes place, except cooperative advertising with
distributors and retailers, which is accrued at the time of sale. For
the years ended December 31, 1996, 1995 and 1994, advertising expenses
totaled approximately $70.0 million, $10.6 million and $6.3 million,
respectively.
Bank Overdraft
The bank overdraft in 1995 represents those checks which had been
disbursed to vendors but had not been presented to the bank for
clearance and were in excess of funds in the account. Upon presentment
to the bank, the bank overdraft was funded by the revolving line of
credit, thereby reducing the availability under the line (See Note 5).
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-year limited warranty is generally provided on the Ditto drives
and media. A two to five-year limited warranty is generally provided
on Bernoulli disk drives and disk drive subsystems.
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 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. The deferred tax assets are
reviewed for recoverability and valuation allowances are provided as
necessary.
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.
There were no temporary investments at December 31, 1996 and 1995.
Cash equivalents primarily consist of investments in money market
mutual funds, commercial paper, option rate preferred stock and
taxable municipal bonds and notes and are recorded at cost which
approximates market.
Fair Value of Financial Instruments
The fair value of the convertible subordinated notes was approximately
$86.4 million at December 31, 1996. The book value of all other
financial instruments approximates fair value. The estimated fair
values have been determined using appropriate market information and
valuation methodologies.
Recent Accounting Pronouncement
The Company adopted Statement of Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" (SFAS No. 121) in 1996. There was no
material impact on the Company's financial position or results of
operations as a result of the adoption of SFAS No. 121.
Reclassifications
Certain reclassifications have been made in prior years' consolidated
financial statements to conform to the current year's presentation.
(2) STOCK SPLITS
In October 1994, the Company's Board of Directors declared a five-for-
four Common 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. Of the shares of Common Stock
distributed by the Company in connection with the November 1994 stock
split, approximately 18,102,000 were treasury shares and the remainder
were 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.
In December 1995, the Board of Directors declared a three-for-one
Common Stock split which was effected in the form of a 200% Common
Stock dividend paid on January 31, 1996 to stockholders of record at
the close of business on January 15, 1996.
On April 23, 1996, the Board of Directors declared a two-for-one Common
Stock split which was effected in the form of a 100% Common Stock
dividend paid on May 20, 1996 to stockholders of record at the close
of business on May 6, 1996.
Each of these stock splits was accounted for as a stock split and 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.
<TABLE>
(3) INCOME TAXES
Income before income taxes consisted of the following:
December 31,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
U.S. $ 88,095 $ 10,761 $ 208
Non-U.S. 5,888 878 (182)
---------- ---------- ----------
$ 93,983 $ 11,639 $ 26
========== ========== ==========
</TABLE>
<TABLE>
The income tax provision consists of the following:
December 31,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Current Income Taxes:
Federal $ 36,341 $ 4,158 $ (1,217)
State 4,153 805 (208)
Foreign 1,278 156 -
---------- ---------- ----------
41,772 5,119 (1,425)
---------- ---------- ----------
Deferred Income Taxes:
Federal 201 (189) 6
State 23 (47) -
Foreign 6,000 - -
Change in valuation allowance (11,341) (1,747) 3,327
---------- ---------- ----------
(5,117) (1,983) 3,333
---------- ---------- ----------
Provision for income taxes $ 36,655 $ 3,136 $ 1,908
========== ========== ==========
</TABLE>
The tax benefits associated with nonqualified stock options and early
dispositions of incentive stock options reduced taxes currently payable
by $24,335,000, $860,000 and $28,000 in 1996, 1995 and 1994,
respectively. Such benefits were recorded as an increase to additional
paid-in capital.
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:
<TABLE>
December 31,
1996 1995
(In thousands)
<S> <C> <C>
Deferred tax assets:
Accounts receivable reserves $ 9,094 $ 1,158
Inventory reserves 1,928 2,378
Fixed asset reserves 558 64
Accrued expense reserves 26,751 7,188
Inventory unicap adjustment 471 375
Foreign net operating loss carryover - 1,921
Tax credit carryover - 1,273
Other 307 552
---------- ----------
Total deferred tax assets 39,109 14,909
Valuation allowance - (11,341)
---------- ----------
Deferred tax assets net of
valuation allowance 39,109 3,568
Deferred tax liabilities:
Accelerated depreciation (1,050) (270)
---------- ----------
Net deferred tax assets $ 38,059 $ 3,298
========== ==========
</TABLE>
<TABLE>
The differences between the provision for income taxes at the U.S.
statutory rate and the effective rate, are summarized as follows:
December 31,
1996 1995 1994
(In thousands)
<S> <C> <C> <C>
Provision at U.S. statutory rate $ 32,894 $ 3,957 $ 9
Change in transfer price - - (1,400)
Non-deductible items 1,566 95 -
State income taxes 4,923 596 22
Increase (decrease) in deferred asset
valuation allowance (11,341) (1,747) 3,327
Foreign income taxes 7,610 156 -
Other 1,003 79 (50)
---------- ---------- ----------
Provision for income taxes $ 36,655 $ 3,136 $ 1,908
========== ========== ==========
</TABLE>
Cash paid for income taxes was $48,958,000 in 1996, $71,000 in 1995,
and $94,000 in 1994.
(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 a substantial portion of its operations from
leased facilities and leases certain equipment used in its operations.
Aggregate lease commitments under noncancelable operating leases in
effect at December 31, 1996 are as follows (in thousands):
<TABLE>
Lease
Years Ending December 31, Commitments
<S> <C>
1997 $ 4,349
1998 3,779
1999 3,405
2000 3,048
2001 1,720
Thereafter 6,499
--------
$ 22,800
========
</TABLE>
Total rent expense for the years ended December 31, 1996, 1995 and
1994 was approximately $3.8 million, $2.0 million and $2.0 million,
respectively.
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, 1996 (in thousands):
<TABLE>
Future Minimum
Years Ending December 31, Lease Payments
<S> <C>
1997 $ 4,813
1998 4,561
1999 1,430
2000 125
2001 6
---------
Total net minimum lease payments 10,935
Less amount representing interest (1,110)
---------
Present value of net minimum lease
payments 9,825
Less: current portion (4,114)
---------
$ 5,711
=========
</TABLE>
Cash Bonus Plan
The Company has adopted a bonus plan that provides for bonus payments
to officers and key employees. At December 31, 1996, the Company has
accrued $5.9 million for management bonuses which will be paid in
February 1997. At December 31, 1995, approximately $3.0 million was
accrued for management bonuses, the majority of which was paid in
March 1996.
Executive Compensation Agreement
In 1995, the Company adopted a bonus plan for the Chief Executive
Officer (CEO) that provided for bonus payments of cash and up to
120,000 shares of stock, subject to a three-year vesting schedule,
contingent upon the achievement of certain objectives. The cash
payment was fully accrued at December 31, 1995 and paid during 1996.
In January 1996, the Compensation Committee approved the issuance of
the full 120,000 shares of stock. The shares will be issued at a cost
equal to par value. In January 1997, 40,000 vested shares were issued
to the CEO. Compensation related to these shares has been reflected
in the accompanying consolidated financial statements.
Profit Sharing Plan
The Company has a profit sharing plan that provides for payments to
all eligible employees of their share of a pool that is based on 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. A portion
of the profit sharing is paid on a quarterly basis. Approximately
$900,000 was paid to employees during 1996. The Company has accrued
approximately $1,000,000 for the remaining 1996 profit sharing plan
liability, which will be paid in February 1997. The Company paid
approximately $600,000 in profit sharing for fiscal 1995. There were
no profit sharing payments for fiscal 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.
The outstanding forward exchange sale contracts at December 31, 1996
are as follows. The contracts mature in March 1997.
<TABLE>
Contracted
Forward
Amount Rate
<S> <C> <C>
German Mark 2,500,000 1.55
French Franc 4,300,000 5.22
Spanish Peseta 204,000,000 131.27
Italian Lira 1,300,000,000 1,532.33
Dutch Guilder 24,000,000 1.74
British Pound 1,900,000 1.67
</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, 1996 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 ("Wells Fargo Bank").
Effective May 13, 1996, the Company renewed and amended its loan
agreement with Wells Fargo Bank. The amended agreement permits
revolving loans, term loans and letters of credit up to an aggregate
outstanding principal amount equal to the lesser of $100 million or
80% of eligible accounts receivable. Amounts outstanding are
collateralized by accounts receivable, inventory and equipment, general
intangibles and certain other assets. The revolving credit line bears
interest at the bank's prime rate plus 0.5% and the term loans bear
interest at the bank's prime rate plus 0.75%. This agreement expires
June 30, 1997. Under this agreement, the Company may also secure
financing of equipment purchases from third parties up to a maximum of
$75 million, less term loans outstanding to Wells Fargo Bank. Total
availability under the Wells Fargo Bank agreement at December 31, 1996
was $99.8 million, of which none was outstanding. The maximum amount
outstanding during 1996 was $58.5 million. Outstanding revolving and
term loans were paid off in June 1996 with proceeds from a public
offering of Common Stock. The weighted average outstanding balance
was $34.8 million during the period that the loans were outstanding in
1996. The weighted average interest rate was 9.8% for the year ended
December 31, 1996. Among other restrictions, covenants within the
agreement require the Company to maintain minimum levels of working
capital and net worth and certain restrictions on dividends.
Loss of the Wells Fargo facility or another replacement facility would
require the Company to find an alternative source of funding, which
could have a material adverse effect on business and financial results.
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 original
agreement expired in November 1996, however, the Company secured an
extension through March 1997. 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 weighted average interest rate
was 8.5% for the year ended December 31, 1996. At December 31, 1996,
$26.7 million was outstanding and is included in notes payable in the
accompanying consolidated balance sheet.
Promissory Note on Malaysian Manufacturing Facility
In September 1996, the Company entered into an agreement with Quantum
Corporation to finance a portion of the purchase price of building and
equipment associated with a manufacturing facility in Penang, Malaysia.
Even though the Company is occupying and utilizing the facility, the
promissory note reflecting the portion of the purchase price being
financed will not be signed or finalized until after receipt of
approval of the sale by the Malaysian government, which the Company
anticipates will occur during the first quarter of 1997. However,
since the Company is utilizing the facilities, the assets and related
obligation have been reflected in the accompanying financial
statements. The amount financed under this agreement totals $18
million, bears interest at 8.5%, and is payable over a three-year
period. Security under this agreement will be comprised of the
building and equipment which were purchased. The agreement will
require the Company to maintain minimum levels of working capital and
net worth and restrictions on maximum levels of indebtedness.
Other Term Notes
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.
The following table summarizes the notes payable outstanding at
December 31, 1996 (in thousands):
<TABLE>
<S> <C>
European agreement $ 26,684
Promissory note 18,000
Other term notes 2,551
----------
47,235
Less: current portion (33,770)
----------
$ 13,465
==========
</TABLE>
<TABLE>
Maturities of notes payable by year are as follows (in thousands):
Years Ending December 31,
<S> <C>
1997 $ 33,770
1998 7,219
1999 6,246
----------
$ 47,235
==========
</TABLE>
Cash paid for interest was $8,854,000 and $970,000 in 1996 and 1995,
respectively, including interest on capital leases. There was no
outstanding debt in 1994. Included in interest expense for 1996 and
1995, respectively, was $986,000 and $267,000 of amortization of
deferred charges associated with obtaining the debt.
(6) CONVERTIBLE SUBORDINATED NOTES
In March 1996, the Company issued $46.0 million of convertible
subordinated notes. The net proceeds from the issuance of the notes
totaled $43.1 million and were used to pay down other debts and for
operating requirements. The notes bear interest at 6.75% per year and
interest payments are payable semi-annually on March 15 and September
15 in each year which commenced on September 15, 1996. The notes
mature on March 15, 2001. The notes are unsecured and subordinated to
all existing and future senior indebtedness of the Company and are
effectively subordinated to all existing and future indebtedness and
other liabilities of the Company's subsidiaries.
The notes are convertible into Common Stock of the Company at the
option of the holder at or before maturity, unless previously redeemed
or repurchased, at a conversion price of $9.875 per share (equivalent
to a conversion rate of approximately 101.26 shares per $1,000
principal amount of notes), subject to adjustment in certain events.
At December 31, 1996, holders have converted $267,000 of convertible
subordinated notes into 27,034 shares of Common Stock.
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, 102.7% for 1999 and 101.35% for 2000, together with
accrued interest, if any, to the redemption date.
If any repurchase event, as defined in the indenture agreement,
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.
(7) PREFERRED STOCK
The Company has authorized the issuance of up to 5,000,000 shares of
Preferred Stock, $0.01 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. At December 31, 1996, 250,000 shares were
designated as Series C Junior Participating Preferred Stock and the
remaining 4,750,000 shares were undesignated.
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 (Series C Stock) in
connection with its Shareholder Rights Plan (see Note 8). Each share
of the Series C Stock will: (1) have a liquidation preference of $750
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 750
votes per share.
(8) PREFERRED STOCK PURCHASE RIGHTS
In July 1989, the Company adopted a Shareholder Rights Plan and
declared a dividend of two-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.
(9) STOCK COMPENSATION PLANS
At December 31, 1996, the Company has five stock-based compensation
plans which are described below. The Company applies Accounting
Principles Board Opinion No. 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its fixed stock option plans. Had compensation cost
for the Company's five stock-based compensation plans been determined
based on the fair value of the option at the grant dates for awards
under those plans consistent with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), the Company's net income and net income per common share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
1996 1995
<S> <C> <C>
Net income (000's) As reported $ 57,328 $ 8,503
========== ==========
Pro forma $ 54,351 $ 8,260
========== ==========
Net income per common share As reported $ 0.43 $ 0.07
========== ==========
Pro forma $ 0.41 $ 0.07
========== ==========
</TABLE>
Because the SFAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995, and due to the nature and
timing of option grants, the resulting pro forma compensation cost may
not be indicative of future years.
Stock Price
The fair value of each option grant has been estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions used for grants in 1996 and 1995, in calculating
compensation cost: expected stock price volatility of 67 and 62
percent, respectively, and a risk-free interest rate of 5.65%, and an
expected life of six years for both 1996 and 1995.
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
41,250,000 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, 1996, the Company had reserved an aggregate of
17,717,666 shares of Common Stock for issuance upon exercise of
options granted or to be granted under these plans.
The following table presents the aggregate options granted, forfeited,
and exercised under the 1981 and 1987 Option Plans for the years ended
December 31, 1996 and 1995 at their respective weighted average
exercise prices. All options and option prices have been restated for
the stock splits in Note 2.
<TABLE>
1996 1995
Shares Weighted Avg. Shares Weighted Avg.
Stock Options (000's) Exercise Price (000's) Exercise Price
------ -------------- ------- --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 11,664 $ 0.88 14,722 $ 0.45
Granted 3,907 10.90 2,002 2.85
Exercised (4,552) 0.52 (4,946) 0.41
Forfeited (128) 5.05 (114) 0.71
------ ------
Outstanding at end of year 10,891 4.64 11,664 0.88
====== ======
Options exercisable at year-end 3,402 0.73 6,137 0.72
Weighted average fair value of
options granted during the
year $ 23.58 $ 5.72
</TABLE>
Options to purchase 5,456,614 shares were reserved for future grant at
December 31, 1996.
At the beginning of the year ended December 31, 1994, there were
14,098,338 shares outstanding at option prices ranging between $0.14
and $1.46 per share. During 1994, 4,409,250 shares were granted
ranging in price from $0.30 to $0.53 per share. Additionally, in
1994, 948,282 shares were exercised at prices between $0.14 and $0.40
per share, and 2,836,782 shares were forfeited at prices ranging from
$0.21 to $1.46 per share.
The following table summarizes information about options outstanding
under the 1981 and 1987 option plans at December 31, 1996. All
relevant data has been restated for the stock splits in Note 2.
<TABLE>
Options Outstanding Options Exercisable
--------------------------------------------------- -------------------------------
Number (000's) Weighted-Avg. Number (000's)
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
<S> <C> <C> <C> <C> <C>
$0.13 to $0.43 2,542 5.6 years $ 0.29 1,403 $ 0.28
$0.44 to $1.05 2,847 6.7 years 0.57 1,540 0.60
$1.06 to $6.29 2,953 8.5 years 4.46 421 2.14
$6.89 to $46.13 2,549 9.4 years 13.89 38 7.09
------ ------
$0.13 to $46.13 10,891 7.5 years 4.64 3,402 0.73
====== ======
</TABLE>
Director Stock Option Plans
The Company has a 1987 Director Stock Option Plan (the "1987 Director
Plan") and a 1995 Director Stock Option Plan (the "1995 Director
Plan"). The 1987 Director Plan has expired and no further options may
be granted under this plan; however, outstanding options previously
granted under this plan remain in effect. The 1987 and 1995 director
plans cover an aggregate of 2,700,000 shares of Common Stock. The
plans provide for the grant to each non-employee director of the
Company, on his initial election as a director, an option to purchase
shares of Common Stock. The 1987 Director Plan provided for 187,500
stock options per director, and the 1995 Director Plan provides for
37,500 stock options per director. Under both plans, 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 options granted under either plan must
be exercised no later than ten years from the date of grant. All
options granted under the plans are nonstatutory options. At December
31, 1996, the Company had reserved an aggregate of 1,643,500 shares for
issuance upon exercise of options granted or to be granted under these
plans.
There have been no options granted under the 1995 Director Plan
through December 31, 1996. The following table presents the options
granted, forfeited, and exercised under the 1987 Director Plan for the
years ended December 31, 1996 and 1995 at their respective weighted
average exercise prices. All options and option prices have been
restated for the stock splits in Note 2.
<TABLE>
1996 1995
Shares Weighted Avg. Shares Weighted Avg.
Stock Options (000's) Exercise Price (000's) Exercise Price
<S> <C> <C> <C> <C>
Outstanding at beginning of year 750 $ 0.39 1,200 $ 0.40
Granted - - - -
Exercised (307) 0.38 (450) 0.42
Forfeited - - - -
----- -----
Outstanding at end of year 443 0.40 750 0.39
===== =====
Options exercisable at year-end 144 0.52 338 0.44
</TABLE>
At the beginning of the year ended December 31, 1994, there were
1,012,500 shares outstanding at option prices ranging between $0.29
and $0.59 per share. During 1994, 375,000 shares were granted at an
exercise price of $0.27 per share and 187,500 shares were exercised at
$0.29 per share. There were no shares forfeited during 1994.
At December 31, 1996, options to purchase 1,200,000 shares were
reserved for future grant under the 1995 Director Plan.
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 187,500 shares
of Common Stock, pursuant to a distinct option plan. The exercise
price of these options was $0.20 per share in the case of four
options, and $0.24 per share in the case of the other option. Each
option is exercisable in increments of 37,500 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 acquired under this plan to purchase 487,500 shares were
exercised at $0.20 and $0.24 per share. There were no options
outstanding at December 31, 1996 or 1995.
(10) STOCK PURCHASE PLAN
Under the 1991 Stock Purchase Plan, eligible employees were allowed to
purchase Common Stock at market value on the date coincident with the
distribution of the semi-annual profit sharing payments during 1991,
1992 and 1993. The employee earns a premium equal to 25% of their
original purchase on each of the 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 9,000,000 shares were
approved for the three-year plan with 1,500,000 shares plus the
premium of 1,500,000 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. At December 31, 1996, a
total of 261,846 shares have been purchased pursuant to this plan and
a total of 98,758 of premium shares have been issued under this plan.
(11) 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 other employer matching
contributions become vested over five years. The Company contributed
approximately $671,000 and $319,000 to the IRIS Plan for the years
ended December 31, 1995 and 1994, respectively. The Company has
accrued $800,000 for contribution to the IRIS Plan for the year ended
December 31, 1996.
(12) OPERATIONS BY GEOGRAPHIC REGION
The Company has several geographic regions: domestic, Asian and
European. During the first half of 1996, the Company opened a sales
office and distribution center in Singapore to support the existing
customer base in Asia and further develop the sales region. All sales
to Asian customers are denominated in U.S. dollars. In late 1996, the
Company entered into an agreement to purchase a manufacturing facility
in Malaysia and is transferring manufacturing capacity and equipment
to this facility. All sales from Malaysia are to affiliated companies.
Domestic operations include all U.S. operations, including export
sales, primarily to Canada. Domestic export sales for the years ended
December 31, 1996, 1995 and 1994 were $3.8 million, $18.2 million and
$6.1 million, 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 European 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,
1996, 1995 and 1994 were approximately $193.8 million, $49.5 million
and $29.9 million, respectively, primarily to European countries other
than Germany. Sales to the 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, 1996 (in thousands):
<TABLE>
Domestic Asian European Intercompany
Operations Operations Operations Transactions Consolidated
<S> <C> <C> <C> <C> <C>
Net Sales:
Unaffiliated Customers $ 806,863 $ 109,625 $ 296,281 $ - $1,212,769
Affiliates 325,384 66,481 - (391,865) -
Cost of Sales (861,658) (153,781) (255,988) 391,438 (879,989)
---------- ---------- ---------- ---------- ----------
Gross Margin 270,589 22,325 40,293 (427) 332,780
---------- ---------- ---------- ---------- ----------
Operating Expenses 186,327 11,766 34,727 - 232,820
---------- ---------- ---------- ---------- ----------
Net Income (Loss) $ 54,474 $ 1,753 $ 1,528 $ (427) $ 57,328
========== ========== ========== ========== ==========
Identifiable Assets $ 467,491 $ 78,570 $ 150,499 $ (10,418) $ 686,142
========== ========== ========== ========== ==========
Capital Expenditures $ 53,474 $ 18,348 $ 1,635 $ - $ 73,457
========== ========== ========== ========== ==========
</TABLE>
For the Year Ended December 31, 1995 (in thousands):
<TABLE>
Domestic European Intercompany
Operations Operations Transactions Consolidated
<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>
For the Year Ended December 31, 1994 (in thousands):
<TABLE>
Domestic European Intercompany
Operations Operations Transactions Consolidated
<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>
(13) OTHER MATTERS
Significant Customers
During 1996, sales to Ingram Micro, Inc. accounted for 15% of the
Company's consolidated sales. In 1995, no single customer accounted
for 10% or more of consolidated sales. During 1994, sales to Ingram
Micro, Inc. accounted for 11% of the Company's 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, 1996, the customers with the ten
highest outstanding accounts receivable balances totaled $81.2 million
or 32% of the gross accounts receivable. At December 31, 1996, the
outstanding accounts receivable balance from one customer was $29.4
million or 12% of gross accounts receivable. At December 31, 1995,
the customers with the ten highest 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 $841,000, $1,130,000
and $398,000 for the years ended December 31, 1996, 1995 and 1994,
respectively, from a vendor having a common director with the
Company.
<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, 1996 and 1995, and the related consolidated statements of oper-
ations, stockholders' equity and cash flows for each of the three years
in the period ended December 31, 1996. 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, 1996 and
1995, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
January 24, 1997
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF IOMEGA CORPORATION
Subsidiary Name Jurisdiction or Incorporation
Iomega Europe GmbH Germany
Iomega United Kingdom Ltd. Delaware
Iomega Belgium Inc. Delaware
Iomega Iberia Inc. Delaware
Iomega France Inc. Delaware
Iomega Canada Inc. Delaware
Iomega Austria Inc. Delaware
Iomega Scandinavia Delaware
Iomega Pacific PTE Ltd Singapore
Iomega Singapore Ltd Delaware
Iomega (Bermuda) Ltd. Bermunda
Iomega Australia PTY Ltd. Australia
Iomega Overseas B.V. The Netherlands
Iomega International SA Switzerland
Iomega (Malaysia) SDN BHD Malaysia
Iomega Japan Corporation Japan
Iomega SARL Switzerland
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 108,312
<SECURITIES> 0
<RECEIVABLES> 251,594
<ALLOWANCES> 40,861
<INVENTORY> 171,920
<CURRENT-ASSETS> 556,668
<PP&E> 187,125
<DEPRECIATION> 61,083
<TOTAL-ASSETS> 686,142
<CURRENT-LIABILITIES> 286,983
<BONDS> 45,733
0
0
<COMMON> 272,701
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 686,142
<SALES> 1,212,769
<TOTAL-REVENUES> 1,212,769
<CGS> 879,989
<TOTAL-COSTS> 1,112,809
<OTHER-EXPENSES> 182
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,875
<INCOME-PRETAX> 93,983
<INCOME-TAX> 36,655
<INCOME-CONTINUING> 57,328
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 57,328
<EPS-PRIMARY> .43
<EPS-DILUTED> .43
</TABLE>
