UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended JUNE 29, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
_______________
COMMISSION FILE NUMBER 1-12333
IOMEGA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 86-0385884
(State or other jurisdiction (IRS employer identification number)
of incorporation or organization)
1821 West Iomega Way, Roy, UT 84067
(Address of principal executive offices)
(801) 778-1000
(Registrant's telephone number, including area code)
_______________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of September 28, 1997.
Common Stock, par value $.03 1/3 129,932,285
(Title of each class) (Number of shares)
<PAGE>
IOMEGA CORPORATION
TABLE OF CONTENTS
Page
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements
Condensed consolidated balance sheets at September 28, 1997
and December 31, 1996...................................... 2
Condensed consolidated statements of operations for the three months
ended September 28, 1997 and September 29, 1996............ 4
Condensed consolidated statements of operations for the nine months
ended September 28, 1997 and September 29, 1996............ 5
Condensed consolidated statements of cash flows for the nine months
ended September 28, 1997 and September 29, 1996............ 6
Notes to condensed consolidated financial statements............ 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 21
Item 2. Changes in Securities and Use of Proceeds.................. 23
Item 6. Exhibits and Reports on 8-K................................ 24
Signatures......................................................... 25
Exhibit Index....................................................... 26
This Quarterly Report on Form 10-Q contains a number of forward-looking
statements, including statements relating to the sufficiency of cash and cash
equivalent balances and available sources of financing; projected effective tax
rates; expected further declines in component and manufacturing costs; the
impact on gross margins of the sales mix between disks and drives and the mix
between OEM sales and sales through other channels; anticipated expenditures for
selling, general and administrative and research and development activities; the
possible effects on future sales due to supplier quality issues and component
shortages; the possible effects of an adverse outcome in legal proceedings,
described in Item 1 of Part II, and the Company's efforts to protect its
intellectual property rights. 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 forward-looking statements. These factors include, without limitation,
those set forth under, and in the paragraph immediately preceding, the caption
"Factors Affecting Future Operating Results" included under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 2 of Part I of this Quarterly Report on Form 10-Q, and those set forth in
Item 1 of Part II of this Quarterly Report on Form 10-Q.
- 1 -
<PAGE>
IOMEGA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
<TABLE>
<CAPTION>
September 28, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $166,024 $108,312
Trade receivables, net 264,184 210,733
Inventories 188,424 171,920
Deferred tax assets 39,572 38,059
Other current assets 11,648 27,644
-------- --------
Total current assets 669,852 556,668
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost 241,440 187,125
Less: Accumulated depreciation and amortization (86,377) (61,083)
-------- --------
Net property, plant and equipment 155,063 126,042
-------- --------
OTHER ASSETS 3,259 3,432
-------- --------
$828,174 $686,142
======== ========
</TABLE>
The accompanying notes to condensed
consolidated financial statements are an integral part
of these balance sheets.
- 2 -
<PAGE>
IOMEGA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
September 28, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of notes payable $ - $ 33,770
Accounts payable 206,257 145,844
Accrued payroll, vacation and bonus 22,216 17,731
Deferred revenue 25,098 15,677
Other accrued liabilities 101,736 69,847
Current portion of capitalized lease obligations 5,465 4,114
--------- ---------
Total current liabilities 360,772 286,983
--------- ---------
CAPITALIZED LEASE OBLIGATIONS,
net of current portion 4,437 5,711
--------- ---------
NOTES PAYABLE, net of current portion - 13,465
--------- ---------
CONVERTIBLE SUBORDINATED NOTES,
6.75%, due 2001 45,683 45,733
--------- ---------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.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 1/3 par value; authorized 400,000,000 shares,
issued 260,693,780 and 256,554,852 shares at September 28,
1997 and December 31, 1996, respectively 8,690 8,552
Additional paid-in capital 269,297 264,149
Less: 829,210 and 600,000 Common Stock treasury shares
at September 28, 1997 and December 31, 1996, respectively,
at cost (6,099) (4,363)
Deferred compensation (418) (669)
Retained earnings 145,812 66,581
--------- --------
Total stockholders' equity 417,282 334,250
--------- ---------
$828,174 $686,142
======== ========
</TABLE>
The accompanying notes to condensed
consolidated financial statements are an integral part
of these balance sheets.
- 3 -
<PAGE>
IOMEGA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended
September 28, September 29,
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
SALES $ 431,700 $ 310,085
COST OF SALES 291,373 228,424
--------- ---------
Gross margin 140,327 81,661
--------- ---------
OPERATING EXPENSES:
Selling, general and administrative 72,631 50,323
Research and development 22,571 10,475
--------- ---------
Total operating expenses 95,202 60,798
--------- ---------
OPERATING INCOME 45,125 20,863
Interest and other income (expense), net 1,055 71
--------- ---------
INCOME BEFORE INCOME TAXES 46,180 20,934
Provision for income taxes (16,172) (8,168)
--------- ---------
NET INCOME $ 30,008 $ 12,766
========= =========
NET INCOME PER COMMON SHARE $ 0.11 $ 0.05
========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Includes effects of stock split (See Note 1) 274,070 274,054
========= =========
</TABLE>
The accompanying notes to condensed
consolidated financial statements are an integral part
of these statements.
- 4 -
<PAGE>
IOMEGA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 28, September 29,
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
SALES $1,193,206 $ 815,711
COST OF SALES 828,141 597,955
---------- ---------
Gross margin 365,065 217,756
---------- ---------
OPERATING EXPENSES:
Selling, general and administrative 187,807 122,605
Research and development 54,295 29,008
---------- ---------
Total operating expenses 242,102 151,613
---------- ---------
OPERATING INCOME 122,963 66,143
Interest and other income (expense), net (1,219) (5,329)
---------- ---------
INCOME BEFORE INCOME TAXES 121,744 60,814
Provision for income taxes (42,513) (23,845)
---------- ---------
NET INCOME $ 79,231 $ 36,969
=========== =========
NET INCOME PER COMMON SHARE $ 0.29 $ 0.14
=========== =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Includes effects of stock split (See Note 1) 272,794 264,178
=========== =========
</TABLE>
The accompanying notes to condensed
consolidated financial statements are an integral part
of these statements.
- 5 -
<PAGE>
IOMEGA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 28, September 29,
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $ 79,231 $ 36,969
Non-Cash Revenue and Expense Adjustments:
Depreciation and amortization expense 26,701 16,532
Deferred income tax benefit (1,513) (27,142)
Other 19 681
Changes in Assets and Liabilities:
Trade receivables, net (53,451) (91,751)
Inventories (16,504) (79,332)
Other current assets 15,996 (7,546)
Accounts payable 60,413 48,279
Accrued liabilities 45,795 54,543
----------- ----------
Net cash provided by (used in) operating activities 156,687 (48,767)
----------- ----------
Cash Flows from Investing Activities:
Purchase of property, plant and equipment (52,094) (62,765)
Net decrease in other assets 173 271
----------- ----------
Net cash used in investing activities (51,921) (62,494)
----------- ----------
Cash Flows from Financing Activities:
Proceeds from sales of Common Stock 2,564 1,825
Proceeds from issuance of notes payable
and capitalized lease obligations 87,295 745,864
Payments on notes payable and capitalized lease
obligations (137,793) (771,668)
Purchase of Common Stock (1,736) (4,363)
Tax benefit from dispositions of employee stock 2,616 6,755
Net proceeds from public offering of Common Stock - 191,146
Net proceeds from issuance of convertible
subordinated notes - 43,131
----------- ----------
Net cash provided by (used in) financing activities (47,054) 212,690
----------- ----------
Net Increase in Cash and Cash Equivalents 57,712 101,429
Cash and Cash Equivalents at Beginning of Period 108,312 1,023
----------- ----------
Cash and Cash Equivalents at End of Period $ 166,024 $ 102,452
========= ==========
</TABLE>
The accompanying notes to condensed
consolidated financial statements are an integral part
of these statements.
- 6 -
<PAGE>
IOMEGA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont'd.)
(In thousands)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 28, September 29,
1997 1996
------------- -------------
(Unaudited)
<S> <C> <C>
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Property, plant and equipment financed under
capitalized lease obligations $ 3,342 $ 28,367
============ ============
Conversion of Subordinated Notes to Common Stock $ 50 $ 267
============ ============
</TABLE>
The accompanying notes to condensed
consolidated financial statements are an integral part
of these statements.
- 7 -
<PAGE>
IOMEGA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) SUBSEQUENT EVENT - STOCK SPLIT
On November 11, 1997, the Company's Board of Directors declared a
two-for-one stock split which will be effected in the form of a 100%
stock dividend. The dividend will be distributed on or about December
22, 1997 to stockholders of record on December 1, 1997. This stock
split has been retroactively reflected in the accompanying condensed
consolidated financial statements and management's discussion and
analysis. In connection with the stock split, proportional adjustments
will be made to outstanding stock options and other outstanding
obligations of the Company to issue shares of Common Stock.
(2) SIGNIFICANT ACCOUNTING POLICIES
In the opinion of management, the accompanying condensed consolidated
financial statements reflect all adjustments (consisting only of normal
recurring adjustments) which are necessary to present fairly the
financial position of Iomega Corporation and subsidiaries (the
"Company") as of September 28, 1997 and December 31, 1996, the results
of operations for the three- and nine-month periods ended September 28,
1997 and September 29, 1996, and cash flows for the nine-month periods
ended September 28, 1997 and September 29, 1996.
The results of operations for the three- and nine-month periods ended
September 28, 1997 are not necessarily indicative of the results to be
expected for the entire year or for any future period.
These unaudited condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements and
notes included in or incorporated into the Company's latest Annual
Report on Form 10-K.
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 disclosures 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 condensed consolidated financial
statements include the accounts of Iomega Corporation 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.
- 8 -
<PAGE>
IOMEGA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 $25.1 million
and $15.7 million at September 28, 1997 and December 31, 1996,
respectively.
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
against gross accounts receivable 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 $25.2 million and $17.0 million at September
28, 1997 and December 31, 1996, respectively, and are netted against
accounts receivable in the accompanying condensed consolidated balance
sheets.
Foreign Currency Translation - For purposes of consolidating foreign
operations, the Company has determined the functional currency for its
foreign operations to be the U.S. dollar. Therefore, translation gains
and losses are included in the determination of income.
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 material
temporary investments at September 28, 1997 or December 31, 1996. 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.
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:
September 28, December 31,
1997 1996
Raw materials $ 102,158 $ 88,728
Work-in-process 29,094 14,004
Finished goods 57,172 69,188
---------- ----------
$ 188,424 $ 171,920
========== ==========
- 9 -
<PAGE>
IOMEGA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Reclassifications - Certain reclassifications were made to the prior
periods' condensed consolidated financial statements to conform with
the current presentation.
Net Income Per Common Share - Net income per common share is based on
the weighted average number of shares of Common Stock and dilutive
common stock equivalent shares outstanding during the period. Common
stock equivalent shares consist primarily of stock options that have a
dilutive effect when applying the treasury stock method. The
outstanding shares and earnings per share have been restated for all
periods to reflect the impact of the stock split described in Note 1.
Recent Accounting Pronouncements - In February 1997, the Financial
Accounting Standards Board released Statement of Financial Accounting
Standards No. 128, "Earnings per Share" (SFAS 128). This statement
specifies the computation, presentation, and disclosure requirements
for earnings per share (EPS) for financial statements issued for all
periods ending after December 15, 1997. SFAS 128 replaces the standards
for computing EPS previously found in APB Opinion No. 15 with a
presentation of Basic EPS and Diluted EPS. The following represents the
Company's pro forma earnings per share as computed under the rules of
SFAS 128:
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
Sept. 28, 1997 Sept. 29, 1996 Sept. 28, 1997 Sept. 29, 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Pro Forma Basic EPS $0.12 $0.05 $0.31 $0.15
Pro Forma Diluted EPS $0.11 $0.05 $0.29 $0.14
</TABLE>
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" (SFAS 130) and No. 131 "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 130 establishes
standards for the reporting and display of comprehensive income and its
components and SFAS 131 establishes new standards for public companies
to report information about their operating segments, products and
services, geographic areas and major customers. These statements will
be effective for financial statements issued for fiscal years beginning
after December 1997.
The Company is required to adopt SFAS 128 in its December 31, 1997
financial statements. The Company plans to adopt SFAS 130 and SFAS 131
in its December 31, 1998 financial statements.
- 10 -
<PAGE>
IOMEGA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) INCOME TAXES
Income taxes for the nine months ended September 28, 1997 have been
provided for at an effective rate of 35% compared to an effective rate
of 39% for the year ended December 31, 1996. This tax rate is based on
the Company's projected mix of domestic and foreign pre-tax income for
1997. The decrease in the effective tax rate is due to tax advantages
associated with the relocation of the Company's manufacturing capacity
to Malaysia and the move of the Company's European headquarters from
Germany to Switzerland.
U.S. taxes have not been provided for unremitted foreign earnings
which are considered to be permanently reinvested in non-U.S.
operations.
Cash paid for income taxes was $16.9 million for the first nine months
of 1997 and $37.5 million for the corresponding period in 1996.
(4) NOTES PAYABLE
Line of Credit - On March 11, 1997, the Company entered into a $200
million Senior Secured Credit Facility ("Credit Facility") with Morgan
Guaranty Trust Company of New York, Citibank, N.A. and a syndicate of
other lenders. The Credit Facility is a three-year revolving line of
credit secured by U.S. and Canadian accounts receivable and a pledge of
66% of the stock of certain of the Company's subsidiaries. Borrowings
under the Credit Facility are limited to the lesser of 70% of eligible
accounts receivable or $200 million. Under the Credit Facility, the
Company may borrow at a base rate, which is the higher of prime or
federal funds plus a margin of 0.0% to 0.5%, depending on the Company's
debt-to-equity ratio, or at LIBOR plus a margin of 1.0% to 2.0%,
depending on the Company's debt-to-equity ratio. Total availability
under the Credit Facility at September 28, 1997 was $184.9 million, and
there were no borrowings outstanding. Among other restrictions, the
Credit Facility treats a change of control (as defined) as an event of
default and requires the maintenance of minimum levels of consolidated
tangible net worth and earnings.
Capital Leases - The Company has entered into various agreements to
obtain capital lease financing for the purchase of certain
manufacturing equipment, software, office furniture and other
equipment. The leases have 36-month to 60-month terms and mature at
various dates from July 1998 to March 2000. Principal and interest
payments are payable monthly and quarterly. Interest rates are fixed
and range from 7.1% to 10.2%. The leases are secured by the underlying
leased equipment, software and furniture.
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 a building and equipment
associated with a manufacturing facility in Penang, Malaysia. The
amount financed under this agreement totaled $18 million. During April
1997, the Company elected to prepay the entire $18 million plus accrued
interest.
- 11 -
<PAGE>
IOMEGA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financing of European Receivables and Other Term Notes - During the
first quarter of 1997, an agreement with a German commercial bank which
involved the factoring of a portion of the Company's European accounts
receivable expired and the Company repaid all amounts outstanding under
the agreement. During the second and third quarters of 1997, the
Company paid off all remaining other term notes relating to equipment
purchases.
(5) OTHER MATTERS
Increase in Authorized Shares - On April 20, 1997, stockholders
approved an amendment to the Company's Restated Certificate of
Incorporation increasing the number of authorized shares of Common
Stock from 150 million to 400 million.
Significant Customers - During the three months and nine months ended
September 28, 1997, sales to Ingram Micro, Inc. accounted for
approximately 12% of consolidated sales. During the three months and
nine months ended September 29, 1996, sales to Ingram Micro, Inc.
accounted for 20% and 17%, respectively, of consolidated sales. No
other single customer accounted for more than 10% of the Company's
sales for these periods.
Forward Exchange Contracts - The Company has commitments to sell and
purchase foreign currencies relating to forward exchange contracts in
order to hedge against future currency fluctuations.
At September 28, 1997 outstanding forward exchange sales (purchase)
contracts, which all mature in December 1997, were as follows:
Contracted
Currency Amount Forward Rate
British Pound (675,000) .62
Dutch Guilder (3,200,000) 1.98
French Franc 1,000,000 5.92
German Mark (5,700,000) 1.76
Japanese Yen 75,000,000 118.32
Malaysian Ringgit (6,750,000) 3.07
Singapore Dollar (1,400,000) 1.51
Swiss Franc (1,675,000) 1.44
The contracts are revalued at the month-end spot rate. 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 September 28, 1997, all of the Company's
foreign currency contracts were 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.
- 12 -
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SUBSEQUENT EVENT - STOCK SPLIT
On November 11, 1997, the Company's Board of Directors declared a two-for-one
stock split which will be effected in the form of a 100% stock dividend. The
dividend will be distributed on or about December 22, 1997 to stockholders of
record on December 1, 1997. This stock split has been retroactively reflected in
the accompanying condensed consolidated financial statements and management's
discussion and analysis. In connection with the stock split, proportional
adjustments will be made to outstanding stock options and other outstanding
obligations of the Company to issue shares of Common Stock.
RESULTS OF OPERATIONS
The Company reported sales of $431.7 million and net income of $30.0 million, or
$0.11 per share, in the third quarter of 1997. This compares to sales of $310.1
million and net income of $12.8 million, or $0.05 per share, in the third
quarter of 1996. For the first nine months of 1997, sales were $1.2 billion and
net income was $79.2 million, or $0.29 per share, compared to sales of $815.7
million and net income of $37.0 million, or $0.14 per share, for the first nine
months of 1996.
SALES
Sales for the three months ended September 28, 1997 increased by $121.6 million,
or 39%, when compared to the corresponding period of 1996. The primary reason
for the increase was higher sales of Zip and Jaz products. The increased sales
reflect higher sales volumes of both drives and media, which were partially
offset by lower prices. Combined Zip and Jaz sales totaled $406.0 million, or
94% of sales, in the third quarter of 1997, as compared to $269.0 million, or
87% of sales, in the third quarter of 1996. Sales of Zip drives to OEM customers
increased to just over 35% of total Zip drive unit sales in the third quarter of
1997, as compared to approximately 10% in the third quarter of 1996. Ditto
product sales decreased in the third quarter of 1997 to $26.0 million, or 6% of
sales, as compared to $32.5 million, or 10% of sales, in the third quarter of
1996.
Sales for the nine months ended September 28, 1997 increased by $377.5 million,
or 46%, when compared to the corresponding period of 1996. The primary reason
for the increase was higher sales of Zip and Jaz products. The increased sales
reflect higher sales volumes of both drives and media, which were partially
offset by lower prices. Combined Zip and Jaz sales totaled $1.1 billion, or 92%
of sales, in the first nine months of 1997, as compared to $700.8 million, or
86% of sales, in the corresponding period of 1996. Sales of Zip drives to OEM
customers increased to 30% of total Zip drive unit sales for the first nine
months of 1997, as compared to 5% of total Zip drive unit sales in the
corresponding period of 1996. Ditto product sales totaled $90.5 million, or 8%
of sales, in the first nine months of 1997, as compared to $88.5 million, or 11%
of sales, in the corresponding period of 1996.
- 13 -
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Sales in Europe were $108.2 million, or 25% of total sales, in the third quarter
of 1997, as compared to $50.7 million, or 16% of sales, in the third quarter of
1996. For the first nine months of 1997, sales in Europe were $323.0 million, or
27% of sales, as compared to $169.5 million, or 21% of sales, for the first nine
months of 1996. Sales in Asia were $36.8 million, or 8% of sales, in the third
quarter of 1997, as compared to $29.3 million, or 9% of sales, in the third
quarter of 1996. For the first nine months of 1997, sales in Asia were $109.6
million, or 9% of sales, as compared to $83.3 million, or 10% of sales, for the
first nine months of 1996.
GROSS MARGIN
The Company's overall gross margin was 32% in the third quarter of 1997, as
compared to 26% in the third quarter of 1996. This increase in gross margin was
due primarily to continued reductions in component material costs and per unit
manufacturing overhead costs for the Zip and Jaz product lines, combined with a
significant increase in the ratio of disk sales to drive sales for the Jaz
product line. This higher ratio was driven primarily by "catch up" shipments of
Jaz disks resulting from an earlier Jaz disk recall (discussed below) and the
temporary inventory shortage that was created while replacing the defective
disks and integrating a new supplier. These improvements were partially offset
by price reductions enacted in the second quarter of 1997 for Zip, Jaz and Ditto
drives, as well as increased sales of Zip drives to OEMs at gross margins lower
than drives sold to distribution and retail channels.
Overall gross margin percentage for the first nine months of 1997 was 31%, as
compared to 27% for the first nine months of 1996. This increase in gross margin
was primarily the result of reductions in component material costs and per unit
manufacturing overhead costs for the Zip and Jaz product lines and higher ratios
of disk sales to drive sales for the Zip, Jaz and Ditto product lines. These
improvements were partially offset by the second quarter 1997 price reductions
for Zip, Jaz and Ditto, as well as increased sales of Zip drives to OEMs. While
the "catch up" of Jaz disk shipments benefited gross margins in the third
quarter of 1997, the Jaz disk recall (discussed below) negatively impacted
overall gross margins during the second quarter and first nine months of 1997.
In April 1997, the Company announced the recall of a batch of approximately
75,000 Jaz disks manufactured within the period of March 13, 1997 to April 20,
1997 at one of the Company's facilities. The recall was announced after the
Company's ongoing reliability testing revealed that the batch of disks contained
a component that did not conform over time to Iomega's reliability requirements.
The Company contacted its distributors and channel partners to remove the
affected disks from their inventories and took steps to replace any affected
disks purchased by customers. The direct costs associated with this recall
totaled approximately $3.1 million during the second quarter of 1997 and were
included in cost of sales.
- 14 -
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased by $22.3 million and
$65.2 million in the third quarter and first nine months of 1997, respectively,
when compared to the corresponding periods of 1996, and increased as a
percentage of sales to 17% and 16% in the third quarter and first nine months of
1997, respectively, from 16% and 15%, respectively, in each of the corresponding
periods of 1996. The increases were primarily the result of increases in
headcount throughout the world, predominantly in the sales and marketing
functions, advertising expenses incurred to increase market awareness of Zip,
Jaz and Ditto products and variable selling expenses. Management expects
selling, general and administrative expenses to increase further in the fourth
quarter of 1997 in absolute dollars due primarily to increased advertising and
promotional expenses throughout the world, including planned costs for a new
"Zip built-in" campaign developed to generate greater consumer demand for OEM
Zip drives, as well as increased variable selling expenses and increased fixed
administrative expenses.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the third quarter and first nine months of
1997 increased by $12.1 million, or 115%, and $25.3 million, or 87%,
respectively, when compared to the corresponding periods of 1996. Research and
development also increased as a percentage of sales to 5% in the third quarter
and first nine months of 1997, as compared to 3% and 4% of sales in the
corresponding periods of 1996, respectively. The increases were primarily the
result of expenditures related to the continued development and enhancement of
Zip, Jaz and Ditto products, as well as continued development expenses related
to the Company's n-hand, Buz and other products. Management expects to maintain
the level of spending for research and development during the remainder of 1997
to support planned product development and enhancement.
OTHER
The Company recorded interest income of $2.2 million and $4.7 million in the
third quarter and first nine months of 1997, respectively, as compared to $1.6
million and $2.2 million in the corresponding periods of 1996, respectively, due
to increased available cash balances in 1997. Interest expense was $1.4 million
and $5.1 million in the third quarter and first nine months of 1997,
respectively, as compared to $1.8 million and $6.4 million in the corresponding
periods of 1996, respectively. The decrease in interest expense was primarily
due to decreased average borrowings outstanding during the third quarter of
1997, resulting in large part from the repayment of amounts borrowed under a
financing agreement (which involved the factoring of a portion of the Company's
European accounts receivable), and the repayment of other term notes during
1997.
Also included in other income and expense were bank charges, royalty income,
gains and losses on disposal of assets and foreign currency gains and losses.
- 15 -
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
INCOME TAXES
For the first nine months of 1997, the Company recorded an income tax provision
of $42.5 million, representing an effective income tax rate of 35%. The
effective tax rate decreased from 39% in the first nine months of 1996 due to
tax advantages associated with the relocation of manufacturing capacity to
Malaysia and the relocation of the Company's European headquarters from Germany
to Switzerland. Differences between the currently anticipated mix of foreign
income versus domestic income, and the actual mix, may have an impact on the
effective tax rate that is recorded during the remainder of 1997.
SEASONALITY
The Company's Ditto, Zip and Jaz products are sold 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. In light of the seasonal nature of the
market for the Company's products, revenues for any prior quarter are not
necessarily indicative of the revenues to be expected in any future quarter.
LIQUIDITY AND CAPITAL RESOURCES
At September 28, 1997, the Company had cash and cash equivalents of $166.0
million, working capital of $309.1 million, and a ratio of current assets to
current liabilities of 1.9 to 1. During the first nine months of 1997, the
Company generated $156.7 million of cash from operating activities. The primary
sources of cash provided by operating activities were net income, non-cash
expenses, reductions in other current assets, and increases in accounts payable
and accrued liabilities. These sources of cash were partially offset by
increases in accounts receivables and inventory. Other current assets decreased
by $16.0 million, due primarily to the collection of value-added taxes in
Europe, partially offset by higher prepaid advertising expenses. Accounts
payable increased by $60.4 million, due primarily to timing of inventory
receipts and related payments to vendors. Accrued liabilities increased by $45.8
million and included, among other changes, an $23.4 million increase in income
taxes payable, an $11.4 million increase in marketing and advertising accruals,
and a $9.4 million increase in deferred revenue. These sources of cash were
offset by a $53.4 million increase in net accounts receivable, due primarily to
increased sales and the timing of sales and collections during the respective
quarters and a $16.5 million increase in inventory due primarily to a build in
inventories going into the fourth quarter. The Company used $51.9 million of
cash in investing activities during the first nine months of 1997, primarily for
the purchase of property, plant and equipment. Cash used in financing activities
totaled $47.0 million during the first nine months of 1997, and included $50.5
million of net payments on notes payable and capitalized lease obligations and
$1.7 million to repurchase 229,210 shares of the Company's Common Stock,
partially offset by a $2.6 million tax benefit for dispositions of employee
stock and proceeds of $2.6 million from sales of Common Stock to option holders.
- 16 -
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
On March 11, 1997, the Company entered into a $200 million Senior Secured Credit
Facility ("Credit Facility") with Morgan Guaranty Trust Company of New York,
Citibank, N.A. and a syndicate of other lenders. The Credit Facility is a
three-year revolving line of credit secured by U.S. and Canadian accounts
receivable and a pledge of 66% of the stock of certain of the Company's
subsidiaries. Borrowings under the Credit Facility are limited to the lesser of
70% of eligible accounts receivable or $200 million. Under the Credit Facility,
the Company may borrow at a base rate, which is the higher of prime or federal
funds plus a margin of 0.0% to 0.5%, depending on the Company's debt-to-equity
ratio, or at LIBOR plus a margin of 1.0% to 2.0%, depending on the Company's
debt-to-equity ratio. Total availability under the Credit Facility at September
28, 1997 was $184.9 million, and there were no borrowings outstanding. Among
other restrictions, the Credit Facility treats a change of control (as defined)
as an event of default and requires the maintenance of minimum levels of
consolidated tangible net worth and earnings.
The current and long-term portions of capitalized lease obligations at September
28, 1997 were $5.5 million and $4.4 million, respectively. During the first
quarter of 1997, the Company repaid all amounts outstanding under its agreement
with a German commercial bank which involved the factoring of a portion of the
Company's European accounts receivable. During the second quarter of 1997, the
Company paid the entire $18 million obligation, plus accrued interest, relating
to the purchase of its Malaysian manufacturing facility. In addition, during the
second and third quarters of 1997, the Company paid off all remaining other term
notes relating to equipment purchases.
The Company had $45.7 million of convertible subordinated notes outstanding at
September 28, 1997, which bear interest at 6.75% per year and mature on March
15, 2001. Additions to property, plant and equipment during the first nine
months of 1997 totaled $55.4 million, partially offset by $3.3 million in
proceeds from capital leases.
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 the next twelve months. The precise amount and
timing of the Company's future financing needs, if any, cannot be determined at
this time, and will depend on a number of factors, including the market demand
for the Company's products, the availability of critical components, the
progress of the Company's product development efforts, the success of the
Company in managing its inventory, accounts receivable and accounts payable.
- 17 -
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
FACTORS AFFECTING FUTURE OPERATING RESULTS
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 market demand for
removable data storage solutions for personal computers, 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 (existing or announced) introduced by other vendors, including the
LS-120 (product of the consortium of Compaq Computer, Imation and MKE) and SyJet
1.5 GB, EZ Flyer 230 and SparQ 1.0GB (products of Syquest Technology, Inc.), the
Shark 250 (product of Avatar Peripherals, Inc.), and the recently announced
200MB high-capacity 3.5 inch floppy disk system being developed jointly by Sony
Corporation and Fuji Photo Film Co., Ltd. which they announced is planned to be
introduced in the spring of 1998; the success of the Company in meeting targeted
availability dates for new or enhanced products; the success of the Company in
establishing and maintaining OEM arrangements and meeting OEM quality, supply
and other requirements; 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, including demand from 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 service and satisfaction. In addition, any
component problems, shortages, quality issues or other factors affecting the
supply of the Company's products, and any inability of the Company to add
manufacturing capacity as needed could limit the Company's sales and provide an
opportunity for competing products to achieve market acceptance. For example,
sales were adversely affected during the second and third quarters of 1997 due
to a shortage of certain integrated circuits for Zip drives and supplier quality
problems, and may also be adversely affected for these and similar reasons in
future quarters.
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/or Jaz drives without infringing the Company's
proprietary rights, or for any other reason, the Company's sales would be
adversely affected, and its net income would be disproportionately adversely
affected. See "Legal Proceedings" with respect to the introduction by Nomai
S.A., a French company, of a disk product claimed to be compatible with the
Company's Zip drives and Nomai's plans to introduce a disk product claimed to be
compatible with the Company's Jaz drives.
- 18 -
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Future market demand for the Company's products cannot be predicted with
certainty. Sales of Zip and Jaz products in 1996 and the first nine months of
1997 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 1996 and
in the first nine months of 1997 should not be assumed to be an indication of
future sales. In addition, the Company has experienced and may in the future
experience significant fluctuations in its quarterly operating results.
Moreover, because the Company's expense levels are based in part on expectations
of future sales levels, a shortfall in expected sales could result in a
disproportionate decrease in the Company's net income.
In addition to the risks surrounding existing products, the Company faces
development, manufacturing, demand and market acceptance risks with regard to
recently introduced and future products, including ZipPlus, the 15mm and 12.7mm
notebook Zip drives, the Jaz 2GB drive, the Ditto Max multiple capacity drive,
n-hand and Buz. The Company's future operating results will depend in part on
its success in introducing enhanced and new products in a timely and
competitively effective manner, and will also depend on intellectual property
matters including the possibility that infringement claims asserted from time to
time against the Company could require the Company to pay royalties to a third
party in order to continue to market and distribute one or more of the Company's
current or future products or require the Company to devote unplanned resources
to develop non-infringing modifications to its products.
The Company has significant international operations with sales transactions
generally denominated in U.S. dollars. Fluctuation in the value of foreign
currencies relative to the U.S. dollar that are not sufficiently hedged by
foreign customers could result in lower sales and have an adverse effect on
future operating results.
A significant portion of the Company's revenues are currently being generated in
Europe and Asia. The Company's existing infrastructure outside of the United
States is significantly less mature and developed than in the United States. In
particular, the Company's relocation of its European operations from Germany to
Switzerland and the Netherlands, combined with the expansion of the Company's
Asian headquarters and sales offices, could adversely impact sales momentum in
these international markets.
The Company continues to refine the design of its Zip and Jaz products in an
effort to improve product performance and reduce manufacturing costs. In
addition, the Company depends on independent parties for the supply of critical
components for its Zip and Jaz products. As a result of these and other factors,
the Company may experience problems relating to the quality and/or reliability
of certain of its products. For example, in the second quarter of 1997, the
Company recalled a limited number of its Jaz disks and in the third quarter of
1997 the Company experienced interruptions due to supplier quality problems. Any
product availability, quality or reliability problems experienced by the Company
could have an adverse effect on the Company's sales and net income, result in
damage to the Company's reputation in the marketplace, and/or subject the
Company to damage claims from its customers.
- 19 -
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONCLUDED)
In addition, the Company is in the process of identifying anticipated costs,
problems and uncertainties associated with making the Company's internal-use
software applications Year 2000 compliant. In general, the Company expects to
resolve Year 2000 issues through planned replacement or upgrades of its software
applications. Although management does not expect Year 2000 issues to have a
material impact on its business or future results of operations, there can be no
assurance that there will not be interruptions of operations or other
limitations of system functionality or that the Company will not incur
significant costs to avoid such interruptions or limitations.
Other factors that could cause actual events or actual results to differ
materially from those indicated by any 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,
transportation issues, product and component pricing, competition, intellectual
property rights, litigation (see "Legal Proceedings") and general economic
conditions.
- 20 -
<PAGE>
IOMEGA CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
As previously reported in the Company's Annual Report on Form 10-K for 1996 and
its quarterly reports on Form 10-Q for the first and second quarters of 1997,
the Company has inititated litigation in France and Germany against Nomai S.A.,
a French company, in connection with Nomai's planned XHD disk product, which
Nomai claims to be compatible with the Company's Zip drives. On October 15,
1997, Nomai and its United States subsidiary Nomus, Inc., filed a complaint for
declaratory relief against the Company in the United States District Court for
the Northern District of California. In its complaint, Nomai seeks a declaratory
judgment of non-infringement and invalidity of certain United States patents
issued to the Company, non-infringement of trade dress, trademark and copyright,
non-unfair competition, and non-misappropriation of trade secrets. The Company
does not believe these claims are meritorious. In support of its standing to
seek declaratory relief from a United States federal court, Nomus claims to have
offered Nomai XHD cartridges for sale in the United States and to be in
apprehension that Iomega will initiate suit against it and Nomai in the United
States. The Company was granted an extension of time until November 21, 1997,
within which to respond to the complaint filed by Nomai. The Company has not
licensed Nomai to manufacture or sell Zip products and believes Nomai's XHD
product infringes the Company's United States and foreign intellectual property
rights and constitutes unfair competition.
With respect to the ongoing European litigation between the Company and Nomai,
Nomai's XHD disk product was formally announced by Nomai in a press release
issued on September 12, 1997. XHD disks were offered for sale at the Apple Expo
exhibition in Paris, France, beginning on September 17, 1997. On September 30,
1997, the Company filed a complaint in the District Court in Paris charging
Nomai with unfair competition, parasitism and violations of the Company's
copyrights, disk design patent and trademarks. The Paris Court granted an early
fixed date hearing on Friday, November 28, 1997, at which time the charges
asserted by the Company will be heard by a panel of three judges. The Company
also filed a separate complaint in Paris on September 30, 1997, claiming that
Nomai is infringing on several Iomega patent applications pending in Europe. No
hearing date has been set on these separate patent claims.
In support of certain of the Company's claims scheduled to be heard by the Paris
District Court on November 28, 1997, the Company filed with the Court reports of
two independent laboratories retained by the Company to test Nomai's XHD disks.
One independent laboratory tested the XHD disks for compatibility with the
Company's Zip drives. Its test results showed that the XHD disk had a very high
rejection rate in PC and Macintosh notebook Zip drives. In addition, five out of
twenty randomly selected Nomai XHD disk cartridges were found to be inoperable
with certain internal Zip drives and the XHD cartridges tested with external Zip
drives exhibited abnormal clicking sounds not exhibited by the tested Iomega
cartridges. 100% of the tested Iomega Zip cartridges were accepted by all models
of Zip drives used in the tests. In correspondence between English solicitors
for the Company and solicitors for Nomai, Nomai's solicitors claim that Nomai's
own tests of the XHD cartridge with commercially available Zip drives have not
shown any incompatibility problems. Nomai claims it has had no opportunity to
test XHD cartridges with notebook Zip drives which were first released for
commercial availability on November 11, 1997.
- 21 -
<PAGE>
IOMEGA CORPORATION
PART II - OTHER INFORMATION (CONTINUED)
A second independent laboratory retained by the Company tested Nomai XHD disks
for drop resistance and media wear. Its test results showed that two of three
randomly selected XHD cartridges failed a drop test while three randomly
selected Iomega Zip cartridges passed the test. In accelerated media wear
testing conducted by this independent laboratory, two of five randomly selected
Nomai XHD cartridges failed, exhibiting severe abrasions of the type that
frequently result in data loss and drive head contamination. In addition, 40% of
the Zip drives tested by the second laboratory with XHD cartridges exhibited
head damage that the laboratory concluded will render the drive inoperable.
Finally, one of the drives damaged by an XHD cartridge in this independent
testing caused unrecoverable data loss not only in the XHD cartridge that caused
the damage, but also in a known good Iomega Zip cartridge which was subsequently
inserted.
Nomai claims that the XHD disk it is currently selling was modified in order to
not violate a partial preliminary injunction previously granted to the Company
on June 20, 1997, by the Paris District Court. That injunction prohibits Nomai
from manufacturing or selling XHD disks that duplicate certain aspects of Iomega
Zip disks. Notwithstanding Nomai's modification of its disk, Nomai has appealed
the June 20 preliminary injunction. In response, the Company also appealed
certain rulings of the Paris District Court, including the Court's partial
denial of the Company's motion for preliminary injunctive relief. The hearing on
these appeals occurred on November 6, 1997, and a decision is anticipated in
December 1997.
The ex parte preliminary injunction obtained by the Company in March 1997
against Nomai from the Hanover Landgericht (or District) Court was lifted by the
Court following a hearing on Nomai's opposition held on August 26, 1997. The
Company has appealed the decision lifting this preliminary injunction. A
separate ex parte preliminary injunction, obtained by the Company from the
Landgericht Frankental Court in Ludwighafen, Germany against Emtec Magnetics
GmbH, a proposed reseller of Nomai's XHD disks, remains in force but is being
opposed by Emtec. The hearing on Emtec's opposition is scheduled for December
11, 1997.
On October 29, 1997, the Company petitioned the High Court of Justice Chancery
Division in London for a preliminary order prohibiting Nomai and its chief
executive, Mr. Frouin, from using the words "100% Iomega Zip compatible" or "Zip
compatible" or words to similar effect in relation to the XHD cartridge and from
importing into the United Kingdom, manufacturing, selling or offering for sale
any XHD cartridges which have the word Iomega written on the magnetic medium of
(or otherwise marked on) such cartridges in any other location. The Company's
petition was based on claims of trademark infringement, malicious falsehood,
passing off and copyright infringement. On October 31, 1997, the High Court of
Justice granted an order temporarily prohibiting Nomai from manufacturing,
importing, advertising, offering for sale, selling or distributing any
cartridges claimed by Nomai to be compatible with the Company's Zip drives or
described as a Zip disk. The temporary order will remain in effect until a
further hearing on the matter is held before the High Court of Justice.
- 22 -
<PAGE>
IOMEGA CORPORATION
PART II - OTHER INFORMATION (CONTINUED)
On November 6, 1997, the Presidents of the District Courts of Albi and
Avranches, France, authorized seizures, on the premises of Nomai in Avranches
and on the premises of a Nomai affiliate in Albi, of materials relating to
Nomai's stated intention to introduce a disk product compatible with the
Company's Jaz drives. These seizures were carried out on November 7, 1997. On
the premises of Nomai in Avranches, numerous documents, and a single nonworking
specimen or prototype Nomai cartridge labeled as being compatible with Iomega
Jaz drives, were seized. On November 12, 1997, the Company served a complaint on
Nomai in France alleging copyright, design, trademark and patent infringement,
parasitism and unfair competition, and seeking injunctive relief as well as
damages.
An adverse outcome in any of the proceedings referred to above could result in
the sale or continuing sale by Nomai in one or more countries of a disk product
claimed to be compatible with Zip drives, and could result in the introduction
and sale by Nomai of a disk product claimed to be compatible with the Company's
Jaz drives. Any such introduction of a disk product claimed to be Jaz drive
compatible or sales or continuing sales of a disk product claimed to be Zip
drive compatible could have a material adverse effect on the Company's future
sales and operating results.
On July 29, 1997, the Company filed suit against SyQuest Technology, Inc.
("SyQuest") in the United States District Court for the District of Delaware
claiming patent infringement and unfair competition with respect to SyQuest's
SyJet product. The Company is seeking injunctive relief and damages in an
unspecified amount. Discovery is underway in the litigation and a trial date has
been set by the Court for January 1999.
The Company continues to be committed to vigorously protecting and enforcing its
intellectual property rights in the proceedings referenced above.
As reported in a press release issued July 23, 1997, the Company has been named
as a defendant in Cox v. Iomega Corporation, a purported class action suit filed
in the Chancery Court of the State of Delaware on July 16, 1997. The named
plaintiff, who purchased a Zip drive in 1996, purports to represent other
similarly situated consumers who have purchased Zip, Jaz or Ditto products for
household purposes since July 16, 1994. The complaint alleges violations of the
Magnuson-Moss Consumer Products Warranties Act and the Delaware Consumer Fraud
Act based on, among other things, the Company's imposition, beginning in August
1996, of per-incident support charges applicable to certain support requests,
alleged difficulties in reaching the Company's technical support call center and
alleged difficulties in installing Zip drives, as well as an alleged failure by
the Company to specify whether certain of its warranties are "Full" or "Limited"
within the meaning of the Magnuson-Moss Consumer Products Warranties Act. The
relief sought in the complaint includes injunctive relief, restitution in an
unspecified amount for charges paid by consumers for certain calls to the
Company's technical support line and reasonable attorneys' fees. The Company is
assessing the maintainability of this suit as a class action and intends to
defend itself vigorously against the claims asserted in the lawsuit.
Item 2. Change in Securities and Use of Proceeds
During the third quarter of 1997, the Company issued 101 shares (not giving
effect to the stock split) 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 the third quarter of 1997 that were not
registered under the Securities Act.
- 23 -
<PAGE>
IOMEGA CORPORATION
PART II - OTHER INFORMATION (CONTINUED)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The exhibits listed on the Exhibit Index filed as a part of
this Quarterly Report on Form 10-Q are incorporated herein by
reference.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter for which this report on Form 10-Q is filed.
- 24 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IOMEGA CORPORATION
(Registrant)
/s/ Kim B. Edwards
-----------------------
Dated: November 12, 1997 Kim B. Edwards
President and Chief Executive Officer
/s/ Leonard C. Purkis
-----------------------
Dated: November 12, 1997 Leonard C. Purkis
Senior Vice President, Finance
and Chief Financial Officer
- 25 -
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report on Form 10-Q:
Exhibit No. Description
- - ---------- -------------------------------------------------------------
27 Financial Data Schedule (only filed as part of electronic copy).
- 26 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> Earnings per share amounts reflect the effects of a
2-for-1 stock split declared on November 11, 1997 (See
footnote 1 in condensed consolidated financial statements).
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-START> JUL-30-1997 JAN-01-1997
<PERIOD-END> SEP-28-1997 SEP-28-1997
<CASH> 166,024 166,024
<SECURITIES> 0 0
<RECEIVABLES> 302,937 302,937
<ALLOWANCES> 38,753 38,753
<INVENTORY> 188,424 188,424
<CURRENT-ASSETS> 669,852 669,852
<PP&E> 241,440 241,440
<DEPRECIATION> 86,377 86,377
<TOTAL-ASSETS> 828,174 828,174
<CURRENT-LIABILITIES> 360,772 360,772
<BONDS> 45,683 45,683
0 0
0 0
<COMMON> 277,987 277,987
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 828,174 828,174
<SALES> 431,700 1,193,206
<TOTAL-REVENUES> 431,700 1,193,206
<CGS> 291,373 828,141
<TOTAL-COSTS> 291,373 828,141
<OTHER-EXPENSES> 95,202 242,102
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,371 5,075
<INCOME-PRETAX> 46,180 121,744
<INCOME-TAX> 16,172 42,513
<INCOME-CONTINUING> 30,008 79,231
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 30,008 79,231
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