UNITED STATES
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, 1997
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 checkmark if disclosure of delinquent filers 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, 1998, was $1,984,021,439, 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 outstanding at January 31,
1998, was 261,764,985.
Documents incorporated by reference:
Specifically identified portions of the Company's Annual Report to
Stockholders for the year ended December 31, 1997, into Part I and
Part II of Form 10-K.
Specifically identified portions of the Company's Definitive Proxy
Statement for its 1998 annual meeting of stockholders into Part III of
Form 10-K .
<PAGE>
PART I
This Annual Report on Form 10-K contains a number of forward-looking statements,
including information with respect to Iomega Corporation's ("Iomega" or the
"Company") plans to position its products as industry standards, establish OEM
relationships and license its Zip(R) and Jaz(R) technologies to third parties,
the Company's manufacturing strategies, cost control and cost reduction
initiatives, relationships with third parties, the availability of key
components, current and future product development projects, including the
anticipated availability, pricing and specifications of Clik!(TM) efforts to
protect its intellectual property rights, the possible effects of another party
succeeding in producing and selling Zip- or Jaz-compatible disks without
infringing or violating the Company's intellectual property rights, the possible
effects of adverse outcomes in litigation or in resolutions of infringement
claims asserted by third parties and the projection of revenue and losses. 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, market
acceptance of, and demand for, the Company's drive and removable disk products,
manufacturing issues, including availability of certain key components of the
Iomega Zip and Jaz drives and disks, product development delays, quality issues,
the Company's success in filling a number of key management vacancies, including
the appointment of a new permanent President and Chief Executive Officer, a
senior executive responsible for Sales and Marketing and General Managers for
certain of the Company's divisions, intellectual property rights, the outcome of
litigation described in Part I, item 3 of this Annual Report on Form 10-K and
the other factors 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.
ITEM 1. BUSINESS:
The Company designs, manufactures and markets innovative personal data
storage solutions, based on removable-media technology for personal computer and
consumer electronics device users. The Company's primary data storage solutions
include disk drives and disks for personal computers marketed under the
trademarks Zip and Jaz and a family of tape drives and tapes for personal
computers marketed under the trademark Ditto(TM) In addition, the Company has
announced, and plans to introduce in the second half of 1998, Clik!, a
miniaturized removable-media storage solution for use in a variety of hand-held
electronic devices. The Company's Zip and Jaz storage systems 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 storage generally
associated with floppy disk drives and disks, including expandable storage
capacity and data transportability, management and security. The Company's Ditto
tape drives primarily address the need for backup data storage.
Iomega Storage Solutions
The Company believes its Zip and Jaz disk drives and disks address key
information storage and management needs of 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. The Company's Ditto tape drives
offer a convenient and effective way for personal computer users to create
backup copies of their programs and files. Specifically, the Company's Zip, Jaz
and Ditto products are designed to offer the following benefits to personal
computer users:
- --------
Iomega, Zip, Jaz, Bernoulli and the stylized "i" logo are registered
trademarks; Clik!, ZipPlus, Ditto, Ditto Max, Ditto Dash, n hand, Zip Built-In,
AutoDetect and RecordIt are trademarks of Iomega Corporation. All other products
and brand names mentioned are the property of their respective owners.
<PAGE>
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. The Zip and Jaz drives 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 or 2 gigabytes (GBs) (in the case of Jaz).
Media Removability. The Company's Zip and Jaz products store data on
high-capacity removable disks, thus enabling personal computer users to:
- take programs and files from an office computer to use on a home or
laptop computer;
- share or transfer 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, modification or damage by another user of the
computer.
Data Backup. The Company's family of Ditto tape drives and tapes, as well as the
Zip and Jaz storage systems, 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
storage systems provide a combination of price, performance and features that
make them attractive data storage solutions for their target markets. Zip offers
data access times, transfer rates and storage capacity that greatly exceed those
offered by conventional floppy disk drives and disks, 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 10 GBs assuming 2:1 compression) 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. Zip drives and the Ditto 2GB tape drives were designed
to achieve price levels which the Company deems crucial to mass-market
consumers. The Jaz 1GB and 2GB drives and Ditto Max(TM) and Ditto Max
Professional tape drives, on the other hand, are principally targeted to more
technically demanding, high-end customers, while still offering affordability.
Iomega's Zip and Jaz products continued to be recognized by industry
publications and trade groups during 1997, receiving a number of prestigious
awards, including: Computer Currents' "Readers Choice Award" (Zip); PC World's
"The Best products of 1997 - Removable media/portable drive" (Zip); Home Office
Computing's "6th Annual Editors' Pick Award" (Jaz 1GB); PC/Computing's "1997 MVP
Awards Finalist - Removable Storage" (Jaz 1GB); PC/Computing's "Most Valuable
Products" award (Jaz 1GB); and Computer Shopper's "Best Removable/Backup Drive"
(Jaz 1GB).
<PAGE>
The following table lists the principal data storage devices currently
being offered by the Company:
<TABLE>
<CAPTION>
Product Typical Retail Price
(Year Introduced) Media and Capacity(1) Drive/Disk (2) Technology
<S> <C> <C> <C>
Zip (1995) (3) 100MB Zip Disks $149/$12.95 Drive: Winchester heads
ZipPlus(TM) (1997) 100MB Zip Disks $199/$12.95 Disks: Advanced flexible media
Notebook Zip (1997) 100MB Zip Disks OEM Product
Jaz 1GB (1995) (3) 1GB Jaz Disks $299/$89.95 Drive: Thin-film heads
Jaz 2GB (1998) (3) 2GB Jaz Disks $649/$149.95 Disks: Two rigid disk platters
Ditto 2GB (1996) (3) Ditto Tape 3.7GB $169/$19.95 Drive: Direct drive mechanism
Ditto Max (1997) (3) Ditto Tape 7-GB $199/$29.95 Media: Proprietary format of Ditto
Ditto Max Professional quarter inch tape cartridges
(1998) (3) Ditto Tape 10-GB $299/$34.95
</TABLE>
(1) The indicated capacities for Ditto tape cartridges represent the maximum
capacity assuming 2:1 data compression.
(2) Indicates the minimum advertised price or, if none, the typical price at
which the external version of the drive and the highest capacity media
for that drive is sold at retail. Prices for the internal version of a
drive are generally lower. Disk prices represent per unit purchase price
in multi-packs.
(3) Drives are available in internal and external versions.
Zip
Since its introduction in March 1995 and through the end of 1997, more than
11 million Zip drives have been shipped. Designed as an affordable mass-market
product, the Zip drive addresses multiple needs of personal computer users: data
storage, archiving, hard drive expansion, data transportability, distributing
files, including multimedia presentations, data security and backup. The drive
uses interchangeable 100 MB Zip disks to provide users of personal computers,
including Apple/Macintosh-compatible personal computers, with 70 times the
capacity of, and up to 20 times faster performance than, 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 were 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 ATAPI 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 slightly over 1.1 MBs 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 with an external
SCSI connector. The SCSI version has two connectors allowing it to be connected
with other SCSI devices. The external Zip drive has a compact design, 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 and ATAPI interface models.
ZipPlus
Building on the success of the original Zip, in the third quarter of 1997,
Iomega expanded the Zip family to include ZipPlus. ZipPlus includes all of the
features of the original Zip in addition to many new enhancements such as easier
connections; faster performance; bundled Iomega and third-party multimedia
software; and an on/off switch. Iomega's AutoDetect(TM) technology enables the
ZipPlus drive to be used with either SCSI or parallel port connections, offering
the industry's first parallel port drive with a built-in path to SCSI for higher
performance. Windows 95 users benefit from a 40 percent increase in speed for
opening, saving and copying files. The ZipPlus drive includes a small, universal
power supply (4 oz.) that is compatible with voltages worldwide.
Notebook Zip
To bring the high capacity, high performance and ease of use of Zip to the
mobile computer market, the Company began shipping notebook Zip drives in
November 1997. Features include 40 percent faster performance than the original
SCSI or ATAPI Zip drives in a Windows 95 environment, a Zip lock feature which
helps ensure reliability even during excessive or abrupt movement, a
user-defined power management feature that helps preserve a notebook computer's
battery, a slim 15mm design that fits most notebook computer bays, and a suite
of software including Iomega RecordIt(TM) and FileFit.
OEMs
As of March 1998, the following PC and consumer electronics companies
incorporate, or have announced plans to incorporate, Zip drives in selected
models of their lines of personal computers as a standard or optional feature:
Acer, Apple, APS Technologies, Chicony, Cisco, Clevo, Compal, Compaq, Dell,
Digital, Gateway, Glyph, Hitachi - Japan, Hewlett-Packard, IBM, Micron
Electronics, NEC - U.S., NEC - Japan, Packard Bell, Packard Bell - Europe,
Sharp, Sony, Umax and Unisys.
The Zip drive carries a one-year limited warranty and Zip disks are
currently sold with a limited lifetime warranty except where local law prohibits
such warranties.
Jaz
The Company began shipping Jaz 1GB drives and Jaz 1GB disks in December
1995. Jaz addresses the high-performance needs of personal computer and other
system users in several areas: professional applications (graphics, desktop
publishing, software development, IT/MIS, CAD/CAM, audio and video), corporate
users (sales force automation and back-up) and personal computer enthusiasts
(multimedia, worldwide web applications). The Jaz 1GB 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 demanded. Using 1 GB disks, Jaz is capable of
storing 1,000 24-bit full color pictures, 56 minutes of video (2X CD-ROM quality
data), or 1.7 hours of audio (CD quality, stereo). The Jaz 1GB drive is
available in an external SCSI version, with a suggested retail price of $299,
and is available in an internal SCSI version, with a typical retail price of
$279. Each Jaz 1GB cartridge sells for an estimated price of $89, if purchased
in quantities of six or more.
The Jaz 1GB drive incorporates many advanced technological features
including tri-pad, thin-film recording heads, dynamic head loading and drag and
drop motorized cartridge ejection. Jaz disks feature a dual rigid platter
cartridge and a proprietary disk capture system which secure 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
and auto-sensing SCSI termination.
Jaz 2GB
Due to the demand for an even higher capacity drive, the Company announced
Jaz 2GB, a 2-gigabyte storage solution, in September 1997. The Jaz 2GB removable
drive utilizes an ultra-SCSI interface, includes a complete software suite,
provides twice the capacity and up to 40 percent faster performance than the
original Jaz drive. With a maximum sustained transfer rate of 8.7 megabytes per
second, Jaz 2GB is fast enough to deliver full-screen, full-motion video. The
Jaz 2GB drive is also capable of reading and writing to Jaz 1GB disks. The
Company began shipping Jaz 2GB in February 1998.
Jaz drives carry a one-year limited warranty and Jaz disks are currently
sold with a limited lifetime warranty except where local law prohibits such
warranties.
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, in 1996, 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 10 GBs
(assuming 2:1 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, with storage capacities large enough to protect all of
the data on most hard drives, not just selected files. In 1996, the Company
introduced a proprietary tape format for use with the Ditto 2GB drive which is
available only from the Company and Sony, the manufacturer of the cartridges. In
November 1997, the Company shipped a new 3.7 GB compressed capacity cartridge
for the Ditto 2GB drive. The storage media offered by Iomega for use with Ditto
tape drives is based on proprietary formatting of quarter inch tape cartridges.
The Company continued its proprietary strategy by introducing the Ditto Max (in
late 1997) and Ditto Max Professional (in early 1998) drives and tapes. The
Ditto Max drives can be used with 3, 5, and 7 GB compressed capacity proprietary
tapes and the Ditto Max Professional can read 3, 5, 7, and 10 GB compressed
capacity proprietary tapes. Each of the proprietary format tapes used in the
Ditto Max and the Ditto Max Professional drives are manufactured for the Company
by a third party and marketed by the Company under the Ditto brand and by the
third-party manufacturer of such tapes. The 3 GB tape is manufactured by Sony, 5
GB tapes are manufactured by Sony and Imation, and the 7 GB and 10 GB tapes are
manufactured by Verbatim. During 1997, the Company discontinued production of
its Ditto 3200 drives.
The Company's tape drives are generally available in either internal or
external models. The internal version of the Ditto 2GB attaches to the standard
1 Mbps floppy drive interface in IBM PC-compatible computers or, in the case of
Ditto Max and Ditto Max Professional, the Ditto Dash(TM) DX, a high speed
adapter card which ships with the drives, 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
specified DOS, Windows, and Windows 95 environments. In addition, Ditto Max
Professional ships with backup software for specified Windows NT environments as
well. 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.
The Ditto 2GB, the Ditto Max and the Ditto Max Professional each carry a
two-year limited warranty. The Company's proprietary Ditto media is also sold
with a two-year limited warranty.
Clik!
The Company has announced, and plans to introduce in the second half of
1998, a miniaturized removable-media storage solution for use in a variety of
hand-held consumer electronics devices. This technology, initially announced
under the name n hand(TM), will be marketed under the trademark Clik!. Clik!
drives are designed to be used with digital cameras, laptop computers, smart
phones, personal digital assistants and other personal electronic devices and
are designed to allow users to transfer data between these devices, personal
computers and other Iomega products.
The Clik! product family is expected to include a small, low-cost portable
drive (external and internal versions) designed for hand-held electronic devices
and is expected to utilize 40 MB disks, each approximately half the size of a
business card, at an expected retail price of $9.95 per Clik! disk.
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 Company's current strategy is to position its products as industry
standards. To accomplish this, the Company has focused and will continue to
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
other customers for their own accounts. Sales of Zip drives to OEM customers
increased to approximately 32% of total Zip drive unit sales in 1997, as
compared to approximately 5% in 1996. To support and foster increased OEM sales,
Iomega initiated a broad-based Zip Built-In(TM) campaign during 1997.
During 1997, the Company decreased the suggested retail prices of its Zip,
Jaz and Ditto drives and conducted other promotions designed to further increase
market share. During 1998, the Company plans to increase spending, by a
substantial amount, on print and television advertising campaigns which are
designed to create greater consumer awareness of, and demand for, both its
aftermarket and OEM drives and to educate users on the potential uses for
multiple disks so as to increase demand for disks. In addition, in order to help
offset the expenses associated with the additional advertising, the Company is
currently planning to delay certain price decreases that may have otherwise been
effected earlier in 1998. Such delays in price decreases could allow competing
solutions to gain market share.
Retail Distribution
Retail outlets for the Company's products include mail order catalogs,
computer superstores, office supply superstores, consumer electronics
superstores, specialty computer stores and other retail outlets. 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 Europe and can
be found in more than 10,000 storefronts around the world. Retailers carrying
the Company's products include Best Buy, Circuit City, CompUSA, Computer City,
Costco Warehouse, Egghead, Fry's Electronics, MicroCenter, Office Max and
Staples in the U.S., and Dixons, FINAC, MicroWarehouse and Vobis in Europe.
Distributors include Ingram Micro, Merisel, MicroAge and Tech Data in the U.S.;
Actebis, Computer 2000, Ingram Micro Europe, and Karma International in Europe;
and Gennett Technologies, Q*Soft Australia Pty. Ltd. and Sunkyong Distribution
Ltd. in Asia.
Strategic Marketing Alliances
In addition to sales through retail and distribution 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 1997, the Company continued to
gain significant industry support from major PC companies that began or
announced plans to begin to incorporate Zip drives into their computer systems
as standard or optional features. At the end of 1997, the Company's OEM partners
included, among others: Acer, Apple, APS Technologies, Axis Communications,
Chicony, Cisco, Clevo, CNF, Compal, Compaq, Dell, Fuji, Gateway, Glyph, Hitachi,
Hewlett-Packard, IBM, Maxell, Micron Electronics, NEC, Packard Bell, Sharp,
Sony, Umax, Unisys and VST.
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 and Fuji, who offer
Zip drives in Japan and Zip disks globally in packages which feature Iomega's
name in addition to the partner's name.
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 and has established several sales offices in both Europe and Asia. Prior
to 1997, the Company had been invoicing predominantly in foreign currencies in
Europe. In 1997, the majority of sales to European customers were denominated in
U.S. dollars. Sales to Asian customers are typically denominated in U.S.
dollars. In total, sales outside of the United States represented 39%, 34% and
32% for the years ended December 31, 1997, 1996 and 1995, respectively, (see
note 13 to Consolidated Financial Statements).
<PAGE>
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 1997, the
Company continued its major print advertising campaigns for its Zip, Jaz and
Ditto products and television advertising campaigns in support of its Zip
products with an emphasis on the Company's Zip Built-In campaign aimed at
increasing awareness and demand of the availability of Zip storage solutions as
a built-in feature in personal computers. The Company expects marketing and
advertising expenses to increase substantially in 1998 as the Company seeks to
expand market awareness of its products and brand 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
retail and distribution customers generally allow customers, in the event of a
price decrease, credit equal to the difference between the price originally paid
and the new decreased price on units in the customers' inventories on the date
of the price decrease. When a price decrease is anticipated, the Company
establishes reserves for amounts estimated to be reimbursed to qualifying
customers. In addition, distribution and retail customers generally have the
right to return excess inventory within specified time periods. The Company
establishes reserves for inventory returns. There can be no assurance that these
reserves will be sufficient or that any future returns or price protection
charges will not have a material adverse effect on the Company's results of
operations and financial condition.
The Company markets its products primarily through computer product
distributors, retailers and OEMs. Accordingly, since the Company grants credit
to its customers, a substantial portion of outstanding accounts receivable are
due from computer product distributors, certain large retailers and OEMs. At
December 31, 1997, the customers with the ten highest outstanding accounts
receivable balances totaled $140.9 million, or 44% of gross accounts receivable,
with one customer accounting for $31.6 million, or 10% 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, 1997, sales to Ingram Micro, Inc., a
distributor, accounted for 14% of sales. During the year ended December 31,
1996, sales to Ingram Micro, Inc., accounted for 15% of sales. No other single
customer accounted for more than 10% of the Company's sales in 1997 or 1996.
Seasonality and Other Fluctuations of Revenue
Iomega's Zip products are targeted to the retail consumer market and to
personal computer OEMs. The Company's Jaz and Ditto products are targeted
primarily to the retail consumer market. Management believes the markets for the
Company's products are generally seasonal, with a higher proportional share of
total sales occurring in the fourth quarter and sales slowdowns commonly
occurring during the first quarter and summer months. Primarily as a result of
such seasonality, the Company experienced a decline in sales between the fourth
quarter of 1996 and the succeeding first quarter of 1997, and, partly because of
such seasonality, the Company expects to experience a decline in sales between
the fourth quarter of 1997 and the first quarter of 1998.
In March 1998, the Company announced, based on review of its preliminary
first quarter results, that it anticipates first quarter 1998 revenue to be
relatively flat with first quarter 1997 revenues and anticipates incurring a
loss for the first quarter 1998 in the range of $10 million to $25 million.
Revenues and growth rates for any prior quarter are not necessarily indicative
of revenues or growth rates 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 outside vendors. Since the first quarter of 1997, a substantial
portion of the Company's Zip drives, Jaz drives and disks and Ditto drives have
been manufactured in the Penang, Malaysia facility that was purchased by the
Company in September 1996. Due to the rapid growth of the Company's
manufacturing output and due to certain design changes and supplier quality
issues, combined with the shift of production to Penang, during 1997 the Company
experienced manufacturing quality problems, including higher than desired
manufacturing defect rates. The Company is undertaking a number of programs
designed to improve quality and reduce manufacturing defect rates and intends to
apply greater focus during 1998 on continuing to improve its manufacturing
processes.
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 purchased a 376,000 square-foot,
manufacturing facility in Penang, Malaysia to serve as an additional
manufacturing site for the Company's Zip drives, Jaz drives and disks and Ditto
drives. Although the Company believes it is positioned (either through existing
capacity or planned additional capacity) 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 not from
time to time encounter difficulties in providing necessary levels of
manufacturing capacity or that it will be successful in managing relationships
with third-party manufacturers, or that third-party manufacturing will be able
to meet the Company's quality requirements or third-party quantity requirements
for manufactured products. The Company currently has third-party manufacturing
relationships with Electronics Assembly, Inc. (which currently produces external
Zip drives), MegaMedia Corporation and Sentinel N.V. (which produce a
significant majority of all Zip disks) and Sony, Imation and Verbatim (each of
which produces one or more of the proprietary format tapes used with the
Company's Ditto products.
During 1996 and 1997, the Company granted non-exclusive worldwide licenses
to NEC Corporation (NEC) and Matsushita Communication Industrial Co., Ltd. of
Japan (MCI), respectively, to manufacture and sell Zip drives under NEC's and
MCI's brand names, as well as to OEMs. MCI commenced shipping drives in April
1997, and NEC commenced shipping drives in May 1997. In March 1998, the Company
granted a non-exclusive worldwide license to Citizen Watch Co., Ltd. of Japan
(Citizen), to manufacture and sell Clik! drives for use in its own portable
electronic products, to other OEMs and consumers worldwide. These agreements
increase competition faced by the Company, including price competition, since
the Company does not control the price at which NEC, MCI or Citizen sells
products for its own account. The Company receives (or will receive) royalties
on units sold to third parties by NEC, MCI and Citizen.
Many components incorporated in, or used in, the manufacture of the
Company's products are currently available only from single or sole source
suppliers. In particular, media used in Zip disks is obtained exclusively from
Fuji Photo Film and certain integrated circuits used in Zip drives are obtained
exclusively from Symbios Logic. 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. The Company continues to
develop relationships with qualified manufacturers with the goal of securing
high-volume manufacturing capabilities and controlling the 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 of components on a timely
basis or realize any future cost savings. 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
were adversely affected in the fourth quarter due to a shortage of components
for Notebook Zip drives which became commercially available during November
1997. Sales may be adversely affected for these or similar reasons in the
future.
The Company purchases a portion of its single, sole and limited source
components 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 (or, in the case of a
component purchased exclusively from one supplier, the Company could be
prevented from producing any quantity of the affected product(s) until such
component becomes available from an alternative source), delay product
shipments, increase the Company's material or manufacturing costs or cause an
imbalance in the inventory levels 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 January 1998 of approximately $220
million, compared to a backlog at the end of January 1997 of approximately $76
million. The backlogs at the end of January 1998 and 1997 were related primarily
to orders with scheduled shipment dates in future months and in January 1998, a
portion of the backlog was a result of delays in new product introductions. 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 or
perceived 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
1996 and 1997, the Company's efforts were primarily focused on enhancing the
features, developing different system interfaces, developing higher capacity and
performance versions, enhancing and expanding compatibility with various
computers and operating systems and reducing the production costs of its
existing Zip, Jaz and Ditto products. 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 development and enhancements to its Zip, Jaz and Ditto
products, the Company is developing a new storage technology called Clik!
(successor to the nohand technology announced in 1996), 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. This
technology is expected to provide a single, affordable means of capturing,
moving and storing information across multiple products. Each Clik! disk is
expected to be approximately half the size of a business card and is expected to
hold 40 MB of data. The Company believes Clik! has the potential to open up
several new markets for removable magnetic recording devices and expects it to
be available beginning in the second half of 1998. 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.
During 1997, 1996 and 1995, the Company's research and development expenses
were $78.0 million, $42.1 million and $19.6 million, respectively (or 4.5%, 3.5%
and 6.0%, respectively of net sales). Increased research and development
spending in 1997 was primarily related to efforts focused on the Company's Zip,
Jaz and Clik! product lines.
The Company operates in an industry that is subject to both rapid
technological change and rapid change in consumer demands. 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 drive products with
improved features, and to develop and manufacture those new products within a
cost structure that enables the Company to sell such products through effective
channels at lower prices than those of competitive products. 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 with other data
storage devices, such as fixed hard drives (for upgrade), magnetic cartridge
disk drives (that use either floppy or rigid media), magnetic tape drives,
magneto optical drives, optical disk drives and "floptical" disk drives. Current
competing solutions of removable media data storage devices include the LS-120,
or SuperDisk (product co-developed by the consortium of Compaq Computer,
Imation, O.R. Technology and MKE), the SyJet 1.5 GB, EZ Flyer 230 and SparQ 1.0
GB (products of Syquest Technology, Inc.), the Shark 250 (product of Avatar
Peripherals, Inc.), products of Nomai S.A. and the new CD-R and CD-RW drives. In
addition, a number of new systems have been announced including the 200 MB
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 and the 2.16 GB Orb drive which has been
announced by Castlewood Systems, Inc. Although the Company believes that its Zip
and Jaz products offer advantages over the other removable-media storage devices
and other storage solutions available today, the Company believes that the
price, performance and usability levels of existing removable-media products
have improved and will continue to improve and that other companies will
introduce new removable-media storage devices and new non-removable storage
solutions. 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 leading market
position. If such is the case, there can be no assurance that the Company's
products would achieve significant market acceptance.
To the extent that Zip and Jaz drives are used for incremental primary
storage capacity, they compete with non-removable media storage devices such as
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 Company believes that it is currently the only source of supply for the
disks used in its Jaz drives and believes Nomai S.A., a French company, is the
only source of supply other than the Company for disks marketed for use with Zip
drives. The Company is involved in litigation with Nomai in several
jurisdictions regarding Nomai's disk products. It is possible that other sources
of supply for disks used in Zip or Jaz drives will emerge, either as a result of
Nomai or another party succeeding in producing disks that are compatible with
Zip and/or Jaz drives without infringing the Company's proprietary rights, or as
a result of licenses granted by the Company to other parties. (See Note 4 to
Consolidated Financial Statements and the "Legal Proceedings" section in item 3
of this report.)
The Company's tape drives compete in the market for backup data storage
with other QIC and Travan products. Travan products currently offer capacities
up to 8 GBs (assuming 2:1 data 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. The proprietary format tapes used in the
Company's Ditto 2GB, Ditto Max and Ditto Max Professional drives are each
marketed by the Company and the third-party manufacturer or manufacturers of
such 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 has entered into license agreements with Matsushita
Communication Industrial Co., Ltd. of Japan and NEC Corporation for the
manufacture and sale of Zip drives. Accordingly, the Company faces competition
from such licensees and expects to compete in the future with any other
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 would adversely affect gross margins 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, removability,
transportability 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 5.25-inch, 3.5-inch, 2.5-inch and 1.8-inch
form factors. The most common form factor for Winchester and floppy drives is
3.5-inches. The Company currently offers 3.5-inch Zip and Jaz drives. The most
common system interface for the OEM market is ATAPI. The Company currently
offers internal Zip drives in ATAPI and SCSI interface models, internal Jaz
drives in SCSI interface models, internal Ditto 2GB drives in floppy interface
models and internal Ditto Max drives which use the Ditto Dash DX controller
card.
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 availability of
competitive products with superior performance, functionality, ease of use,
security or substantially lower prices could 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. While the Company currently intends to
vigorously enforce its intellectual property rights, there can be no assurance
that the steps taken by the Company to protect its technology and enforce its
rights will be successful (see "Legal Proceedings" section in item 3 of this
report). The Company has filed approximately 300 U.S. and foreign patent
applications relating to its Zip, Jaz and Clik! drives and disks, although there
can be no assurance that such patents will be issued. The Company holds more
than 100 individually or jointly owned U.S. and foreign patents relating to its
Zip, Jaz, Ditto and Bernoulli(R) technologies. There can be no assurance that
any patents obtained by the Company will provide substantial value or protection
to the Company, or that their validity will not be challenged or that
affirmative defenses to infringement will not be asserted. The validity of
certain of the Company's patents has been challenged by parties against whom
infringement claims have been asserted. If another party were to succeed in
producing and selling Zip- or Jaz-compatible disks in volume, without infringing
or violating the Company's intellectual property rights, the Company's sales
would be adversely affected and such adverse effects could be material. It is
also possible that the price at which the Company sells its proprietary disks
could be adversely affected by the availability of such disks from other
parties. Moreover, because the Company's Zip and Jaz disks have 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.
As is typical in the data storage industry, from time to time the Company
has been, and may in the future be, notified of claims that it may be infringing
certain patents, trademarks and other intellectual property rights of third
parties. It is not possible to predict the outcome of such claims and there can
be no assurance that such claims will be resolved in the Company's favor. If one
or more of such claims is resolved unfavorably, there can be no assurance that
such outcomes will not have a material adverse effect on the Company's business
or financial results. The data storage industry has been characterized by
significant litigation relating to infringement of patents and other
intellectual property rights. The Company has in the past been engaged in patent
infringement litigation, both as plaintiff and defendant. There can be no
assurance that future intellectual property claims will not result in
litigation. If infringement were established, the Company could be required to
pay substantial damages or be enjoined from manufacturing and selling the
infringing product(s) in one or more countries, or both. In addition, the costs
of engaging in intellectual property litigation may be substantial regardless of
outcome, and there can be no assurance that the Company will be able to obtain
any necessary licenses on satisfactory terms.
Certain technology used in the Company's products is licensed on a
royalty-bearing basis from third parties, including certain patent rights
relating to Zip products and the backup software included with the Company's
Ditto products. The Company is in the process of negotiating a definitive
license agreement for the Ditto backup software and the failure to execute such
definitive agreement or the termination of any such license arrangements could
have a material adverse effect on the Company's business and financial results.
<PAGE>
Employees
As of December 31, 1997, the Company employed 4,816 persons worldwide,
consisting of 381 in research and development, 3,302 in manufacturing, 416 in
sales, marketing and service, 281 in customer satisfaction and 436 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. The Company's success will depend in large part upon the services of a
number of key employees. The loss of the services of one or more of these key
employees could have a material adverse effect on the Company. Effective March
24, 1998, Kim B. Edwards, resigned as President and Chief Executive Officer of
the Company. James E. Sierk, a member of the Company's Board of Directors, has
assumed the role of acting President and Chief Executive Officer while the
Company conducts a search for a new President and Chief Executive Officer. The
Company is also seeking to fill a number of other key management vacancies,
including the appointment of a senior executive responsible for Sales and
Marketing and General Managers of the Company's Europe, Asia Pacific and Mobile
Storage Divisions.
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 1997 and is not expected to have a material
effect in 1998.
ITEM 2. PROPERTIES:
The Company's executive offices, certain distribution facilities, certain
manufacturing facilities, and certain research and development facilities are
located in leased offices and warehouses in the Roy, Utah area. During 1997, the
Company leased warehouse facilities in North Carolina to serve as its principal
distribution center for North America. 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 for local sales, marketing and technical
support personnel. In September 1996, the Company purchased a 376,000 square
foot manufacturing facility in Penang, Malaysia.
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 to
which any of their property is subject.
The Company is engaged in ongoing litigation in several jurisdictions
against Nomai S.A., a French company, Nomai's U.S. subsidiary and several Nomai
distributors in connection with Nomai's XHD disk products, which Nomai claims to
be compatible with certain of the Company's Zip drives, and a disk product
planned by Nomai, but not yet introduced, purportedly for use with the Company's
Jaz drives, and in connection with various claims asserted by Nomai, including
claims of patent and copyright invalidity, abuse of dominant position, and
improper patent markings and warranty terms in Germany. The principal ongoing
proceedings are as follows:
Iomega Corporation v. Nomai S.A. filed in the Paris District Court on
March 25, 1997 and on September 30, 1997; Nomai S.A. v. Iomega
International S.A. and Iomega Corporation filed in the District Court of
Hamburg on October 13, 1997; Nomus, Inc., and Nomai S.A. v. Iomega
Corporation filed in the United States District Court for the Northern
District of California on October 15, 1997, and amended counterclaims in
such action filed by Iomega on December 17, 1997; a confidential complaint
submitted by Nomai S.A. against Iomega Corporation on October 15, 1997, to
the European Commission in Brussels; Iomega Corporation v. Mac and More
Limited, Nomai S.A. and Marc-Andre Frouin filed in the London High Court of
Justice Chancery Division on October 29, 1997, and Iomega Corporation v.
Nomai S.A. filed in the London High Court of Justice Chancery Division on
March 9, 1998; Iomega Corporation v. Nomai S.A. filed in the Paris District
Court on November 12, 1997, (with respect to Nomai's so-called "DUO"
product in development that purports to be compatible with Iomega Jaz
drives); Iomega Corporation v Triangel Computer GmbH filed in the
Dusseldorf District Court on November 19, 1997; Iomega Corporation v.
Prutting (MediaCom) filed in the Mannheim District Court on November 12,
1997; Iomega Corporation v. Speirings Computers & Supplies B.V. and Nomai
S.A. filed in the Amsterdam Regional Court on December 24, 1997, and
counterclaims in such action filed by the defendants on January 28, 1998;
Iomega Corporation v. boeder Deutschland GmbH filed in the Frankfurt
District Court on December 11, 1997 and on February 6, 1998; Nomai S.A. v.
Misco Germany, Inc. filed in the Frankfurt District Court on January 16,
1998 and Iomega Corporation v. Nomai S.A., et al. filed in the Federal
Court of Australia Victoria District, Registry General Division on March 6,
1998.
In these proceedings the Company has maintained that Nomai's products
infringe the Company's copyrights, patents, trademarks or other intellectual
property rights and/or that Nomai and its distributors have engaged in unfair
competition or passing off. Nomai has denied such infringement, contested the
validity of the underlying intellectual property right and/or denied such unfair
competition and passing off, and in certain European proceedings has asserted
antitrust claims against the Company. The Company has also applied for
declaratory relief against Nomai in respect of certain antitrust allegations
under English and European law. The proceedings are at various stages. In a
number of the proceedings, the court has declined to enjoin preliminarily or to
continue to enjoin preliminarily sales by Nomai of its XHD cartridge, subject in
many cases to certain restrictions on advertising claims made with respect to
XHD cartridges, or on use by Nomai or its distributors of Iomega trademarks
and/or logos. In February 1998, the Amsterdam Regional Court issued a
preliminary order requiring the Company to remove the light baffle from notebook
Zip drives in the possession of European Union distributors and enjoining Iomega
from including in Zip drives, brought in the future to the European Union
market, any device which has no purpose other than to prevent the compatibility
of the XHD disks with Zip storage systems.
An adverse outcome in these proceedings could result in the continuing sale
by Nomai in one or more countries, or the introduction for sale in the United
Kingdom (or other countries where the product is not presently offered for
sale), of a disk product claimed to be compatible with certain 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 continuing sales or
introductions would adversely affect the Company's sales and would have a
disproportionately negative effect on the Company's net income. Such adverse
effects could be material. In addition, Nomai has asserted various antitrust
claims against the Company, which if decided against the Company could
materially and adversely affect the Company.
On July 23, 1997, the Company initiated litigation against SyQuest
Technology, Inc. ("SyQuest") in the United States District Court in the District
of Delaware for infringing the Company's U.S. Patent No. 5.644,444, U.S. Design
Patent No. D378,518 and the Company's registered trademark "JET". The complaint
requests monetary damages and injunctive relief enjoining SyQuest from further
infringement. The matter is scheduled for trial in January 1999. On March 6,
1998, the Company also initiated litigation against SyQuest, its French
subsidiary and a French distributor of SyQuest products, in the Paris District
Court, based on claims of copyright and patent infringement.
The Company continues to be committed to vigorously protecting and
enforcing its intellectual property rights and to attacking unfair competition
in the proceedings referenced above.
During 1997, two consumer class-action suits against the Company,
Pizzimenti, et al. v. Iomega Corporation, filed in the Chancery Court of the
State of Delaware in and for New Castle County on March 10, 1997, relating to
administration of consumer rebate programs and Cox v. Iomega Corporation, filed
in the Chancery Court of the State of Delaware in and for New Castle County on
July 16, 1997, relating to technical support, were settled. A settlement of the
rebate related Pizzimenti class-action suit was approved by the Chancery Court
on March 24, 1998. The Company has also responded to inquiries received from the
Federal Trade Commission relating to certain rebate and registration card
programs and certain product advertisements. The Company is engaged in
discussions with the Commission staff concerning alleged violations by the
Company of the FTC Act and the Mail Order Rule and is attempting to reach a
resolution with the Commission that would avoid the necessity of litigating
these matters. In the event such discussions do not lead to a mutually
acceptable resolution, management of the Company does not believe an adverse
outcome in any resulting litigation would be material. A settlement of the
technical support related Cox class-action suit has been approved preliminarily
by the Chancery Court and a hearing on the motion for final court approval is
scheduled for April 3, 1998.
Beginning on February 10, 1998, several purported class-action complaints
were filed in the United States District Court for the District of Utah against
the Company and certain of its officers on behalf of certain persons who
purchased the Company's common stock during the period from September 22, 1997,
to January 22, 1998. The complaints allege that the Company and certain of its
officers violated certain federal securities laws. The complaints seek an
unspecified amount of damages. Management believes that the named defendants
have highly meritorious defenses to the allegations made in the lawsuits and the
Company intends to vigorously defend against such allegations.
On February 25, 1998, the Company was served with a complaint in a
purported class action filed in the Supreme Court of the State of New York,
entitled Christian Champod v. Iomega Corporation. The named plaintiff claims to
have commenced the action on behalf of a purported class consisting of certain
persons who purchased Iomega Ditto tape drives since February 18, 1992, and a
subclass consisting of such purchasers who called the Company's "800" or "888"
telephone number for technical assistance and/or customer service and were
charged a fee for the call. The complaint claims violations of certain
provisions of the New York General Business Law and fraudulent inducement, based
on, among other things, alleged advertising and product packaging
representations regarding the Ditto products' ability to "read" certain
non-Ditto cartridges. Additionally, the complaint alleges that Iomega's product
packaging, indicating that a customer could call a toll free "800" or "888"
telephone number for technical assistance, implicitly, but falsely, represented
that the customer could receive free telephone technical support. It is the
Company's belief that these latter claims, at least through September 1, 1997,
i.e., the end of the class period for the Cox action discussed above, would be
subject to release upon approval of the settlement now pending before the
Delaware Chancery Court in the Cox action. As for the remainder of the action,
the Company is assessing the maintainability of the suit as a class action and
intends to defend itself vigorously against the claims asserted.
<PAGE>
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, 1997.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company as of March 1, 1998, were as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Kim B. Edwards 50 President, Chief Executive Officer and Director*
Leonard C. Purkis 49 Senior Vice President - Finance and Chief Financial Officer
L. Scott Flaig 54 Executive Vice President, Operations
Edward D. Briscoe 35 President, Personal Storage Division
Fred Forsyth 54 President, Professional Products Division
Laurie B. Keating 44 Senior Vice President, General Counsel and Secretary
Anton J. Radman, Jr. 45 Senior Vice President, Strategic Business Development
Douglas M. Clifford 54 Vice President, Research and Development
James Kelly 40 Vice President/General Manager, Mobile Storage Division
Kevin O'Connor 39 Vice President, Human Resources
Robert J. Simmons 35 Vice President and Treasurer
Dan E. Strong 39 Vice President and Corporate Controller
</TABLE>
* Effective March 24, 1998, Mr. Edwards resigned as President and Chief
Executive Officer of the Company. James E. Sierk, a member of the Company's
Board of Directors, has assumed the role of acting President and Chief Executive
Officer while the Company conducts a search for a new President and Chief
Executive Officer.
Kim B. Edwards joined the Company as President and Chief Executive Officer
on January 1, 1994. From March 1993 to December 1993, 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 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.
L. Scott Flaig joined the Company in November 1997. From 1996 to 1997, Mr.
Flaig was an adjunct professor at Northwestern University, lectured at top
business schools across the country and performed consulting services in the
area of supply chain management. From 1992 to 1995, Mr. Flaig was Senior Vice
President, Worldwide Operations for Dell Computer based in Austin, Texas. He has
also held senior operations management positions at Ernst & Young, Digital
Equipment Corporation and Xerox.
Edward D. Briscoe was appointed President, Personal Storage Division in
September 1997. Mr. Briscoe joined the Company as Vice President, Sales in
January 1995. From January 1997 to September 1997, Mr. Briscoe served as Vice
President and General Manager of the Personal Storage Division. 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.
Fred Forsyth joined the Company in August 1997. From July 1989 to March
1997, Mr. Forsyth was with Apple Computer where he was most recently Senior Vice
President and General Manager of the Power Macintosh group. Mr. Forsyth also
spent nine years at Digital Equipment Corporation where his experience included
global operational responsibility for procurement, manufacturing and logistics.
From 1968 to 1979, Mr. Forsyth was with General Electric in a variety of
leadership roles and is a graduate of GE's Manufacturing management program.
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, from May 1987 to March 1989, served as Group Counsel at
Tandem Computers Incorporated, a fault-tolerant computer maker and software
provider.
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.
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.
James Kelly was appointed Vice President and General Manager of the Mobile
Storage Division 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.
Kevin O'Connor joined the Company as Vice President, Human Resources in
January 1997. Mr. O'Connor came to the Company from Dell Computer Corporation
where he held several senior human resource positions. While at Dell, from
October 1995 to December 1996, Mr. O'Connor 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 joined the Company as Treasurer in January 1996. In
January 1998, he was promoted to Vice President, Treasurer. 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, and
Vice President and Corporate Controller in January 1998. Mr. Strong held various
management positions within the finance and accounting organizations 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.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS:
The information required by this item is found in the section entitled
"Securities" of the Company's 1997 Annual Report to Stockholders, which section
is incorporated herein by reference.
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
1997 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 1997 Annual Report to Stockholders, which section
is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
The information required by this item is contained in the section entitled
"Financial Highlights" of the Company's 1997 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.
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 1998 annual meeting of stockholders entitled
"ITEM ONE - ELECTION OF DIRECTORS" and "-- STOCK OWNERSHIP INFORMATION --
Section 16(a) Beneficial Ownership Reporting Compliance", which sections are
incorporated herein by reference and 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 1998 annual meeting of stockholders entitled
"ITEM ONE - ELECTION OF DIRECTORS - DIRECTOR COMPENSATION" and "-- EXECUTIVE
COMPENSATION", 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 1998 annual meeting of stockholders entitled
"ITEM ONE - ELECTION OF DIRECTORS - STOCK OWNERSHIP INFORMATION -- Ownership by
Management and Principal Stockholders", 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 1998 annual meeting of stockholders entitled
"ITEM ONE - ELECTION OF DIRECTORS - EXECUTIVE COMPENSATION -- Employment and
Severance Agreements", which section is incorporated herein by reference.
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, 1997.
<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/ Leonard C. Purkis
Leonard C. Purkis
Senior Vice President-Finance and
Chief Financial Officer
Date: March 30, 1998
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.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ James E. Sierk Acting President and Chief Executive ) March 30, 1998
- ----------------------------- Officer and Director )
James E. Sierk (Acting Principal executive officer) )
)
/s/ Leonard C. Purkis Senior Vice President - Finance and ) March 30, 1998
- ----------------------------- Chief Financial Officer (Principal )
Leonard C. Purkis financial and accounting officer) )
)
/s/ David J. Dunn Chairman of the Board of Directors ) March 30, 1998
- ----------------------------- )
David J. Dunn )
)
/s/ Willem H.J. Andersen Director ) March 30, 1998
- ----------------------------- )
Willem H.J. Andersen )
)
/s/ Robert P. Berkowitz Director ) March 30, 1998
- ----------------------------- )
Robert P. Berkowitz )
)
/s/ David A. Duke Director ) March 30, 1998
- ----------------------------- )
David A. Duke )
)
/s/ Kim B. Edwards Director ) March 30, 1998
- ----------------------------- )
Kim B. Edwards )
)
/s/ Michael J. Kucha Director ) March 30, 1998
- ----------------------------- )
Michael J. Kucha )
)
- ----------------------------- Director )
John R. Myers )
)
/s/ John E. Nolan Director ) March 30, 1998
- ----------------------------- )
John E. Nolan )
)
/s/ John E. Sheehan Director ) March 30, 1998
- ----------------------------- )
The Honorable John E. Sheehan )
)
</TABLE>
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED
FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements appear in the Company's
1997 Annual Report to Stockholders and are incorporated herein by reference:
Description
Report of Independent Public Accountants
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995
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 20, 1998 (except with respect to the
fourth paragraph of Note 4, as to which the date is February 10, 1998.) 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 20, 1998
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance at charged to Balance
beginning costs and at end
Description of period expenses Deductions of period
(in thousands)
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL
ACCOUNTS:
Year ended December 31, 1997 $ 8,992 $ 3,598 $ (1,324)* $11,266
Year ended December 31, 1996 $ 1,861 $ 9,022 $ (1,891)* $ 8,992
Year ended December 31, 1995 $ 1,627 $ 799 $ (565)* $ 1,861
PRICE PROTECTION AND
VOLUME REBATES:
Year ended December 31, 1997 $17,041 $44,956 $(33,498)** $28,499
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
</TABLE>
- ---------------
* Represents write-offs of Accounts Receivable
** Credits granted against Accounts Receivable
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,
333-15335, 333-26375, 333-43775 and 333-41955.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
March 30, 1998
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report on Form
10-K:
<TABLE>
<CAPTION>
Exhibit
Number Description
<S> <C>
3.(i).1 (14) Restated Certificate of Incorporation of the Company, as amended
3.(ii).1 (14) By-Laws of the Company, as amended
4.1 (7) Indenture, dated March 13, 1996, between the Company and State Street
Bank and Trust Company
4.2 (3) Rights Agreement dated as of July 28, 1989 between the Company and
The First National Bank of Boston, as Rights Agent
4.2(a) (4) 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 (1) 1981 Stock Option Plan of the Company, as amended
** 10.2 (1) 1987 Stock Option Plan of the Company, as amended
** 10.3 (1) 1987 Director Stock Option Plan of the Company, as amended
** 10.4 (10) 1995 Director Stock Option Plan of the Company, as amended
** 10.5 (2) Form of Indemnification Agreement between the Company and each of
its directors
** 10.6 (11) 1997 Stock Incentive Plan
** 10.7 (12) Iomega Corporation Nonqualified Deferred Compensation Plan
** 10.8 (5) Employment Letter dated November 29, 1993 between the Company and
Kim Edwards
** 10.9 (6) Iomega Incentive Plan for Kim B. Edwards
** 10.10 (13) 1997 Bonus Plan
10.11 (3) Rights Agreement dated as of July 28, 1989 between the Company and
The First National Bank of Boston, as Rights Agent
10.12(a) (4) 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
10.13 (7) Indenture, dated March 13, 1996, between the Company and State Street
Bank and Trust Company
10.14 (13) $200 million Credit Agreement, dated March 11, 1997.
10.14(a) (13) Pledge Agreement, dated March 11, 1997.
10.14(b) (13) Security Agreement, dated March 11, 1997.
10.14(c) First Amendment to $200 Credit Agreement dated January 23, 1998.
10.15 (8) Lease Agreement dated January 25, 1996 between the Company and
Boyer Iomega LLC, by the Boyer Company, L.C., its Manager
10.16 (9) Agreement for the Sale and Purchase of Assets in Malaysia, dated
September 13, 1996, between the Company and Quantum Corporation.
10.16(a) (9) 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
10.16(b) (9) 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
10.17 Lease Agreement dated May 13, 1997, between the Company and Liberty Property
Limited Partnership.
13.1 Portions of the Company's 1997 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. Financial Data Schedule (only filed as part of electronic copy)
- ---------------------------
<PAGE>
** 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 Annual Report on Form
10-K for the year ended December 31, 1991
(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, 1992
(File No. 0-11963).
(3) 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).
(4) 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).
(5) 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).
(6) 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).
(7) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-3. (File No. 33-64995)
(8) 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).
(9) 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).
(10) Incorporated herein by reference to the
exhibits to the Company's Annual Report on Form
10-K for the period ended December 31, 1996
(File No. 1-12333).
(11) Incorporated by reference to Appendix to the
Company's definitive Proxy Statement for the
1997 Annual Meeting of Stockholders
(File No. 1-12333).
(12) Incorporated by reference to the exhibits to the
Company's Registration Statement on Form S-8
(File No.333-43775)
(13) Incorporated herein by reference to the
exhibits to the Company's Quarterly Report on
Form 10-Q for the period ended March 30, 1997
(File No. 1-12333).
(14) Incorporated herein by reference to the
exhibits to the Company's Quarterly Report on
Form 10-Q for the period ended June 29, 1997
(File No. 1-12333).
</TABLE>
AMENDED AND RESTATED CREDIT AGREEMENT
AND COLLATERAL RELEASE
AMENDED AND RESTATED CREDIT AGREEMENT AND COLLATERAL RELEASE dated as of
January 23, 1998 among IOMEGA CORPORATION (the Borrower), the BANKS listed on
the signature pages hereof (the Banks), and CITICORP USA, INC., as Security
Agent (the Amendment and Restatement).
W I T N E S S E T H :
WHEREAS, Citibank, N.A., as Administrative Agent, Morgan Guaranty Trust
Company of New York, as Documentation Agent, and the parties hereto other than
Citicorp USA, Inc., have heretofore entered into a Credit Agreement dated as of
March 11, 1997 (the Credit Agreement); and
WHEREAS, the parties hereto desire to (x) modify the Credit Agreement to
(i) extend the Termination Date from March 11, 2000 to January 23, 2001, (ii)
change the Commitment Schedule and the Pricing Schedule and permit each of Wells
Fargo Bank, N.A., Credit Lyonnais Los Angeles Branch, National Bank of Canada
and Credit Italiano, New York Branch, to cease to be a party to the Credit
Agreement as of the date hereof, (iii) agree as to the amount of the Borrowing
Base for the period from the date hereof through the first date on which
financial statements are required to be delivered for the first Fiscal Quarter
ending after the date hereof, (iv) amend the definition of Restricted Payment
and the restricted payments covenant to permit specified amounts of stock
repurchases and rights redemptions, (v) amend the definition of Temporary Cash
Investment to permit certain Investments by foreign Subsidiaries, (vi) amend the
litigation representation to reflect proceedings disclosed in periodic filings
with the Securities and Exchange Commission and (vii) modify the representations
as to Subsidiaries to exclude immaterial Subsidiaries, (y) release the
Collateral and (z) restate the Credit Agreement in its entirety to read as set
forth in the Credit Agreement with the modifications specified below;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Defined Terms; References. Unless otherwise specifically defined
herein, each term used herein which is defined in the Credit Agreement has the
meaning assigned to such term in the Credit Agreement. Each reference to hereof,
hereunder, herein and hereby and each other similar reference and each reference
to this Agreement and each other similar reference contained in the Credit
Agreement shall, after this Amendment becomes effective, refer to the Credit
Agreement as amended and restated hereby.
SECTION 2. Definition of Restricted Payments. The definition of Restricted
Payment in Section 1.01 of the Credit Agreement is amended to add the following
sentence at the end thereof:
It is understood that the net exercise of stock options and other employee
awards not involving any cash payments by the Borrower, pursuant to plans
described in the Borrower's filings with the Securities and Exchange
Commission, does not constitute a Restricted Payment by the Borrower.
SECTION 3. Definition of Temporary Cash Investment. Clause (iii) of the
definition of Temporary Cash Investment in Section 1.01 of the Credit Agreement
is amended to read in its entirety as follows:
(iii) time deposits with, including certificates of deposit issued by, any
office located in the United States of any bank or trust company which is
organized or licensed under the laws of the United States or any State
thereof (or, if the Investment is made outside the United States by a
foreign Subsidiary, any office located in the United Kingdom, Switzerland
or the Netherlands of any bank or trust company which is organized or
licensed under the laws of the United Kingdom, Switzerland or the
Netherlands, the unsecured long-term debt of which is rated at least A by
Standard & Poor's Ratings Service or A2 by Mode's Investors Services, Inc.)
and has capital, surplus and undivided profits aggregating at least
$1,000,000,000,
SECTION 4. Extension of Termination Date. The definition of Termination
Date in Section 1.01 of the Credit Agreement is amended by changing the date
specified therein from March 11, 2000 to January 23, 2001.
SECTION 5. Modification of Litigation Representation. Section 4.05 of the
Credit Agreement is amended by replacing the word There with the following:
Except with respect to clause (i) of the definition of Material Adverse
Effect in the event of an adverse decision in any of the legal proceedings
referenced in the Borrower's Quarterly Report on Form 10-Q for the
quarterly period ended September 28, 1997 or in any antitrust or fair trade
proceeding relating to Nomai S.A.'s XHD cartridge, there
SECTION 6. Material Subsidiaries. Section 4.09 of the Credit Agreement is
amended by adding after the word Subsidiaries the following:
which has consolidated assets of at least $1,000,000
SECTION 7. Increase in Minimum Consolidated Tangible Net Worth Section 7.
Increase in Minimum Consolidated Tangible Net Worth . Section 5.11 of the Credit
Agreement is amended by changing the amount specified therein from $250,000,000
to $313,600,000 and by changing the dates specified therein from December 31,
1996 to September 30, 1997.
SECTION 8. Increase in Amount Available for Restricted Payments Section
5.15 of the Credit Agreement is amended in its entirety to read as follows:
Neither the Borrower nor any Subsidiary will declare or make any Restricted
Payment; provided that the Borrower may (x) purchase and retire shares of its
capital stock and (y) redeem rights issued under any shareholders rights plan as
in effect from time to time so long as the aggregate amount paid for such
purchases in any Fiscal Quarter of 1998, Fiscal Year 1999, Fiscal Year 2000 or
Fiscal Year 2001 (each, a Fiscal Period) does not exceed the Permitted Amount
for such Fiscal Period. For purposes of this Section, Permitted Amount means (w)
for the first Fiscal Quarter of 1998, $50,000,000, (x) for each of the second,
third and fourth Fiscal Quarters of 1998, the sum of 30% of consolidated net
income of the Borrower and its Consolidated Subsidiaries for the prior Fiscal
Quarter (the Prior Quarter) plus the amount (if any) by which the Permitted
Amount for the Prior Quarter exceeds the aggregate amount paid for such
purchases during the Prior Quarter, (y) during Fiscal Year 1999, the sum of 30%
of consolidated net income of the Borrower and its Consolidated Subsidiaries for
the fourth Fiscal Quarter of 1998 plus the amount (if any) by which the
Permitted Amount for the fourth Fiscal Quarter of 1998 exceeds the aggregate
amount paid for such purchases during the fourth Fiscal Quarter of 1998, and (z)
in any subsequent Fiscal Year, beginning with Fiscal Year 2000, the sum of 20%
of consolidated net income of the Borrower and its Consolidated Subsidiaries for
the prior Fiscal Year plus the amount (if any) by which the Permitted Amount for
the prior Fiscal Year exceeds the amount paid for such purchases during such
prior Fiscal Year. For purposes of calculating compliance with the limitations
set forth in the preceding sentence, the amount of any Restricted Payment shall
be reduced (but not below zero) by any cash gains realized on transactions in
Derivatives Obligations entered into to hedge or close out the transaction with
respect to which the Restricted Payment was made, and the Borrower shall notify
the Agents and the Banks promptly if any Permitted Amounts are recalculated
retroactively to give effect to any such reduction.
SECTION 9. Reallocation of Commitments; Reduction of Interest Rates;
Departing Banks. The Commitment Schedule and Pricing Schedule attached to the
Credit Agreement (the Existing Schedules) are deleted and replaced by the
Commitment Schedule and the Pricing Schedule attached to this Amendment and
Restatement (the New Schedules). The New Schedules shall apply to and for
purposes of calculation of interest and fees accruing under the Credit Agreement
on and after the date hereof. The Existing Schedules shall continue to apply to
interest and fees accruing under the Credit Agreement prior to the date hereof.
As of the date hereof, each of Wells Fargo Bank, N.A., Credit Lyonnais Los
Angeles Branch, National Bank of Canada and Credito Italiano, New York Branch,
hereby ceases to be a party to the Credit Agreement as amended by this Amendment
and Restatement.
SECTION 10. Agreement with Respect to Borrowing Base. The Banks agree that
during the period beginning on the date hereof and ending on the first date on
which financial statements are required to be delivered pursuant to clause (a)
or (b) of Section 5.01 for the first Fiscal Quarter ending after the date
hereof, the Borrowing Base shall be $200,000,000.
SECTION 11. Release of Collateral. The Banks consent to the release by the
Security Agent of, and the Security Agent hereby releases, all of the
Collateral. From and after the date hereof, all provisions of the Credit
Agreement relating to Collateral are deemed to be without further force or
effect. Without limiting the generality of the foregoing, the Pledge Agreement
and the Security Agreement are terminated and Sections 4.12 and 6.01(k) of the
Credit Agreement are deleted in their entirety.
SECTION 12. Representations of BorrowerSection. The Borrower represents and
warrants that (i) the representations and warranties of the Borrower set forth
in Article 4 of the Credit Agreement are true on and as of the date hereof and
(ii) no Default has occurred and is continuing on such date.
SECTION 13. Governing Law. This Amendment and Restatement shall be governed
by and construed in accordance with the laws of the State of New York.
SECTION 14. Counterparts. This Amendment and Restatement may be signed in
any number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
SECTION 15. Effectiveness. This Amendment and Restatement shall become
effective as of the date hereof on the date when the following conditions are
met (the Amendment Closing Date):
(a) the Documentation Agent shall have received from each of the
Borrower and the Banks a counterpart hereof signed by such party or
facsimile or other written confirmation (in form satisfactory to the
Documentation Agent) that such party has signed a counterpart hereof;
(b) the Documentation Agent shall have received an opinion of Hale and
Dorr LLP, counsel for the Borrower, dated the Amendment Closing Date and
substantially in the form of Exhibit A hereto; and
(c) the Documentation Agent shall have received a certificate, dated
the Amendment Closing Date, signed by the Secretary of the Borrower and
substantially in the form of Exhibit B hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment and
Restatement to be duly executed by their respective authorized officers as
of the day and year first above written.
IOMEGA CORPORATION
By /s/ Robert J. Simmons
Name: Robert J. Simmons
Title: Vice President and Treasurer
BANKS
CITIBANK, N.A.
By /s/ Carolyn A. Kee
Name: Carolyn A. Kee
Title: Attorney-in-Fact
MORGAN GUARANTY TRUST
COMPANY OF NEW YORK
By /s/ Jeffrey Hwang _
Name: Jeffrey Hwang
Title: Vice President
FLEET NATIONAL BANK
By /s/ William E. Rurode, Jr.
Name: William E. Rurode, Jr.
Title: Senior Vice President
WELLS FARGO BANK, N.A.
By /s/ Alfred Artis, Jr.
Name: Alfred Artis, Jr.
Title: Vice President
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS
ASSOCIATION
By /s/ Kevin Mc Mahon
Name: Kevin Mc Mahon
Title: Managing Director
FIRST SECURITY BANK, N.A.
By /s/ Taft G. Meyer
Name: Taft G. Meyer
Title: Vice President
KEYBANK NATIONAL ASSOCIATION
By /s/ J. T. Taylor
Name: J. T. Taylor
Title: Assistant Vice President
ABN AMRO BANK N.V.
By /s/ Thomas R. Wagner
Name: Thomas R. Wagner
Title: Group Vice President
By /s/ Richard R. DaCosta
Name: Richard R. DaCosta
Title: Assistant Vice President
CREDIT LYONNAIS LOS ANGELES
BRANCH
By /s/ Dianne M. Scott
Name: Dianne M. Scott
Title: Vice President and Manager
NATIONAL BANK OF CANADA
By /s/ Raymond L. Yager
Name: Raymond L.Yager
Title: Vice President
By /s/ A.M. Conneen
Name: A.M. Conneen
Title: Vice President
THE SUMITOMO TRUST & BANKING
CO., LTD., LOS ANGELES AGENCY
By /s/ Ninoos Y. Benjamin
Name: Ninoos Y. Benjamin
Title: Vice President & Manager
CREDITO ITALIANO, NEW YORK
BRANCH
By /s/ Gianfranco Bisagni
Name: Gianfranco Bisagni
Title: First Vice President
By /s/ Umberto Seretti
Name: Umberto Seretti
Title: Vice President
<PAGE>
THE NORTHERN TRUST COMPANY
By /s/ John E. Burda
Name: John E. Burda
Title: Second Vice President
ISTITUTO BANCARIO SAN PAOLO DI
TORINO S.P.A
By /s/ Robert Wurster
Name: Robert Wurster
Title: First Vice President
By /s/ Ettore Viazzo
Name: Ettore Viazzo
Title: Vice President
THE SANWA BANK, LIMITED, LOS
ANGELES BRANCH
By /s/ Toshiko Boyd
Name: Toshiko Boyd
Title: Assistant Vice President
UNION BANK OF CALIFORNIA, N.A.
By /s/ Glenn Leyrer
Name: Glenn Leyrer
Title: Assistant Vice President
<PAGE>
CITICORP USA, INC., as Security Agent
By /s/ Carolyn A. Kee
Name: Carolyn A. Kee
Title: Attorney-in-Fact
<PAGE>
COMMITMENT SCHEDULE
Bank Commitment
Citibank, N.A .............................................. $ 25,000,000
Morgan Guaranty Trust Company of New York .................. 25,000,000
Fleet National Bank ........................................ 20,000,000
First Security Bank of Utah, N.A ........................... 20,000,000
KeyBank National Association ............................... 20,000,000
ABN AMRO Bank N.V .......................................... 20,000,000
Bank of America National Trust and Savings
Association ............................................. 13,000,000
The Sumitomo Trust & Banking Co., Ltd. .....................
Los Angeles Agency ...................................... 13,000,000
The Northern Trust Company ................................. 13,000,000
Union Bank of California, N.A .............................. 13,000,000
Istituto Bancario San Paolo Di Torino S.P.A ................ 10,000,000
The Sanwa Bank, Limited, Los Angeles Branch ................ 8,000,000
Total .............................................. $200,000,000
<PAGE>
PRICING SCHEDULE
Each of Euro-Dollar Margin, Base Rate Margin and Commitment Fee Rate means, for
any date, the percentage as set forth below in the row opposite such term and in
the column corresponding to the Pricing Level that applies at such date:
- -------------------- ----------------- ------------- ------------- -------------
Level Level Level Level
I II III IV
==================== ================= ============= ============= =============
Euro-Dollar 1.0% 1.125% 1.375% 1.75%
Margin
==================== ================= ============= ============= =============
Base Rate 0% 0% 0% .375%
Margin
Commitment Fee Rate .25% .25% .25% .375%
- -------------------- ----------------- -------------- ------------- ------------
For purposes of this Schedule, the following terms have the following
meanings:
Level I Pricing applies at any date if, as of such date, the Leverage
Ratio is less than .15 to 1.
Level II Pricing applies at any date if, as of such date, (i) the
Leverage Ratio is less than or equal to .35 to 1 and (ii) Level I Pricing
does not apply.
Level III Pricing applies at any date if, as of such date, (i) the
Leverage Ratio is less than or equal to .5 to 1 and (ii) neither Level I
Pricing nor Level II Pricing applies.
Level IV Pricing applies at any date if, as of such date, no other
Pricing Level applies.
<PAGE>
2
Leverage Ratio means as of any date the ratio of Consolidated Debt to
Consolidated Tangible Net Worth set forth in the most recent certificate
delivered pursuant to Section 5.01(c); provided that unless the Required
Banks otherwise agree, if the Borrower has failed to deliver the financial
statements and accompanying certificates most recently required to have
been delivered within the time periods specified therefor in Section 5.01,
Level IV Pricing shall apply until the next date on which financial
statements and accompanying certificates are timely delivered.
Pricing Level refers to the determination of which of Level I, Level
II, Level III or Level IV applies at any date.
<PAGE>
EXHIBIT A
Opinion of
Counsel for the Borrower
January 23, 1998
To the Banks and the Agents
Referred to Below
c/o Morgan Guaranty Trust Company
of New York, as Documentation Agent
60 Wall Street
New York, NY 10260
Ladies and Gentlemen:
We have acted as counsel for Iomega Corporation (the "Borrower") in
connection with the Amended and Restated Credit Agreement and Collateral Release
of even date herewith (the Amendment and Restatement), which amends and restates
the Credit Agreement dated as of March 11, 1997 (as so amended, the "Credit
Agreement") among the Borrower, the Banks party thereto, Citibank, N.A. as
Administrative Agent, and Morgan Guaranty Trust Company of New York, as
Documentation Agent. Capitalized terms used but not otherwise defined herein
have the meanings ascribed to such terms in the Credit Agreement . This opinion
is furnished to you at the request of our client pursuant to Section 15(b) of
the Amendment and Restatement.
For purposes of the opinions expressed below, we have examined the
following:
a. the Credit Agreement;
b. the Amendment and Restatement;
c. that certain Secretary's Certificate of the Borrower of even date
herewith (the "Secretary's Certificate");
d. those certain resolutions of the board of directors of the Borrower in
the form annexed to the Secretary's Certificate as Exhibit C (the
"Resolutions");
<PAGE>
5
e. the Borrower's Certificate of Incorporation, as amended (the "Articles
of Organization");
f. the By-Laws of the Borrower (the "By-Laws");
g. that certain Certificate of Legal Existence and Good Standing for the
Borrower dated January 14, 1998, issued by the Secretary of State of
the State of Delaware (the "Good Standing Certificate");
h. that certain Certificate of Foreign Qualification for the Borrower
dated January 21, 1998, issued by the Secretary of the State of the
State of Utah (the "Foreign Qualification Certificate"); and
i. such other documents, instruments and certificates (including, but not
limited to, certificates of public officials and officers of the
Borrower) as we have considered necessary for purposes of this
opinion.
In our examination of the documents described above, we have assumed the
genuineness of all signatures (other than signatures of officers of the Borrower
certified to us), the capacity, power and authority of all parties (other than
the Borrower) to execute and deliver all applicable documents, the authenticity
of all documents submitted to us as originals, the conformity to original
documents of all copies of documents submitted to us as certified or photostatic
copies, and the authenticity of the originals of such latter documents. As to
any facts material to this opinion, we have relied upon representations made to
us by one or more officers or employees of the Borrower.
Any reference to "our knowledge" or "knowledge" or any variation thereof
shall mean the conscious awareness of the attorneys in this firm who have
rendered substantive attention to this transaction of any facts which would
contradict our opinions set forth below. Although we have not undertaken any
independent investigation to determine the existence or absence of such facts,
and no inference as to our knowledge of the existence or absence of such facts
should be drawn from the fact of our representation of the Borrower, nothing has
come to our attention leading us to question the accuracy of such matters.
Without limiting the generality of the foregoing, with respect to our opinions
in paragraphs 4 and 5 below, we have not conducted a search of the dockets of
any court or administrative or other regulatory agency.
<PAGE>
We express no opinion herein with respect to the laws of any state or
jurisdiction other than the Commonwealth of Massachusetts, the Delaware General
Corporation Law statute and the federal laws of the United States of America. We
note that the Amendment and Restatement and the Credit Agreement provide that
they are governed by the laws of the State of New York. With your permission, we
have assumed, without investigation, for purposes of the opinions expressed
below, that the laws of the Commonwealth of Massachusetts are identical to the
laws of the State of New York.
The opinion expressed in paragraph 1 below, insofar as it relates to the
valid existence and corporate good standing of the Borrower in Delaware, is
based solely upon the Good Standing Certificate and is rendered as of the date
thereof. Our opinion in paragraph 1 below, to the extent pertaining to the
qualification of Borrower to do business in the State of Utah, is based solely
upon the Foreign Qualification Certificate and is rendered as of the date
thereof.
Our opinions below are qualified to the extent that the validity or
enforceability of the documents referred to or of any of the rights granted to
any party pursuant thereto may be subject to or affected by (i) applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or
similar laws affecting the rights of creditors generally, (ii) statutory or
decisional law concerning recourse by creditors to security in the absence of
notice or hearing, and (iii) duties and standards imposed on creditors and
parties to contracts, including, without limitation, requirements of good faith,
reasonableness and fair dealing. Furthermore, we express no opinion as to the
availability of any equitable or specific remedy upon any breach of such
documents or any of the agreements, documents or obligations referred to
therein, as the availability of such remedies may be subject to the discretion
of a court.
Based upon and subject to the foregoing, and further subject to the
qualifications set forth below, it is our opinion that:
1. The Borrower is a corporation duly organized, validly existing and in good
standing under the laws of Delaware and is qualified to do business as a
foreign corporation in the State of Utah, with all requisite corporate
power and authority to own, operate or lease its properties and assets and
to carry on its business as, to our knowledge, it is now being conducted.
2. The execution and delivery by the Borrower of the Amendment and Restatement
and the performance by it of its obligations under the Credit Agreement are
within the Borrower's corporate powers and have been duly authorized by all
necessary corporate action on the part of the Borrower.
<PAGE>
3. The Amendment and Restatement has been duly executed and delivered by the
Borrower, and each of the Amendment and Restatement and the Credit
Agreement constitutes a legal, valid and binding obligation of the Borrower
enforceable in accordance with its terms.
4. The execution and delivery by the Borrower of the Amendment and
Restatement, the performance by the Borrower of the terms and provisions of
the Credit Agreement and the consummation of the transactions contemplated
thereby, will not violate, conflict with, result in a breach or termination
of, or a default under (or an event which, with or without due notice or
lapse of time, or both, would constitute a default under) or accelerate the
performance required by, or result in the creation of any lien, security
interest, charge or other encumbrance upon any of the properties or assets
of the Borrower under any of the terms, conditions or provisions of (i) the
Articles of Organization or By-Laws, (ii) any laws applicable to the
Borrower, (iii) to our knowledge, any judgment, order, decree, ruling or
injunction specifically naming the Borrower or specifically applicable to
its properties, of any court or governmental authority, or (iv) any of the
agreements to which the Borrower is a party which have been filed as
exhibits to the Borrower's filings with the Securities and Exchange
Commission, and which will remain in effect following consummation of the
Credit Agreement.
5. To our knowledge, without independent investigation or inquiry of any kind,
there is no action, suit, proceeding or investigation pending or threatened
against the Borrower before any court or governmental department, which
could prevent the consummation of the transactions contemplated by the Loan
Documents or purports by its terms to challenge the validity or
enforceability of the Loan Documents or any action taken or to be taken in
connection with the transactions contemplated thereby, or which, except as
disclosed in Section 4.05 of the Credit Agreement, if adversely determined,
could have a material adverse effect on the business, condition, affairs or
operations of the Borrower or any material impairment of the right or
ability of the Borrower to carry on its operations as now conducted.
This opinion is based upon currently existing statutes, rules, regulations
and judicial decisions, and we disclaim any obligation to advise you of any
change in any of these sources of law or subsequent legal or factual
developments which might affect any matters or opinions set forth herein.
<PAGE>
Please note that we are opining only as to the matters expressly set forth
herein, and no opinion should be inferred as to any other matters. This opinion
is solely for your benefit, and the benefit of your counsel, in connection with
the consummation of the transactions contemplated by the Credit Agreement, and
may not be quoted or relied upon by any other person without our prior written
consent.
Very truly yours,
By /s/ Hale and Dorr LLP
HALE AND DORR LLP
<PAGE>
EXHIBIT B
Iomega Corporation
SECRETARY'S CERTIFICATE
The undersigned, Secretary of Iomega Corporation, a Delaware corporation
(the Company), DOES HEREBY CERTIFY THAT:
1. This Certificate is furnished in connection with the Amendment and
Restatement dated as of January 23, 1998 (the Amendment and
Restatement) amending and restating that certain Credit Agreement
dated as of March 11, 1997, among the Company, the banks party
thereto, Citibank, N.A., as Administrative Agent and Morgan Guaranty
Trust Company of New York, as Documentation Agent (as amended by the
Amendment and Restatement, the Amended Credit Agreement).
2. The copy of the Certificate of Incorporation of the Company attached
hereto and marked as Exhibit A, is true, correct and in effect on and
as of the date hereof.
3. The Certificate of Incorporation of the Company has not been amended
since June 6, 1997 and no action has been taken by the Company or its
directors or officers or, to the best of its knowledge, its
stockholders in contemplation of the filing of any such amendment or
other document or in contemplation of the liquidation or dissolution
of the Company since June 6, 1997.
4. The copy of the bylaws of the Company attached hereto and marked as
Exhibit B is true, correct and in effect on and as of the date hereof.
5. The bylaws of the Company have not been amended or otherwise modified
since June 6, 1997.
6. Attached hereto and marked as Exhibit C is a true and correct copy of
the resolutions adopted by the Board of Directors of the Company on
and as of January 19, 1998, which resolutions are in full force and
effect.
<PAGE>
2
7. The signature set forth opposite the person's name below is his
genuine signature and the office opposite such person's name is the
office he currently holds with the Company:
Name Office Signature
Len Purkis Chief Financial Officer By /s/ Len Purkis
Robert Simmons Treasurer By /s/ Robert Simmons
8. The banks party to the Amended Credit Agreement and the Administrative
Agent and the Documentation Agent may rely on this Certificate.
9. Capitalized terms used herein and not otherwise defined shall have the
meanings ascribed to them in the Amended Credit Agreement.
IN WITNESS WHEREOF, I have hereunto set my hand as of January 20, 1998.
By /s/ Laurie B. Keating
Name: Laurie B. Keating
Title: Secretary
The undersigned, Robert Simmons, Treasurer of the Company, does hereby
certify that Laurie B. Keating is a duly elected, qualified Secretary of the
Company and the signature appearing above is his genuine signature.
By /s/ Robert Simmons
Name: Robert Simmons
Title: Treasurer
AGREEMENT OF LEASE
Single Tenant Building
THIS AGREEMENT OF LEASE by and between Liberty Property Limited
Partnership, a limited partnership organized and existing under the laws of
Pennsylvania (herein called "Landlord") and Iomega Corporation organized and
existing under the laws of Delaware (herein called "Tenant.")
WITNESSETH:
1. Premises. Landlord does hereby demise and let unto Tenant and Tenant
does hereby lease and take from Landlord for the term and upon the terms1
covenants, conditions and provisions set forth herein all that tract of land
located at 6532 Judge Adams Road, Whitsett, North Carolina 27377 (herein called
the "Lot") which is outlined in red on Exhibit "A" hereto, together with the
building (herein called the "Building") and improvements (the Lot, the Building
and any other improvements thereon being herein collectively called the
"Premises").
*located thereon
4. Use of Premises. Tenant shall occupy the Premises throughout the term
and shall use the same for and only for a light assembly, warehousing and
distribution of computer storage devices with appurtenant offices.
5. Rent.
(a) Minimum Annual Rent. Tenant shall pay a minimum annual rent of
Four Hundred Ninety-One Thousand One Hundred Eight-Four and No/100 Dollars
($491,184.00), without notice or demand, and without setoff, in equal
monthly installments of Forty Thousand Nine Hundred Thirty-Two and No/100
Dollars ($40,932.00) in advance, on the first day of each calendar month
during the term of this lese. Provided, however, that rent for the first
full month shall be paid upon the signing of this lease. If the
Commencement Date shall fall on a day other than the first day of a
calendar month, the rent shall be apportioned pro rata on a per diem basis
for the period between the Commencement Date and the first day of the
following calendar month and such apportioned sum shall be paid on such
Commencement Date. In addition, Tenant shall pay Landlord without setoff
the additional rent as hereinafter set forth. Unless otherwise specifically
provided, all sums shall be paid to Landlord at the address given in
Article 30 hereof.
6. Taxes and Other Impositions.
(a) Payment. As additional rent hereunder, at least thirty (30) days
before any fine, penalty, interest or cost may be added thereto for the
non-payment thereof (or sooner if elsewhere herein required). Tenant shall
pay throughout the term or this lease all levies, taxes, assessments, water
and sewer rents and charges, liens, license and permit fees, charges for
public utilities and all other charges, imposts or burdens of whatsoever
kind and nature, general or special, foreseen or unforeseen, whether or no
particularized by name, ordinary or extraordinary, which are applicable to
the term of this lease, and which are created, levied, assessed, confirmed,
adjudged, imposed or charged by any federal, state or municipal government
or public authority, or under any law, ordinance or regulation thereof, or
pursuant to any recorded covenants or agreements (alt of which are
hereinafter referred to as "Impositions") upon or with respect to the
Premises, the Lot or any improvements made thereto, any part of the
foregoing, any appurtenances thereto. or directly upon this lease or the
rent payable hereunder or amounts payable by any subtenants or other
occupants or the Premises, or upon this transaction or any related
documents to which Tenant is a party or successor in interest, or against
Landlord because or Landlord's estate or interest herein. If Tenant is
permitted by the assessing and collecting authorities and by all mortgagees
and elects to pay any Imposition in installments, Tenant shall nevertheless
pay all unpaid installments thereof prior to the expiration or sooner
termination of the term or this lease, whether or not such installments are
then due or payable. Tenant shall pay each Imposition at Landlord's
election to Landlord or directly to the government or other public
authority charged with the collection of such Imposition; and in the latter
event, Tenant shall furnish Landlord, not later than ten (10) days prior to
the last day upon which they may be paid without any fine, penalty,
interest or cost, receipts or other evidence satisfactory to Landlord of
the payment of all such Impositions.
(b) New Methods of Taxation. Nothing herein contained shall be
interpreted as requiring Tenant to pay any income, excess profits,
corporate capital stock, or franchise tax imposed or assessed upon
Landlord, unless such tax or any similar tax is levied or assessed in lieu
of all or any part of any Imposition or an increase in any Imposition. If
under the requirements of any state or local law with respect to such new
method of taxation, Tenant is prohibited from paying such new tax, Landlord
may, at its election, terminate this lease by giving written notice thereof
to Tenant.
(c) Monthly Deposits. Notwithstanding the foregoing provisions of this
Article 6, Landlord shall have the right, at its option, to require Tenant
to pay to Landlord or to any mortgagee, at the time when the monthly
installment of minimum rent is payable, an amount equal to one-twelfth
(1/12th) of the annual Impositions as estimated by Landlord. If Landlord
elects to have Tenant make such payments, Tenant also shall pay to Landlord
or to such mortgagee, as the case may be, at least thirty (30) days before
any fine, penalty, interest or cost may be added thereto for the
non-payment thereof, the amount by which the impositions becoming due
exceed the monthly payments on account thereof previously made by Tenant.
The amounts paid by Tenant pursuant to this Paragraph (c) shall be used to
pay the Impositions, but such amounts shall not be deemed to be trust funds
and no interest shall be payable thereon.
(d) Contest by Landlord. Landlord may bring proceedings to contest the
validity or amount of any Imposition or to recover payments therefor.
Tenant shall cooperate with Landlord with respect to such proceedings to
the extent reasonably necessary and shall pay to Landlord all reasonable
costs, tees and expenses Incurred in connection with such proceedings as
additional rent promptly upon being billed therefor.
(e) Contest by Tenant. Tenant, without postponement of payment, may
bring proceedings to contest the validity or amount of any Imposition or to
recover payments therefor. Tenant shall save Landlord harmless from all
costs and expenses in connection with such proceedings. Landlord shall
cooperate with Tenant with respect to such proceedings to the extent
reasonably necessary, but all costs, fees and expenses Incurred in
connection with such proceedings shall be borne by Tenant. Tenant shall
give Landlord advance written notice of Tenant's intention to take any such
action.
7. Insurance.
(a) Types. Tenant, at Tenant's sole cost and expense, shall maintain
and keep in effect throughout the term with policies from an Insurer and in
form and substance all satisfactory to Landlord:
(i) insurance against loss or damage to the Building and all
other improvements now or hereafter located on the Premises by fire
and such other casualties as may be Included in the broadest form of
all-risk insurance from time to time available, in an amount equal to
the full Insurable replacement value of the Building and improvements,
the policy to have attached thereto replacement cost, agreed amount
and rental coverage endorsements or comparable forms of coverage:
(ii)Insurance against liability for bodily injury (including
death) or property damage in or about the Premises, under a policy of
comprehensive general public liability insurance, with such limits as
to each as may reasonably be required by Landlord from time to time
but not less than $500,000 for each person and $1,000,000 for each
occurrence of bodily injury (including death) and $500,000 for
property damage:
(iii) boiler insurance, plate glass insurance, war risk insurance
(when available), and such other forms of insurance as may be
specified from time to time by Landlord; all such insurance shall be
in such reasonable amounts as may be specified from time to time by
Landlord or by any mortgagee; and
(iv) any other reasonable insurance coverage that may be required
from time to time by any mortgagee or that may be required generally
by Institutional mortgagees.
(b) Insured Parties. The policies of Insurance described in Paragraphs
(a)(i), (iii) and (iv) of this Article 7 shall name Landlord as the insured
party, and in addition shall contain a standard mortgagee endorsement In
favor of all mortgagees or, at the election of any such mortgagee, any
reasonable variation of such endorsement, The policies of insurance
described in Paragraph (a)(ii) of this Article 7 shall name both Landlord
and Tenant as the Insured parties.
(c) Policies. Each policy of Insurance required by Paragraph (a) of
this Article 7 shall provide that it shall not be cancelled without at
least thirty (30) days prior written notice to Landlord and to any
mortgagee named in any endorsement thereto. Each policy shall have an
executive notice endorsement or comparable form of coverage attached
thereto to the effect that no act or omission of Tenant shall affect the
obligation of the insurer to pay the full amount of any loss sustained.
(d) Evidence of Coverage. At least thirty (30) days prior to the
commencement Date, the Original and a signed duplicate of each policy shall
be delivered to Landlord by Tenant. Tenant may carry any insurance required
by this Article 7 under a blanket policy, applicable to the Premises, In
which event Tenant shall deliver the Insurer's certificates thereof and two
certified copies of the underlying policy in lieu of the original, showing
all of the terms of such coverage applicable to the Premises and showing
the insured parties as aforesaid. If Tenant shall fail, refuse or neglect
to obtain or to maintain any insurance that it is required to provide, or
to furnish Landlord with satisfactory evidence of coverage within the time
required, Landlord shall have the right to purchase such insurance. All
payments for such Insurance made by Landlord shall be recoverable by
Landlord from Tenant, together with interest thereon, as additional rent
promptly upon being billed therefor.
(e) Waiver of Subrogation. Each of the parties hereto hereby releases
the other, to the extent of the releasing party's insurance coverage, from
any and all liability for any loss or damage covered by such insurance
which may be inflicted upon the property of such party even if such loss or
dam age shall be brought about by the fault or negligence of the other
party, its agents or employees; provided, however, that this release shall
be effective only with respect to loss or damage occurring during such time
as the appropriate policy of insurance shall contain a clause to the effect
that this release shall not affect said policy or the right of the insured
to recover thereunder. If any policy does not permit such a waiver, and if
the party to benefit therefrom requests that such a waiver be obtained. the
other party agrees to obtain an endorsement to its insurance policies
permitting such waiver of subrogation If It is available, If an additional
premium is charged for such waiver, the party benefiting therefrom agrees
to pay the amount of such additional premium promptly upon being billed
therefor.
8. Repairs and Maintenance.
(a) Except as specifically otherwise provided in Paragraph (b) of this
Article, Tenant, at its sole cost and expense and throughout the term of
this lease, shall keep and maintain in good order and condition the
Building and the other improvements now or hereafter located upon the
Premises. and any sidewalks, parking areas, curbs and access ways upon or
adjoining the Premises, and shall promptly make all repairs necessary to
keep and maintain such good order and condition, whether such repairs are
interior or exterior, ordinary or extraordinary, foreseen or unforeseen.
Tenant shall not use or permit the use of any portion or the Premises for
outdoor storage. When used in this Article 8, the term "repairs" shall
include replacements and renewals when necessary. All repairs made by
Tenant shall utilize materials and equipment which are at least equal in
quality and usefulness to those originally used in constructing the
Building and the Premises. Tenant shall maintain all HVAC systems
appurtenant to the Building using a service firm[s] acceptable to Landlord
which shall provide service and maintenance in accordance with the
manufacturer's recommendations and shall provide a copy of the contract to
Landlord.
(c) Tenant shall keep and maintain all portions of the Premises and
any sidewalks, parking areas, curbs and access ways adjoining the Premises
in a clean and orderly condition, free of accumulation of dirt, rubbish,
snow and ice and shall keep and maintain all open areas of the Premises not
built upon or paved as landscaped areas in a neat and orderly condition by
performing all necessary tasks, including, but not limited to, grass
cutting, seeding, watering, weeding and replacing any dead or diseased
planting.
9. Utility Charges. Tenant shall be solely responsible for and shall pay
promptly all rents, costs and charges for water service, sewer service, gas.
electricity, light, heat, stew', power. telephone and other communication
services, and any and all other utilities or services rendered or supplied upon
or in connection with the Premises.
10. Net lease. Except for the obligations of Landlord expressly set forth
herein, this lease is a "net lease" and Landlord shall receive the minimum
annual rent as hereinabove provided as net income from the Premises, not
diminished by any Imposition or any expenses or charges required to be paid to
maintain and carry the Premises or to continue the ownership of Landlord other
than payments under any mortgages now existing or hereafter created by Landlord,
and Landlord is not and shall not be required to render any services of any kind
to Tenant.
11. Governmental Regulations. With regard to all or any part of the
Premises or to the use or manner of use of the Premises, or to the sidewalks,
parking areas, curbs and access ways adjoining the premises, or to the fixtures
and equipment in the Premises, throughout the term of this lease and at its sole
cost and expense, Tenant shall: (i) comply promptly with all laws, ordina9ces,
notices, orders, rules, regulations and requirements of all federal, state and
municipal governments and all departments, commissions, boards and officers
thereof, and of the National Board of Fire Underwriters or any other body now or
hereafter constituted exercising similar functions; and (ii) keep, in force at
all times all licenses. consents and permits necessary for the lawful use of the
Premises for the purposes herein provided; and (iii) comply with the
requirements of all public liability, fire, and other policies of insurance
covering the Premises whether any of the foregoing are foreseen or unforeseen,
ordinary or extraordinary. Provided, however, that Tenant shall not be required
to comply with the foregoing laws, ordinances and notices with respect to the
footings and foundations and the structural steel columns and girders forming a
part of the Premises unless the need for such compliance arises out of or is
caused by Tenant's use. manner of use or occupancy of the Premises, or by
Tenant's Installations in or upon the Premises or by any act or omission of
Tenant or any employee, agent, contractor or invitee of Tenant.
12. Signs. Except for signs which are located wholly within the interior of
the Building and which are not visible from the exterior of the Premises, no
signs shall be placed, erected, maintained or painted at any place upon the
Premises without the prior written consent of Landlord as to the size, design,
color, location, content, illumination, composition or material and mobility
thereof All. signs shall be maintained by Tenant In good condition during the
term of this lease, and Tenant shall remove all signs at the termination of this
lease and shall repair and restore any damage caused by the installation or
removal thereof.
13. Alterations, Additions and Fixtures.
(a) Subject to the provisions of Article 14 hereof, Tenant shall have
the right to install in the Building any trade fixtures from time to time
during the term of this lease; provided, however, that no such installation
or removal thereof shall affect the structural portions of the Building and
that Tenant shall repair and restore any damage or injury to the Premises
caused thereby.
(b) Tenant shall not make or permit to be made any alterations,
improvements or additions to the Premises without on each occasion first
presenting to Landlord plans and specifications therefor and obtaining
Landlord's prior written consent thereto: except that Tenant may make minor
nonstructural changes to the interior of the Building without the consent
of Landlord provided that: (i) Tenant supplies Landlord with plans and
specifications and any necessary permits therefor at least ten (10) days in
advance of commencing construction thereof; (ii) such alterations and
improvements do not impair the structural strength of the Building or any
other improvements or reduce the value of the Premises: (iii) Tenant shall
take or cause to be taken all steps that are required by Article 14 hereof
and that are required or permitted by law In order to avoid the imposition
of any mechanic's, laborer's or materialman's lien upon the Premises,
Building or Lot; and (iv) the occupants of any adjoining real estate are
not annoyed or disturbed by reason thereof. Any and all alterations,
Improvements and additions to the Premises which are constructed, Installed
or otherwise made by Tenant shall be the property of Tenant until the
expiration or sooner termination of this lease; at that time all such
alterations and additions shall remain on the Premises and become the
property of Landlord without payment therefor by Landlord; unless, upon the
termination of this lease, Landlord shall give written notice to Tenant to
remove the same; in which event Tenant will remove such alterations,
improvements and additions, and repair and restore any damage to the
Premises caused by the installation or removal thereof.
14. Mechanics' Liens. Tenant shall promptly pay any contractors and
materialmen who supply labor, work or materials to Tenant at the Premises so as
to minimize the possibility of a lien attaching to the Premises or the Lot.
Tenant shall take all steps permitted by law in order to avoid the imposition of
any mechanic's, laborer's or materialman's lien upon the Premises or the Lot.
Should any such lien or notice of lien be filed, for work performed for Tenant
other than by Landlord, Tenant shall bond against or dischar8e the same within
fifteen (15) days after the lien or claim is filed or formal notice of said lien
or claim has been issued regardless of the validity of such lien or claim.
Nothing in this lease is intended to authorize Tenant to do or cause any work or
labor to be done or any materials to be supplied for the account of Landlord,
all of the same to be solely for Tenant's account and at Tenant's risk and
expense. Throughout this lease the term "mechanic's lien" is used to include any
lien, encumbrance or charge levied or imposed upon the Premises or the Lot or
any interest therein or income therefrom on account of any mechanic's, laborer's
or materialman's lien or arisin8 cut of any debt or liability to or any claim or
demand of any contractor mechanic, supplier, materialman or laborer and shall
include without limitation any mechanic's notice of intention given to Landlord
or Tenant. any stop order given to Landlord or Tenant, any notice of refusal to
pay naming Landlord or Tenant and any injunctive or equitable action brought by
any person entitled to any mechanic's lien.
15. Landlord's Right of Entry.
(a) Tenant shall permit Landlord and the authorized representatives of
Landlord and of any mortgagee or any prospective mortgagee to enter the
Premises at all reasonable limes for the purpose of (i) inspecting them or
(ii) making any necessary repairs thereto or to the Property and performing
any work therein: During the progress of any work on the Premises Landlord
will attempt not to inconvenience Tenant, but shall not be liable for
inconvenience, annoyance, disturbance, loss of business or other damage to
Tenant by reason of making any repair or by bringing or storing materials,
supplies, tools and equipment on the Premises during the performance of any
work, and the obligations or Tenant under this lease shall not be thereby
affected in any manner whatsoever.
(b) Landlord shall have the right at all reasonable times to enter and
to exhibit the Premises for the purpose of sale or mortgage1 and, during
the last nine (9) months of the term of this lease, to enter and to exhibit
the Premises to any prospective tenant.
16. Damage by Fire or Other Casualty.
(a) If the Premises shall be damaged or destroyed by fire or other
casualty, Tenant shall promptly notify Landlord, and Landlord, subject to
any mortgagee's consent and to the conditions set forth in this Article 16,
shall repair, rebuild or replace such damage and restore the Premises to
substantially the same condition in which they were immediately prior to
such damage or destruction; provided, however, that Landlord shall only be
obligated to restore such damage which is covered by the fire and other
extended coverage insurance policies.
(b) The work shall be commenced promptly and completed with due
diligence, taking into account the time required by Landlord to effect a
settlement with, and procure insurance proceeds from, the insurer, and for
delays beyond Landlord's reasonable control.
(c) The net amount or any insurance proceeds (excluding proceeds
received pursuant to a rental coverage endorsement) recovered by reason of
the damage or destruction of the Premises in excess of the cost or
adjusting the insurance claim and collecting the insurance proceeds (such
excess amount being hereinafter called the "net insurance proceeds") shall
be applied towards the reasonable cost of restoration. If In Landlord's
sole opinion the net insurance proceeds will not be adequate to complete
such restoration, Landlord shall have the right to terminate this lease and
all the unaccrued obligations of the parties hereto by sending a written
notice of such termination to Tenant, the notice to specify a termination
date no less then ten (10) days after its transmission; provided, however,
that except during the last two (2) years of the term, Tenant may require
Landlord to withdraw the notice of termination by agreeing to pay the cost
of restoration in excess of the net insurance proceeds and by giving
Landlord adequate security for such payment prior to the termination date
specified in Landlord's notice of termination. If Landlord determines that
the net insurance proceeds are not adequate and Landlord does not elect to
terminate the lease, Tenant shall pay, upon notice that Landlord shall
restore, out of funds other than such net Insurance proceeds, the amount by
which the cost of restoration estimated by Landlord will exceed the net
insurance proceeds, such sum payable by Tenant to be later readjusted to
such actual excess upon the completion of restoration. If such net
insurance proceeds are more than adequate, the amount by which such net
insurance proceeds exceed the cost of restoration will be retained by
Landlord or applied to repayment of any mortgage secured by the Premises.
(e) Tenant shall maintains rental coverage endorsement or other
comparable form of coverage as part of its fire and extended coverage or
all-risk insurance policy. Tenant will receive an abatement of its minimum
annual rent to the extent of payments received by Landlord from the carrier
providing the rental coverage endorsement.
17. Non-Abatement of Rent. Except as otherwise expressly provided as to
damage by fire or by any other casualty in Paragraph 16(e) and as to
condemnation in Paragraphs 19(a) and (b) there shall be no abatement or
reduction of tile minimum rent, additional rent or other sums payable hereunder
for any cause whatsoever, and this lease shall not terminate, and Tenant shall
not be entitled to surrender the Premises.
18. Indemnification of Landlord. Tenant will indemnify Landlord and save
landlord harmless from and against any and all claims, actions, damages,
liability and expense (including without limitation fees Of attorneys,
investigators and experts) in connection with loss or life, personal Injury or
damage to property caused to any person in or about the Premises or arising out
or the occupancy or use by Tenant of the Premises or any part thereof or
occasioned wholly or in part by any act or omission of Tenant, its agents,
contractors, employees, licensees or invitees; unless such loss, injury or
damage was caused by the negligence of Landlord, its agents, employees,
licensees or invitees. Without limiting the foregoing, Tenant will forever
release and hold Landlord harmless from all claims arising out of damage to
Tenant's property unless such damage occurs as a result of Landlord's negligent
failure to make repairs after having received written notice of the need for
such repair. In case any such claim, action or proceeding is brought against
Landlord, upon notice from Landlord and at Tenant's sole cost and expense,
Tenant shall resist or defend such claim, action or proceeding or shall cause it
to be resisted or defended by an insurer.
19. Condemnation.
(a) Termination.
(i) If all of the Premises are covered by a condemnation: or
(ii) subject to the provisions of Paragraph (b)(i) hereof, if any
of the Premises Is covered by a condemnation and, in Landlord's sole
opinion, it would be impractical or the condemnation proceeds are
insufficient to restore the remainder of the Premises: then, in any
such event, this lease shall terminate and all obligations hereunder
shall cease as of the date upon which possession is taken by the
condemnor and the rent herein reserved shall be apportioned and paid
in full by Tenant to Landlord to that date and all rent prepaid for
periods beyond that date shall forthwith be repaid by Landlord to
Tenant.
(b) Partial Condemnation.
(i) If there is a partial condemnation and Landlord decides to
terminate pursuant to Paragraph (a) hereof, except during the last two
(2) years of the term, Tenant may require Landlord to withdraw its
notice of termination by: [A] giving Landlord written notice thereof
within ten (10) days from transmission of Landlord's notice to Tenant
of Landlord's intention to terminate, [B] agreeing to pay the cost of
restoration in excess of the condemnation proceeds reduced by those
sums expended by Landlord in collecting the condemnation proceeds, and
[C] giving Landlord adequate security for such payment within such ten
(10) day period.
(ii) If there is a partial condemnation and this lease has not
been terminated pursuant to Paragraph (a) hereof Landlord shall
restore the Building and the improvements which are part or the
Premises to a condition and size as nearly comparable as reasonably
possible to the condition and size thereof immediately prior to the
date upon which possession shall have been taken by the condemnor. If
the condemnation proceeds are more than adequate to cover the cost of
restoration and Landlord's expenses in collecting the condemnation
proceeds, any excess proceeds shall be retained by Landlord or applied
to repayment of any mortgage secured by the Premises.
(iii) If there is a partial condemnation and Landlord has not
exercised its right to terminate on the date upon which the condemnor
shall have obtained possession, the obligations of Landlord and Tenant
under the lease. shall be unaffected by such condemnation except that
there shall be an equitable abatement for the balance of the term of
the minimum annual rent according to the value of the Premises before
and after the date upon which the condemnor shall have taken
possession, In the event that the parties are unable to agree upon the
amount of such abatement. either party may submit the issue to
arbitration.
(c) Award. In the event of a condemnation affecting Tenant. Tenant
shall have the right to make a claim against the condemnor for removal
expenses, business dislocation damages and moving expenses; provided and to
the extent, however, that such claims or payments do not reduce the sums
otherwise payable by the condemnor to Landlord. Except as aforesaid, Tenant
hereby waive all claims against Landlord and against the condemnor, and
Tenant hereby assigns to Landlord all claims against the condemnor
including, without limitation, all claims for leasehold damages and
diminution in value of Tenant's leasehold interest.
(d) Temporary Taking. If the condemnor should take only the right to
possession (or a fixed period or lime or (or that duration of an emergency
or other temporary condition, then, notwithstanding anything hereinabove
provided, this lease shall continue in full force and effect without any
abatement of rent, but the amounts payable by the condemnor with respect to
any period of time prior to the expiration or sooner termination of this
lease shall be paid by the condemnor to Landlord and the condemnor shall be
considered a subtenant of Tenant. Landlord shall apply the amount received
from the condemnor applicable to the rent due hereunder net of costs IC'
Landlord for the collection thereof, or as much thereof as may be necessary
for the purpose, toward the amount due from Tenant as rent for that period;
and, Tenant shall pay to Landlord any deficiency between the amount thus
paid by the condemnor and the amount of the rent, or Landlord shall pay to
Tenant any excess of the amount of the award over the amount of the rent.
20. Quiet Enforcement. Tenant, upon paying the minimum rent, additional
rent and other charges herein provided for, and observing and keeping all
covenants, agreements and conditions of this lease on its part to be kept, shall
quietly have and enjoy the Premises during the term of this lease without
hindrance or molestation by anyone claiming by or through Landlord, subject,
however, to the exceptions, reservations and conditions of this lease.
21. Assignment and Subletting.
(a) Restricted Assignment. Tenant shall not assign, mortgage, pledge
or encumber this lease, or sublet the whole or any part or the Premises,
without the prior written consent of Landlord which consent shall not be
unreasonably withheld. This prohibition against assigning or subletting
shall be construed to include a prohibition against any assignment or
subletting by operation of law, and/or a transfer by any person or persons
controlling Tenant on the date of the lease of such control to a person or
persons not controlling Tenant on the date of the lease. In the event of
any assignment of this lease made with or without Landlord's consent,
Tenant nevertheless shall remain liable for the performance of all of the
terms, conditions and covenants of this lease and shall require any
assignee to execute and deliver to Landlord an assumption of liability
agreement in form satisfactory to Landlord, Including an assumption by the
assignee of all of the obligations of Tenant and the assignee's
ratification of and agreement to be bound by all the provisions of this
lease. Landlord shall be entitled to, and Tenant shall promptly remit to
Landlord, any profit which may' inure to the benefit of Tenant as a result
of any subletting of the Premises or assignment of this lease, whether or
not consented to by Landlord.
(b) Percentage Agreements. It is agreed that Tenant shall not enter
into any assignment, sublease, license, concession or other agreement for
use, occupancy or utilization of the whole or any part of the Premises with
or without Landlord's consent, which provides for rental or other payment
for such use, occupancy or utilization based, in whole or in part on the
net income or profits derived y any person or entity from the space leased,
used, occupied or utilized (other than an amount based on a fixed
percentage or percentages of receipts or sales), and any such purported
assignment, sublease, license, concession or other agreement shall be
absolutely void and ineffective as a conveyance of any right or Interest in
the possession, use, occupancy or utilization of any part of the Premises.
22. Subordination. This lease and Tenant's rights hereunder shall be
subject and subordinate at all times in lien and priority to any first mortgage
or other primary encumbrance now or hereafter placed upon or affecting the
Premises, and to any second mortgage or encumbrance with the consent of the
first mortgagee, and to all renewals, modifications, consolidations and
extensions thereof, without the necessity of any further instrument or act on
the part of Tenant. Tenant shall execute and deliver upon demand any further
instrument or instruments confirming the subordination of this lease to the lien
of any such first mortgage or to the lien of any other mortgage if requested to
do so by Landlord with the consent of the first mortgagee, and any further
instrument or instruments of attornment that may be desired by any such
mortgagee or Landlord. Notwithstanding the foregoing, any mortgagee may at any
time subordinate its mortgage to this lease, without Tenant's consent, by giving
notice in writing to Tenant, and thereupon this lease shall be deemed prior to
such mortgage without regard to their respective dates of execution and
delivery, and in that event such mortgagee shall have the same rights with
respect to this lease as though this lease had been executed prior to the
execution and delivery of the mortgage and had been assigned to such mortgagee.
23. Memorandum of Lease; Tenant's Certificate.
(a) Tenant, at any time and from time to time and within five (5) days
after Landlord's written request, shall execute, acknowledge and deliver to
Landlord a short form or memorandum of this lease for recording purposes.
(b) Tenant, at any time and from time to time and within five (5) days
after Landlord's written request, so long as there are no material and
substantial defects in the Premises which Landlord is obligated to remedy
and which Landlord is not proceeding to remedy, and so long as Landlord is
not otherwise in default of this lease, shall execute, acknowledge and
deliver to Landlord a written instrument in recordable form certifying that
this lease is unmodified and In full force and effect (or, if there have
been modifications, that it is in full force and effect as modified and
stating the modifications); stating that the improvements required by
Article 2 hereof have been completed; certifying that Tenant has accepted
possession of the Premises; stating the date on which the term of the lease
commenced and the dates to which minimum rent, additional rent and other
charges have been paid in advance, if any; stating that to the best
knowledge of the signer of such instrument Landlord Is not in default of
this lease; stating any other fact or certifying any other condition
reasonably requested by Landlord or required by any mortgagee or
prospective mortgagee or purchaser of the Premises or any Interest therein;
and stating that it is understood that such instrument may be relied upon
by any mortgagee or prospective mortgagee or purchaser of the Premises or
any interest therein or by any assignee of Landlord's interest in this
lease or by any assignee of any mortgagee. The foregoing instrument shall
be addressed to Landlord and to any mortgagee, prospective mortgagee,
purchaser or other party specified by Landlord.
24. Curing Tenant's Defaults. If Tenant shall be in default in the
performance of any of its obligations hereunder, Landlord, without any
obligation to do so, in addition to any other rights it may have in law or
equity, may elect to cure such default on behalf of Tenant after written notice
(except In the case of emergency) to Tenant. Tenant shall reimburse Landlord
upon demand for any sums paid or costs incurred by Landlord in curing such
default, including interest thereon from the respective dates of Landlord's
making the payments and incurring such costs, which stems and costs together
with interest thereon shall be deemed additional rent payable promptly upon
being billed therefor,
25. Surrender.
(a) Subject to the terms of Paragraphs 13 (b) and 16 (a) and (c)
hereof at the expiration or earlier termination of the term hereof, Tenant
shall promptly yield up, clean and neat, and in the same condition, order
and repair in which they ate required to be kept throughout the term
hereof, the Premises and all improvements, alterations and additions
thereto, and all fixtures and equipment servicing the Building, ordinary
wear and tear excepted.
(b) If Tenant, or any person claiming through Tenant, shall continue
to occupy the Premises after the expiration or earlier termination of the
term or any renewal thereof, such occupancy shall be deemed to be under a
month-to-month tenancy under !he same terms and conditions set forth in
this lease: except, however, that the minimum annual rent during such
continued occupancy shall be double the amount set forth in Paragraphs 5
(a) and (b) hereof. Anything to the contrary notwithstanding. any holding
over by Tenant without Landlord's prior written consent shall constitute a
default hereunder and shall be subject to all the remedies set forth in
Article 26 hereof.
26. Defaults - Remedies.
(a) Defaults. It shall be an event of default:
(i) If Tenant does not pay in full when due and without demand
any and all installment, of minimum rent or additional rent or any
other charges or payments whether or not herein included as rent; or
(ii) If Tenant violates or fail, to perform or otherwise breaches
any agreement, term, covenant or condition herein contained; or
(iii) If Tenant abandons the Premises or removes or attempts to
remove Tenant's goods or property therefrom other than in the ordinary
course or business without having first paid to Landlord in full all
minimum rent, additional rent and other charges that may have become
due as well as all which will become due thereafter; or
(iv) If Tenant becomes insolvent or bankrupt in any sense or
makes an assignment for the benefit of creditors or offers a
composition or settlement to creditors, or if a petition in bankruptcy
or for reorganization or for an arrangement with creditors under any
federal or state law is flied by or against Tenant, or a bill in
equity or other proceeding for the appointment of a receiver, trustee,
liquidator, custodian, conservator or similar official for any of
Tenant's assets is commenced, or if any of the real or personal
property of Tenant shall be levied upon by any sheriff, marshal or
constable; provided, however, that any proceeding brought by anyone
other than the panics to this lease under any bankruptcy,
reorganization arrangement. insolvency, readjustment, receivership or
similar law shall not constitute a default until such proceeding,
decree, judgement or order has continued unstayed for more than sixty
(60) consecutive days; or
(v) If any of the events enumerated In Paragraph (a) (iv) of this
Article shall happen to any guarantor of this lease;
(b) Remedies. Then, and in any such event, Landlord shall have the
following rights:
(i) To charge a late payment penalty of five (5%) percent of any
amount owed to Landlord pursuant to this lease which is not paid
within five (5) days of the date which is set forth in the lease if a
date Is specified, or. if a date is not specified, within thirty (30)
days of the mailing of a bill therefor by Landlord, If Landlord incurs
a penalty in connection with any payment which Tenant has failed to
make within the times required in this lease, Tenant shall pay
Landlord, in addition to such sums, the full amount of such penalty
incurred by Landlord.
(ii) To accelerate the whole or any part of the rent for the
entire unexpired balance of the term of this 'lease, as well as all
other charges, payments, costs and expenses herein agreed to be paid
by Tenant, and any rent or other charges, payments, costs and expenses
if so accelerated shall, in addition to any and all installments of
rent already due and payable and in arrears, and any other charge or
payment herein reserved, included or agreed to be treated or collected
as rent and any other charge, expense or cost herein agreed to be paid
by Tenant which may be due and payable and in arrears, be deemed due
and payable as if, by the terms and provisions of this lease, such
accelerated rent and other charges, payments, costs and expenses were
on that date payable in advance.
(iii) To enter the Premises and without further demand or notice
proceed to distress and sale of the goods, chattel, and personal
property there round and to levy the rent and other charges herein
payable as rent, and Tenant shall pay all costs and officers'
commissions which are permitted by law, including watchmen's wages and
sums chargeable to Landlord, and further including commission(s)
charged by the constable or other person ma king the levy and in such
case all costs, officers' commissions and other charges shall
immediately attach and become part of the claim of Landlord for rent.
and any tender of rent without said costs, commissions and charges
made after the issuance of a warrant of distress, shall not be
sufficient to satisfy the. claim of Landlord.
(iv) To re-enter the Premises, together with all additions,
alterations and Improvements, and, at the option of Landlord, remove
all persons and all or any property therefrom, either by summary
dispossess proceedings or by any suitable action or proceeding at law
or by force or otherwise, without being liable for prosecution or
damages therefor, and repossess and enjoy the Premises. Upon
recovering possession of the Premises as a result of a default on the
part of Tenant, Landlord may, at Landlord's option, either terminate
this lease or make such alterations and repairs as may be necessary in
order to relet the Premises and relet the Premises or any part or pans
thereof, either in Landlord's name or otherwise, for a term or terms
which may, at Landlord's option, be less than or exceed the period
which would other-wise have constituted the balance of the term of
this lease and at such rent or rents and upon such other terms and
conditions as in Landlord's sole discretion may seem advisable and to
such person or persons as may In Landlord's discretion seem best: upon
each such reletting all rents received by Landlord from such reletting
shall be applied: first, to the payment of any costs and expenses of
such reletting, including brokerage fees and attorney's fees and all
costs of such alterations and repairs; second, to the payment of any
Indebtedness other than rent due hereunder from Tenant to Landlord;
third, to the payment of rent due and unpaid hereunder; and the
residue, if any, shall be held by Landlord and applied in payment of
future rent as It may become due and payable hereunder. If such
rentals received from such reletting during any month shall be less
than that to he paid during that month by Tenant, Tenant shall pay any
such deficiency to Landlord, Such deficiency shall be calculated and
paid monthly. No such re-entry or taking possession of the Premises or
the making of alterations or improvements thereto or the reletting
thereof shall be construed as an election on the pan of Landlord to
terminate this lease unless written notice of such intention be given
to Tenant. Landlord shall in no event be liable in any way whatsoever
for failure to relet the Premises or, in the event that the Premises
or any p art or pans thereof are relet, for failure to collect the
rent under such reletting. Tenant, for Tenant and Tenant's successors
and assigns, hereby irrevocably constitutes and appoints Landlord
Tenant's and their agent to collect the rents due and to become due
under all sublease, of the Premises or any parts thereof without in
any way affecting Tenant's obligation to pay any unpaid balance of
rent due or to become due hereunder. Notwithstanding any such
reletting without termination, Landlord may at any time thereafter
elect to terminate this lease for such previous breach.
(v) To terminate this lease and the term hereby created without
any right on the part of Tenant to waive the forfeiture by payment of
any sum due or by other performance of any condition, term or covenant
broken. Whereupon Landlord shall be entitled to recover, in addition
to any and all sums and damages for violation of Tenant's obligations
hereunder in existence at the time of such termination, damages for
Tenant's default In an amount equal to the amount of the rent reserved
for the balance of the term of this lease, as well as all other
charges, payments, costs and expenses herein agreed to be paid by
Tenant, all discounted at the rate of six percent (6%) per annum to
their then present worth, less the fair rental value of the Premises
for the remainder of said term, also discounted at the rate of six
percent (6%) per annum to its then present worth, all of which amount
shall be immediately due and payable from Tenant to Landlord.
(c) Non-Waiver. No waiver by Landlord of any breach by Tenant or any
of Tenant's obligations, agreements or covenants herein shall be a waiver
of any subsequent breach or of any obligation, agreement or covenant, nor
shall any forebearance by Landlord to seek a remedy for any breach by
Tenant be a waiver by Landlord of any rights and remedies with respect to
such or any subsequent breach.
(d) Grace Period. Notwithstanding anything hereinabove stated, except
in the case of emergency as set forth in Article 24 and except in the event
of any default enumerated in Paragraphs (a) (iii), (iv) and (v) or this
Article, neither party hereto will exercise any right or remedy provided
for in this lease or allowed by law because of any default or the other,
except those remedies contained in Paragraph (b/2) of this Article unless
such party shall have first given ten (10) days written notice thereof to
the defaulting party, and the defaulting party shall have (ailed to cure
the default within such period; provided, however, that if the default
consists of something other than the failure to pay money which cannot
reasonably be cured within ten (20) days. neither party hereto will
exercise any such right or remedy if the defaulting party begins to cure
the default within the ten (10) days and continues actively and diligently
in good faith to completely cure said default; and further provided that
Landlord shall not be required to give such ten (30) days notice more than
two (2) times during any twelve (12) month period.
(e) Rights and Remedies Cumulative. No right or remedy herein
conferred upon or reserved to Landlord is intended to be exclusive of any
other right or remedy provided herein or by law, but each shall be
cumulative and in addition to every other right or remedy given herein or
now or hereafter existing at law or in equity or by statute.
27. Condition of Title and of Premises.
(a) Tenant represents that the Premises. the title thereto, the zoning
thereof, the street or streets, sidewalks, parking areas, curbs and access
ways adjoining them, any surface and sub-surface conditions thereof, and
the present uses and non-uses thereof, have been examined by Tenant, and
Tenant accepts them in the condition or state in which they now are, or any
of them now is, without relying on any representation, covenant or
warranty, express or implied, in fact or in law, by Landlord and without
recourse to Landlord, as tot e title thereto, the encumbrances thereon. the
appurtenances thereto, the nature, condition or usability thereof or the
use or uses to which the Premises or any part thereof may be put, except
basic work to be performed by Landlord pursuant to Article 2 hereof.
Tenant's occupancy of the Premises shall constitute acceptance of the work
performed by Landlord pursuant to Article 2 hereof.
(b) Tenant shall not suffer or permit the Premises or any portion
thereof to be used by the public without restriction or in such manner as
might reasonably tend to impair Landlord's title to the Premises or in such
manner as might reasonably make possible a claim or claims of adverse usage
or adverse possession by the public, as such, or of implied dedication or
the Premises or any portion thereof.
28. Interpretation.
(a) Captions. The captions in this lease are for convenience only and
are not a part of this lease and do not in any way define, limit, describe
or amplify the terms and provisions of this lease or the scope or intent
thereof.
(b) Entire Agreement. This lease represents the entire agreement
between the parties hereto and there are no collateral or oral agreements
or understandings between Landlord and Tenant with respect to the Premises.
No rights, easements or licenses are acquired in the Premises or any land
adjacent to the Premises by Tenant by implication or otherwise except as
expressly set forth in the provisions of this lease. Tenant agrees to make
such changes to this lease as are required by any mortgagee, provided such
changes do not substantially affect Tenant's rights and obligations
hereunder This lease shall not be modified in any manner except by an
instrument in writing executed by the parties. The masculine (or neuter)
pronoun, singular number, shall include the masculine, feminine and neuter
genders and the singular and plural number.
(c) Exhibits. Each writing or plan referred to herein as being
attached hereto as an Exhibit or otherwise designated herein as an Exhibit
hereto is hereby made a part hereof.
(d) Covenants. The terms, covenants and obligations set forth herein
all constitute conditions and not covenants of this lease.
(e) Arbitration. Wherever arbitration is set forth herein as the
appropriate resolution ala dispute, issues shall be submitted for
arbitration to the American Arbitration Association in the city nearest to
the Premises in which offices of the American Arbitration Association are
located. Landlord and Tenant will comply with the rules then obtaining of
the American Arbitration Association and the determination of award
rendered by the arbitrator[s] shall be final, conclusive and binding upon
the parties and not subject to appeal, and judgement thereon may be entered
in any court of competent jurisdiction.
(f) Interest. Wherever interest is required to be paid hereunder, such
interest shall be at the highest rate permitted under law but not in excess
of fifteen percent (15%).
29. Definitions.
(a) "Landlord". The word "Landlord" is used herein to include the
Landlord named above as well as its heirs, successors and assigns, each of
whom shall have the same rights, remedies, powers, authorities and
privileges as he would have had had he originally signed this lease as
Landlord. Any such person, whether or not named herein, shall have no
liability hereunder after he ceases to hold title to the Premises except
(or obligations which may have theretofore accrued. Neither Landlord nor
any principal of Landlord nor any owner or the Building or the Lot, whether
disclosed or undisclosed, shall have any personal liability with respect to
any of the provisions of this lease or the Premises and if Landlord is in
breach or default with respect to Landlord's obligations under this lease
or otherwise, tenant shall look solely to the equity or Landlord in the
Premises for the satisfaction of Tenant's claims.
(b) "Tenant". The word "Tenant" is used herein to include the Tenant
named above as well as its successors and assigns, each of which shall be
under the same obligations, liabilities and disabilities and each of which
shall have the same rights, privileges and powers as it would have
possessed had it originally signed this lease as Tenant. Each and every of
the persons named above as Tenant shall be bound formally and severally by
the terms, covenants and agreements contained herein. However, no such
rights, privileges or powers shall inure to the benefit of any assignee of
Tenant immediate or remote. unless the assignment to such assignee is
permitted or has been approved in writing by Landlord. Any notice required
or permitted by the terms of this lease may be given by or to any one of
the persons named above as Tenant, and shall have the same force and effect
as if given by or to all thereof.
(c) "Mortgage" and "Mortgagee". The word "mortgage" is used herein to
include any lien or encumbrance on the Premises or the Lot or on any part
of or interest in or appurtenance to the Premises, including without
limitation any ground rent or ground lease if Landlord's interest is or
becomes a leasehold estate. The word "mortgagee" is used herein to include
the holder of any mortgage, including any ground lessor if Landlord's
interest is or becomes a leasehold estate. Wherever any right is given to a
mortgagee, that right may be exercised on behalf of such mortgagee by any
representative or servicing agent of such mortgagee.
(d) "Person". The word "person" is used herein to include a natural
person, a partnership, a corporation, an association, and any other form or
business association or entity.
(e) "Date of this lease". The "date of this lease" shall be the date
upon which this lease has been fully executed by both parties.
(f) "Index". The word "index" is used herein to mean the U.S. City
Average Consumer Price Index for Urban Wage Earners and Clerical Workers
(revised series) 1967 = 100 issued from time to time by the Federal Bureau
of Labor Statistics or any successor agency that shall issue the index or
any other measure hereafter employed by the Federal Bureau of Labor
Statistics or any successor agency in lieu or such index. If there be any
controversy as to the measure to be substituted, then the controversy shall
be resolved by arbitration. The arbitrators shall be guided by the
intention of the parties hereto to modify the minimum annual rent to
reflect upward changes in the cost of living. The fees and expenses of the
arbitration shall be borne by Landlord and Tenant.
(g) "Lot". The metes and bounds description of the Lot is set forth in
Exhibit "D" attached hereto.
30. Notices. All notices. demands, requests, consents, certificates and
waivers required or permitted hereunder from either party to the other shall be
in writing and sent by United States certified mail, return receipt requested,
postage prepaid. Notices to Tenant shall be addressed to 1821 West Iomega Way,
Roy, Utah 84067 or, after the Commencement Date, tot he Premises. Notices to
Landlord shall be addressed to 200 CentrePort Drive, Suite 350, Greensboro,
North Carolina 27409 with a copy to any mortgagee or other party designated by
Landlord. Either party may at any time, in the manner set forth for giving
notices to the other, specify a different address to which notices to it shall
be sent.
31. Security Deposit. At the time of signing this lease Tenant shall
deposit with the Landlord the sum of Forty Thousand Nine Hundred Thirty-Two and
No/100 Dollars ($40,932.00) to be retained by Landlord as cash security for the
faithful performance and observance by Tenant of the covenants, agreements and
conditions of this Lent. Notwithstanding anything to the contrary contained in
any law or statute now existing or hereafter passed (i) Tenant shall not be
en-titled to any interest whatever on the cash security, (ii) Landlord shall not
be obligated to hold the cash security in trust or in a separate account, and
(iii) Landlord shall have the right to commingle the cash security with its
other funds. Landlord may use, apply or retain the whole or any part of the cash
security to the extent required for the payment of any minimum rent, any
additional rent or any other sums payable hereunder as to which Tenant is in
default or to the extent required for the reimbursement to Landlord of any sum
which Landlord may expend or may be required to expend by reason of Tenant's
default in respect to any of the covenants, agreements or conditions of this
lease. If Tenant shall fully and faithfully comply with all of the covenants,
agreements and conditions of this lease, the cash security shall be returned to
Tenant after the Expiration Date and surrender of the Premises to Landlord. If
the Premises are sold to a bona fide purchaser, Landlord shall have the right to
transfer the aforesaid cash security to such purchaser, by which transfer
Landlord shall be released from all liability, and Tenant shall look solely to
the new landlord for the return thereof.
32. Additional Articles. The following Additional Articles 33 through 68
attached hereto are hereby made a part hereof.
IN WITNESS WHEREOF, and in consideration of the mutual entry into this lease and
for other good and valuable consideration, and intending to be legally bound,
each party hereto has caused this agreement to be duly executed under seal.
Date signed: Landlord:
May 9, 1997 Liberty Property Limited Partnership, by its (SEAL)
sole general partner, Liberty Property Trust
By /s/ Lawrence D. Gildea
Lawrence D. Gildea, Senior Vice President
Date signed: Tenant:
May 13, 1997 Iomega Corporation
By /s/ C. David Correll
Attest:Director of Corporate Facilities
[Corporate Seal]
Corporate Resolution and Authorization of Agency
It is hereby certified that a meeting of a quorum of the directors of the
corporation which is the Tenant herein was held on
________________________________, 19____ and that it was resolved to enter into
this lease and further that the officers of the Corporation, and
__________________________________________ as agent of the corporation, have
been authorized, empowered and directed in the corporate name and with the
corporate seal to execute and deliver any or all documents and to pay all fees
and charges necessary to carry out the entry into and compliance with this
lease.
------------------------------------
Secretary
<TABLE>
Iomega Corporation and Subsidiaries
Financial Highlights
<CAPTION>
For years ended December 31,
(in thousands, except per share and employee data) 1997 1996
-------------- ------------
<S> <C> <C>
Sales $ 1,739,972 $1,212,769
Cost of sales 1,192,310 879,989
Operating expenses 369,956 232,820
Net income $ 115,352 $ 57,328
Net income per common share (1) (2)
Basic $ 0.45 $ 0.23
Diluted $ 0.42 $ 0.21
Share price (1)
High $ 16.41 $ 27.57
Low $ 7.06 $ 2.86
Employees 4,816 2,926
</TABLE>
<TABLE>
Quarterly Financial Information
<CAPTION>
For year ended December 31, 1997
(in thousands, except per share data) Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total Year
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Sales $ 361,344 $ 400,162 $ 431,700 $ 546,766 $1,739,972
Gross margin 107,279 117,459 140,327 182,597 547,662
Net income 23,014 26,209 30,008 36,121 115,352
Net income per common share (1) (2)
Basic $ 0.09 $ 0.10 $ 0.12 $ 0.14 $ 0.45
Diluted $ 0.08 $ 0.09 $ 0.11 $ 0.13 $ 0.42
For year ended December 31, 1996
(in thousands, except per share data) Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total Year
---------- ---------- ---------- ---------- -----------
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 (1) (2)
Basic $ 0.04 $ 0.06 $ 0.05 $ 0.08 0.23
Diluted $ 0.04 $ 0.05 $ 0.05 $ 0.07 0.21
</TABLE>
(1) Net income per common share and share prices have been retroactively
adjusted to reflect stock splits (see Note 2 to Consolidated Financial
Statements).
(2) Net income per common share has been restated to reflect changes made
through the Company's adoption of Statement of Financial Accounting Standards
No. 128 "Earnings per Share" (see Note 1 to Consolidated Financial Statements).
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
<TABLE>
<CAPTION>
Years ended December 31, 1997 1996 1995 1994 1993
---------- ---------- --------- --------- --------
(in thousands, except per share and employee data)
<S> <C> <C> <C> <C> <C>
Sales $1,739,972 $1,212,769 $ 326,225 $ 141,380 $147,123
Cost of sales 1,192,310 879,989 235,838 92,453 92,585
---------- ---------- --------- --------- --------
Gross margin 547,662 332,780 90,387 48,927 54,538
---------- ---------- --------- --------- --------
Operating expenses:
Selling, general and administrative 291,930 190,719 57,189 36,862 38,862
Research and development 78,026 42,101 19,576 15,438 18,972
Restructuring costs (reversal) - - - (2,491) 14,131
---------- ---------- --------- --------- --------
Total operating expenses 369,956 232,820 76,765 49,809 71,965
---------- ---------- --------- --------- --------
Operating income (loss) 177,706 99,960 13,622 (882) (17,427)
Interest and other income (expense) (391) (5,977) (1,983) 908 771
---------- ---------- --------- --------- --------
Income (loss) before income taxes and
cumulative effect of accounting change 177,315 93,983 11,639 26 (16,656)
Provision for income taxes 61,963 36,655 3,136 1,908 206
---------- ---------- --------- --------- --------
Net income (loss) before cumulative effect
of accounting change 115,352 57,328 8,503 (1,882) (16,862)
Cumulative effect of accounting change - - - - 2,337
---------- ---------- --------- --------- --------
Net income (loss) $ 115,352 $ 57,328 $ 8,503 $ (1,882) $(14,525)
========== ========== ========= ========= ========
Net income (loss) per common share (1)
Basic $ 0.45 $ 0.23 $ 0.04 $ (0.01) $ (0.07)
========== ========== ========= ========= ========
Diluted $ 0.42 $ 0.21 $ 0.03 $ (0.01) $ (0.07)
========== ========== ========= ========= ========
Total employees 4,816 2,926 1,667 886 1,077
</TABLE>
(1) Net income per share amounts for all periods have been restated to reflect
changes made through the Company's adoption of Statement of Financial
Accounting Standards No. 128 "Earnings per Share" and certain stock splits.
(See Notes 1 and 2 in consolidated financial statements.)
<PAGE>
STOCK SPLITS
All shares, per share amounts and stock options have been retroactively restated
to reflect the stock splits described in Note 2 to the Consolidated Financial
Statements.
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of sales
for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales 68.5 72.6 72.3
-------- -------- --------
Gross margin 31.5 27.4 27.7
-------- -------- --------
Operating expenses:
Selling, general and administrative 16.8 15.7 17.5
Research and development 4.5 3.5 6.0
-------- -------- --------
Total operating expenses 21.3 19.2 23.5
-------- -------- --------
Operating income 10.2 8.2 4.2
Net interest and other expense - (0.5) (0.6)
-------- -------- --------
Income before income taxes 10.2 7.7 3.6
Provision for income taxes 3.6 3.0 1.0
-------- -------- --------
Net income 6.6% 4.7% 2.6%
======== ========= =========
</TABLE>
Seasonality
The Company's Zip products are targeted to the retail consumer market and to
personal computer OEMs. The Company's Jaz and Ditto products are targeted
primarily to the retail consumer market. Management believes the markets for the
Company's products are generally seasonal, with a higher proportional share of
total sales occurring in the fourth quarter and sales slowdowns commonly
occurring during the first quarter and summer months. Primarily as a result of
such seasonality, the Company experienced a decline in sales between the fourth
quarter of 1996 and the succeeding first quarter of 1997. Accordingly, revenues
for any prior quarter are not necessarily indicative of the revenues to be
expected in any future quarter.
1997 As Compared to 1996
Sales. Sales increased by $527.2 million, or 43%, in 1997 as compared to 1996.
This increase was due primarily to higher sales of Zip and Jaz products and such
increase reflects higher sales volumes of both drives and media, which were
partially offset by price reductions. Combined Zip and Jaz sales totaled $1.6
billion, or 93% of total sales, in 1997, as compared to $1.1 billion, or 87% of
total sales, in 1996. Sales of Zip drives to OEM customers increased to
approximately 32% of total Zip drive unit sales in 1997, as compared to
approximately 5% in 1996. Ditto product sales decreased in 1997, as total Ditto
sales were $118.3 million, or 7% of sales, in 1997, as compared to $127.6
million, or 10% of sales, in 1996. Other sales declined to $2.9 million in 1997,
as compared to $34.2 million, or 3% of sales, in 1996.
<PAGE>
International sales represented $679 million, or 39% of total sales, in 1997, as
compared to $406 million, or 34% of total sales, in 1996. Sales in Europe were
$520 million, or 30% of total sales, in 1997, as compared to $296 million, or
24% of total sales, in 1996. Sales in Asia were $159 million, or 9% of total
sales, in 1997, as compared to $110 million, or 9% of total sales, in 1996.
Sales in the Americas increased in total from $807 million, or 66% of total
sales, in 1996, to $1,061 million, or 61% of total sales, in 1997.
Gross Margin. The Company's overall gross margin was 31.5% in 1997, as compared
to 27.4% in 1996. The 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 an increase in 1997 in the ratio
of disk sales to drive sales for the Jaz product line when compared to 1996. The
ratio of disk sales to drive sales for the Zip product line was relatively flat
for 1997 when compared to 1996, but in the fourth quarter of 1997, the ratio was
significantly lower than in prior quarters. The Company believes the relatively
higher proportion of OEM drive sales was an important factor in causing the
lower ratio of disk sales to drive sales in the fourth quarter of 1997. The
improvements in Zip and Jaz product gross margins were partially offset by price
reductions enacted during the year for both product lines and lower gross
margins resulting from an increase in the proportion of Zip drives sold into the
OEM channel. Sales to OEM customers yield lower gross margins than sales to
retail channels and are likely to have the effect of lowering the overall ratio
of disk sales to drive sales which also has a negative effect on gross margin
percentages. Moreover, the gross margin for Jaz products was adversely affected
during 1997 by costs of approximately $3.1 million associated with a recall of
approximately 75,000 Jaz disks. Gross margins on Ditto products were lower in
1997, as compared to 1996, as material and overhead cost reductions were more
than offset by price reductions.
Gross margins in 1998 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, Jaz, Ditto and
other products. As indicated above, fourth quarter 1997 ratios of Zip disk sales
to drive sales were significantly lower than in previous quarters. Gross margin
percentages will also depend in large part on the Company's ability to achieve
planned cost reductions, as well as on recent and any future pricing actions.
Also, future gross margin percentages will continue to be impacted by the
percentage of OEM sales (which generally provide lower gross margins than sales
through retail channels) verses retail sales, as well as other factors.
Additionally, management expects that the planned introduction of Clik! products
will initially have a negative impact on gross margins due to start-up costs
associated with early production volumes. In the event of a delay in the planned
commercial availability of Clik!, such negative impact may be greater.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $101.2 million in 1997, as compared to
1996, and increased as a percentage of sales from 15.7% in 1996 to 16.8% in
1997. 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 from 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
represented 15.0% of sales in 1996. The increased expenses in 1997 were
primarily the result of increases in advertising expenses incurred to increase
market awareness of Zip and Jaz products and a new "Zip built-in" campaign
developed to generate greater consumer demand for OEM Zip drives. In addition,
the increase was affected by the growth in headcount throughout the world,
predominantly in the sales and marketing functions; variable selling expenses;
increased legal expenses; and increased fixed administrative expenses. For 1998,
management expects selling, general and administrative expenses to increase in
absolute dollars and, depending on sales levels, to represent between 15% and
20% of net sales. Specifically, the Company plans to increase spending by a
substantial amount on print and television advertising campaigns which are
designed to create greater consumer awareness of and demand for both its
aftermarket and OEM drives and to educate users on the potential uses for
multiple disks so as to increase demand for disks. Management cannot predict the
success or failure of these marketing efforts. In addition, management also
expects increases in variable selling expenses and fixed administrative expenses
in 1998.
<PAGE>
Research and Development Expenses. Research and development expenses increased
by $35.9 million in 1997, as compared to 1996, and increased as a percentage of
sales to 4.5% in 1997, from 3.5% in 1996. This increase was primarily the result
of expenditures related to the development and enhancement of Zip, Jaz and Ditto
product lines, as well as continued development expenses related to new products
such as Clik! and Buz, among others. For 1998, management expects research and
development expenses to increase in absolute dollars and, depending on sales
levels, to represent between 3% and 5% of net sales in order to support planned
new product development and existing product enhancements.
Other Income and Expense. The Company recorded interest income of $6.9 million
in 1997, as compared to $3.1 million in 1996, due to increased available cash,
cash equivalent and temporary investment balances in 1997. Interest expense was
$6.4 million in 1997, compared to $8.9 million in 1996. This decrease was due to
decreased average borrowings outstanding during 1997, resulting in large part
from the repayment of amounts borrowed under an European financing agreement,
the retirement of a promissory note for the purchase of the Company's
manufacturing facility in Malaysia 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.
Income Taxes. For 1997, the Company recorded an income tax provision of $62.0
million, representing an effective tax rate of 35%. The effective tax rate
decreased from 39% in 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. The Company expects its
effective tax rate to remain at approximately 35% in 1998. However, differences
between the currently anticipated mix and the actual mix of foreign income
versus domestic income, along with the ability of the Company to permanently
invest foreign earnings outside of the U.S., could impact the Company's
effective tax rate.
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
$406 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.
Sales to the Americas, excluding export sales, in total increased from $223
million, or 68% of total sales, in 1995, to $807 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 flat 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.
<PAGE>
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 from 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.
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 Company's nohand technology.
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 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 carry-forwards during 1996.
Liquidity and Capital Resources
At December 31, 1997, the Company had cash, cash equivalents, and temporary
investments of $196.2 million, working capital of $338.2 million, and a ratio of
current assets to current liabilities of 1.76 to 1. During 1997, the Company
generated $223.3 million from operating activities. The primary sources of cash
provided by operating activities were net income and increases in accounts
payable and accrued liabilities. These sources of cash were partially offset by
increases in trade receivables and inventories. Other current assets decreased
by $15.7 million, due primarily to the collection of value-added taxes in
Europe, partially offset by higher prepaid advertising expenses. Accounts
payable increased by $111.4 million, due to timing and volume of inventory
receipts and related payments to vendors. Accrued liabilities increased by $58.7
million which included increases in accrued payroll, vacation and bonus,
deferred revenue, and accrued advertising. In addition, income taxes payable
increased by $19.8 million. The $69.4 million increase in 1997 net trade
receivables, as compared with 1996, was due primarily to increased sales and the
timing of sales and collections during the respective years. The $74.5 million
increase in inventories at year-end 1997, as compared with year-end 1996,was
substantially due to an overall increase in sales volume, delays in new product
introductions, as well as lower than anticipated sales in the fourth quarter.
Certain new products that were expected to be shipped in the fourth quarter of
1997 were delayed, which contributed to higher levels of raw materials and
work-in-process.
The Company used $121.9 million in investing activities during 1997, primarily
for the purchase of property and equipment and the purchases of temporary
investments. Cash used in financing activities totaled $49.7 million in 1997 and
included $52.0 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 proceeds of $4.0 million from sales of Common
Stock to option holders.
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 and was originally secured by U.S. and
<PAGE>
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 December 31, 1997 was $196.1 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 and limits the
amount of cash dividends that can be paid.
During January 1998, the Company amended the $200 million Credit Facility
described above. The amendment extended the term of the Credit Facility to
January 2001, removed the collateral requirements under the original agreement,
reduced the margin on the base rate option to between 0.0% and 0.38%, reduced
the margin on the LIBOR rate option to between 1.0% and 1.75%, and reduced the
commitment fees associated with the Credit Facility.
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
at that time) which involved the sale of a portion of the foreign subsidiary's
accounts receivable to the bank. During March 1997, the agreement expired and
the Company repaid all amounts outstanding under the agreement.
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, bearing interest at
8.5%, and was payable over a three-year period. In April 1997, in connection
with the consummation of the purchase of the facility, the Company paid the
entire $18 million plus accrued interest.
The current and long-term portions of capitalized lease obligations at December
31, 1997 were $5.5 million and $2.9 million, respectively. During 1997, the
Company repaid all outstanding amounts under other term notes payable.
The Company had $45.7 million of convertible subordinated notes outstanding at
December 31, 1997, which bear interest at 6.75% per year and mature on March 15,
2001.
Additions to property and equipment during 1997 totaled $89.2 million, offset by
$3.3 million in proceeds from capital leases. These additions were primarily
related to increased manufacturing and distribution capacity, new information
systems, and leasehold improvements resulting from the Company's growth and
global expansion. During 1998, the Company expects capital expenditures to
increase substantially over 1997 levels. The largest portion of planned
expenditures is expected to be used to expand manufacturing capacity; however,
actual capital expenditures will depend largely on the levels of future sales.
The Company expects that its balance of cash, cash equivalents and temporary
investments, 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, and the success of the Company in managing its inventory,
accounts receivables and accounts payable.
Factors Affecting Future Operating Results
This Annual Report contains a number of forward-looking statements, including,
without limitation, statements referring to Zip as the emerging successor to the
floppy disk or relating to growth and market leadership prospects; the
sufficiency of cash; cash equivalent and temporary investment balances and
<PAGE>
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 expenses, including anticipated advertising expenditures, and
research and development activities; anticipated incorporation in personal
computers of Zip and notebook Zip drives by personal computer manufacturers; the
timing and impact of Clik! drives and disks and other new products becoming
commercially available; the possible effects on future sales due to supplier
quality issues and component shortages; efforts to be undertaken by the Company
to improve its manufacturing supply chain management; the maintenance of
stringent quality assurance standards; the possible effects of any adverse
outcomes in legal proceedings; 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", "expects", "anticipates",
"plans" 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 below.
Because the Company is relying on its Zip and Jaz products for the substantial
majority of its sales in 1998, 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
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, quality and other characteristics of the
Company's products and of competing solutions or media for use with the
Company's drives (existing, announced or unannounced) introduced by other
vendors, including the LS-120, or SuperDisk (product of the consortium of Compaq
Computer, Imation and MKE), the SyJet 1.5 GB, EZ Flyer 230 and SparQ 1.0GB
(products of Syquest Technology, Inc.), the Shark 250 (product of Avatar
Peripherals, Inc.), products of Nomai S.A., and the 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
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 and other 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 continued efforts
to improve customer service and satisfaction. In addition, 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
were adversely affected in the fourth quarter due to a shortage of components
for notebook Zip drives that became commercially available during November 1997
and may also be adversely affected for these and similar reasons in the future.
The Company's business strategy is substantially dependent on maximizing sales
of its proprietary Zip and Jaz disks, which generate significantly higher
margins than the related 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 any of the Company's drive products 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 Note 4 to Consolidated Financial
Statements for a description of certain litigation relating to third party media
claimed to be compatible with certain of the Company's products). As the
Company's mix of drive sales between OEM and retail customers continues to shift
towards a higher percentage of OEM sales, the ratio of disk sales to drive sales
are expected to continue to decrease from the levels experienced for the years
1997 and 1996, which could have an adverse effect on gross margin and net
income.
<PAGE>
Future market demand for the Company's products cannot be predicted with
certainty. Sales of Zip products in 1997 and 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 1997 and 1996 should not be assumed to be
an indication of future sales levels. 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 adverse effect on the Company's net income.
During 1998, the Company plans to increase by a substantial amount spending on
print and television advertising campaigns which are designed to create greater
consumer awareness of and demand for both its aftermarket and OEM drives and to
educate users on the potential uses for multiple disks so as to increase demand
for disks. Management cannot predict the success or failure of these marketing
efforts. To the extent that the increased spending does not generate additional
demand, the spending could have an adverse effect on net income. Additionally,
in order to help offset the expenses associated with the additional advertising,
the Company is planning to delay certain price decreases that would have
otherwise been effected earlier in 1998. This strategy to delay price decreases
could allow competing solutions to gain market share.
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. For example, management believes that sales in Asia
were adversely affected during the fourth quarter of 1997 and will continue to
be adversely affected due to a regional economic downturn and the devaluation of
certain Asian currencies vis-a-vis the U.S. dollar. The Company cannot predict
with any certainty the impact that these or other such events could have on its
foreign operations.
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 less mature and developed than in the United States. Consequently,
future sales and operating income from these regions are less predictable than
in the United States. In addition, operating expenses may increase as those
operations mature and increase in size.
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.
All of the factors described above for Zip and Jaz products are, or will be,
relevant to Clik!. In addition to such factors, demand from digital camera and
other consumer electronics manufacturers will affect the extent to which Clik!
achieves a significant market presence.
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 and Ditto Max Pro multiple
capacity drives, Clik!, 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, which will include the ability of the
Company to effectively manage obsolescence risks associated with products that
are phased out, and its success in ramping to volume production of new or
enhanced products. Future operating results will also depend on intellectual
property and antitrust 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, and the possibility
that the Company would be required to devote unplanned resources to developing
modifications to its products or marketing programs.
<PAGE>
The Company's success will depend in large part upon the services of a number of
key employees. The loss of the services of one or more of these key employees
could have a material adverse effect on the Company. The Company's success will
also depend in significant part upon its ability to continue to attract and
retain highly skilled management and other personnel. There can be no assurance
that the Company will be successful in attracting and/or retaining these key
employees.
The Company is currently in the process of transitioning to new computer
hardware and software for its financial, accounting, inventory control, order
processing and other management information systems. The successful
implementation of these new systems is crucial to the efficient operation of the
Company's business. There can be no assurance that the Company will implement
its new systems in an efficient and timely manner or that the new systems will
be adequate to support the Company's operations. Problems with installation or
initial operation of the new systems could cause substantial difficulties in
operations planning, financial reporting and management and thus could have a
material adverse effect on the Company's business, financial condition and
results of operations.
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 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,
transportation issues, product and component pricing, competition, intellectual
property rights, litigation, and general economic conditions.
Financial Conditions and Trends
<TABLE>
<CAPTION>
December 31, (in thousands) 1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and temporary
investments $ 196,241 $ 108,312 $ 1,023 $ 19,793 $ 18,804
Trade receivables, net 280,182 210,733 105,955 18,892 21,685
Inventories 246,383 171,920 98,703 17,318 13,572
Total assets 961,639 687,192 266,227 75,833 81,089
Current portion of notes payable - 33,770 47,640 - -
Accounts payable and accrued liabilities 439,113 249,099 151,087 25,739 29,023
Current portion of capitalized lease
obligations 5,505 4,114 782 - -
Working capital 338,166 270,735 12,623 34,818 30,550
Long-term obligations 2,939 19,176 4,032 1,031 976
Convertible subordinated notes 45,683 45,733 - - -
Property, plant and equipment cash
additions during year 85,871 73,457 45,232 7,083 6,567
--------- --------- --------- --------- ---------
</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, 1997, there
were 5,043 holders of record of Common Stock. The Company has not paid cash
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
1997 and 1996, retroactively adjusted for stock splits (see Note 2 to the
<PAGE>
Company's Consolidated Financial Statements). The Company's Credit Facility
limits the amount of cash dividends that can be paid.
Price Range of Common Stock
<TABLE>
<CAPTION>
1997 1996
---- ----
High Low High Low
<S> <C> <C> <C> <C>
1st Quarter $ 9.88 $ 7.06 $ 6.82 $ 2.86
2nd Quarter 11.81 7.63 27.57 6.16
3rd Quarter 14.56 9.56 15.19 6.32
4th Quarter 16.41 11.00 13.44 7.75
</TABLE>
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 159,922 $ 108,312
Temporary investments 36,319 -
Trade receivables, less allowance for doubtful accounts
of $11,266 and $8,992, respectively 280,182 210,733
Inventories 246,383 171,920
Deferred tax assets 47,996 39,109
Other current assets 11,982 27,644
------------ ------------
Total current assets 782,784 557,718
------------ ------------
Property, plant and equipment, at cost:
Machinery and equipment 196,671 133,146
Building 21,517 21,517
Leasehold improvements 26,473 12,334
Furniture and fixtures 15,014 9,155
Construction in process 12,544 10,973
------------ ------------
272,219 187,125
Less: Accumulated depreciation and amortization (96,550) (61,083)
------------ ------------
175,669 126,042
------------ ------------
Other assets 3,186 3,432
------------ ------------
$ 961,639 $ 687,192
============ ============
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
</TABLE>
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
---------- ----------
<S> <C> <C>
Current liabilities:
Current portion of notes payable $ - $ 33,770
Accounts payable 257,281 145,844
Accrued payroll, vacation and bonus 31,728 17,731
Deferred revenue 42,423 15,677
Income taxes payable 22,440 2,610
Accrued advertising 32,628 12,474
Other accrued liabilities 52,613 54,763
Current portion of capitalized lease obligations 5,505 4,114
---------- ----------
Total current liabilities 444,618 286,983
---------- ----------
Capitalized lease obligations, net of current portion 2,939 5,711
---------- ----------
Deferred income taxes 10,334 1,050
---------- ----------
Notes payable, net of current portion - 13,465
---------- ----------
Convertible subordinated notes, 6.75%, due 2001 45,683 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 1/3 par value; authorized 400,000,000
shares; issued 262,264,830 and 256,554,852 shares,
respectively (Note 2) 8,741 8,551
Additional paid-in capital 273,826 264,150
Less: 829,210 and 600,000 Common Stock treasury shares,
respectively, at cost (6,099) (4,363)
Deferred compensation (336) (669)
Retained earnings 181,933 66,581
---------- ----------
Total stockholders' equity 458,065 334,250
---------- ----------
$ 961,639 $ 687,192
========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Sales $ 1,739,972 $ 1,212,769 $ 326,225
Cost of sales 1,192,310 879,989 235,838
------------ ------------ ------------
Gross margin 547,662 332,780 90,387
------------ ------------ ------------
Operating expenses:
Selling, general and administrative 291,930 190,719 57,189
Research and development 78,026 42,101 19,576
------------ ------------ ------------
Total operating expenses 369,956 232,820 76,765
------------ ------------ ------------
Operating income 177,706 99,960 13,622
Interest income 6,931 3,080 537
Interest expense (6,443) (8,875) (1,652)
Other expense (879) (182) (868)
------------ ------------ ------------
Income before income taxes 177,315 93,983 11,639
Provision for income taxes 61,963 36,655 3,136
------------ ------------ ------------
Net income $ 115,352 $ 57,328 $ 8,503
============ ============ ============
Net income per common share (Notes 1 and 2):
Basic $ 0.45 $ 0.23 $ 0.04
============ ============ ===========
Diluted $ 0.42 $ 0.21 $ 0.03
============ ============ ===========
Weighted average common shares outstanding 259,182 246,725 229,886
============ ============ ===========
(Notes 1 and 2)
Weighted average common shares outstanding -
assuming dilution (Notes 1 and 2) 282,401 275,194 250,275
============ =========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
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, 1994 222,236,988 $7,408 $ (597) $ 41,467 $ - $ 785 $ - $ 49,063
Sale of shares pursuant to exercise of
stock options at an average price
of $0.21 cash per share 9,719,004 324 - 1,702 - - - 2,026
Sale of shares to an officer at an
average price of $0.14 per share
for a note receivable 1,987,500 66 (283) 217 - - - -
Accretion of Series A Convertible
Preferred Stock redemption
premium - - - (14) - - - (14)
Dividends on Series A Convertible
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 Convertible
Preferred Stock to Common Stock 1,274,400 43 - 1,162 - - - 1,205
Issuance of Common Shares under
Employee Stock Purchase Plan 59,448 2 - 11 - - - 13
Collection of notes receivable
from stockholders - - 880 - - - - 880
Net income - - - - - 8,503 - 8,503
--------------------------------------------------------------------------------------------
Balances at December 31, 1995 235,277,340 7,843 - 45,590 - 9,253 - 62,686
Sale of shares pursuant to exercise
of stock options at an average
price of $0.25 cash per share 9,691,408 323 - 2,145 - - - 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 600,000 Common Shares at an
average price of $7.27 cash
per share - - - - - - (4,363) (4,363)
Net proceeds from public offering of
Common Stock 11,500,000 383 - 190,767 - - - 191,150
Conversion of convertible subordinated
notes to Common Shares 54,068 2 - 265 - - - 267
Recognition of compensation from
Employee Stock Purchase Plan - - - 43 - - - 43
Issuance of Common Shares under
Employee Stock Purchase Plan 32,036 - - - - - - -
Net income - - - - - 57,328 - 57,328
--------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
<PAGE>
7
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
(In thousands, except share data)
<TABLE>
<CAPTION>
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, 1996 256,554,852 $ 8,551 $ - $ 264,150 $ (669) $ 66,581 $(4,363) $ 334,250
Sale of shares pursuant to exercise of
stock options at an average price
of $0.70 cash per share 5,693,693 190 - 3,801 - - - 3,991
Tax benefit from dispositions
of employee stock - - - 5,767 5,767
Amortization of deferred compensation - - - - 333 - - 333
Purchase of 229,210 Common Shares at an
average price of $7.57 cash
per share - - - - - - (1,736) (1,736)
Conversion of convertible subordinated
notes to Common Shares 10,129 - - 50 - - - 50
Issuance of Common Shares under
Employee Stock Purchase Plan 6,156 - - 58 - - - 58
Net income - - - - - 115,352 - 115,352
----------- ------- --------- --------- -------- --------- ------- ----------
Balances at December 31, 1997 262,264,830 $ 8,741 $ - $ 273,826 $ (336) $ 181,933 $(6,099) $ 458,065
=========== ======= ========= ========= ======== ========= ======= ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 115,352 $ 57,328 $ 8,503
Non-cash revenue and expense adjustments:
Depreciation and amortization 39,272 24,650 8,943
Deferred income tax provision (benefit) 397 (34,761) (2,821)
Tax benefit from dispositions of employee stock 5,767 24,335 860
Other 703 975 926
Changes in assets and liabilities:
Trade receivables, net (69,449) (104,778) (87,063)
Inventories (74,463) (73,217) (81,385)
Other current assets 15,662 (23,971) (1,278)
Accounts payable 111,437 51,062 87,554
Accrued liabilities 58,747 49,481 34,490
Income taxes payable 19,830 (2,531) 5,141
------------ ------------ ------------
Net cash provided by (used in)
operating activities 223,255 (31,427) (26,130)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment (85,871) (73,457) (45,232)
Proceeds from sale of assets - 3,906 -
Purchase of temporary investments (59,918) - (2,090)
Sale of temporary investments 23,599 - 5,022
Net decrease (increase) in other assets 246 (358) (205)
------------ ------------ ------------
Net cash used in investing activities (121,944) (69,909) (42,505)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from sales of Common Stock 3,991 2,468 2,028
Proceeds from issuance of notes payable 87,295 834,473 259,667
Payments on notes payable and capitalized lease obligations (139,251) (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 -
Redemption of Preferred Stock - - (30)
Purchase of Common Stock (1,736) (4,363) -
Proceeds from notes receivable from stockholders - - 880
------------ ------------ ------------
Net cash provided by (used in) financing activities (49,701) 208,625 52,797
------------ ------------ ------------
Net change in cash and cash equivalents 51,610 107,289 (15,838)
Cash and cash equivalents at beginning of year 108,312 1,023 16,861
------------ ------------ ------------
Cash and cash equivalents at end of year $ 159,922 $ 108,312 $ 1,023
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
---------- ---------- ----------
<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 $ 3,342 $ 28,367 $ 2,535
========== ========== ==========
Conversion of convertible subordinated notes to
Common Stock $ 50 $ 267 $ -
========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Operations
The Company designs, manufactures and markets innovative multiple
personal storage solutions, based on removable-media technology, for personal
computer and consumer electronics device users. The Company's primary data
storage solutions include disk drives and disks marketed under the trademarks
Zip and Jaz and a family of tape drives and tapes marketed under the trademark
Ditto. Retail outlets for the Company's products include mail order catalogs,
computer superstores, office supply superstores, specialty computer stores and
other retail outlets. The Company sells its products to retail channels directly
as well as indirectly through distributors. In addition to sales through these
retail channels, the Company has marketing alliances with a variety of companies
within the computer industry. These alliances include original equipment
manufacturers (OEMs) and value added reseller arrangements that provide for
certain of the Company's products to be incorporated in new computers 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 or resulting from
unavailability from a particular supplier 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. Not all of the Company's
manufacturing relationships are 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 Iomega
Corporation and its wholly owned subsidiaries after elimination of all material
intercompany accounts and transactions.
Revenue Recognition
The Company's customers include OEMs, 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 $42.4 million, $15.7 million and $3.2 million at December 31,
1997, 1996 and 1995, 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 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 $28.5 million, $17.0 million and $1.6 million at December 31,
1997, 1996 and 1995, 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,
1997 1996
<S> <C> <C>
Raw materials $ 130,049 $ 88,728
Work-in-process 18,714 14,004
Finished goods 97,620 69,188
--------- ---------
$ 246,383 $ 171,920
========= =========
</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, 1997, 1996 and 1995, advertising expenses totaled approximately $96.3
million, $70.0 million and $10.6 million, respectively.
Warranty Costs
A one-year limited warranty is generally provided on the Company's Zip
and Jaz drives. During 1997, Zip and Jaz disks had a limited lifetime warranty,
and a two-year limited warranty is generally provided on the Ditto drives and
media.
<PAGE>
Net Income Per Common Share
Basic net income per common share (Basic EPS) excludes dilution and is
computed by dividing net income by the weighted-average number of common shares
outstanding during the year. Diluted net income per common share (Diluted EPS)
reflects the potential dilution that could occur if stock options or other
contracts to issue common stock were exercised or converted into common stock.
Diluted EPS for 1997 and 1996 was determined under the assumption that the
convertible subordinated notes were converted on January 1, 1997 and March 1,
1996, respectively. The computation of Diluted EPS does not assume exercise or
conversion of securities that would have an antidilutive effect on net income
per common share. Net income per common share amounts and share data have been
restated for all periods presented to reflect Basic and Diluted EPS and the
stock splits described in Note 2.
Following is a reconciliation of the numerator and denominator of Basic EPS to
the numerator and denominator of Diluted EPS for all periods presented (in
thousands, except per share data):
<TABLE>
<CAPTION>
Net Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
December 31, 1997
Basic EPS $ 115,352 259,182 $ 0.45
Effect of options - 13,967
Effect of convertible subordinated notes 2,004 9,252
---------- ------------
Diluted EPS $ 117,356 282,401 $ 0.42
========== ============
December 31, 1996
Basic EPS $ 57,328 246,725 $ 0.23
Effect of options - 20,745
Effect of convertible subordinated notes 1,578 7,724
---------- ------------
Diluted EPS $ 58,906 275,194 $ 0.21
========== ============
December 31, 1995
Basic EPS $ 8,503 229,886 $ 0.04
Effect of options - 20,389
---------- ------------
Diluted EPS $ 8,503 250,275 $ 0.03
========== ============
</TABLE>
At December 31, 1997, 1996 and 1995, there were outstanding options to purchase
973,475; 344,750 and 952,659 shares of common stock, respectively, that were not
included in the computation of Diluted EPS because the options' exercise prices
were greater than the average market price of the common shares of the four
preceding quarters.
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 net income.
<PAGE>
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. 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.
Instruments with maturities in excess of three months are classified as
temporary investments. The Company has classified its entire portfolio of
temporary investments at December 31, 1997, as held-to-maturity. These temporary
investments consist primarily of commercial paper and municipal bonds. At
December 31, 1997, all temporary investments had maturities of less than six
months. There were no temporary investments at December 31, 1996.
Fair Value of Financial Instruments
The fair value of the convertible subordinated notes was approximately
$118.0 million at December 31, 1997. 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 Pronouncements
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. Both
statements are effective for financial statements issued for periods beginning
after December 15, 1997. Accordingly, the Company will adopt SFAS 130 and SFAS
131 in its December 31, 1998 consolidated financial statements.
Reclassifications
Certain reclassifications have been made in prior years' consolidated
financial statements to conform to the current year's presentation.
(2) STOCK SPLITS
In November 1997, 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 December 22, 1997 to stockholders of record at the close of business on
December 1, 1997.
In April 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 dividends 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.
<PAGE>
(3) INCOME TAXES
Income before income taxes consisted of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
U.S. $ 89,864 $ 88,095 $ 10,761
Non-U.S. 87,451 5,888 878
----------- ----------- -----------
$ 177,315 $ 93,983 $ 11,639
=========== =========== ===========
</TABLE>
The income tax provision consists of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Current Income Taxes:
Federal $ 48,303 $ 36,341 $ 4,158
State 6,141 4,153 805
Foreign 2,183 1,278 156
----------- ----------- ----------
56,627 41,772 5,119
----------- ----------- ----------
Deferred Income Taxes:
Federal 4,790 201 (189)
State 546 23 (47)
Foreign - 6,000 -
Change in valuation allowance - (11,341) (1,747)
----------- ----------- ----------
5,336 (5,117) (1,983)
----------- ----------- ----------
Provision for income taxes $ 61,963 $ 36,655 $ 3,136
=========== =========== ==========
</TABLE>
The tax benefits associated with nonqualified stock options and
disqualifying dispositions of incentive stock options reduced taxes currently
payable by $5.8 million, $24.3 million and $0.9 million in 1997, 1996 and 1995,
respectively. Such benefits were recorded as an increase to additional paid-in
capital.
<PAGE>
Deferred tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases 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>
<CAPTION>
December 31,
1997 1996
(In thousands)
<S> <C> <C>
Deferred tax assets:
Accounts receivable reserves $ 4,083 $ 9,094
Inventory reserves 3,743 1,928
Fixed asset reserves 1,297 558
Accrued expense reserves 35,883 26,751
Foreign tax credit 2,183 -
Other 807 778
------------ ------------
Total deferred tax assets $ 47,996 $ 39,109
============ ============
Deferred tax liabilities:
Tax on unremitted foreign earnings, net of
foreign tax credits and foreign deferred taxes $ 9,665 $ -
Accelerated depreciation 669 1,050
------------ ------------
Total deferred tax liabilities $ 10,334 $ 1,050
============ ============
</TABLE>
Although the realization of the deferred tax assets is not assured,
management believes that it is more likely than not that all of the deferred tax
assets will be realized.
The differences between the provision for income taxes at the U.S.
statutory rate and the Company's effective rate are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996 1995
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Provision at U.S. statutory rate $ 62,061 $ 32,894 $ 3,957
Non-deductible items 792 1,566 95
State income taxes, net of federal benefit 7,093 4,923 596
Decrease in deferred asset valuation
allowance - (11,341) (1,747)
Foreign income taxes 2,183 7,610 156
Foreign earnings taxed at less than U.S. rates (11,598) - -
Other 1,432 1,003 79
--------- --------- ---------
Provision for income taxes $ 61,963 $ 36,655 $ 3,136
========= ========= =========
</TABLE>
Cash paid for income taxes was $34.4 million in 1997, $49.0 million in
1996, and $0.1 million in 1995. U.S. taxes have not been provided for unremitted
foreign earnings of $29.7 million. These earnings are considered to be
permanently invested in non-U.S. operations. The residual U.S. tax liability, if
such amounts were remitted, would be approximately $11.6 million.
<PAGE>
(4) COMMITMENTS AND CONTINGENCIES
Litigation
The Company is engaged in ongoing litigation in several jurisdictions
with Nomai S.A., a French company, in connection with Nomai's XHD disk product,
which Nomai claims to be compatible with certain of the Company's Zip drives,
and a disk product planned by Nomai, but not yet introduced, purportedly for use
with the Company's Jaz drives. An adverse outcome in these proceedings could
result in the continuing sale by Nomai in one or more countries, or the
introduction for sale in the United Kingdom (or other countries where the
product is not presently offered for sale), of a disk product claimed to be
compatible with certain Zip drives, or the introduction and sale by Nomai of a
disk product claimed to be compatible with the Company's Jaz drives, or other
undesirable rulings. Any such continuing sales or introductions would adversely
affect the Company's sales and would have a disproportionately negative effect
on the Company's net income. The adverse effects of any such adverse outcome in
such proceedings could be material.
The Company continues to be committed to vigorously protecting and
enforcing its intellectual property rights and to attacking unfair competition
in the proceedings referenced above.
During 1997, two consumer class-action suits filed against the Company,
one relating to administration of consumer rebate programs and one relating to
technical support, were settled. The settlements in both the rebate related
Pizzimenti and technical support related Cox class-action suits have been
preliminarily approved by the United States District Court for the District of
Delaware and hearings on the motions for final court approval are scheduled for
March 24 and April 3, 1998, respectively. The estimated costs associated with
these settlements are reflected in the accompanying consolidated financial
statements.
On February 10, 1998, a purported class-action complaint was filed in
the United States District Court for the District of Utah against the Company
and certain of its officers on behalf of persons who purchased the Company's
common stock during the period from September 22, 1997 to January 22, 1998. The
complaint alleges that the Company and certain of its officers violated certain
federal securities laws. The complaint seeks an unspecified amount of damages.
As the outcome of this matter cannot be reasonably determined at this time, the
Company has not accrued for any potential loss contingencies related to this
matter. Management believes that the named defendants have highly meritorious
defenses to the allegations made in the lawsuit and the Company intends to
vigorously defend against such allegations.
The Company is involved in other 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 position or
results of operations.
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,
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Lease
Years Ending December 31, Commitments
<S> <C>
1998 $ 8,840
1999 7,912
2000 5,491
2001 3,733
2002 3,270
Thereafter 13,275
---------
$ 42,521
</TABLE>
Total rent expense for the years ended December 31, 1997, 1996, and 1995
was approximately $7.4 million, $3.8 million and $2.0 million, respectively.
<PAGE>
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, 1997 (in thousands):
Future Minimum
Years Ending December 31, Lease Payments
1998 $ 6,019
1999 2,761
2000 300
2001 6
2002 -
----------
Total net minimum lease payments 9,086
Less amount representing interest (642)
----------
Present value of net minimum lease payments 8,444
Less current portion (5,505)
----------
$ 2,939
Cash Bonus Plan
The Company has a bonus plan that provides for bonus payments to
officers and key employees. At December 31, 1997, the Company had accrued $10.4
million for management bonuses which were paid in February 1998. At December 31,
1996, approximately $5.9 million was accrued for management bonuses which were
paid in February 1997.
Executive Compensation Agreement
In 1995, the Company adopted a bonus plan for the Chief Executive
Officer that provided for bonus payments of cash and up to 240,000 shares of
common 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 240,000 shares of common stock at a
cost equal to par value. Under this plan, 80,000 vested shares were issued in
January 1997 and another 80,000 vested shares were issued in January 1998.
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 pool is paid
throughout the year on a quarterly basis. Approximately $830,000 was paid to
employees during 1997. The Company has accrued approximately $1.1 million for
the remaining 1997 profit sharing plan liability, which was paid in February
1998. The Company paid approximately $1.9 million in profit sharing for 1996 and
approximately $0.6 million in profit sharing for 1995.
Foreign 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.
<PAGE>
At December 31, 1997, outstanding forward exchange sales (purchase)
contracts, which all mature in March 1998, were as follows:
<TABLE>
<CAPTION>
Contracted
Forward
Amount Rate
<S> <C> <C>
Belgian Franc (14,500,000) 36.67
British Pound (200,000) 0.60
Dutch Guilder (4,500,000) 2.00
German Mark (1,250,000) 1.78
Irish Punt (100,000) 0.69
Italian Lira 200,000,000 1,758.60
Japanese Yen 70,000,000 128.65
Malaysian Ringgit (7,400,000) 3.83
Singapore Dollar (1,080,000) 1.69
Swiss Franc (1,000,000) 1.43
</TABLE>
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
December 31, 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.
(5) 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 and was originally 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 December 31, 1997 was $196.1 million, and there were no borrowings
outstanding. The weighted average outstanding balance was $20 million during the
one-month period the loan was outstanding in 1997. The weighted average interest
rate was 6.7%. 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 and limits the
amount of cash dividends that can be paid.
During January 1998, the Company amended the $200 million Credit Facility
described above. The amendment extended the term of the Credit Facility to
January 2001, removed the collateral requirements under the original agreement,
reduced the margin on the base rate option to between 0.0% and 0.38%, reduced
the margin on the LIBOR rate option to between 1.0% and 1.75%, and reduced the
commitment fees associated with the Credit Facility.
Loss of the Credit Facility would require the Company to find an
alternative source of funding which could have a material adverse effect on the
Company's business and financial results.
<PAGE>
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 at that time) which involved the sale of a portion of the foreign
subsidiary's accounts receivable to the bank. At December 31, 1996, $26.7
million was outstanding and is included in notes payable in the accompanying
consolidated balance sheet. During March 1997, the agreement expired and the
Company repaid all amounts outstanding under the agreement.
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 and bore interest at
8.5%. In April 1997, in connection with the consummation of the purchase of the
facility, the Company paid the entire $18 million plus accrued interest.
Other Term Notes
Prior to 1997, the Company had entered into certain term notes with
financial institutions. The proceeds from these notes were used to purchase
manufacturing equipment. At December 31, 1996, $2.5 million was outstanding and
is included in notes payable in the accompanying consolidated balance sheet.
During 1997, the Company paid off all of its other term notes.
Cash paid for interest was $5.9 million, $8.9 million, and $1.0 million
in 1997, 1996, and 1995, respectively, including interest on capital leases.
Included in interest expense for 1997, 1996 and 1995, respectively, was
$982,000, $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 is payable
semi-annually. 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 $4.938 per share (equivalent to a
conversion rate of approximately 202.52 shares per $1,000 principal amount of
notes), subject to adjustment in certain events. Through December 31, 1997,
holders have converted a cumulative $317,000 of convertible subordinated notes
into 64,197 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.
<PAGE>
(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, 1997, 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 $1,500 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 1,500 votes per share.
(8) PREFERRED STOCK PURCHASE RIGHTS
In July 1989, the Company adopted a Shareholder Rights Plan and
declared a dividend of one-fifteenth 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, 1997, the Company had five stock-based compensation
plans, which are described below. The Company accounts for these plans under
Accounting Principles Board Opinion No. 25, under which no compensation cost has
been recognized. 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 earnings per share would have been reduced to
the pro forma amounts indicated below (all per share amounts have been restated
to reflect changes made through the Company's adoption of Statement of Financial
Accounting Standards No. 128, "Earnings per Share" and for the stock splits
described in Notes 1 and 2):
<PAGE>
<TABLE>
<CAPTION>
For years ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Net income (000's) As reported $115,352 $ 57,328 $ 8,503
======== ======== =========
Pro forma $109,793 $ 54,351 $ 8,260
======== ======== =========
Basic EPS As reported $ 0.45 $ 0.23 $ 0.04
======== ======== =========
Pro forma $ 0.42 $ 0.22 $ 0.04
======== ======== =========
Diluted EPS As reported $ 0.42 $ 0.21 $ 0.03
======== ======== =========
Pro forma $ 0.39 $ 0.20 $ 0.03
======== ======== =========
</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 costs may not be indicative
of future compensation costs.
Stock Price Assumptions
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 1997, 1996, and 1995, in calculating compensation
cost: expected stock price volatility of 55%, 67%, and 62%, respectively, a
risk-free interest rate of 6.04% for 1997 and 5.65% for 1996 and 1995, and an
expected average life of 3.5 years for 1997 and 3.75 years for 1996 and 1995.
Stock Incentive Plans
The Company has three stock incentive plans: the 1981 Stock Option Plan
(the 1981 Plan), the 1987 Stock Option Plan (the 1987 Plan) and the 1997 Stock
Incentive Plan (the 1997 Plan). The 1981 Plan and the 1987 Plan have expired and
no further grants may be made under these plans; however, all remaining
outstanding options previously granted under these plans remain in effect. The
1997 Plan provides for the grant of incentive stock options (ISO's) intended to
qualify under Section 422 of the Internal Revenue Code, nonstatutory stock
options (NSO's) and restricted stock awards. Under the 1997 Plan, the Company
may grant options for up to 12,000,000 shares of Common Stock to the Company's
officers, key employees, directors, consultants, and advisors. The exercise
price of ISO's granted under the 1997 Plan may not be less than 100%; NSO's may
be granted with exercise prices below the fair market value of the Common Stock
as of the date of grant, subject to certain limitations. The duration of options
awarded under these plans may not exceed ten years from the date of grant, or
sooner if so specified. At December 31, 1997, the Company had reserved
27,720,438 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, exercised,
and forfeited under the 1981 Plan, the 1987 Plan, and the 1997 Plan for the
years ended December 31, 1997, 1996, and 1995 at their respective weighted
average exercise prices. All options and option prices have been restated for
the stock splits described in Note 2.
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------------------------------------------------------------------------
Shares Weighted Avg. Shares Weighted Avg. Shares Weighted Avg.
Stock Options (000's) Exercise Price (000's) Exercise Price (000's) Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 21,782 $ 2.32 23,328 $ 0.44 29,444 $ 0.23
Granted 2,303 11.61 7,814 5.45 4,004 1.43
Exercised (5,620) 0.72 (9,104) 0.26 (9,892) 0.21
Forfeited (996) 3.80 (256) 2.53 (228) 0.36
-------- -------- --------
Outstanding at end of year 17,469 3.95 21,782 2.32 23,328 0.44
======== ======== ========
Options exercisable at year-end 5,934 1.28 6,804 0.37 12,274 0.36
Weighted average fair value of
options granted during the
year $ 5.33 $ 2.95 $ 0.71
</TABLE>
The number of shares available for future grant under the 1997 Plan
totaled 10,251,300 at December 31, 1997.
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), which was
amended, subject to stockholder approval, during 1997. 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. Under
the 1995 Director Plan, the Company may grant options for up to 2,400,000 shares
of Common Stock. This Plan currently provides for the grant to each non-employee
director of the Company, on his or her initial election as a director, of an
option to purchase 40,000 shares of Common Stock. If stockholders approve the
amendment adopted in September 1997 by the Board of Directors, such initial
option grant will increase to 50,000 shares of common stock. In addition to the
initial option grant, each non-employee director is granted an option to
purchase 10,000 shares of Common Stock on each anniversary of his or her initial
election following the full vesting of the initial option grant. All options
generally 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. 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. 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. At December 31, 1997, the Company had reserved
3,212,000 shares of Common Stock for issuance upon exercise of options granted
or to be granted under these plans.
The following table presents the options granted, exercised, and
forfeited under the 1987 and 1995 Director Plans for the years ended December
31, 1997, 1996, and 1995 at their respective weighted average exercise prices.
All options and option prices have been restated for the stock splits described
in Note 2.
<TABLE>
<CAPTION>
1997 1996 1995
-----------------------------------------------------------------------------------------------------
Shares Weighted Avg. Shares Weighted Avg. Shares Weighted Avg.
Stock Options (000's) Exercise Price (000's) Exercise Price (000's) Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 886 $ 0.20 1,500 $ 0.20 2,400 $ 0.20
Granted 120 11.41 - - - -
Exercised (74) 0.13 (614) 0.19 (900) 0.21
Forfeited - - - - - -
------ ------- -------
Outstanding at end of year 932 1.65 886 0.20 1,500 0.20
====== ======= =======
Options exercisable at year-end 437 0.35 288 0.26 676 0.22
Weighted average fair value of
options granted during the
year $ 5.34 $ - $ -
</TABLE>
<PAGE>
The number of shares available for future grant under the 1995 Director
Plan was 2,280,000 at December 31, 1997.
The following table summarizes information about options outstanding
under all plans at December 31, 1997. All relevant data has been restated for
the stock splits described in Note 2.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Number (000's) Weighted-Avg. Number (000's)
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
<S> <C> <C> <C> <C> <C>
$0.13 to $4.22 13,458 6.8 years $ 1.44 6,138 $ 0.79
$5.52 to $9.85 2,883 8.8 years 7.80 86 7.52
$10.28 to $14.48 1,391 9.4 years 12.33 95 12.50
$15.24 to $16.38 535 9.7 years 15.86 18 15.76
$20.07 to $23.07 134 8.4 years 22.51 34 22.51
-------- --------
18,401 7.4 years 3.83 6,371 1.21
======== ========
</TABLE>
(10) STOCK PURCHASE PLANS
1991 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 earned a premium, equal to 25% of the number of shares
originally purchased, on each of the four anniversaries of purchase provided the
employee was still employed by the Company and the shares were still held by the
Company. A total of 18,000,000 shares was approved for the three-year plan with
3,000,000 shares plus the premium of 3,000,000 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, 1997, a total of
523,692 shares have been purchased pursuant to this plan and a total of 203,672
of premium shares have been issued under this plan. The final shares to be
issued under this plan were issued in the first quarter of 1997.
1998 Plans
The Company has adopted two Employee Stock Purchase Plans (one for
primarily U.S. employees and one for international employees) to take effect on
January 1, 1998, subject to stockholder approval at the 1998 Annual Meeting of
Stockholders. Under these plans, participants will be able to purchase shares of
the Company's Common Stock through specified payroll deductions (or by other
means for international employees). Offerings to purchase shares of the
Company's stock begin each January 1 and July 1. Each offering commencement date
begins a six-month period during which payroll deductions will be made and held
for the purchase of stock at the end of each six-month period at a price equal
to 85% of the common stock's closing price at the end of this six-month period.
An aggregate of 3,000,000 shares of Common Stock has been reserved for issuance
under these plans.
(11) RETIREMENT PLAN
The Iomega Retirement and Investment Savings Plan (the 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
(ERISA). 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 $900,000 and $671,000 to the IRIS Plan for the years
ended December 31, 1996 and 1995, respectively. The Company has accrued $1.3
million for contribution to the IRIS Plan for the year ended December 31, 1997.
(12) NONQUALIFIED DEFERRED COMPENSATION PLAN
In 1998, the Company will offer a nonqualified deferred compensation
plan to a select group of management and highly compensated employees that
provides the opportunity to defer a specified percentage of their cash
compensation. Participants may elect to defer up to 50% of annual base salary
and up to 100% of bonus. The Company's obligations under this plan will be
unfunded, for tax purposes and for purposes of Title I of ERISA, and unsecured
general obligations of the Company to pay in the future the value of the
deferred compensation adjusted to reflect the performance, whether positive or
negative, of selected investment measurement options, chosen by each
participant, during the deferral period.
(13) OPERATIONS BY GEOGRAPHIC REGION
The Company has three geographic regions: Americas, Asia and Europe.
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. Sales to Asian customers are denominated
in U.S. dollars. In late 1996, the Company purchased a manufacturing facility in
Malaysia. All sales from Malaysia are to affiliated companies. In the first
quarter of 1997, the Company moved its European headquarters from Germany to
Switzerland and moved its European distribution center from Germany to the
Netherlands. In 1997, the majority of sales to European customers were
denominated in U.S. dollars.
Americas operations include all U.S. operations, including export
sales, primarily to Canada in 1997 and 1996, and primarily to Canada and Asia in
1995. Domestic export sales for the years ended December 31, 1997, 1996, and
1995 were $3.3 million, $3.8 million and $18.2 million, respectively. European
operations are comprised of a subsidiary in Switzerland, a distribution facility
in the Netherlands, and sales offices located in France, Belgium, the United
Kingdom, Spain, Italy, Germany, Ireland and Austria. All European sales and
substantially all European identifiable assets and operating expenses are
recorded on the books of the Switzerland subsidiary in 1997 and the German
subsidiary in 1996 and 1995. Export sales from the European operation for the
years ended December 31, 1997, 1996 and 1995 were approximately $507.0 million,
$193.8 million, and $49.5 million, respectively, primarily to European countries
other than Switzerland in 1997 and other than Germany in 1996 and 1995. The
sales offices are compensated through commission agreements. Inventory is
transferred from domestic and Malaysian operations to the Switzerland and
Singapore subsidiaries at an arms-length price as determined by an independent
economic study. Research and development costs are allocated from the Americas
operations to the Switzerland subsidiary based on a cost sharing agreement as
determined by an independent economic study. Also, the Switzerland subsidiary
pays the Americas operations a royalty, determined by an independent economic
study, for the rights to existing technologies. Following is a summary of the
Company's operations by geographic location (in thousands).
<PAGE>
For the Year Ended December 31, 1997:
<TABLE>
<CAPTION>
Intercompany
Americas Asia Europe Transactions Consolidated
<S> <C> <C> <C> <C> <C>
Net Sales:
Unaffiliated Customers $ 1,060,954 $ 158,592 $ 520,426 $ - $ 1,739,972
Affiliates 232,371 538,651 11,725 (782,747) -
Cost of Sales (979,767) (631,534) (364,986) 783,977 (1,192,310)
------------ ----------- ---------- ------------- -----------
Gross Margin 313,558 65,709 167,165 1,230 547,662
------------ ----------- ----------- ------------- -----------
Operating Expenses 224,418 19,849 124,885 804 369,956
------------ ----------- ----------- ------------- -----------
Operating Income $ 89,140 $ 45,860 $ 42,280 $ 426 $ 177,706
============ =========== =========== ============= ===========
Identifiable Assets $ 654,867 $ 153,987 $ 194,110 $ (41,325) $ 961,639
============ =========== =========== ============= ===========
Capital Expenditures $ 59,930 $ 23,653 $ 2,288 $ - $ 85,871
============ =========== =========== ============= ===========
</TABLE>
For the Year Ended December 31, 1996:
<TABLE>
<CAPTION>
Intercompany
Americas Asia Europe 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
------------ ----------- ------------ ----------- -----------
Operating Income (Loss) $ 84,262 $ 10,559 $ 5,566 $ (427) $ 99,960
============ =========== ============ =========== ===========
Identifiable Assets $ 468,541 $ 78,570 $ 150,499 $ (10,418) $ 687,192
============ =========== ============ =========== ===========
Capital Expenditures $ 53,474 $ 18,348 $ 1,635 $ - $ 73,457
============ =========== ============ =========== ===========
</TABLE>
For the Year Ended December 31, 1995:
<TABLE>
<CAPTION>
Intercompany
Americas Europe 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
---------- ---------- ------------- ------------
Operating Income $ 11,566 $ 2,047 $ 9 $ 13,622
========== ========== ============== ============
Identifiable Assets $ 226,696 $ 39,473 $ 58 $ 266,227
========== ========= ============== ============
Capital Expenditures $ 44,223 $ 1,009 $ - $ 45,232
========== ========= ============== ============
</TABLE>
<PAGE>
(14) OTHER MATTERS
Significant Customers
During 1997 and 1996, sales to Ingram Micro, Inc. accounted for 14% and
15%, respectively, of the Company's consolidated sales. In 1995, no single
customer accounted for 10% or more of consolidated sales.
Concentration of Credit Risk
The Company markets its products primarily through computer product
distributors, retailers, and OEM's. Accordingly, as the Company grants credit to
its customers, a substantial portion of outstanding accounts receivable are due
from computer product distributors, certain large retailers, and OEM's. At
December 31, 1997, the customers with the ten highest outstanding accounts
receivable balances totaled $140.9 million or 44% of the gross accounts
receivable. At December 31, 1997, the outstanding accounts receivable balance
from one customer was $31.6 million or 10% of gross accounts receivable. At
December 31, 1996, the customers with the ten highest outstanding accounts
receivable balances totaled $81.2 million or 32% of 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. If any one or a
group of these customers' receivable balances should be deemed uncollectable, it
would have a material adverse effect on the Company's results of operations and
financial condition.
Purchases from Related Parties
During 1996 and 1995, the Company purchased inventory items totaling
$841,000 and $1,130,000, respectively, from a vendor having a common director
with the Company. There were no related party transactions in 1997.
<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, 1997
and 1996, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1997. 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, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
January 20, 1998
(except with respect to
the fourth paragraph
of Note 4, as to which
the date is February 10, 1998)
EXHIBIT 21.1
SUBSIDIARIES OF IOMEGA CORPORATION
Subsidiary Name Jurisdiction or Incorporation
Iomega Europe GmbH (in disolution) Germany
Iomega GmbH Germany
Iomega Canada Inc. 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 KK Japan
Iomega SARL Switzerland
Iomega Korea Korea
Iomega Hong Kong Ltd. Hong Kong
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS. THE COMPANY HAS RESTATED EARNINGS PER SHARE FOR
FISCAL YEARS ENDING DECEMBER 31, 1996 AND 1995 TO BASIC AND DILUTED EARNINGS
PER SHARE TO BE IN ACCORDANCE WITH STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS
(SFAS) SFAS NO. 128: EARNINGS PER SHARE. CERTAIN RECLASSIFICATION HAVE BEEN
MADE IN PRIOR YEARS' AMOUNTS TO CONFORM TO THE CURRENT YEAR'S PRESENTATION.
</LEGEND>
<MULTIPLIER> 1,000
<CIK> 0000352789
<NAME> Iomega Corporation
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1997 DEC-31-1996 DEC-31-1995
<CASH> 159,922 108,312 1,023
<SECURITIES> 36,319 0 0
<RECEIVABLES> 321,474 251,594 109,449
<ALLOWANCES> 41,292 40,861 3,494
<INVENTORY> 246,383 171,920 98,703
<CURRENT-ASSETS> 782,784 557,718 212,132
<PP&E> 272,219 187,125 103,149
<DEPRECIATION> 96,550 61,083 49,779
<TOTAL-ASSETS> 961,639 687,192 266,227
<CURRENT-LIABILITIES> 444,618 286,983 199,509
<BONDS> 45,683 45,733 0
0 0 0
0 0 0
<COMMON> 282,567 272,701 53,433
<OTHER-SE> 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 961,639 687,192 266,227
<SALES> 1,739,972 1,212,769 326,225
<TOTAL-REVENUES> 1,739,972 1,212,769 326,225
<CGS> 1,192,310 879,989 235,838
<TOTAL-COSTS> 1,562,266 1,112,809 312,603
<OTHER-EXPENSES> 879 182 868
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 6,443 8,875 1,652
<INCOME-PRETAX> 177,315 93,983 11,639
<INCOME-TAX> 61,963 36,655 3,136
<INCOME-CONTINUING> 115,352 57,328 8,503
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 115,352 57,328 8,503
<EPS-PRIMARY> .45 .23 .04
<EPS-DILUTED> .42 .21 .03
</TABLE>
