UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 27, 1999
COMMISSION FILE NUMBER 1-12333
Iomega Corporation
(Exact name of registrant as specified in its charter)
Delaware 86-0385884
(State or other jurisdiction (IRS employer identification number)
of incorporation or organization)
1821 West Iomega Way, Roy, UT 84067
(Address of principal executive offices)
(801) 332-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of March 28, 1999.
Common Stock, par value $.03 1/3 269,456,569
(Title of each class) (Number of shares)
<PAGE>
IOMEGA CORPORATION
TABLE OF CONTENTS
Page
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements
Condensed consolidated balance sheets at June 27, 1999
and December 31, 1998......................................... 3
Condensed consolidated statements of operations for the three months
ended June 27, 1999 and June 28, 1998......................... 5
Condensed consolidated statements of operations for the six months
ended June 27, 1999 and June 28, 1998......................... 6
Condensed consolidated statements of cash flows for the six months
ended June 27, 1999 and June 28, 1998......................... 7
Notes to condensed consolidated financial statements............... 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 39
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.................................................. 40
Item 2. Changes in Securities and Use of Proceeds.......................... 41
Item 5. Other Events....................................................... 42
Item 6. Exhibits and Reports on 8-K........................................ 44
Signatures.................................................................. 45
Exhibit Index............................................................... 46
This Quarterly Report on Form 10-Q contains a number of forward-looking
statements, including, without limitation, statements referring to: the expected
second half results; the expected sufficiency of cash and cash equivalent
balances and available sources of financing; expected positive cash flow for
1999; projected effective tax rates; expected realization of deferred tax
assets; the impact on gross margins of the sales volumes of disks, sales mix
between disks and drives, the mix between OEM sales and sales through other
channels and the sales mix between the Company's products; targeted levels for
gross margin, selling, general and administrative expenses and research and
development expenses; the impact of Clik! drives and disks and other new
products introduced or expected to be introduced during 1998 or 1999;
anticipated availability of new products expected to be shipped in 1999,
including ZipCD drives and disks; the possible effects on future sales due to
supplier quality issues or component shortages; efforts to be undertaken by the
<PAGE>
Company to improve its manufacturing supply chain management; the maintenance of
stringent quality assurance standards; the impact of new accounting
pronouncements; the impact of the Euro conversion on the Company's business or
financial condition; the timing and impact of restructuring activities and other
organizational changes; expected cost savings resulting from the Company's
restructuring plan; expected sales levels due to seasonal demand; anticipated
hedging strategies; the possible effects of an adverse outcome in legal
proceedings described in Item 1 of Part II; estimated additional expenditures
associated with the Company's efforts to address Year 2000 issues; and the
anticipated Year 2000 compliance of the Company's computer systems and hardware
and utility software products and third-party suppliers. 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," "intends" and similar expressions
are intended to identify forward-looking statements. There are a number of
important factors that could cause actual events or the Company's actual results
to differ materially from those indicated by such forward-looking statements.
These factors include, without limitation, those set forth under the captions
"Liquidity and Capital Resources," "Factors Affecting Future Operating Results,"
"Disclosures About Market Risk," and "Year 2000 Readiness" included under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 2 of Part I of this Quarterly Report on Form 10-Q, and those
set forth in Item 1 of Part II of this Quarterly Report on Form 10-Q. The
factors discussed below do not reflect the potential future impact of any
mergers, acquisitions or dispositions. The Company does not assume any
obligation to update any forward-looking statements made herein.
<PAGE>
<TABLE>
IOMEGA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
<CAPTION>
June 27, December 31,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 89,281 $ 90,273
Trade receivables, net 185,999 233,662
Inventories 138,400 165,132
Income taxes receivable 12,916 24,974
Deferred income taxes 48,245 49,827
Other current assets 27,762 20,246
------------- -------------
Total current assets 502,603 584,114
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, at cost 393,102 373,227
Less: Accumulated depreciation
and amortization (219,543) (165,112)
------------- -------------
Net property, plant and equipment 173,559 208,115
------------- -------------
INTANGIBLES, net 38,310 33,580
DEFERRED INCOME TAXES 9,716 -
OTHER ASSETS 5,755 4,350
------------- -------------
$ 729,943 $ 830,159
============= =============
</TABLE>
The accompanying notes to condensed
consolidated financial statements are an integral part
of these balance sheets.
<PAGE>
<TABLE>
IOMEGA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands, except share data)
<CAPTION>
June 27, December 31,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Related party notes payable (Note 4) $ - $ 40,000
Accounts payable 124,097 160,977
Other current liabilities (Note 1) 175,656 152,843
Current portion of capitalized
lease obligations and notes
payable 4,397 4,408
------------- -------------
Total current liabilities 304,150 358,228
------------- -------------
CAPITALIZED LEASE OBLIGATIONS AND
NOTES PAYABLE, net of current portion 5,089 4,607
------------- -------------
DEFERRED INCOME TAXES - 4,903
------------- -------------
CONVERTIBLE SUBORDINATED NOTES,
6.75%, due 2001 45,505 45,655
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value;
authorized 4,750,000 shares,
none issued - -
Series C Junior Participating
Preferred Stock, authorized
250,000 shares, none issued - -
Common Stock, $.03 1/3 par value;
authorized 400,000,000 shares,
issued 270,266,111 and 268,186,096
shares at June 27, 1999 and
December 31, 1998, respectively 9,008 8,937
Additional paid-in capital 291,052 286,206
Less: 809,542 Common Stock treasury
shares, at cost (6,088) (6,088)
Retained earnings 81,227 127,711
------------- -------------
Total stockholders' equity 375,199 416,766
------------- -------------
$ 729,943 $ 830,159
============= =============
</TABLE>
The accompanying notes to condensed
consolidated financial statements are an integral part
of these balance sheets.
<PAGE>
<TABLE>
IOMEGA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<CAPTION>
For the Quarter Ended
--------------------------------
June 27, June 28,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
SALES $ 348,781 $ 393,831
COST OF SALES 273,020 299,607
------------- -------------
Gross margin 75,761 94,224
------------- -------------
OPERATING EXPENSES:
Selling, general and administrative 82,828 124,399
Research and development 23,085 30,303
Restructuring charge 41,909 -
------------- -------------
Total operating expenses 147,822 154,702
------------- -------------
OPERATING LOSS (72,061) (60,478)
Interest and other expense, net (328) (918)
------------- -------------
LOSS BEFORE INCOME TAXES (72,389) (61,396)
Benefit for income taxes 25,336 21,486
------------- -------------
NET LOSS $ (47,053) $ (39,910)
============= =============
NET LOSS PER COMMON SHARE
(Basic and Diluted) $ (0.17) $ (0.15)
============= =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
(Basic and Diluted) 269,115 265,464
============= =============
</TABLE>
The accompanying notes to condensed
consolidated financial statements are an integral part
of these statements.
<PAGE>
<TABLE>
IOMEGA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<CAPTION>
For the Six Months Ended
--------------------------------
June 27, June 28,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
SALES $ 734,993 $ 801,331
COST OF SALES 565,496 604,971
------------- -------------
Gross margin 169,497 196,360
------------- -------------
OPERATING EXPENSES:
Selling, general and administrative 152,769 232,341
Research and development 43,798 53,436
Restructuring charge 41,909 -
------------- -------------
Total operating expenses 238,476 285,777
------------- -------------
OPERATING LOSS (68,979) (89,417)
Interest and other expense, net (2,533) (481)
------------- -------------
LOSS BEFORE INCOME TAXES (71,512) (89,898)
Benefit for income taxes 25,028 31,412
------------- -------------
NET LOSS $ (46,484) $ (58,486)
============= =============
NET LOSS PER COMMON SHARE
(Basic and Diluted) $ (0.17) $ (0.22)
============= =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
(Basic and Diluted) 268,753 263,878
============= =============
</TABLE>
The accompanying notes to condensed
consolidated financial statements are an integral part
of these statements.
<PAGE>
<TABLE>
IOMEGA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
For the Six Months Ended
--------------------------------
June 27, June 28,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Loss $ (46,484) $ (58,486)
Non-Cash Revenue and Expense Adjustments:
Depreciation and amortization 46,142 30,218
Deferred income tax benefit (13,037) (20,454)
Tax benefit from dispositions
of employee stock 1,061 1,954
Restructuring charge 41,909 -
Bad debt provision 3,761 (404)
Other 972 2,641
Changes in Assets and Liabilities:
Trade receivables, net 43,902 137,287
Inventories 22,112 (34,028)
Other current assets (2,923) (4,199)
Accounts payable (36,880) (134,105)
Accrued liabilities 1,974 (13,923)
Income taxes 12,058 (40,425)
------------- -------------
Net cash provided by (used in)
operating activities 74,567 (133,924)
------------- -------------
Cash Flows from Investing Activities:
Purchase of property, plant and equipment (25,688) (49,514)
Acquisition of SyQuest assets (12,093) -
Sale of temporary investments - 36,319
Net increase in other assets (1,955) (3,845)
------------- -------------
Net cash used in investing activities (39,736) (17,040)
------------- -------------
Cash Flows from Financing Activities:
Proceeds from sale of Common Stock 3,706 2,914
Proceeds from issuance of notes payable
and capital leases 3,532 60,000
Payments on notes payable and capitalized
lease obligations (43,061) (3,265)
Purchase of Common Stock - (465)
------------- -------------
Net cash provided by (used in)
financing activities (35,823) 59,184
------------- -------------
Net Decrease in Cash and Cash Equivalents (992) (91,780)
Cash and Cash Equivalents at Beginning
of Period 90,273 159,922
------------- -------------
Cash and Cash Equivalents at End of Period $ 89,281 $ 68,142
============= =============
</TABLE>
The accompanying notes to condensed
consolidated financial statements are an integral part
of these statements.
<PAGE>
<TABLE>
IOMEGA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
For the Six Months Ended
--------------------------------
June 27, June 28,
1999 1998
------------- -------------
<S> <C> <C>
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Property, plant and equipment financed
under capitalized lease obligations $ - $ 1,223
============= =============
</TABLE>
The accompanying notes to condensed
consolidated financial statements are an integral part
of these statements.
<PAGE>
IOMEGA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SIGNIFICANT ACCOUNTING POLICIES
In the opinion of the Company's management, the accompanying unaudited,
condensed, consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments) which are necessary
to present fairly the financial position of the Company as of June 27,
1999 and December 31, 1998, the results of operations for the three-
and six-month periods ended June 27, 1999 and June 28, 1998 and cash
flows for the six-month periods ended June 27, 1999 and June 28, 1998.
The results of operations for the three- and six-month periods ended
June 27, 1999 are not necessarily indicative of the results to be
expected for the entire year or for any future period.
These unaudited, condensed, consolidated financial statements should be
read in conjunction with the consolidated financial statements and
notes included in or incorporated into the Company's latest Annual
Report on Form 10-K.
Pervasiveness of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
Principles of Consolidation - These unaudited, condensed, consolidated
financial statements include the accounts of Iomega Corporation and its
majority-owned subsidiaries after elimination of all material
intercompany accounts and transactions.
Revenue Recognition - The Company's customers include original
equipment manufacturers, end users, retailers, distributors and
value-added manufacturers. Some retail and distribution customer
agreements have provisions which allow the customer to return product
under certain conditions within specified time periods. 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 $23.7 million
and $33.1 million at June 27, 1999 and December 31, 1998, respectively,
and is included in "Other current liabilities" in the accompanying
condensed consolidated balance sheets.
<PAGE>
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 $38.2 million and $47.6 million at June 27,
1999 and December 31, 1998, respectively, and are netted against
accounts receivable in the accompanying condensed consolidated balance
sheets.
Foreign Currency Translation - For purposes of consolidating non-U.S.
operations, the Company has determined the functional currency for its
non-U.S. operations to be the U.S. dollar. Therefore, translation
gains and losses are included in the determination of income.
Cash Equivalents and Temporary Investments - For purposes of the
statements of cash flows, the Company considers all highly liquid debt
instruments purchased with maturities of three or fewer months to be
cash equivalents. Cash equivalents primarily consist of investments in
money market mutual funds, commercial paper, auction rate, money market
preferred stock investments and taxable and non-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. There were no temporary investments at June 27,
1999 and December 31, 1998.
Inventories - Inventories include direct materials, direct labor and
manufacturing overhead costs and are recorded at the lower of cost
(first-in, first-out) or market and consist of the following (in
thousands):
<TABLE>
<CAPTION>
June 27, December 31,
1999 1998
----------- ------------
<S> <C> <C>
Raw materials $ 59,193 $ 62,613
Work-in-process 17,291 8,482
Finished goods 61,916 94,037
----------- ------------
$ 138,400 $ 165,132
=========== ============
</TABLE>
<PAGE>
Other Current Liabilities - Other current liabilities consist of the
following (in thousands):
<TABLE>
<CAPTION>
June 27, December 31,
1999 1998
----------- ------------
<S> <C> <C>
Accrued payroll, vacation
and bonus 22,288 21,048
Deferred revenue 23,699 33,114
Accrued advertising 41,326 30,226
Accrued restructuring 20,651 -
Other accrued liabilities 67,692 68,455
----------- ------------
$ 175,656 $ 152,843
=========== ============
</TABLE>
Reclassifications - Certain reclassifications were made to the prior
periods' unaudited, condensed, consolidated financial statements to
conform with the current period presentation.
Net Income (Loss) Per Common Share - Basic net income (loss) per common
share ("Basic EPS") excludes dilution and is computed by dividing net
income (loss) by the weighted average number of common shares
outstanding during the period. 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. 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. In periods where
losses are recorded, common stock equivalents would decrease the loss
per share and therefore are not added to the weighted average shares
outstanding. For the three- and six-month periods ended June 27, 1999
and June 28, 1998, basic and diluted net loss per common share were the
same due to the antidilutive effect of recording net losses during the
respective periods.
Recent Accounting Pronouncements - In June 1998, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes new
accounting and reporting standards for companies to report information
about derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as "derivatives")
and for hedging activities. In June 1999, the FASB issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133." This statement amended the effective date of
SFAS 133. SFAS 133 will now be effective for financial statements
issued for all fiscal quarters of fiscal years beginning after June 15,
2000. The Company does not expect this pronouncement to have a material
impact on the Company's results of operations, financial position or
liquidity.
<PAGE>
(2) ACQUISITIONS
Nomai S.A. During the third quarter of 1998, the Company purchased
approximately 54% of the capital stock of Nomai, S.A. ("Nomai"), a
France-based manufacturer of removable storage systems, from Nomai's
principal and other major shareholders. As required by French law, the
Company subsequently offered all other shareholders of Nomai the
opportunity to sell their shares to the Company at the same price per
share that was paid to the principal and other major shareholders. The
initial purchase and the tender offer resulted in the Company owning
substantially all of Nomai's outstanding shares. The total purchase
price of the acquisition was approximately $45 million ($42 million,
net of cash acquired).
The transaction was accounted for as a purchase and, on this basis, the
excess purchase price over the estimated fair value of net tangible
assets has been allocated, based upon an independent third-party
valuation, to intangibles and purchased in-process technology.
Intangibles of approximately $36 million arising from the acquisition
are being amortized on a straight-line basis over seven years. The
Company recorded a non-cash pre-tax charge of $11.1 million related to
purchased in-process technology, representing the appraised value of
technology still in the development stage that was not considered to
have reached technological feasibility and had no alternative future
use. At the acquisition date, purchased in-process technology projects
and their respective assigned values consisted of the following: a 2GB
design drive and cartridge projects ($9.3 million), a DVD and CD-RW
interface technology project ($1.3 million) and a servo writer
technology project ($0.5 million). During the second quarter of 1999,
the Company recorded a restructuring charge that included the
discontinuance of a drive development project that included the 2GB
design drive and cartridge development project that was acquired as a
purchased in-process technology project in the acquisition of Nomai
during 1998.
The following unaudited pro forma combined financial data for the six
months ended June 28, 1998 presents the results of operations of the
Company as if the Nomai acquisition had been effective at the beginning
of the period presented (in millions, except per share data):
<TABLE>
<CAPTION>
June 28, 1998
-------------
(Unaudited)
<S> <C>
Revenue $ 817
Net loss (65)
Diluted EPS $ (0.25)
</TABLE>
These pro forma results of operations have been prepared for
comparative purposes only and do not purport to be indicative of the
results of operations, which actually would have resulted had the Nomai
acquisition occurred on the date indicated, or which may result in the
future.
<PAGE>
SyQuest. In April 1999, the Company completed the purchase of certain
assets of SyQuest Technology, Inc. and its subsidiaries, ("SyQuest"),
including intellectual property, inventory and fixed assets in the
U.S., Europe and Malaysia. The total purchase price of the asset
purchase in the U.S. and Europe was $9.2 million and the purchase price
of the Malaysian assets was $2.9 million. The assets purchased are
included in the Company's other current assets and intangibles at June
27, 1999. The Company is in the process of selling, disposing or
utilizing the inventory and fixed assets from the purchase.
Intellectual property of $7.5 million arising from the purchase is
being amortized on a straight-line basis over three years. No material
obligations or liabilities of SyQuest were assumed by the Company. As
part of the purchase, the Company released SyQuest and SyQuest released
the Company from all claims in connection with patent and trademark
infringement litigation pending between the parties in Delaware and in
Paris, France.
(3) INCOME TAXES
For the three- and six-months ended June 27, 1999, the Company recorded
an income tax benefit at an effective rate of approximately 35%. This
tax rate is based on the Company's anticipated mix of domestic and
foreign pre-tax income (loss) for 1999.
U.S. taxes have not been provided for unremitted foreign earnings which
are considered to be permanently reinvested in non-U.S. operations.
The Company has approximately $9.5 million of foreign net operating
loss carryovers for which the Company has established a valuation
allowance. These carryovers expire at various dates beginning in 2004.
The Company has a net deferred tax asset of $64.6 million as of June
27, 1999, reflecting the benefit of $165.6 million in future tax
deductions. Realization is primarily dependent on generating sufficient
taxable income. Although realization is not assured, management
believes it is more likely than not that all of the net deferred tax
asset will be realized. The amount of the net deferred tax asset
considered realizable, however, could be reduced in the future if
estimates of future taxable income are reduced.
Cash paid for income taxes was $4.2 million for the first six months of
1999 and $28.0 million for the corresponding period in 1998. The
Company received an income tax refund of $20.4 million during the
quarter ended June 27, 1999.
<PAGE>
(4) DEBT
Notes Payable - On March 11, 1997, the Company entered into a $200
million Senior Secured Credit Facility with Morgan Guaranty Trust
Company of New York, Citibank, N.A. and a syndicate of other lenders.
During 1998 and 1999, the Company and the lenders agreed to several
amendments to and waivers under the Credit Facility, the most recent of
which was entered into on June 30, 1999, (the "Credit Facility"). At
June 27, 1999, the Credit Facility is a $150 million secured revolving
line of credit that expires on July 14, 2000, and is secured by
accounts receivable, domestic inventory, domestic intellectual
property, general intangibles, equipment, personal property, investment
property and a pledge of 65% of the stock of certain of the Company's
subsidiaries. Under the Credit Facility, the Company may borrow at a
base rate, which is the higher of prime or the sum of 0.5% plus the
Federal funds rate plus a margin of 0.0% to 1.63% depending on the
Company's earnings before interest expense, income taxes, depreciation
and amortization ("EBITDA") and utilization of the Credit Facility, or
at LIBOR plus a margin of 1.25% to 2.75% depending on the Company's
EBITDA and utilization of the Credit Facility. There were no borrowings
outstanding on the Credit Facility at June 27, 1999. Borrowing
availability under the Credit Facility is based on an agreed upon
advance rate on receivables and inventory not to exceed $150 million.
Total availability under the Credit Facility at June 30, 1999 was
$122.0 million. 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,
EBITDA and certain other covenants. On June 15, 1999, the Company
amended the Credit Facility to exclude certain restructuring and other
charges taken in the second quarter of 1999 from the minimum
consolidated EBITDA financial covenant and the consolidated tangible
net worth covenant for the period ended June 27, 1999. Further, on June
30, 1999, the Company obtained a waiver to the Credit Facility with
respect to the minimum consolidated EBITDA financial covenant for the
period ended June 27, 1999. Depending on its financial performance in
future quarters, the Company may be required to seek further covenant
waivers and amendments under the Credit Facility. There can be no
assurance that the Company will be able to obtain any such waivers or
amendments on terms acceptable to the Company, if at all. Loss of the
Credit Facility may 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.
Related Party Notes - In July 1998, the Company borrowed a total of $40
million from Idanta Partners Ltd. and another entity affiliated with
David J. Dunn, Chairman of the Company's Board of Directors, pursuant
to a series of three senior subordinated notes. The proceeds of these
notes were used for the cash purchase of Nomai. The Company used
internally generated funds to repay the principal and interest
associated with these notes upon their maturity on March 31, 1999.
<PAGE>
Capital Leases - The Company has entered into various agreements to
obtain capital lease financing for the purchase of certain
manufacturing equipment, software, office furniture and other
equipment. The leases have terms ranging from 36 to 60 months and
mature at various dates from August 1999 to April 2002. Principal and
interest payments under the various agreements are payable monthly or
quarterly. Interest rates are fixed and range from 7.1% to 10.2%. The
leases are secured by the underlying leased equipment, software and
furniture.
Cash paid for interest was $7.3 million and $5.5 million, respectively,
for the first six months of 1999 and 1998, including interest on
capital leases. Included in interest expense for the first six months
of 1999 and 1998, respectively, was $0.8 million and $0.4 million of
amortization of deferred charges associated with obtaining the debt.
(5) BUSINESS SEGMENT INFORMATION
The accounting policies of the segments are the same as those described
in Note 1 "Significant Accounting Policies." Intersegment sales,
eliminated in consolidation, are not material. The Company evaluates
performance based on product profit margin for each segment. Product
profit margin is defined as sales and other income directly related to
a segment's operations, less both fixed and variable manufacturing,
research and development and selling, general and administrative
expenses directly related to a segment's operations. The expenses
attributable to corporate activity are not allocated to the operating
segments. The Company has four reportable segments based primarily on
the nature of the Company's customers and products: Zip, Jaz, Ditto and
Clik!. The Zip segment includes Zip disk and drive systems. The Jaz
segment includes Jaz disk and drive systems and the Buz multimedia
producer. The Company's restructuring charge in the second quarter of
1999 included the write-off of assets related to the discontinuance of
certain Jaz segment products and projects including the Buz multimedia
producer and a drive development project. The Ditto segment includes
the Ditto family of tape backup drives and tape cartridges. In March
1999, the Company agreed to sell certain assets associated with its
Ditto segment, including intellectual property, exclusive manufacturing
rights, certain software and intellectual property rights, equipment,
brand names and product logos. The Company continued to sell its Ditto
finished goods inventory through June 27, 1999, after which the buyer
has agreed to purchase the Company's remaining finished goods
inventory. The Company will continue to sell Ditto cartridges for a
period of time. The Clik! segment includes Clik! mobile and Clik! PC
Card drives and Clik! disks. Clik! products began shipping in limited
quantities during the fourth quarter of 1998. The "Other" category
includes products such as Bernoulli, floppy disks, ZipCD drives and
other miscellaneous items. The information in the following table is
derived directly from the segments' internal financial information used
for corporate management purposes.
<PAGE>
<TABLE>
Reportable Operating Segment Information
<CAPTION>
For the Three Months Ended For the Six Months Ended
------------------------------- -----------------------------
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
-------------- --------------- ------------- --------------
(In millions) (In millions)
<S> <C> <C> <C> <C>
Sales:
Zip $ 274 $ 284 $ 576 $ 551
Jaz 66 87 129 197
Ditto 6 21 16 51
Clik! 1 - 6 -
Other 2 2 8 2
-------------- --------------- ------------- --------------
Total sales $ 349 $ 394 $ 735 $ 801
============== =============== ============= ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
------------------------------- -----------------------------
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
-------------- --------------- ------------- --------------
(In millions) (In millions)
<S> <C> <C> <C> <C>
Product profit margin
before restructuring
charge:
Zip $ 33 $ 38 $ 84 $ 67
Jaz (5) (21) (8) (24)
Ditto (3) (6) (4) (7)
Clik! (17) (10) (30) (18)
Other (6) (2) (12) (3)
-------------- --------------- ------------- --------------
Total product
profit margin 2 (1) 30 15
-------------- --------------- ------------- --------------
Product profit margin
after restructuring
charge:
Zip $ 33 $ 38 $ 84 $ 67
Jaz (32) (21) (35) (24)
Ditto (9) (6) (10) (7)
Clik! (17) (10) (30) (18)
Other (11) (2) (17) (3)
-------------- --------------- ------------- --------------
Total product
profit margin (36) (1) (8) 15
-------------- --------------- ------------- --------------
Corporate restructuring
charge (4) - (4) -
General corporate expenses (32) (59) (57) (104)
Interest income 1 1 2 3
Interest expense (1) (2) (4) (3)
Other expense - - (1) (1)
-------------- --------------- ------------- --------------
Loss before income taxes $ (72) $ (61) $ (72) $ (90)
============== =============== ============= ==============
</TABLE>
(6) RESTRUCTURING COSTS
During the quarter ended June 27, 1999, the Company recorded a pre-tax
restructuring charge of $41.9 million as a result of steps the Company
is taking to organize along functional lines and to better position the
Company for sustained profitable growth and improved asset management.
These actions included costs relating to the exit of facilities,
headcount reductions, the discontinuance of certain products and
development projects and other costs to consolidate the Company's
magnetic technology expertise at its headquarters in Roy, Utah. This
consolidation
<PAGE>
will include closing the Company's facilities in Milpitas, California
and San Diego, California. The restructuring charge was comprised of
$20.2 million for the write-off of fixed assets and inventory related
to the discontinuance of certain products and development projects;
$9.7 million for work force reduction costs; $4.3 million for the
write-off or write-down of excess leasehold improvements, furniture and
fixtures formerly utilized in the Milpitas and San Diego facilities;
$3.0 million for lease termination costs for facilities located in
Milpitas and San Diego; and $4.7 million for work force reduction
costs, contract cancellation costs and other exit costs to consolidate
the Company's Nomai operations in France and Scotland. The
restructuring charge consisted of cash and non-cash charges of
approximately $18 million and $24 million, respectively. The
restructuring charge was included in the income statement under the
caption "Restructuring charge" for the three- and six-month periods
ended June 27, 1999. Prior to this period, there were not any
indications of permanent impairment of the assets associated with the
closure and consolidation of these facilities.
In connection with the Company's restructuring, the Company currently
expects a workforce reduction of approximately 450 regular and
temporary employees, consisting primarily of operations and product
development employees located in Milpitas, San Diego and Roy. None of
these employees had been terminated as of June 27, 1999. Workforce
reduction costs and other exit costs noted above were determined in
accordance with Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity." The Company anticipates the implementation of the
restructuring plan will be substantially complete by the end of
December 1999, with the remainder of the plan to be completed by the
end of June 2000.
Restructuring reserves are included in the Company's accrued
liabilities, inventory and property, plant and equipment as of June 27,
1999. The following table represents the Company's restructuring
activities (in thousands):
<TABLE>
<CAPTION>
June 27, 1999
Restructuring Adjustments and Balance
Charge Utilized Reclassifications June 27, 1999
---------------- -------- ----------------- -------------
<S> <C> <C> <C> <C>
Discontinued products (a) $ 20,210 - - $ 20,210
Severance and benefits (b) 9,700 - - 9,700
Other fixed asset charges (a) 4,300 - - 4,300
Lease terminations (b) 3,000 - - 3,000
Other exit costs (b) 4,699 - - 4,699
---------------- -------- ----------------- -------------
Total $ 41,909 - - $ 41,909
---------------- -------- ----------------- -------------
</TABLE>
(a) Amounts represent primarily non-cash charges
(b) Amounts represent primarily cash charges
<PAGE>
(7) OTHER MATTERS
Significant Customers - During the three and six months ended June 27,
1999, sales to Ingram Micro, Inc. accounted for approximately 14.3% and
12.6%, respectively, of consolidated sales. During the three months
ended June 27, 1999, sales to Tech Data Corporation accounted for
approximately 10.4% of consolidated sales. During the three months and
six months ended June 28, 1998, sales to Ingram Micro, Inc. accounted
for 11.0% and 12.7%, respectively, of consolidated sales. No other
single customer accounted for more than 10% of the Company's sales for
these periods.
Forward Exchange Contracts - The Company has commitments to sell and
purchase foreign currencies relating to forward exchange contracts in
order to hedge against future currency fluctuations.
At June 27, 1999, outstanding forward exchange sales (purchase)
contracts, which all mature in September 1999, were as follows:
<TABLE>
<CAPTION>
Contracted
Currency Amount Forward Rate Spot Rate
----------------- ------------ ------------- ---------
<S> <C> <C> <C>
Australian Dollar (310,000) 0.66 0.66
British Pound (700,000) 0.63 0.63
European Euro 10,040,000 0.96 0.97
Japanese Yen 825,000,000 120.48 122.05
Singapore Dollar (660,000) 1.69 1.70
Swiss Franc 200,000 1.53 1.55
</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 June 27, 1999, 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.
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company reported sales of $348.8 million and a net loss, before a
restructuring charge, of $19.8 million, or $(0.07) per diluted share, in the
second quarter of 1999. This compares to sales of $393.8 million and a net loss
before special charges of $33.8 million, or $(0.13) per diluted share, in the
second quarter of 1998. In the second quarter of 1999, the Company recorded a
pre-tax restructuring charge of $41.9 million, or $(0.10) per diluted share,
relating to the exit of facilities, the discontinuance of certain products and
development projects, headcount reductions, and other cost reduction activities.
The after-tax loss for the second quarter of 1999, including the restructuring
charge, was $47.1 million, or $(0.17) per diluted share. For the first six
months of 1999, sales were $735.0 and net loss, including the second quarter
restructuring charge, was $46.5 million, or $(0.17) per diluted share, compared
to sales of $801.3 million and a net loss of $58.5 million, or $(0.22) per
diluted share, for the first six months of 1998.
For the second half of 1999, the Company anticipates an after-tax return on
sales in the mid-single digits. However, financial results in the second half of
the year will be heavily dependent on the success of new product offerings, on
the results of the seasonally strong fourth quarter, and on the Company's
ability to resolve current Zip drive component constraints.
SALES
Sales for the quarter ended June 27, 1999 decreased by $45 million, or 11.4%,
when compared to the corresponding period of 1998, primarily as a result of the
reduction of Zip drive and disk prices during the second half of 1998,
discontinued Ditto sales, lower than expected Jaz sales volumes and an increase
in the percentage of Zip drives shipped to the OEM channel, which generally has
lower average selling prices than sales through other channels. Total drive
sales of $179.4 million decreased by 14.8% as compared to the second quarter of
1998. Total unit drive shipments for the quarter ended June 27, 1999, increased
by 19.4% as compared to the second quarter of 1998. Total disk sales of $162.1
million decreased by 5.4% as compared to the second quarter of 1998. Total unit
disk shipments for the quarter ended June 27, 1999, increased by 20.8% as
compared to the second quarter of 1998.
Sales of Zip products in the second quarter of 1999 totaled $274.3 million, or
78.6% of total sales, and represented a 3.6% decrease from the second quarter of
1998. Zip unit drive shipments increased by 27.1% from the second quarter of
1998, while Zip unit disk shipments increased by 24.3%. Sales of Zip OEM drives
accounted for approximately 57% of total Zip drive shipments in the second
quarter of 1998, compared to approximately 50% in the second quarter of 1998.
Sales of Zip drives were adversely impacted by supply constraints during the
second quarter of 1999 relating to a shortage of a certain Application Specific
Integrated Circuit ("ASIC") chip, which is a component included in certain
models of the Company's Zip drives. The ASIC chip is supplied by a sole source
supplier. The Company is working with the supplier to establish additional
capacity to help in the short-term and is working on establishing another
supplier for the long-term. The Company expects the chip shortage to continue
through the third quarter of 1999. The impact of the component constraints on
the fourth quarter of 1999 will depend on the supplier's success in
establishing additional capacity combined with the level of demand for the
applicable Zip drives during the second half of 1999.
Jaz product sales in the second quarter of 1999 were $65.6 million, or 18.8% of
total sales, representing a 24.4% decrease from the second quarter of 1998. Jaz
unit drive shipments decreased by 23.8% as compared to the second quarter of
1998, while Jaz unit disk shipments decreased by 23.3%.
<PAGE>
Ditto product sales in the second quarter of 1999 were $6.1 million, or 1.7% of
total sales, representing a 70.6% decline from the second quarter of 1998. Ditto
unit drive shipments decreased by 87.7% as compared to the second quarter of
1998, while Ditto unit disk shipments decreased by 46.4%. In March 1999, the
Company announced that it had entered into an agreement to sell certain assets
and rights associated with its Ditto product line. The Company continued to sell
its Ditto finished goods inventory through June 1999, after which, the buyer has
agreed to purchase the Company's remaining finished goods inventory. The Company
will continue to sell Ditto cartridges for a period of time.
Clik! product sales in the second quarter of 1999 were $0.6 million, or 0.2% of
total sales. The Company began shipping Clik! products in limited quantities
in December 1998. The Clik! PC Card drive began shipping in limited quantities
in June 1999.
Sales for the six months ended June 27, 1999 decreased by $66.3 million, or
8.3%, when compared to the corresponding period of 1998. Sales of Zip products
totaled $575.8 million, or 78.3% of total sales, representing a 4.6% increase
from the corresponding period of 1998. Jaz product sales totaled $128.3 million,
or 17.5% of total sales, representing a 34.9% decrease from the corresponding
period of 1998. Sales of Clik! products totaled $5.7 million, or 0.8% of total
sales. Ditto product sales totaled $16.2 million, or 2.2% of total sales,
representing a 68.5% decrease from the corresponding period of 1998.
Geographically, sales in the Americas were $232.1 million, or 66.5% of total
sales, in the second quarter of 1999, as compared to $257.5 million, or 65.3% of
total sales, in the second quarter of 1998. Sales in Europe were $81.2 million,
or 23.3% of total sales, in the second quarter of 1999, as compared to $93.2
million, or 23.6% of total sales, in the second quarter of 1998. Sales in Asia
were $35.4 million, or 10.2% of total sales, in the second quarter of 1999, as
compared to $43.1 million, or 10.9% of total sales, in the second quarter of
1998.
For the first six months of 1999, sales in the Americas were $482.1 million, or
65.6% of total sales in the first six months of 1999, as compared to $555.7
million, or 69.3% of total sales, for the first six months of 1998. Sales in
Europe were $184.5 million, or 25.1% of total sales, in the first six months of
1999, as compared to $182.5 million, or 22.8% of total sales, for the first six
months of 1998. Sales in Asia were $68.3 million, or 9.3% of total sales, in the
first six months of 1999, as compared to $63.1 million, or 7.9% of total sales,
in the first six months of 1998.
<PAGE>
GROSS MARGIN
The Company's overall gross margin was 21.7% in the second quarter of 1999, as
compared to 23.9% in the second quarter of 1998. Overall gross margin percentage
for the first six months of 1999 was 23.1%, as compared to 24.5% for the first
six months of 1998. This decrease in gross margin for the second quarter and
first six months of 1999, when compared to the corresponding periods of 1998,
was due primarily to price reductions on Zip drives and disks during the second
half of 1998 and to an increase in the percentage of Zip drives shipped to the
OEM channel, which generally provides lower gross margins than sales through
other channels. Additionally, during the second quarter of 1999, the Company
recorded reserves for Jaz excess fixed asset capacity and Clik! inventory
valuation reserves of approximately $7 million, or 2.0% of sales.
Future gross margin percentage will be impacted by the mix between retail sales
and OEM drive sales, which generally provide lower gross margins than sales
through other channels. Gross margins for the remainder of 1999 will also depend
on sales volumes of Zip, Jaz and Clik! disks, which generate significantly
higher gross margins than the corresponding drives, and on the mix between disks
and drives, and between Zip, Jaz and Clik! products. The Company is targeting
overall gross margin percentages to be in the mid to upper twenty percent range
for the second half of 1999. However, there can be no assurance that such margin
percentages will be realized.
SEGMENT PRODUCT PROFIT MARGIN
Zip segment product profit margin decreased by 13.2% in the second quarter of
1999 when compared to the corresponding period of 1998 primarily due to price
reductions on Zip drives and disks during the second half of 1998, component
constraints and an increase in sales of Zip OEM drives, which have lower margins
than drives sold to distributors and retailers. These price reductions and mix
changes were partially offset by an increase in volumes of Zip drives and disks.
Jaz segment product profit margin, including the second quarter pre-tax
restructuring charge, decreased by 52.4% in the second quarter of 1999 when
compared to the corresponding period of 1998 due to a combination of a pre-tax
restructuring charge of $27.0 million, price reductions on Jaz disk and drive
products during the second half of 1998, a decrease in Jaz drive unit shipments
and Jaz excess fixed asset capacity reserves recorded during the second quarter
of 1999. Ditto segment product profit margin, including the second quarter
pre-tax restructuring charge, decreased by 50.0% due to a pre-tax restructuring
charge of $5.6 million, and a decrease in volumes of Ditto drive and disk
products sold in the second quarter of 1999. Clik! segment product profit margin
decreased by 70.0% in the second quarter of 1999 when compared to the
corresponding period of 1998 due to limited sales of Clik! products and reserves
recorded during the quarter for the valuation of Clik! inventory.
<PAGE>
Zip segment product profit margin increased by 25.4% for the first six months of
1999 when compared to the corresponding period of 1998 due to a combination of
an increase in volumes of Zip drives and disks and a higher mix of Zip disks
sales to Zip drive sales that were partially offset by price reductions during
the second half of 1998. Jaz segment product profit margin, including the second
quarter pre-tax restructuring charge, decreased by 45.8% for the first six
months of 1999 when compared to the corresponding period of 1998 due primarily
to a pre-tax restructuring charge of $27.0 million and a decrease in volumes of
Jaz disk and drive products shipped during the first six months of 1999. Ditto
segment product profit margin, including the second quarter pre-tax
restructuring charge, decreased by 42.9% for the first six months of 1999 when
compared to the corresponding period of 1998 due to a combination of a pre-tax
restructuring charge of $5.6 million, and a decrease in volumes of Ditto drive
products shipped in the first six months of 1999. Clik! segment product profit
margin decreased by $12.0 million for the first six months of 1999 when compared
to the corresponding period of 1998 due primarily to reserves recorded during
1999 for the valuation of Clik! inventory.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased by $41.6 million and
$79.6 million in the second quarter and first six months of 1999, respectively,
when compared to the corresponding periods of 1998, and decreased as a
percentage of sales to 23.7% and 20.8% in the second quarter and first six
months of 1999, respectively, from 31.6% and 29.0%, respectively, in each of the
corresponding periods in 1998. Included in selling, general and administrative
expenses in the second quarter of 1998 was a special pre-tax charge of $9.4
million representing expenses associated with cost reduction measures
implemented by the Company to improve financial performance and included
employee severance and outplacement charges, cash and non-cash write-offs for
facility-related assets and miscellaneous cancellation charges for marketing
programs that were discontinued. The Company's 1998 cost reduction measures
included specific actions to reduce advertising and other sales and marketing
expenses, legal expenses, information system costs as well as a reduction in
other discretionary spending and headcount. Excluding the 1998 charge, selling,
general and administrative expenses decreased by $32.2 million and $70.2 million
and represented 29.2% and 27.8% of sales in the second quarter and first six
months of 1998, respectively. The decrease is due primarily to substantial
marketing and advertising program expenditures in the first half of 1998.
Management is focused on maintaining selling, general and administrative
expenses in a range of 15% to 20% of sales during the second half of 1999.
However, the Company's success in achieving this objective depends in part on
the levels of sales achieved during the second half of 1999, and there can be no
assurance that the Company's restructuring and other efforts to reduce the
percentage of sales represented by selling, general and administrative expenses
will be successful.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the second quarter and first six months of
1999 decreased by $7.2 million, or 23.8%, and $9.6 million, or 18.0%,
respectively, when compared to the second quarter and first six months of 1998,
and decreased as a percentage of sales to 6.6% and 6.0%, respectively, in the
second quarter and first six months of 1999, from 7.7% and 6.7%, respectively,
in the second quarter and first six months of 1998. The decrease in research and
development expenses for the second quarter and first six months of 1999 was due
primarily to decreased spending for Clik! and Jaz development in the second
quarter and first six months of 1999, which was partially offset by increased
spending for Zip and new product development in the second quarter and first six
months of 1999. Management is targeting the level of spending for research and
development during the second half of 1999 to be in the range of 3% to 5% of
sales to support planned new product development and existing product
enhancements. However, the Company's success in achieving this objective depends
in part on the levels of sales achieved during the second half of 1999 and there
can be no assurance that restructuring and other efforts to reduce the
percentage of sales represented by research and development expenses will be
successful.
<PAGE>
RESTRUCTURING CHARGE
During the quarter ended June 27, 1999, the Company recorded a pre-tax
restructuring charge of $41.9 million as a result of steps the Company is taking
to organize along functional lines and to better position the Company for
sustained profitable growth and improved asset management. These actions
included costs relating to the exit of facilities, headcount reductions, the
discontinuance of certain products and development projects and other costs to
consolidate the Company's magnetic technology expertise at its headquarters in
Roy, Utah. This consolidation will include closing the Company's facilities in
Milpitas, California and San Diego, California. The restructuring charge was
comprised of $20.2 million for the write-off of assets related to the
discontinuance of certain products and development projects; $9.7 million for
work force reduction costs; $4.3 million for the write-off or write-down of
excess leasehold improvements, furniture and fixtures formerly utilized in the
Company's facilities in Milpitas and San Diego; $3.0 million for lease
termination costs for facilities located in Milpitas and San Diego; and $4.7
million for work force reduction costs, contract cancellation costs and other
exit costs to consolidate the Company's Nomai operations in France and Scotland.
Prior to this period, there were not any indications of permanent impairment of
the assets associated with the closure and consolidation of these facilities.
In connection with the Company's restructuring, the Company currently expects a
workforce reduction of approximately 450 employees. No employees had been
terminated as of June 27, 1999. Workforce reduction costs and other exit costs
noted above were determined in accordance with Emerging Issues Task Force Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity." As a result of work force reduction and the
write-off of equipment and facilities in connection with the 1999 second quarter
restructuring plan, the Company estimates that when fully implemented, the
restructuring plan will result in a cost savings of approximately $10 million
per quarter beginning in the first quarter of 2000. The Company anticipates the
implementation of the restructuring plan will be substantially complete by the
end of December 1999, with the remainder of the plan to be completed by the end
of June 2000.
OTHER INCOME AND EXPENSE
The Company recorded interest income of $1.1 million and $2.2 million in the
second quarter and first six months of 1999, respectively, as compared to $0.9
million and $2.6 million in the second quarter and first six months of 1998,
respectively. Interest expense of $1.5 million and $4.3 million in the second
quarter and first six months of 1999, respectively, was relatively flat when
compared to interest expense of $2.2 million and $3.4 million in the second
quarter and first six months of 1998, respectively.
<PAGE>
Also included in other income and expense were bank charges, miscellaneous
royalty income, gains and losses on disposal of assets and foreign currency
gains and losses.
INCOME TAXES
For the first six months of 1999, the Company recorded an income tax benefit of
$25.0 million, representing an effective income tax rate of approximately 35%.
The Company expects its effective tax rate to remain at approximately 35% for
the remainder of 1999. However, differences between the currently anticipated
mix and the actual mix of non-U.S. income versus domestic income, along with the
ability of the Company to permanently invest non-U.S. earnings outside of the
U.S. and its ability to meet the requirements for favorable tax treatment in
certain jurisdictions outside of the U.S., could impact the Company's effective
tax rate.
The Company has a net deferred tax asset of $64.6 million as of June 27, 1999,
reflecting the benefit of $165.6 million in future tax deductions. Realization
is primarily dependent on generating sufficient taxable income. Although
realization is not assured, management believes it is more likely than not that
all of the net deferred tax asset will be realized. The amount of the net
deferred tax asset considered realizable, however, could be reduced in the
future if estimates of future taxable income are reduced.
SEASONALITY
The Company's Zip products are targeted primarily to the personal computer OEM
and retail consumer markets. The Company's Jaz products are targeted primarily
to the distribution and retail consumer market. The Company's Clik! products are
targeted to the retail consumer market and to consumer OEMs. 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.
Accordingly, revenues and growth rates for any prior quarter are not necessarily
indicative of the revenues or growth rates to be expected in any future quarter.
LIQUIDITY AND CAPITAL RESOURCES
At June 27, 1999, the Company had cash and cash equivalents of $89.3 million,
working capital of $198.5 million, and a ratio of current assets to current
liabilities of 1.7 to 1. During the first six months of 1999, the Company used a
total of $1.0 million of cash and cash equivalents. Operating activities
generated $74.6 million in cash for the first six months of 1999 compared with
using $133.9 million in the first six months of 1998. The cash generated from
operations in the first six months of 1999 was primarily due to a combination of
non-cash adjustments partially offset by a net loss and a reduction in accounts
receivable, inventory and income taxes receivable. The primary uses of cash
during the first six months of 1999 were the repayment upon maturity of the
Idanta senior subordinated notes, payments on capitalized lease obligations,
reductions in accounts payable, and the purchase of property, plant and
equipment.
<PAGE>
Accounts receivable decreased by $43.9 million, due primarily to the timing of
sales and collections during the respective periods. The decrease of $22.1
million in inventory was due to a combination of improved supply chain
management and changes to the Company's procurement and manufacturing processes
to a demand pull model initiated during 1998 and the write-down of excess
inventory during the second quarter of 1999. The decrease of $12.1 million in
income taxes receivable was due primarily to the Company receiving an income tax
refund of $20.4 million during the second quarter of 1999 that was partially
offset by the creation of an additional receivable of $8.3 million comprised
primarily of the benefit of the Company's current year net operating loss. These
sources of cash were partially offset by a $36.9 million decrease in accounts
payable, due primarily to timing of inventory receipts and related payments to
vendors.
The Company used $39.7 million of cash in investing activities during the first
six months of 1999, primarily in the purchase of property, plant and equipment
and the purchase of certain assets from SyQuest, including intellectual
property, inventory and fixed assets. Cash used by financing activities totaled
$35.8 million during the first six months of 1999, and included $43.1 million in
repayment upon maturity of the Idanta senior subordinated notes and payments on
capitalized lease obligations that were partially offset by $3.7 million of
proceeds from the sale of common stock and $3.5 million of proceeds from the
issuance of notes payable and capitalized lease obligations during the second
quarter of 1999.
On March 11, 1997, the Company entered into a $200 million Senior Secured Credit
Facility with Morgan Guaranty Trust Company of New York, Citibank, N.A. and a
syndicate of other lenders. During 1998 and 1999, the Company and the lenders
agreed to several amendments to and waivers under the Credit Facility, the most
recent of which was entered into on June 30, 1999, (the "Credit Facility"). At
June 27, 1999, the Credit Facility is a $150 million secured revolving line of
credit that expires on July 14, 2000 and is secured by accounts receivable,
domestic inventory, domestic intellectual property, general intangibles,
equipment, personal property, investment property and a pledge of 65% of the
stock of certain of the Company's subsidiaries. Under the Credit Facility, the
Company may borrow at a base rate, which is the higher of prime or the sum of
0.5% plus the Federal funds rate plus a margin of 0.0% to 1.63% depending on the
Company's earnings before interest expense, income taxes, depreciation and
amortization ("EBITDA") and utilization of the Credit Facility, or at LIBOR plus
a margin of 1.25% to 2.75% depending on the Company's EBITDA and utilization of
the Credit Facility. There were no borrowings outstanding on the Credit Facility
at June 27, 1999. Borrowing availability under the Credit Facility is based on
an agreed upon advance rate on receivables and inventory not to exceed $150
million. Total availability under the Credit Facility at June 30, 1999 was
$122.0 million. 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, EBITDA and certain other
covenants. On June 15, 1999, the Company amended the Credit Facility to exclude
certain restructuring and other charges taken in the second quarter of 1999 from
the minimum consolidated EBITDA financial covenant and the consolidated tangible
net worth covenant for the period ended June 27, 1999. Further, on June 30,
1999, the Company obtained a waiver to the Credit Facility with respect to the
minimum consolidated EBITDA financial covenant for the period ended June 27,
1999. Depending on its financial performance in future quarters, the Company may
be required to seek further covenant waivers and amendments under the Credit
Facility. There can be no assurance that the Company will be able to obtain any
such waivers or amendments on terms acceptable to the Company, if at all. Loss
of the Credit Facility may 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>
The current and long-term portions of capitalized lease obligations and notes
payable at June 27, 1999 were $4.4 million and $5.1 million, respectively. In
July 1998, the Company borrowed a total of $40 million from Idanta Partners Ltd.
and another entity affiliated with David J. Dunn, Chairman of the Company's
Board of Directors, pursuant to a series of three senior subordinated notes. The
initial interest rate was 8.7% per annum, increasing through January 1, 1999 to
12.7% per annum. The proceeds of these notes were used for the cash purchase of
Nomai. The Company used internally generated funds to repay the principal and
interest associated with the notes, upon their maturity on March 31, 1999.
The Company had $45.5 million of convertible subordinated notes outstanding at
June 27, 1999, which bear interest at 6.75% per year and mature on March 15,
2001.
In April 1999, the Company completed the purchase of certain assets of SyQuest
Technology, Inc. and its subsidiaries, ("SyQuest"), including intellectual
property, inventory and fixed assets in the U.S., Europe and Malaysia. The total
purchase price of the asset purchase in the U.S. and Europe was $9.2 million and
the purchase price of the Malaysian assets was $2.9 million. The assets
purchased are included in the Company's other current assets and intangibles at
June 27, 1999. The Company is in the process of selling, disposing or utilizing
the inventory and fixed assets from the purchase. No material obligations or
liabilities were assumed by the Company. As part of the agreement, the Company
released SyQuest and SyQuest released the Company from all claims in connection
with patent and trademark infringement litigation pending between the parties in
Delaware and in Paris, France.
The Company expects to generate positive cash flow for 1999. The Company expects
that its balance of cash and cash equivalents, together with current and future
sources of available financing, will be sufficient to fund the Company's
operations during the next twelve months. However, whether the Company will
achieve a positive cash flow for 1999, and the precise amount and timing of the
Company's future financing needs, cannot be determined at this time, and will
depend on a number of factors, including cash flow from operations, which
depends on the success of the Company's efforts to consolidate facilities and
reduce headcount, 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
receivable and accounts payable.
<PAGE>
OTHER MATTERS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes new
accounting and reporting standards for companies to report information about
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. In June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities
- - Deferral of the Effective Date of FASB Statement No. 133." This statement
amended the effective date of SFAS 133. SFAS 133 will now be effective for
financial statements issued for all fiscal quarters of fiscal years beginning
after June 15, 2000. The Company does not expect this pronouncement to have a
material impact on the Company's results of operations, financial position or
liquidity.
FACTORS AFFECTING FUTURE OPERATING RESULTS
Because the Company is relying on its Zip, Jaz, Clik! and the recently announced
ZipCD products for the substantial majority of its sales in 1999, the Company's
future operating results will depend in large part on the success of those
products in the market. Although the Company believes there is a market demand
for removable data storage solutions for personal computers and other devices,
there can be no assurance that the Company will be successful in establishing
Zip, Jaz, Clik! and ZipCD products as the preferred solutions for those market
needs. The extent to which Zip, Jaz, Clik!, and ZipCD achieve and maintain 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 (existing, announced or unannounced) introduced by
other vendors, including, without limitation, the LS-120 (or SuperDisk) (product
co-developed by the consortium of Compaq Computer, Imation, O.R. Technology and
MKE), the HiFD (product co-developed by Sony Corporation and Fuji Photo Film
Co., Ltd.), the UHD144 (product in development by Caleb Technology Corporation),
the Orb (product developed by Castlewood Systems, Inc.), the Pro-FD (product in
development by Samsung Electro-Mechanics Co., Ltd.), the Microdrive (product
developed by IBM), the Memorystick (product developed by Sony Corporation),
various formats of flash memory, CD-R and CD-RW drives, announced developments
of rewritable DVD drives and media, and announced products in development by
Terastor Corporation; the success of any third party in creating and marketing
media intended for use with the Company's drive products; the success of the
Company in meeting targeted availability dates for new and 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 computer and other products containing the Company's drives; the ability
of the Company to create demand for Zip, Jaz, Clik! and ZipCD, 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,
Jaz, Clik! and ZipCD storage solutions; the success of the Company's efforts to
make continued improvements to customer service and satisfaction; the public
perception of the Company and its products, including statements made by
industry analysts or consumers and adverse publicity resulting from such
statements or from litigation filed against the Company; and the overall market
demand for personal computers and other products with which the Company's
products can be used.
<PAGE>
The Company's business strategy is substantially dependent on maximizing sales
of its proprietary Zip, Jaz and Clik! 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, Jaz and Clik! drives, because the sales mix between disks and drives is
below levels anticipated by the Company, because another party succeeds in
producing or marketing 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 results of
operations would also be adversely affected.
Sales of Zip products in 1998 and the first six months of 1999 accounted for a
significant majority of the Company's revenues. However, these sales may not be
indicative of the long-term demand for Zip products. Accordingly, the sales
levels experienced by the Company in 1998 and the first six months of 1999
should not be assumed to be an indication of future sales levels. In the fourth
quarter of 1998, the Company introduced the Zip 250 product. The market
acceptance of the Zip 250 product and its impact on other Zip products has not
yet been determined and, therefore, may have an adverse impact on future sales.
In addition, the Company has experienced and may in the future experience
significant fluctuations in its quarterly operating results. Moreover, because
the Company's expense levels (including budgeted selling, general, and
administrative and research and development expenses) 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 results of operations and
cash flow. For example, in 1998, the Company's operating expenses as a
percentage of sales fell outside of management's operating model resulting in a
net operating loss for the year. In addition, the Company's stock price, like
other high-technology companies' stock prices, could be subject to fluctuations
in response to actual or anticipated variations in operating results, as well as
changes in analysts' earnings estimates, announcements of new products or
developments by the Company or its competitors, market conditions in the
information technology industry as well as general economic conditions and other
factors external to the Company.
The Company's Clik! products are miniaturized removable-media storage solutions
for use in a variety of portable and handheld electronic devices, and represent
the Company's first products which are primarily targeted to digital camera and
other portable consumer electronics manufacturers. The Company does not have
prior experience in these channels and, accordingly, there are additional risks
that the Clik! products will not achieve significant market presence or
otherwise be successful. Three different models of the Clik! drive are currently
being sold. Two of these models, the Clik! Drive for Digital Cameras and the
Clik! Drive Plus, both of which began shipping in limited quantities in December
1998, are currently being marketed as an add-on storage solution to digital
cameras that use various formats of flash memory. Market acceptance of Clik!
products as a storage solution for digital cameras is dependent upon obtaining a
significant market presence and establishing OEM relationships with digital
camera manufacturers who produce digital cameras incorporating built-in Clik!
drives. To date, no digital camera incorporating Clik! as a built-in drives has
been introduced or marketed; however, the Agfa Gevaert Group, a manufacturer of
digital cameras and other digital imaging products and systems has announced
plans to manufacture digital imaging products with Clik! built-in drives. The
third model of Clik! drive, the Clik! PC Card drive, which began shipping in
limited quantities in June 1999, is currently being marketed to notebook and
sub-notebook computer users. The impact of the Clik! PC Card drive on the
Company's other storage solution has not yet been determined and may have an
adverse impact on future sales.
<PAGE>
ZipCD, a CD-ReWritable ("CD-RW") drive designed for use as a storage solution
for personal computers, represents the Company's first CD-RW product and the
Company's planned entry into the optical storage market. Market acceptance of
the ZipCD product, which is expected to ship in the second half of 1999, is not
yet known. In addition, the impact of ZipCD on the Company's other storage
solutions has not yet been determined and may have an adverse impact on future
sales. Moreover, the Company's current business strategy for ZipCD is different
from its strategy for its other products because ZipCD does not include
proprietary media and thus has lower overall gross margins. Therefore, the
success of ZipCD will depend on margin contributions from the drive products.
The CD-RW drive market is very competitive and includes a number of established
participants. Accordingly, there are additional risks that the ZipCD product
will not achieve significant market acceptance or otherwise be successful.
Management of the Company's inventory levels has become increasingly complex.
The Company's customers frequently adjust their ordering patterns in response to
various factors including: the Company's perceived ability to meet demand, the
Company's and competitors' inventory supply in the retail and distribution
channel, timing of new product introductions, seasonal fluctuations, Company and
customer promotions, the consolidation of customer distribution centers, pricing
considerations and the attractiveness of the Company's products as compared with
competing products. Customers may increase orders during times of shortages,
cancel orders if the channel is filled with currently available products or
delay orders in anticipation of new products. Any excess supply could result in
price reductions and inventory writedowns, which in turn could adversely affect
the Company's results of operations.
The Company has evolved from an after market business to a business that
includes a significant volume of OEM sales. In an OEM business, a high
proportion of sales are concentrated among a small number of customers. Although
the Company believes its relationships with OEM customers are generally good, as
the concentration of sales to OEM customers continues to evolve, a relatively
small number of major customers will represent a business risk that loss of one
or more accounts could adversely affect the Company's financial condition or
operating results. The Company's customers are generally not obligated to
purchase any minimum volume and are generally able to terminate their
relationship with the Company at will. If changes in purchase volume or customer
relationships resulted in decreased demand for the Company's drives, whether by
loss of or delays in orders, the Company's financial condition or operating
results could be adversely affected.
<PAGE>
The Company continues to refine the design of its 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 products. Certain of these suppliers are or may become competitors of the
Company. As a result of these and other factors, the Company may experience
problems relating to the quality, reliability and/or availability of certain of
its products. For example, the Company has recalled certain products and
experienced manufacturing interruptions due to supplier quality problems. Any
product availability, quality or reliability problems experienced by the
Company, or claims filed against the Company as a result of these problems,
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. In addition, component problems, shortages,
quality issues or other factors affecting the supply of the Company's products
could provide an opportunity for competing products to increase their market
share.
All of the factors described above for Zip, Jaz, Clik! and ZipCD products are,
or will be, relevant to any other products currently sold by the Company or new
products introduced by the Company in the future. In addition, the Company faces
development, manufacturing, demand and market acceptance risks with regard to
recently introduced and future products. 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. Future operating results will also
depend on the Company's ability 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.
Many components incorporated 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 certain drives are obtained exclusively
from LSI Logic Corporation. 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. 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, 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
<PAGE>
its products to use a more readily available component, and such design
modifications may result in product performance problems. For example, the
Company's Zip drive shipments, revenue and profitability were negatively
impacted by an ASIC chip shortage during the second quarter of 1999. The ASIC
chip is supplied by a sole source supplier. The Company expects the chip
shortage to continue through the third quarter of 1999. 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's success depends in large part upon the services of a number of key
employees and the loss of the services of one or more of these key employees
could have a material adverse effect on the Company. Many members of the
Company's senior management team have been serving in their current positions
for only a short period of time, including Jodie K. Glore, who joined the
Company as Chief Executive Officer and President in October 1998, Philip G.
Husby, who joined the Company as Chief Financial Officer in August 1999, and
John L. Conley, Sr., who was promoted to Executive Vice President, Global
Operations in June 1999. In addition, a number of senior management positions,
including, Executive Vice President, Global Product, Sales and Marketing, Chief
Technology Officer and general counsel, are currently being filled on an interim
basis. The Company's success will depend in part on its ability to attract
highly skilled personnel to fill vacancies in a timely manner and on the success
of the Company's senior management team in learning to work effectively as a
team. In addition, the Company's success will depend in part on its ability to
successfully transition to a functional organization. There can be no assurance
that the Company will be successful in attracting and/or retaining key
employees, or that the transition to a functional organization will not result
in short-term disruptions, or that the transition will eventually produce the
desired results.
On June 18, 1999, the Company announced plans to consolidate facilities and
implement headcount reduction in order to streamline its efforts to focus on
earnings growth. Management expects that the planned consolidation of facilities
and the reduction of headcount will reduce total operating expenses during the
second half of 1999 and future periods. However, there can be no assurance that
the Company will be successful in its efforts to reduce operating expenses in
future periods. The Company is also in the process of implementing Six Sigma
quality initiatives intended to make substantial product and process quality
improvements and reduce costs. However, there can be no assurance that the
Company's quality initiatives will be successful in providing substantial
product and process improvements and in reducing costs.
A significant portion of the Company's revenues are 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's international sales transactions are
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 (see "Disclosures About Market Risk" below). For
example, management believes that sales in Asia were adversely affected from the
fourth quarter of 1997 through the second quarter of 1999 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.
<PAGE>
On January 1, 1999, eleven countries of the European Union established fixed
conversion rates between their existing currencies and adopted the Euro as their
new common legal currency. As of that date, the Euro has traded on currency
exchanges, with the legacy currencies remaining as legal tender in the
participating countries for a transition period between January 1, 1999 and
January 1, 2002. During the transition period, parties can elect to pay for
goods and services and transact business using either the Euro or a legacy
currency. Between January 1, 2002 and July 1, 2002, the participating countries
will introduce Euro bills and coins and withdraw all legacy currencies so that
they will no longer be available. The Euro conversion may affect cross-border
competition by creating cross-border price transparency. The Company is
assessing the competitiveness of its pricing/marketing strategy in a broader
European market. The Company is also assessing whether certain existing
contracts may require modification in addition to assessing its information
technology systems to allow for transactions to take place in both the legacy
currencies and the Euro and the eventual elimination of the legacy currencies.
The Company's currency risk and risk management for operations in participating
countries may be reduced as the legacy currencies are converted to the Euro. The
Company will continue to evaluate issues involving the introduction of the Euro.
Based on the Company's assessment from current information, the Company does not
expect the Euro conversion to have a material adverse effect on the Company's
business or financial condition. There can be no assurance, however, that the
Euro conversion will not have a material adverse effect on the Company's
European sales or otherwise adversely affect the Company's business, results of
operations or financial condition.
Factors other than those discussed above that could cause actual events or
actual results to differ materially from those indicated by any forward-looking
statements include the ability of management to manage increasing volumes of
production and an increasingly complex business, transportation issues, product
and component pricing, competition, technological changes and advances, adoption
of technology or communications standards affecting the Company's products,
intellectual property rights, litigation, general economic conditions, changes
or slowdowns in overall market demand for personal computer products and any
difficulties experienced by the Company as a result of the Year 2000 issue (see
"Year 2000 Readiness" below).
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various interest rate and foreign currency exchange
rate risks that arise in the normal course of business. The Company uses
borrowings comprised primarily of variable rate debt to finance its operations.
The Company has international operations resulting in receipts and payments in
currencies that differ from the functional currency of the Company. The
Company's functional currency is the U.S. dollar.
The Company attempts to reduce foreign currency exchange rate risks by utilizing
financial instruments, including derivative transactions pursuant to Company
policies. The Company uses forward contracts to hedge those assets and
liabilities that, when remeasured according to generally accepted accounting
principles, impact the consolidated statement of operations. All forward
contracts entered into by the Company are components of hedging programs and are
entered into for the sole purpose of hedging an existing or anticipated currency
exposure, not for speculation or trading purposes. The contracts are primarily
in European currencies, the Singapore dollar and the Japanese yen. The contracts
have maturities that do not exceed three months. The Company has a substantial
presence in Malaysia. In September 1998, the ruling party in Malaysia fixed the
Malaysian Ringgit to the U.S. dollar. The Company experienced a loss related to
the fixing of the currency. The Company recognized this loss in other expense
for the year ended December 31, 1998. The Company has material amounts of
accounts payable denominated in Ringgit. Currently, the foreign currency markets
are closed to hedging alternatives in Ringgit. When the foreign currency markets
re-open for the Ringgit, the Company plans to re-institute its hedging strategy
for Ringgit exposure.
When hedging balance sheet exposure, realized gains and losses on forward
contracts are recognized in other income and expense in the same period as the
realized gains and losses on remeasurement of the foreign currency denominated
assets and liabilities occur. All gains and losses related to foreign exchange
contracts are included in cash flows from operating activities in the unaudited,
condensed, consolidated statement of cash flows.
The fair value of the Corporation's long-term debt and forward contracts are
subject to change as a result of potential changes in market rates and prices.
The Company has performed a sensitivity analysis assuming a hypothetical 10%
adverse movement in foreign exchange rates and interest rates applied to the
forward contracts and underlying exposures described above. As of June 27, 1999,
the analysis indicated that such market movements would not have a material
effect on the Company's consolidated financial position, results of operations
or cash flows. Factors that could impact the effectiveness of the Company's
hedging programs include volatility of the currency markets, availability of
hedging instruments and the Company's ability to accurately project net asset or
liability positions. Actual gains and losses in the future may differ materially
from the Company's analysis depending on changes in the timing and amount of
interest rate and foreign exchange rate movements and the Company's actual
exposure and hedges.
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 READINESS
The information provided below constitutes a "Year 2000 Readiness Disclosure"
under the Year 2000 Information and Readiness Disclosure Act of 1998.
Overview. In general, the Year 2000 issue relates to computers and other systems
being unable to distinguish between the years 1900 and 2000 because they use two
digits, rather than four, to define the applicable year. The Company is
addressing the Year 2000 issue in the following areas: (i) hardware and software
products sold by the Company; (ii) the Company's information technology ("IT")
systems; (iii) the Company's non-IT systems (i.e., machinery, equipment and
devices that utilize "built-in" technology such as embedded microcontrollers)
and (iv) third-party suppliers and customers. The Company is undertaking its
Year 2000 review in the following phases: Awareness (education and sensitivity
to the Year 2000 issue), Inventory (identifying the equipment, processes or
systems which are susceptible to the Year 2000 issue), Assessment (determining
the potential impact of Year 2000 on the equipment, processes and systems
identified during the Inventory phase and assessing the need for testing and
remediation), Testing/Verification (testing to determine if an item is Year 2000
ready or the degree to which it is deficient) and Implementation (carrying out
necessary remedial efforts to address Year 2000 readiness, including validation
of upgrades, patches or other Year 2000 fixes). The Company has formed a Year
2000 Committee that meets regularly and has responsibility to oversee the
implementation of Year 2000 initiatives.
The Year 2000 Committee reports regularly to an executive management committee.
Products. The Company has completed the review and testing of its hardware
products. Hardware testing was conducted by the National Software Testing
Laboratories ("NSTL") according to NSTL developed standards or guidelines (NSTL
YMark 2000, Version 97.08.15). NSTL has verified that the Zip, Jaz, Ditto,
Bernoulli, Buz and Clik! hardware products tested are Year 2000 ready when used
in an operating system and with other products which themselves are Year 2000
ready. Some Bernoulli drive products were reviewed, and determined to be Year
2000 ready, by a Company engineer and were not tested by NSTL.
With a few exceptions noted below, the Company has completed the review and
testing of its software products. Software utility tools and drivers were tested
internally by the Company. When used in an operating system and with other
products which themselves are Year 2000 ready, the tested software utility tools
and drivers have been found to be Year 2000 ready, except for Findit and
CopyMachine software applications used with Zip and Jaz drives, and the Ditto
16-bit software applications intended for DOS and Windows 3.1 users. For Windows
95 and higher users, a 32-bit Year 2000 upgrade is available, on the Company's
web site without charge, for Findit and CopyMachine. The Company is in the
process of preparing Year 2000 upgrades for the 16-bit software versions of the
Findit and CopyMachine intended for DOS and Windows 3.1 users and expects these
upgrades to be available on the Company's web site in the third quarter, 1999.
No solution is presently available for the 16-bit software version of the Ditto
software application intended for DOS and Windows 3.1 users. The 16-bit version
of the Ditto s oftware was provided by a third party who no longer supports the
<PAGE>
software. The Company continues to investigate the possibility of providing a
Year 2000 upgrade for this software application, but has not determined whether
an upgrade will be made available. Due to the legacy nature of the Bernoulli
product, the Company will not test software provided with the Bernoulli drive.
Instead, the Company is internally testing Company developed software utility
tools and drivers which are Year 2000 ready which may be used with Bernoulli
drives as an alternative to originally shipped software. For software developed
by third parties which was bundled or sold with Bernoulli drive products, the
third party provider of such software should be contacted for the Year 2000
readiness of such software products.
The Company has completed its review of Nomai branded hardware drive products.
CD-RW drives sold by Nomai were manufactured by third parties who have indicated
that such drive products are Year 2000 ready. NSTL also tested one version of
the Nomai CD-RW drive and determined it to be Year 2000 ready. Nomai also
produced a rigid, magnetic media drive which has been reviewed, and determined
to be, Year 2000 ready by a Nomai engineer. Software provided with Nomai branded
CD-RW drives was developed by a third party, who has indicated that such
software is Year 2000 compliant.
The specific results of hardware and software testing are provided on the
Company's Year 2000 web pages on its web site (www.iomega.com). The Company
plans to use its web site to communicate Year 2000 product issues that may be
identified in the future. Notwithstanding the results of the Company's testing
and remediation efforts, actual backup, restore and rollover results in specific
operating system environments may vary depending on a number of factors,
including, without limitation, other hardware utilized, the specific operating
system utilized, other software applications utilized and the Year 2000
readiness of each. Statements concerning, or references made to, a third party's
Year 2000 statements or claims constitute "Republications" of such information
for purposes of the Year 2000 Information and Readiness Disclosure Act, and such
statements or republications have not be reviewed or verified by the Company as
to their accuracy, correctness or content. Such information was supplied by the
person or entity identified in such Year 2000 statement or republication, and
the Company is not the source of such statement or republication.
Internal IT Systems. During 1998, the Company implemented new HP computer
hardware and Oracle software for its financial, accounting, inventory control,
order processing, supply chain management and other management information
systems. According to the respective vendors, the hardware operating systems and
software currently in use by the Company are in various stages of Year 2000
readiness. The respective vendors are providing Year 2000 software upgrades when
Year 2000 deficiencies are identified. In January 1999, the Company began
testing the hardware operating systems and software applications in use by the
Company to confirm Year 2000 readiness. The Company has identified other
hardware and applications software used in its IT systems and is in the process
of obtaining Year 2000 compliance information from the providers of such
hardware and applications software. The Company will assess and remedy, as
deemed appropriate, Year 2000 issues it identifies with respect to critical IT
systems utilized by the Company. The Company does not anticipate any significant
Year 2000 issues with respect to its IT systems and therefore does not
contemplate any significant contingency planning for its IT systems.
<PAGE>
Internal Non-IT Systems. The Company has substantially completed inventorying,
assessing and testing its major non-IT systems, as well as implementing any
remedial actions to the extent deemed appropriate. The Company anticipates
completing its Year 2000 review of its major non-IT systems by the end of the
third quarter, 1999. The Company does not anticipate any significant Year 2000
issues with respect to its non-IT systems and therefore does not contemplate any
significant contingency planning for its non-IT systems.
Material Third-Party Relationships. The Company has significant relationships
with various third parties (many located outside of the U.S.) and the failure of
any of these third parties to achieve Year 2000 compliance could have a material
impact on the Company's business, operating results and financial condition.
These third parties include energy and utility suppliers, financial
institutions, material and product suppliers, transportation providers,
communications vendors, including value added network vendors and the Company's
significant customers. While the Company has received Year 2000 readiness
statements from its major third-party suppliers which in general indicate Year
2000 readiness, the Company continues in the process of conducting a
questionnaire/review with each major supplier and vendor to confirm their Year
2000 readiness. By the end of the second quarter, 1999, approximately 65% of the
Company's major suppliers have been reviewed. The questionnaire/review process
for suppliers is expected to be completed in the third quarter of 1999.
Costs. Through the second quarter of 1999, the Company incurred approximately
$39 million in costs to improve the Company's IT systems and for Year 2000
readiness efforts. Of this amount, 91% represented the costs of transitioning to
new computer hardware and software for its financial, accounting, inventory
control, order processing, supply chain management and other management
information systems. This system hardware and software was implemented to
upgrade and improve the Company's IT systems. The implementation of the hardware
and software also resulted in facilitating the Company's Year 2000 readiness for
these systems. The balance was expended for hardware and software testing,
third-party consulting costs and third-party audits and reviews. The Company is
not separately tracking the internal costs for its Year 2000 review activities;
such costs are principally the related payroll costs for the Company's
information systems group. The Company anticipates incurring an additional $4
million in the second half of 1999 in connection with Year 2000 readiness
efforts, including additional system hardware and software, third-party
consulting fees, third-party audits and reviews and product software and
hardware testing costs. The Company has set a goal of having substantially all
Year 2000 readiness efforts completed by the end of the third quarter of 1999.
Contingency Plans. The Company is preparing contingency plans for critical areas
to address Year 2000 failures if remedial efforts are not fully successful. The
Company's contingency plans are expected to target the Company's most reasonably
likely worst case scenarios. Presently, the Company does not anticipate
significant Year 2000 failures with respect to its products and IT and non-IT
systems, and thus does not contemplate any significant contingency planning for
these areas. The Company believes that its most reasonably likely worst case
Year 2000 failure scenario would be a key supplier of a critical component who
is unable to timely deliver components to the Company's manufacturing locations.
In such a case, the Company may be unable to timely manufacture product which
would in turn negatively impact sale revenues. Such a situation would also
<PAGE>
include the inability of the local power company to deliver power to the
Company's Penang manufacturing site. Additionally, if any of the Company's
logistical transportation providers are unable to ship the Company's finished
goods to distribution and retail points, due to such provider's Year 2000
failure or a Year 2000 failure in the underlying transportation network (air
traffic centers, ports of call, custom clearance houses, etc.), then similarly,
the Company's sales revenue would be negatively impacted. To address these
issues the Company's contingency plans are expected to include the
identification of alternate providers for critical components and maintaining an
inventory buffer for critical components. The Company has established multiple
accounts for alternative third-party logistics. Finally, the Company has
alternative manufacturing capacity at different locations world wide which
should minimize to some degree the adverse impact if any one manufacturing site
is adversely affected. The Company's final contingency plans will be based in
part on the results of third-party supplier audits, and thus are not fully
developed at this time. Completion of initial contingency plans is targeted for
the third quarter of 1999 (which plans will thereafter be revised from time to
time as deemed appropriate).
General. To supplement the Company's efforts described above, the Company has
engaged outside IT and legal advisors to conduct independent reviews of the
Company's Year 2000 plans.
No assurance can be given that the Company will not be materially adversely
affected by Year 2000 issues. Although the Company is not currently aware of any
material operational issues with preparing its internal IT and non-IT systems
for the Year 2000, the Company may experience material unanticipated problems
and costs caused by undetected errors or defects in its internal IT and non-IT
systems. In addition, the failure of third parties to timely address their Year
2000 issues could have a material adverse impact on the Company's business,
operations and financial condition. If, for example, third party suppliers
become unable to deliver necessary components, the Company would be unable to
timely manufacture products and meet customer order requirements. Similarly, if
international shipping and freight forwarders were unable to ship product, the
Company would be unable to deliver product to sales channels.
Additionally, there can be no assurance that the Company will not be the subject
of lawsuits regarding the failure of the Company's products (former or present)
in the event they are not Year 2000 ready. Despite the testing and remediation
efforts undertaken by the Company, the Company's products may contain errors or
defects associated with the Year 2000. Known or unknown errors or defects in the
Company's products could result in delay or loss of revenue, diversion of
development resources, damage to the Company's reputation or increased service
and warranty costs, any of which could materially adversely affect the Company's
business, operating results and financial condition. In addition, because the
computer systems in which the Company's products are used involve different
hardware, software and firmware components from different manufacturers, it may
be difficult to determine which component in a system caused a Year 2000 issue.
As a result, the Company may be subjected to Year 2000 related lawsuits
independent of whether its products are Year 2000 ready. Any Year 2000 related
suits, if adversely determined, could have a material adverse affect on the
Company's business, operating results and financial condition.
<PAGE>
The foregoing discussion of the Company's Year 2000 readiness includes
forward-looking statements, including estimates of the timeframes and costs for
addressing the known Year 2000 issues confronting the Company and is based on
management's current estimates, which were derived using numerous assumptions.
There can be no assurance that these estimates will be achieved. There are a
number of important factors that could cause actual events or results to differ
materially from those indicated by such forward-looking statements. These
factors include, but are not limited to, the availability of personnel with
required remediation skills, the ability of the Company to identify and correct
all relevant computer code and the success of third parties with whom the
Company does business in addressing their Year 2000 issues. 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", "intends" and similar expressions
are intended to identify forward-looking statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
A discussion of the Company's exposure to, and management of, market risk
appears in Item 2 of this Form 10-Q under the heading "Disclosures About Market
Risk".
<PAGE>
IOMEGA CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Except as set forth below, or in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, 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.
As previously disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 and in the Company's Quarterly Report on Form 10-Q for
the period ended March 28, 1999, on October 9, 1998, Hi-Val, Inc. filed a
complaint against the Company and other parties, Hi-Val, Inc. v. Nomai, S.A.,
Nomus, Inc., Kevin Scheier and Iomega, in the Superior Court of California,
County of Santa Clara. The claims are related to an alleged arrangement between
Nomai, S.A. and Hi-Val for Hi-Val to distribute Nomai's XHD cartridges.
Plaintiff seeks to recover $26 million in alleged, unspecified damages. The
Court has sustained Iomega's demurrers to the complaint on May 21, 1999 and the
only claims remaining are breach of contract, tortious interference with
contract and tortious interference with prospective economic advantage. The
Company intends to vigorously defend against such allegations.
As previously disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 and in the Company's Quarterly Report on Form 10-Q for
the period ended March 28, 1999, on July 28, 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 sought monetary damages and injunctive
relief enjoining SyQuest from further infringement. The matter was scheduled for
trial in April 1999; however, the trial date was delayed as a result of
SyQuest's filing of a voluntary petition in the United States Bankruptcy Court
under Chapter 11 of the U.S. Bankruptcy Code in November 1998. The Company also
filed complaints on March 6, 1998, and April 29, 1998, in the Paris District
Court alleging claims of copyright and patent infringement. The Company's
definitive agreement to purchase certain assets of SyQuest, including all of its
intellectual property, and its inventory and fixed assets in the U.S., for $9.2
million and in Malaysia for $2.9 million closed on April 6, 1999. As part of the
agreement, the Company released SyQuest and SyQuest released the Company from
all claims in connection with patent and trademark infringement litigation
pending between the parties in Delaware and in Paris, France.
As previously disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998 and in the Company's Quarterly Report on Form 10-Q for
the period ended March 28, 1999, 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. On July 28,
1999, the Court approved the parties' proposed settlement to the litigation. The
settlement provides that, in exchange for the dismissal and release of all
claims in this case, (a) the Company will issue a credit of up to $10, less
certain fees, with respect to each technical support phone call made during the
class period for which a charge was incurred, (b) the Company will modify its
Ditto software to provide readability of cartridges created by certain
non-Iomega products and provide the modified software free of charge, (c) for
any class member who has a cartridge for which the modified software does not
solve the readability problem, the Company will attempt to translate such
cartridge into a format readable by the Ditto drive and (d) for any class member
whose cartridge cannot be translated into a format readable by the Ditto drive,
the class member will have the option of returning the Ditto drive for a refund
or keeping the drive and receiving up to approximately $50. The settlement also
provides for the Company to modify current and future packaging materials.
<PAGE>
On July 6, 1999, the Company initiated litigation against Castlewood Systems,
Inc. ("Castlewood") in the United States District Court in the District of Utah
for infringing the Company's U.S. Patent No. 4,458,273 and U.S. Patent No.
5,854,719 and for infringing and diluting the Company's registered trademarks
"Iomega", "Zip" and "Jaz". The complaint requests monetary damages and
injunctive relief enjoining Castlewood from further infringement. A trial date
has not been set by the Court.
As previously disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, on February 10, 1998, several purported class action
complaints were filed in the United States District Courts for the District of
Utah and the Southern District of New York, against the Company and certain of
its former officers on behalf of certain persons who purchased the Company's
common stock during the period from September 22, 1997 to January 22, 1998.
These cases were consolidated in the District of Utah and a consolidated class
action complaint, Karacand v. Kim B. Edwards, Leonard C. Purkis and Iomega
Corporation, was filed on July 8, 1998. The Karacand complaint alleges that the
Company and certain of its former officers violated certain federal securities
laws and seeks an unspecified amount of damages. On June 11, 1999, the Company
prevailed on its motion to dismiss in the Karacand matter. Pursuant to the
Order, the complaint was dismissed with prejudice and the plaintiffs' motion for
leave to amend was denied. The plaintiffs filed a motion for reconsideration
which was denied by the Court on August 4, 1999.
A separate individual suit, Ora v. Iomega Corporation, et al., was filed on May
27, 1998, in Superior Court of the State of California for the County of Los
Angeles. The Ora complaint alleges that the Company and certain of its former
officers violated certain federal and state securities laws and alleges that Mr.
Edwards breached his duties as a director of the Company. Management believes
that the named defendants have highly meritorious defenses to the allegations
made in this lawsuit. The Company intends to vigorously defend against such
allegations.
The Company continues to be committed to vigorously protecting and enforcing its
intellectual property rights and to attacking unfair competition, including
through the proceedings referenced above.
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.
Item 2. Change in Securities and Use of Proceeds
The Company did not sell any equity securities during the second quarter of 1999
that were not registered under the Securities Act of 1933.
As described in more detail under Item 5 of this report, on July 29, 1999, the
Board of Directors of the Company adopted a new shareholder rights plan to
replace the Company's 1989 shareholder rights plan, which expires by its terms
on August 14, 1999.
<PAGE>
Item 5. Other Events
On July 29, 1999, the Board of Directors of the Company adopted a new
shareholder rights plan to replace the Company's 1989 rights plan, which expires
by its terms on August 14, 1999. Pursuant to the new plan, the Board declared a
dividend of one Right for each outstanding share of the Company's Common Stock
to stockholders of record at the close of business on August 16, 1999 (the
"Record Date"). Each Right entitles the registered holder to purchase from the
Company one one-thousandth of a share of Series A Junior Participating Preferred
Stock, $.01 par value per share (the "Preferred Stock"), at a Purchase Price of
$28.88 in cash, subject to adjustment. The description and terms of the Rights
are set forth in a Rights Agreement dated as of July 29, 1999 (the "Rights
Agreement") between the Company and American Stock Transfer & Trust Company, as
Rights Agent.
Initially, the Rights will be attached to all Common Stock certificates
representing shares then outstanding, and no separate Rights Certificates will
be distributed. The Rights will separate from the Common Stock and a
Distribution Date will occur upon the earlier of (i) 10 business days (or such
later date as may be determined by the Board of Directors of the Company)
following the later of (a) the first date of a public announcement that a person
or group of affiliated or associated persons (an "Acquiring Person") has
acquired, or obtained the right to acquire, beneficial ownership of 20% or more
of the outstanding shares of Common Stock or (b) the first date on which an
executive officer of the Company has actual knowledge that an Acquiring Person
has become such (the "Stock Acquisition Date"), or (ii) 10 business days (or
such later date as may be determined by the Board of Directors of the Company)
following the commencement of a tender offer or exchange offer that would result
in a person or group beneficially owning 20% or more of such outstanding shares
of Common Stock. Until the Distribution Date (or earlier redemption or
expiration of the Rights), (i) the Rights will be evidenced by the Common Stock
certificates and will be transferred with and only with such Common Stock
certificates, (ii) new Common Stock certificates issued after the Record Date
will contain a notation incorporating the Rights Agreement by reference and
(iii) the surrender for transfer of any certificates for Common Stock
outstanding, even without such notation, will also constitute the transfer of
the Rights associated with the Common Stock represented by such certificate.
The Rights are not exercisable until the Distribution Date and will expire upon
the close of business on July 29, 2009 (the "Final Expiration Date") unless
earlier redeemed or exchanged as described below. As soon as practicable after
the Distribution Date, separate Rights Certificates will be mailed to holders of
record of the Common Stock as of the close of business on the Distribution Date
and, thereafter, the separate Rights Certificates alone will represent the
Rights. Except as otherwise determined by the Board of Directors, and except for
shares of Common Stock issued upon exercise, conversion or exchange of then
outstanding options, convertible or exchangeable securities or other contingent
obligations to issue shares, only shares of Common Stock issued prior to the
Distribution Date will be issued with Rights.
In the event that any Person becomes an Acquiring Person, then, promptly
following the first occurrence of such event, each holder of a Right (except as
provided below and in Section 7(e) of the Rights Agreement) shall thereafter
have the right to receive, upon exercise, that number of shares of Common Stock
of the Company (or, in certain circumstances, cash, property or other securities
of the Company) which equals the exercise price of the Right divided by 50% of
the current market price (as defined in the Rights Agreement) per share of
Common Stock at the date of the occurrence of such event. However, Rights are
not exercisable following such event until such time as the Rights are no longer
redeemable by the Company as described below. Notwithstanding any of the
foregoing, following the occurrence of such event, all Rights that are, or
(under certain circumstances specified in the Rights Agreement) were,
beneficially owned by any Acquiring Person will be null and void. The event
summarized in this paragraph is referred to as a "Section 11(a)(ii) Event."
<PAGE>
In the event that, at any time after any Person becomes an Acquiring Person, (i)
the Company is consolidated with, or merged with and into, another entity and
the Company is not the surviving entity of such consolidation or merger or if
the Company is the surviving entity, but shares of its outstanding Common Stock
are changed or exchanged for stock or securities (of any other person) or cash
or any other property, or (ii) 50% or more of the Company's assets or earning
power is sold or transferred, each holder of a Right (except Rights which
previously have been voided as set forth above) shall thereafter have the right
to receive, upon exercise, that number of shares of common stock of the
acquiring company which equals the exercise price of the Right divided by 50% of
the current market price of such common stock at the date of the occurrence of
the event. The events summarized in this paragraph are referred to as "Section
13 Events." A Section 11(a)(ii) Event and Section 13 Events are collectively
referred to as "Triggering Events."
At any time after the occurrence of a Section 11(a)(ii) Event, subject to
certain conditions, the Board of Directors of the Company may exchange the
Rights (other than Rights owned by such Acquiring Person which have become
void), in whole or in part, at an exchange ratio of one share of Common Stock,
or one one-thousandth of a share of Preferred Stock (or of a share of a class or
series of the Company's preferred stock having equivalent rights, preferences
and privileges), per Right (subject to adjustment).
The Purchase Price payable, and the number of units of Preferred Stock or other
securities or property issuable, upon exercise of the Rights are subject to
adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of, the Preferred
Stock, (ii) if holders of the Preferred Stock are granted certain rights or
warrants to subscribe for Preferred Stock or convertible securities at less than
the then-current market price of the Preferred Stock, or (iii) upon the
distribution to holders of the Preferred Stock of evidences of indebtedness or
assets (excluding regular periodic cash dividends paid out of earnings or
retained earnings) or of subscription rights or warrants (other than those
referred to above). The number of Rights associated with each share of Common
Stock is also subject to adjustment in the event of a stock split of the Common
Stock or a stock dividend on the Common Stock payable in Common Stock or
subdivisions, consolidations or combinations of the Common Stock occurring, in
any such case, prior to the Distribution Date.
With certain exceptions, no adjustment in the Purchase Price will be required
until cumulative adjustments amount to at least 1% of the Purchase Price. No
fractional shares of Preferred Stock (other than fractions which are integral
multiples of one one-thousandth of a share of Preferred Stock) will be issued
and, in lieu thereof, an adjustment in cash will be made based on the market
price of the Preferred Stock on the last trading date prior to the date of
exercise.
Preferred Stock purchasable upon exercise of the Rights will not be redeemable.
Each share of Preferred Stock will be entitled to receive, when, as and if
declared by the Board of Directors, a minimum preferential quarterly dividend
payment of $10 per share or, if greater, an aggregate dividend of 1,000 times
the dividend declared per share of Common Stock. In the event of liquidation,
the holders of the Preferred Stock will be entitled to a minimum preferential
liquidation payment of $1,000 per share and will be entitled to an aggregate
payment of 1,000 times the payment made per share of Common Stock. Each share of
Preferred Stock will have 1,000 votes, voting together with the Common Stock. In
the event of any merger, consolidation or other transaction in which Common
Stock is changed or exchanged, each share of Preferred Stock will be entitled to
receive 1,000 times the amount received per share of Common Stock. These rights
are protected by customary antidilution provisions. Because of the nature of the
Preferred Stock's dividend, liquidation and voting rights, the value of one
one-thousandth of a share of Preferred Stock purchasable upon exercise of each
Right should approximate the value of one share of Common Stock.
<PAGE>
At any time prior to the earlier of (i) the tenth Business Day (or such later
date as may be determined by the Board of Directors of the Company) after the
Stock Acquisition Date, or (ii) the Final Expiration Date, the Company may
redeem the Rights in whole, but not in part, at a price of $.001 per Right (the
"Redemption Price"), payable in cash or stock. Immediately upon the action of
the Board of Directors ordering redemption of the Rights, the Rights will
terminate and the only right of the holders of Rights will be to receive the
Redemption Price. The Rights may also be redeemable following certain other
circumstances specified in the Rights Agreement.
Until a Right is exercised, the holder thereof, as such, will have no rights as
a stockholder of the Company, including, without limitation, the right to vote
or to receive dividends. While the distribution of the Rights will not be
taxable to stockholders or to the Company, stockholders may, depending upon the
circumstances, recognize taxable income in the event that the Rights become
exercisable for Common Stock (or other consideration) of the Company or for
common stock of the acquiring company as set forth above.
Any of the provisions of the Rights Agreement (other than the Redemption Price)
may be amended by the Board of Directors of the Company prior to such time as
the Rights are no longer redeemable.
A copy of the Rights Agreement has been filed with the Securities and Exchange
Commission as an exhibit to the Company's Registration Statement on Form 8-A
filed on August 5, 1999. A copy of the Rights Agreement is available free of
charge from the Company. This summary description of the Rights does not purport
to be complete and is qualified in its entirety by reference to the Rights
Agreement, which is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The exhibits listed on the Exhibit Index filed as a part of
this Quarterly Report on Form 10-Q are incorporated herein by
reference.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter for which this report on Form 10-Q is filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IOMEGA CORPORATION
------------------
(Registrant)
/s/Jodie K. Glore
--------------------------
Dated: August 10, 1999 Jodie K. Glore
Chief Executive Officer and President
/s/Dan E. Strong
--------------------------
Dated: August 10, 1999 Dan E. Strong
Vice President and Corporate Controller
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report on Form 10-Q:
<TABLE>
Exhibit No. Description
- ------------ -----------
<S> <C>
4.4 Rights Agreement, dated July 29, 1999, between the Company
and American Stock Transfer & Trust Company, as rights agent
(incorporated by reference from the Company's Registration
Statement on Form 8-A filed on August 5, 1999, File No. 1-12333).
10.13 (g) Amendment No. 2 to Credit Agreement, dated June 15, 1999.
10.13 (h) Waiver of Credit Facility Agreement, dated June 30, 1999.
10.24 Rights Agreement, dated July 29, 1999, between the Company
and American Stock Transfer & Trust Company, as rights agent
(incorporated by reference from the Company's Registration
Statement on Form 8-A filed on August 5, 1999, File No. 1-12333).
27 Financial Data Schedule (only filed as part of electronic copy).
</TABLE>
[CONFORMED COPY]
AMENDMENT NO. 2 TO CREDIT AGREEMENT
AMENDMENT dated as of June 15, 1999 to the Amended and Restated Credit
Agreement dated as of July 15, 1998, as amended by Amendment No. 1 dated as of
January 29, 1999 (the "Credit Agreement") among IOMEGA CORPORATION (the
"Borrower"), the BANKS party thereto (the "Banks"), CITIBANK, N.A., as
Administrative Agent, and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as
Documentation Agent (the "Documentation Agent").
W I T N E S S E T H :
WHEREAS, the parties hereto desire to amend the definitions of
Consolidated EBITDA and Consolidated Tangible Net Worth in the Credit Agreement
to exclude certain special charges taken in the second fiscal quarter of 1999;
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 hereby.
SECTION 2. Amendment of Section 1.01. (a) The definition of
"Consolidated EBITDA" in Section 1.01 of the Credit Agreement is amended to
replace "and (v)" with ", (v)" and to add before the period at the end thereof
the following:
and (vi) the Permitted Second Quarter 1999 Addback
(b) The first sentence of the definition of "Consolidated Tangible Net
Worth" in Section 1.01 of the Credit Agreement is amended to replace "(iii)"
with "(iv)" and to add after "(ii) the Permitted Second Quarter Addback" the
following:
<PAGE>
, (iii) the Permitted Second Quarter 1999 Addback
(c) Section 1.01 of the Credit Agreement is further amended to insert
the following definition in appropriate alphabetical order:
"Permitted Second Quarter 1999 Addback" means special charges
taken in the second Fiscal Quarter of 1999 to the extent such special
charges are less than $53,000,000 (and to the extent that such special
charges exceed $53,000,000 then such special charges will be deemed to
equal $53,000,000), so long as the cash portion of all special charges
taken in such Fiscal Quarter does not exceed $18,000,000.
SECTION 3. Representations of Borrower. The Borrower represents and
warrants that (i) the representations and warranties of the Borrower set forth
in Article 4 of the Credit Agreement will be true on and as of the date hereof
and (ii) no Default will have occurred and be continuing on such date.
SECTION 4. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
SECTION 5. Counterparts. This Amendment 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 6. Effectiveness. This Amendment shall become effective as of
the date hereof when (i) the Administrative Agent shall have received from the
Borrower, for the account of each Bank which has signed a counterpart hereof on
or prior to June 21, 1999, an amendment fee equal to .05% of such Bank's
Commitment, and (ii) the Documentation Agent shall have received from each of
the Borrower and the Required 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.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed as of the date first above written.
IOMEGA CORPORATION
By: /s/ Dan E. Strong
----------------------------
Title: Vice President and
Chief Financial Officer
CITIBANK, N.A.
By: /s/ J. Robert Cotton
----------------------------
Title: Vice President
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
By: /s/ Unn Boucher
----------------------------
Title: Vice President
FLEET NATIONAL BANK
By: /s/ Michael S. Barclay
----------------------------
Title: Vice President
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS BANK
By: /s/ Kevin McMahon
----------------------------
Title: Managing Director
<PAGE>
FIRST SECURITY BANK, N.A.
By: /s/ Taft G. Meyer
----------------------------
Title: Vice President
KEYBANK NATIONAL ASSOCIATION
By: /s/ Thomas A. Crandell
----------------------------
Title: Vice President
ABN AMRO BANK N.V.
By: /s/ Lee-Lee Miao
----------------------------
Title: Vice President
By: /s/ Paul S. Faust
----------------------------
Title: Vice President
THE SUMITOMO TRUST & BANKING CO., LTD.
By:
----------------------------
Title:
THE NORTHERN TRUST COMPANY
By: /s/ Patrick J. Connelly
----------------------------
Title: Vice President
<PAGE>
THE CIT GROUP/BUSINESS CREDIT, INC.
By: /s/ Adrian Avalos
----------------------------
Title: Assistant Vice President
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Glenn Leyrer
----------------------------
Title: Vice President
[CONFORMED COPY]
WAIVER
June 30, 1999
Iomega Corporation
1821 West Iomega Way
Roy, Utah 84067
Attention: Tracy Welch
Senior Director, Treasurer
Dear Sirs:
We refer to the Amended and Restated Credit Agreement dated as of July
15, 1998, as amended by Amendment No. 1 dated as of January 29, 1999 and
Amendment No. 2 dated as of June 15, 1999 (the "Credit Agreement"), among Iomega
Corporation, the banks party thereto, Citibank, N.A., as Administrative Agent,
and Morgan Guaranty Trust Company of New York, as Documentation Agent. Terms
defined in the Credit Agreement are used herein as therein defined.
The undersigned hereby waive the provisions of Section 5.13 for the
four consecutive fiscal quarters ended June 30, 1999, provided that Consolidated
EBITDA for such period is at least $85,000,000.
This Waiver shall be governed by and construed in accordance with the
laws of the State of New York. It shall become effective when the Documentation
Agent shall have received counterparts hereof signed by you and the Required
Banks.
Very truly yours,
CITIBANK, N.A.
By: /s/ J. Robert Cotton
--------------------------
Name: J. Robert Cotton
Title: Vice President
<PAGE>
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
By: /s/ Unn Boucher
--------------------------
Name: Unn Boucher
Title: Vice President
FLEET NATIONAL BANK
By:
--------------------------
Name:
Title:
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS BANK
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/ Mary K. Young
--------------------------
Name: Mary K. Young
Title: Assistant Vice President
<PAGE>
ABN AMRO BANK N.V.
By: /s/ Jamie Dillon
--------------------------
Name: Jamie Dillon
Title: Vice President
By: /s/ Mathew Harvey
Name: Mathew Harvey
Title: Vice President
THE SUMITOMO TRUST & BANKING CO., LTD.
By:
--------------------------
Name:
Title:
THE NORTHERN TRUST COMPANY
By: /s/ Patrick J. Connelly
--------------------------
Name: Patrick J. Connelly
Title: Vice President
THE CIT GROUP/BUSINESS CREDIT, INC.
By: /s/ Cecil Chinery
--------------------------
Name: Cecil Chinery
Title: Vice President
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Glenn Leyrer
--------------------------
Name: Glenn Leyrer
Title: Vice President
<PAGE>
The Borrower hereby acknowledges receipt, and consents to the provisions, of
this Waiver.
IOMEGA CORPORATION
By: /s/ Tracy M. Welch
------------------------
Name: Tracy M. Welch
Title: Senior Director, Treasurer
<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.
</LEGEND>
<CIK> 0000352789
<NAME> IOMEGA CORPORATION
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> MAR-28-1999 JAN-1-1999
<PERIOD-END> JUN-27-1999 JUN-27-1999
<CASH> 89,281 89,281
<SECURITIES> 0 0
<RECEIVABLES> 239,201 239,201
<ALLOWANCES> 53,202 53,202
<INVENTORY> 138,400 138,400
<CURRENT-ASSETS> 502,603 502,603
<PP&E> 393,102 393,102
<DEPRECIATION> 219,543 219,543
<TOTAL-ASSETS> 729,943 729,943
<CURRENT-LIABILITIES> 304,150 304,150
<BONDS> 45,505 45,505
0 0
0 0
<COMMON> 300,060 300,060
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 729,943 729,943
<SALES> 348,781 734,993
<TOTAL-REVENUES> 348,781 734,993
<CGS> 273,020 565,496
<TOTAL-COSTS> 420,842 803,972
<OTHER-EXPENSES> (17) 491
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,479 4,268
<INCOME-PRETAX> (72,389) (71,512)
<INCOME-TAX> (25,336) (25,028)
<INCOME-CONTINUING> (47,053) (46,484)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (47,053) (46,484)
<EPS-BASIC> (0.17) (0.17)
<EPS-DILUTED> (0.17) (0.17)
</TABLE>
