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 SEPTEMBER 26, 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 September 26, 1999.
Common Stock, par value $.03 1/3 269,784,162
(Title of each class) (Number of shares)
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IOMEGA CORPORATION
TABLE OF CONTENTS
Page
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements
Condensed consolidated balance sheets at September 26, 1999
and December 31, 1998.......................................... 3
Condensed consolidated statements of operations for the quarter
ended September 26, 1999 and September 27, 1998................ 5
Condensed consolidated statements of operations for the nine months
ended September 26, 1999 and September 27, 1998................ 6
Condensed consolidated statements of cash flows for the nine months
ended September 26, 1999 and September 27, 1998................ 7
Notes to condensed consolidated financial statements.............. 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 22
Item 3. Quantitative and Qualitative Disclosures About Market Risk........ 40
PART II - OTHER INFORMATION
Item 1 Legal Proceedings ................................................ 41
Item 2 Changes in Securities and Use of Proceeds ........................ 42
Item 6 Exhibits and Reports on Form 8-K ................................. 42
Signatures................................................................ 43
Exhibit Index............................................................. 44
This Quarterly Report on Form 10-Q contains a number of forward-looking
statements, including, without limitation, statements referring to: achieving
profitability in the fourth quarter; the expected sufficiency of cash and cash
equivalent balances and available sources of financing; expected positive cash
flow for 1999; 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; the impact of Clik!,
Zip 250, ZipCD and other new products introduced or expected to be introduced
during 1998 or 1999; resolution of the ASIC chip shortage affecting Zip drives;
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 actions; 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
1
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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, although not
all forward-looking statements contain these words. 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.
2
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IOMEGA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
September 26, December 31,
1999 1998
------------- -------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 118,106 $ 90,273
Temporary investments 14,695 -
Trade receivables, net 187,975 233,662
Inventories (Note 1) 132,136 165,132
Income taxes receivable 21,992 24,974
Deferred income taxes - 49,827
Other current assets 23,234 20,246
------------- -------------
Total current assets 498,138 584,114
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, at cost 387,565 373,227
Less: Accumulated depreciation
and amortization (228,494) (165,112)
------------- -------------
Net property, plant and equipment 159,071 208,115
------------- -------------
INTANGIBLES, NET 34,542 33,580
OTHER ASSETS 6,087 4,350
------------- -------------
$ 697,838 $ 830,159
============= =============
The accompanying notes to condensed consolidated financial
statements are an integral part of these balance sheets.
3
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IOMEGA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands, except share data)
September 26, December 31,
1999 1998
------------- -------------
(Unaudited)
CURRENT LIABILITIES:
Related party notes payable $ - $ 40,000
Accounts payable 162,351 160,977
Other current liabilities (Note 1) 183,950 152,843
Current portion of capitalized
lease obligations and notes payable 4,463 4,408
------------- -------------
Total current liabilities 350,764 358,228
------------- -------------
CAPITALIZED LEASE OBLIGATIONS AND
NOTES PAYABLE, net of current portion 3,735 4,607
------------- -------------
DEFERRED INCOME TAXES - 4,903
------------- -------------
CONVERTIBLE SUBORDINATED NOTES,
6.75%, due 2001 45,505 45,655
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.01 par value;
authorized 4,350,000 shares,
none issued - -
Series C Junior Participating
Preferred Stock, $0.01 par value;
authorized 250,000 shares,
none issued - -
Series A Junior Participating
Preferred Stock, $0.01 par value;
authorized 400,000 shares,
none issued - -
Common Stock, $.03 1/3 par value;
authorized 400,000,000 shares, issued
270,593,704 and 268,186,096 shares at
September 26, 1999 and
December 31, 1998, respectively 9,019 8,937
Additional paid-in capital 292,022 286,206
Less: 809,542 Common Stock
treasury shares, at cost (6,088) (6,088)
Retained earnings 2,881 127,711
------------- -------------
Total stockholders' equity 297,834 416,766
------------- -------------
$ 697,838 $ 830,159
============= =============
The accompanying notes to condensed consolidated financial
statements are an integral part of these balance sheets.
4
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IOMEGA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For the Quarter Ended
--------------------------------
September 26, September 27,
1999 1998
------------- -------------
(Unaudited)
SALES $ 356,625 $ 391,766
COST OF SALES 269,976 304,119
------------- -------------
Gross margin 86,649 87,647
------------- -------------
OPERATING EXPENSES:
Selling, general and administrative 71,773 72,587
Research and development 17,813 23,741
Restructuring charge 20,457 -
Purchased in-process technology - 11,100
------------- -------------
Total operating expenses 110,043 107,428
------------- -------------
OPERATING LOSS (23,394) (19,781)
Interest and other expense, net (2,601) (2,877)
------------- -------------
LOSS BEFORE INCOME TAXES (25,995) (22,658)
Benefit (provision) for income taxes (52,351) 7,881
------------- -------------
NET LOSS $ (78,346) $ (14,777)
============= =============
NET LOSS PER COMMON SHARE
(Basic and Diluted) $ (0.29) $ (0.06)
============= =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
(Basic and Diluted) 269,715 266,920
============= =============
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
5
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IOMEGA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For the Nine Months Ended
--------------------------------
September 26, September 27,
1999 1998
------------- -------------
(Unaudited)
SALES $ 1,091,618 $ 1,193,097
COST OF SALES 835,472 909,090
------------- -------------
Gross margin 256,146 284,007
------------- -------------
OPERATING EXPENSES:
Selling, general and administrative 224,542 304,928
Research and development 61,611 77,177
Restructuring charges 62,366 -
Purchased in-process technology - 11,100
------------- -------------
Total operating expenses 348,519 393,205
------------- -------------
OPERATING LOSS (92,373) (109,198)
Interest and other expense, net (5,134) (3,358)
------------- -------------
LOSS BEFORE INCOME TAXES (97,507) (112,556)
Benefit (provision) for income taxes (27,323) 39,293
------------- -------------
NET LOSS $ (124,830) $ (73,263)
============= =============
NET LOSS PER COMMON SHARE
(Basic and Diluted) $ (0.46) $ (0.28)
============= =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING
(Basic and Diluted) 269,073 265,032
============= =============
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
6
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IOMEGA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Nine Months Ended
--------------------------------
September 26, September 27,
1999 1998
------------- -------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (124,830) $ (73,263)
Non-Cash Revenue and Expense Adjustments:
Depreciation and amortization 70,928 48,379
Purchased in-process technology - 11,100
Deferred income taxes 38,213 (3,276)
Tax benefit from dispositions of
employee stock 1,113 6,462
Restructuring reserves 30,795 -
Bad debt provision 4,562 (2,057)
Other 2,124 5,583
------------- -------------
22,905 (7,072)
Changes in Assets and Liabilities:
Trade receivables, net 46,348 64,932
Inventories 25,032 53,896
Other current assets 1,605 (6,677)
Accounts payable (3,849) (135,503)
Other current liabilities 31,107 (36,823)
Income taxes 9,693 (69,976)
------------- -------------
Net cash provided by (used in)
operating activities 132,841 (137,223)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant
and equipment (38,709) (67,617)
Purchase of Nomai S. A., net of
cash acquired - (41,579)
Acquisition of SyQuest assets (12,093) -
Purchase of temporary investments (14,695) -
Sale of temporary investments - 36,319
Net increase in other assets (3,329) (3,410)
------------- -------------
Net cash used in investing activities (68,826) (76,287)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of Common Stock 4,635 4,758
Proceeds from issuance of notes
payable and capital leases 3,532 120,000
Payments on notes payable and
capitalized lease obligations (44,349) (25,148)
Purchase of Common Stock - (465)
------------- -------------
Net cash provided by (used in)
financing activities (36,182) 99,145
------------- -------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 27,833 (114,365)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 90,273 159,922
------------- -------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 118,106 $ 45,557
============= =============
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
7
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IOMEGA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Nine Months Ended
September 26, September 27,
1999 1998
------------- -------------
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Property, plant and equipment financed under
capitalized lease obligations$ - $ 1,223
============= =============
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
8
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IOMEGA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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 September 26,
1999 and December 31, 1998, the results of operations for the three- and
nine-month periods ended September 26, 1999 and September 27, 1998 and cash
flows for the nine-month periods ended September 26, 1999 and September 27,
1998. The results of operations for the three- and nine-month periods ended
September 26, 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 ("OEMs"), 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 $22.1 million and $33.1 million
at September 26, 1999 and December 31, 1998, respectively, and is included
in "Other current liabilities" in the accompanying condensed consolidated
balance sheets.
PRICE PROTECTION AND VOLUME REBATES - The Company has agreements with
certain of its customers which, in the event of a price decrease, allow
those customers (subject to certain limitations) credit equal to the
difference between the price originally paid and the reduced price on units
in the customers' inventories at the date of the price decrease. When a
price decrease is anticipated, the Company establishes reserves against
gross accounts receivable for amounts estimated to be reimbursed to the
qualifying customers.
9
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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 $34.0 million and $42.4 million at September 26,
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. The Company has classified its entire portfolio of
temporary investments at September 26, 1999 as held-to-maturity. The
temporary investments consisted primarily of commercial paper. At September
26, 1999, all temporary investments had maturities of less than six months.
There were no temporary investments at 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>
September 26, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Raw materials $ 31,985 $ 62,613
Work-in-process 13,975 8,482
Finished goods 86,176 94,037
------------- -------------
$ 132,136 $ 165,132
============= =============
</TABLE>
10
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OTHER CURRENT LIABILITIES - Other current liabilities consist of the
following (in thousands):
<TABLE>
September 26, December 31,
1999 1998
------------- -------------
<S> <C> <C>
Accrued payroll, vacation
and bonus 18,803 21,048
Deferred revenue 22,083 33,114
Accrued advertising 40,889 30,226
Accrued restructuring 23,840 -
Other accrued liabilities 78,335 68,455
------------- -------------
$ 183,950 $ 152,843
============= =============
</TABLE>
RECLASSIFICATIONS - Certain reclassifications were made to both the prior
periods' unaudited, condensed, consolidated financial statements and notes
to 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 nine-month
periods ended September 26, 1999 and September 27, 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 SFAS 133 to have a material
impact on the Company's results of operations, financial position or
liquidity.
11
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(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 pursuant to a public tender
offer. The tender offer was undertaken 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 Company completed the purchase of all
remaining shares during the third quarter of 1999, thus resulting in
ownership of 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 project ($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.
During the third quarter of 1999, the Company recorded a restructuring
charge that included both costs to cease operations of the Company's Nomai
manufacturing facility and the write-off of impaired intangibles directly
assigned to this facility.
The following unaudited pro forma combined financial data for the nine
months ended September 27, 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):
September 27, 1998
------------------
(Unaudited)
Revenue $ 1,209
Net loss (80)
Diluted EPS $ (0.30)
12
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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.
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. 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 nine months ended September 26, 1999, the Company
recorded an income tax provision of $52.4 and $27.3 million, respectively.
The provisions differ from the benefits computed by applying the Federal
statutory rate of 35% to the pre-tax losses incurred for the three and nine
months ended September 26, 1999 by $61.4 million, for each of the periods,
primarily due to an increase in the deferred tax asset valuation allowance
and permanent items which are not deductible for Federal income taxes,
which were partially offset by earnings permanently invested in non-U.S.
operations and state income taxes.
U.S. taxes have not been provided for unremitted foreign earnings of
approximately $112 million, which are considered to be permanently invested
in non-U.S. operations. The residual U.S. tax liability, if such amounts
were remitted, would be approximately $44 million. There is a possibility
that future foreign income generated by the Company may result in a current
tax provision even though the Company is incurring losses on a consolidated
basis.
As of September 26, 1999, the Company had approximately $18 million of
deferred tax assets related to foreign net operating loss carryovers, which
reflected the benefit of approximately $43 million in future tax
deductions, for which the Company had established a valuation allowance.
These carryovers expire at various dates beginning in 2004.
Additionally, as of September 26, 1999, the Company had approximately $72
million of domestic deferred tax assets net of deferred tax liabilities,
which reflected the benefit of approximately $185 million in future
domestic tax deductions. In light of the net operating loss in the third
quarter of 1999 and the cumulative net operating losses for 1999 and 1998,
in the third quarter of 1999, the Company fully reserved its net deferred
tax assets which previously existed at the end of the second quarter of
1999 and those deferred tax assets recognized during the third quarter of
1999. These net deferred tax assets relate to temporary differences, tax
credit carry forwards and net operating loss carry forwards. This valuation
allowance was recorded in accordance with SFAS 109, which requires that a
valuation allowance be established when there is significant uncertainty as
to the realizability of the deferred tax assets.
13
<PAGE>
During the third quarter of 1999, the Company increased its deferred tax
asset valuation allowance by approximately $76 million. The Company
evaluates the realizability of its deferred tax assets on a quarterly
basis. If the deferred tax assets are realized in the future, or if a
portion or all of the valuation allowance is no longer deemed to be
necessary, the related tax benefits will reduce future income tax
provisions.
Cash paid for income taxes was $4.8 million for the first nine months of
1999 and $28.3 million for the corresponding period in 1998. The Company
received an income tax refund of $20.4 million during the second quarter of
1999.
(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 Senior Secured Credit Facility, the most recent of which
was entered into on October 14, 1999, (the "Credit Facility"). As a result
of the most recent amendment, the Credit Facility was reduced to $75
million and certain financial covenants were amended to be effective for
the period ended September 26, 1999. The Credit Facility 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 the
Federal funds rate plus 2.75%, or at LIBOR plus 3.25%. There were no
borrowings outstanding on the Credit Facility at September 26, 1999.
Borrowing availability under the Credit Facility is based on an agreed upon
advance rate on receivables and inventory not to exceed $75 million. Total
availability under the Credit Facility at October 14, 1999 was $75 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. 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.
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
December 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.
14
<PAGE>
Cash paid for interest was $9.6 million and $6.5 million, respectively, for
the first nine months of 1999 and 1998, including interest on capital
leases. Included in interest expense for the first nine months of 1999 and
1998, respectively, was $1.2 million and $0.7 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 costs, research and development
expenses and selling, general and administrative expenses directly related
to a segment's operations. When such costs and expenses exceed sales and
other income, product profit margin is referred to as product loss. The
expenses attributable to corporate activity are not allocated to the
operating segments. The Company has five reportable segments based
primarily on the nature of the Company's customers and products: Zip, Jaz,
Clik!, ZipCD and Ditto. 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 reserves for assets related to the discontinuance
of certain Jaz segment products and projects including the Buz multimedia
producer and a drive development project. The Clik! segment includes Clik!
Mobile, Clik! PC Card and OEM drives and Clik! disks. Clik! products began
shipping in limited quantities during the fourth quarter of 1998. The
Company's restructuring charge in the third quarter of 1999 included
charges relating to refocusing the Clik! product platform from the Clik!
Mobile Drive to the newer Clik! PC Card and OEM drives and included
reserves for fixed assets and inventory related to the Clik! Mobile Drive.
The Company's ZipCD segment includes ZipCD disc and drive systems, which
began shipping in limited quantities in August 1999. 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 1999, after which the buyer of the Ditto
assets agreed to purchase the Company's remaining finished goods inventory.
The Company plans to continue to sell Ditto cartridges for a period of time
ending on or before July 1, 2001. The "Other" category includes products
such as Bernoulli, floppy disks and other Nomai products and other
miscellaneous items. The information in the following table is derived
directly from the segments' internal financial information used for
corporate management purposes.
15
<PAGE>
Reportable Operating Segment Information (in millions)
<TABLE>
For the Three Months Ended For the Nine Months Ended
------------------------------- -------------------------------
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Sales:
Zip $ 274 $ 279 $ 850 $ 830
Jaz 66 94 195 291
Clik! 6 - 12 -
ZipCD 9 - 9 -
Ditto 2 14 18 65
Other - 5 8 7
------------- ------------- ------------- -------------
Total sales $ 357 $ 392 $ 1,092 $ 1,193
============= ============= ============= =============
</TABLE>
16
<PAGE>
<TABLE>
For the Three Months Ended For the Nine Months Ended
------------------------------- -------------------------------
September 26, September 27, September 26, September 27,
1999 1998 1999 1998
------------- ------------- ------------- -------------
(In millions) (In millions)
Product profit margin
(product loss) before
restructuring charge(s):
<S> <C> <C> <C> <C>
Zip $ 48 $ 29 $ 132 $ 96
Jaz 11 6 3 (18)
Clik! (20) (8) (49) (27)
ZipCD (3) - (5) -
Ditto (7) (3) (11) (10)
Other (5) (2) (16) (4)
------------- ------------- ------------- -------------
Total product profit
margin 24 22 54 37
------------- ------------- ------------- -------------
Product profit margin
(product loss) including
restructuring charge(s):
Zip $ 48 $ 29 $ 132 $ 96
Jaz 11 6 (24) (18)
Clik! (31) (8) (61) (27)
ZipCD (3) - (6) -
Ditto (7) (3) (17) (10)
Other (14) (2) (28) (4)
------------- ------------- ------------- -------------
Total product profit
margin 4 22 (4) 37
------------- ------------- ------------- -------------
Corporate restructuring
charge - - (4) -
General corporate
expenses (27) (42) (85) (146)
Interest income 1 1 4 3
Interest expense (1) (4) (6) (7)
Other expense (3) - (3) -
------------- ------------- ------------- -------------
Loss before income taxes $ (26) $ (23) $ (98) $ (113)
============= ============= ============= =============
</TABLE>
(6) RESTRUCTURING COSTS
During the three and nine months ended September 26, 1999, the Company
recorded pre-tax restructuring charges of $20.5 and $62.4 million,
respectively, as a result of steps the Company is taking to organize along
functional lines, consolidate manufacturing and other facilities,
discontinue certain products and refocus the Clik! product platform on the
newer Clik! PC Card and OEM drives.
17
<PAGE>
During the quarter ended September 26, 1999, the Company recorded a pre-tax
restructuring charge of $20.5 million as a result of restructuring actions
initiated to consolidate worldwide disk manufacturing, refocus the Clik!
product platform on the newer Clik! PC Card and OEM drives and consolidate
leasehold facilities. The total restructuring charges in connection with
these actions are expected to be approximately $28 million. However, a
portion of these charges will not be recorded until the fourth quarter
because employee notifications had not taken place by September 26, 1999
and certain specific plans associated with leasehold consolidations had not
been finalized as required by Emerging Issues Task Force Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity." This restructuring charge included reserves of
$6.3 million relating to certain assets and exit costs such as cancellation
fees associated with the cessation of manufacturing in Avranches, France;
$11.5 million of inventory and fixed asset reserves associated with the
older Clik! products; and $2.7 million for write-offs of intangibles and
other miscellaneous charges. This restructuring charge consisted of cash
and non-cash charges of approximately $6 million and $15 million,
respectively.
In connection with the Company's third quarter restructuring actions, the
Company expects a workforce reduction of approximately 140 regular and
temporary employees, consisting primarily of operations employees in
Avranches, France and product development employees in Longmont, Colorado.
None of these employees had been notified or terminated at September 26,
1999. The Company anticipates that the implementation of the restructuring
charge will be substantially complete by the end of March 2000, with the
remainder being completed in the second and third quarters of 2000. The
restructuring charge was included in the accompanying condensed,
consolidated statements of operations under the caption "Restructuring
charge(s)" for the three- and nine-month periods ended September 26, 1999.
There were not any indications of permanent impairment of the assets prior
to the restructuring actions.
18
<PAGE>
Restructuring reserves are included in the Company's other current
liabilities, inventory and property, plant and equipment as of September
26, 1999. Changes in the third quarter restructuring reserves during the
quarter ended September 26, 1999 are summarized below (in thousands):
<TABLE>
Third Quarter 1999 Balance
Restructuring Charge Utilized September 26, 1999
-------------------- ----------- ------------------
<S> <C> <C> <C>
Third Quarter 1999
Restructuring Actions:
Clik! streamlining (a) $ 11,492 $ - $ 11,492
Manufacturing cessation (b) 6,300 - 6,300
Severance and benefits (b)(c) - - -
Other fixed asset charges (a)(c) - - -
Lease terminations (b)(c) - - -
Other exit costs (a) 2,665 2,665 -
------------ ------------ -----------
$ 20,457 2,665 $ 17,792
============ ============ ===========
</TABLE>
(a) Amounts represent primarily non-cash charges.
(b) Amounts represent primarily cash charges.
(c) Charges for these actions will be recorded in the fourth quarter of 1999 as
required by EITF Issue No. 94-3.
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 was
taking to organize along functional lines. These actions included the exit
of facilities, headcount reductions, the discontinuance of certain products
and development projects and consolidation of the Company's magnetic
technology expertise at its headquarters in Roy, Utah. These actions
included closing the Company's facilities in Milpitas, California and San
Diego, California. The restructuring charge was comprised of $20.2 million
for 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 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
operations in France and Scotland. This restructuring charge consisted of
cash and non-cash charges of approximately $18 million and $24 million,
respectively. The restructuring charge was included in the accompanying
condensed, consolidated statements of operations under the caption
"Restructuring charges" for the nine-month period ended September 26, 1999.
There were not any indications of permanent impairment of the assets prior
to the restructuring actions.
19
<PAGE>
In connection with the Company's second quarter restructuring actions, the
Company has terminated 466 regular and temporary employees, consisting
primarily of operations and product development employees located in
Milpitas, San Diego and Roy. The Company expects that the implementation of
the second quarter 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 other current
liabilities, inventory and property, plant and equipment as of September
26, 1999. Changes in the second quarter restructuring reserves during the
quarter ended September 26, 1999 are summarized below (in thousands):
<TABLE>
Balance Balance
June 27, 1999 Additions Utilized September 26, 1999
------------- --------- --------- ------------------
Second Quarter 1999
Restructuring Actions:
<S> <C> <C> <C> <C>
Discontinued products/projects (a) $ 20,210 $ - $ 7,906 $ 12,304
Severance and benefits (b) 9,700 - 4,637 5,063
Other fixed asset charges (a) 4,300 - 46 4,254
Lease terminations (b) 3,000 - 311 2,689
Other exit costs (b) 4,699 - 2,222 2,477
---------- --------- --------- -------------
$ 41,909 $ - $ 15,122 $ 26,787
========== ========= ========= =============
</TABLE>
(a) Amounts represent primarily non-cash charges.
(b) Amounts represent primarily cash charges.
(7) OTHER MATTERS
SIGNIFICANT CUSTOMERS - During the three and nine months ended September
26, 1999, sales to Ingram Micro, Inc. accounted for approximately 17.0% and
14.0%, respectively, of consolidated sales. During the three months and
nine months ended September 27, 1998, sales to Ingram Micro, Inc. accounted
for 19.0% and 14.8%, respectively, of consolidated sales. No other single
customer accounted for more than 10% of the Company's sales for these
periods.
20
<PAGE>
FORWARD EXCHANGE CONTRACTS - The Company has commitments to sell and
purchase foreign currencies relating to forward exchange contracts in order
to hedge against future currency fluctuations.
At September 26, 1999, outstanding forward exchange sales (purchase)
contracts, which all mature in December 1999, were as follows:
<TABLE>
Contracted Spot
Currency Amount Forward Rate Rate
------------------ ------------ ------------ -------
<S> <C> <C> <C>
Australian Dollar (290,000) 0.65 0.65
British Pound 100,000 0.61 0.61
European Euro 10,420,000 0.94 0.95
Japanese Yen 590,000,000 102.57 104.02
Singapore Dollar (1,120,000) 1.70 1.71
Swiss Franc (500,000) 1.51 1.52
</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 September 26, 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.
21
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company reported sales of $356.6 million and a net loss of $78.3 million, or
$(0.29) per diluted share, for the third quarter of 1999, which included a $20.5
million restructuring charge, $51.3 million related to a deferred tax valuation
allowance and $12.7 million of other charges that were not part of the
restructuring charge, reflecting current estimates of the net realizable value
of inventory, equipment and other assets. This compares to sales of $391.8
million and a net loss of $14.8 million, or $(0.06) per diluted share, in the
third quarter of 1998. In the third quarter of 1998, the Company's net loss
included a pre-tax, non-cash special charge of $11.1 million, related to
purchased in-process technology, as part of its acquisition of Nomai S.A. In the
third quarter of 1999, the Company recorded a pre-tax restructuring charge of
$20.5 million, consisting of costs to consolidate worldwide disk manufacturing,
refocus the Clik! product platform on the newer Clik! PC Card and OEM drives and
consolidate leasehold facilities.
For the first nine months of 1999, sales were $1.1 billion with a net loss of
$124.8 million, or $(0.46) per diluted share, which included $62.4 million of
restructuring charges taken in the second and third quarters of 1999, $51.3
million related to a deferred tax valuation allowance and $19.7 million of other
charges in the second and third quarters of 1999 that were not part of the
restructuring charge. This compared to sales of $1.2 billion and a net loss of
$73.3 million, or $(0.28) per diluted share, for the first nine months of 1998.
The net loss for the nine months ended September 27, 1998 included a pre-tax,
non-cash special charge of $11.1 million, related to purchased in-process
technology, as part of its acquisition of Nomai S.A.
The Company is optimistic about achieving profitability in the fourth quarter of
1999; however, financial results in the fourth quarter will be heavily dependent
on the success of recently introduced products, recurrence of typically strong
fourth quarter sales and on the Company's ability to resolve component
constraints.
SALES
Sales for the quarter ended September 26, 1999 decreased by $35.1 million, or
9.0%, when compared to the corresponding period of 1998, primarily as a result
of discontinued Ditto drive sales, reduced 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, offset in part
by sales of recently introduced Clik! and ZipCD products. Total drive sales of
$202.5 million decreased by 6.8% as compared to the third quarter of 1998. Total
unit drive shipments for the quarter ended September 26, 1999, increased by
19.1% as compared to the third quarter of 1998. Total disk sales of $145.5
million decreased by 10.6% as compared to the third quarter of 1998. Total unit
disk shipments for the quarter ended September 26, 1999 decreased by 7.3% as
compared to the third quarter of 1998.
Sales of Zip products in the third quarter of 1999 totaled $274.1 million,
representing a decrease of 1.8% from the third quarter of 1998. Sales of Zip
products represented 76.9% of total sales for the third quarter of 1999 compared
to 71.3% in the corresponding period of 1998. Zip unit drive shipments,
including shipments by licensees, increased by 22.9% from the third quarter of
1998, while the Company's Zip unit disk shipments decreased by 5.8%. Zip unit
drive shipments increased as a result of increased demand for Zip 250 drives in
both the OEM and aftermarket channels and an increase in licensee shipments of
Zip 100 drives, offset in part by a decrease in Zip 100 drives shipped to
aftermarket channels. Sales of Zip OEM drives accounted for approximately 63% of
22
<PAGE>
total Zip drive shipments in the third quarter of 1999, compared to 53% in the
third quarter of 1998. Sales of Zip drives were adversely impacted by supply
constraints during the third quarter of 1999 relating to a shortage of an
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 be resolved in the fourth 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 affected Zip drives during the fourth quarter of 1999. The
decrease in Zip disk shipments was due primarily to a decrease in shipments of
Zip 100 disks to private label and OEM customers that was partially offset by an
increase in Zip 250 disk shipments.
Jaz product sales in the third quarter of 1999 were $66.5 million, representing
a decrease of 29.9% from the third quarter of 1998. Jaz product sales
represented 18.6% of total sales in the third quarter of 1999 compared to 24.4%
in the corresponding period of 1998. Jaz unit drive shipments decreased by 22.8%
as compared to the third quarter of 1998, while Jaz unit disk shipments
decreased by 30.7%. These decreases are a result of the maturing of the Jaz
product platform.
Clik! product sales in the third quarter of 1999 were $5.9 million, or 1.7% 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.
ZipCD product sales in the third quarter of 1999 were $8.8 million, or 2.5% of
total sales. The Company began shipping ZipCD products in limited quantities in
August 1999.
Ditto product sales in the third quarter of 1999 were $2.0 million, representing
a decrease of 85.5% from the third quarter of 1998. Ditto product sales
represented 0.6% of total sales in the third quarter of 1999 compared to 3.4% of
total sales in the corresponding period of 1998. In March 1999, the Company sold
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 of the Ditto assets agreed to purchase the Company's remaining
finished goods inventory. The Company plans to continue to sell Ditto cartridges
for a period of time ending on or before July 1, 2001.
Sales for the nine months ended September 26, 1999 decreased by $101.5 million,
or 8.5%, when compared to the corresponding period of 1998. Sales of Zip
products totaled $850.0 million, or 77.9% of total sales, representing a 2.4%
increase in sales dollars from the corresponding period of 1998. Jaz product
sales totaled $194.2 million, or 17.8% of total sales, representing a 33.6%
decrease in sales dollars from the corresponding period of 1998. Sales of Clik!
products totaled $11.7 million, or 1.1% of total sales. Sales of ZipCD products
totaled $8.8 million, or 0.8% of total sales. Ditto product sales totaled $18.2
million, or 1.7% of total sales, representing a 72.2% decrease in sales dollars
from the corresponding period of 1998.
Geographically, sales in the Americas were $238.1 million, or 66.8% of total
sales, in the third quarter of 1999, as compared to $268.2 million, or 68.5% of
total sales, in the third quarter of 1998. Sales in Europe were $86.5 million,
or 24.2% of total sales, in the third quarter of 1999, as compared to $90.6
million, or 23.1% of total sales, in the third quarter of 1998. Sales in Asia
were $32.0 million, or 9.0% of total sales, in the third quarter of 1999, as
compared to $33.0 million, or 8.4% of total sales, in the third quarter of 1998.
23
<PAGE>
For the first nine months of 1999, sales in the Americas were $720.2 million, or
66.0% of total sales, as compared to $823.8 million, or 69.0% of total sales,
for the first nine months of 1998. Sales in Europe were $271.0 million, or 24.8%
of total sales, in the first nine months of 1999, as compared to $273.1 million,
or 22.9% of total sales, for the first nine months of 1998. Sales in Asia were
$100.4 million, or 9.2% of total sales, in the first nine months of 1999, as
compared to $96.2 million, or 8.1% of total sales, in the first nine months of
1998.
GROSS MARGIN
The Company's overall gross margin percentage was 24.3% in the third quarter of
1999, as compared to 22.4% in the third quarter of 1998. Overall gross margin
percentage for the first nine months of 1999 was 23.5%, as compared to 23.8% for
the first nine months of 1998. The increase in gross margin percentage for the
third quarter of 1999, when compared to the corresponding period of 1998, was
due to increased Zip and Jaz gross margins as a result of an increased mix of
higher margin Zip 250 and Jaz 2GB products and lower overall material and
variable overhead costs during the third quarter of 1999. These improvements
were partially offset by increased Clik! manufacturing costs during start up, an
increase in the percentage of Zip drives shipped to the OEM channel during the
third quarter of 1999, which generally provides lower gross margins than sales
through other channels. Additionally, during the third quarter of 1999, the
Company recorded reserves for Ditto, Clik! and other products totaling $11.0
million.
Future gross margin percentage will be impacted by the mix between retail sales
and OEM drive sales, as OEM sales generally provide lower gross margins than
sales through other channels, and by the sales mix of Zip 100 and Zip 250
product. Gross margins for the remainder of 1999 will also depend on sales
volumes of Zip and Jaz disks, which generate significantly higher gross margins
than the corresponding drives and on the mix between disks and drives and
between Zip, Jaz, Clik! and ZipCD products.
SEGMENT PRODUCT PROFIT MARGIN (Including Restructuring Charges)
Zip segment product profit margin increased by $19.0 million, or 65.5%, in the
third quarter of 1999 when compared to the corresponding period of 1998
primarily due to an increased mix of higher margin Zip 250 products and lower
overall material and variable overhead costs. These third quarter improvements
were partially offset by a decrease in shipments of higher margin Zip disks and
an increase in sales of lower margin Zip OEM drives. Jaz segment product profit
margin increased by $4.1 million, or 64.7%, in the third quarter of 1999 when
compared to the corresponding period of 1998 due to decreased material,
manufacturing and operating costs and an increased mix of higher margin Jaz 2GB
products. Clik! segment product loss increased to $31.2 million in the third
quarter of 1999 from a product loss of $8.4 million in the corresponding period
of 1998 due to a combination of a restructuring charge of $11.5 million, sales
and marketing product launch costs, manufacturing startup costs and reserves for
the valuation of Clik! excess fixed asset capacity recorded during the third
quarter of 1999. The ZipCD segment had a product loss of $3.3 million for the
third quarter of 1999 due primarily to a $0.6 million restructuring charge taken
in the third quarter and product development and launch costs incurred as the
Company began shipping ZipCD products in limited quantities in August 1999. The
Ditto segment product loss increased to $7.3 million in the third quarter of
1999 from a product loss of $2.7 million in the corresponding period of 1998 due
to a decrease in volumes of Ditto products sold in the third quarter of 1999 and
inventory valuation reserves recorded in the quarter.
24
<PAGE>
For the first nine months of 1999, Zip segment product profit margin increased
by $35.6 million, or 36.9%, when compared to the corresponding period of 1998
due to a combination of an increase in volumes of Zip drives and disks, lower
overall material and variable overhead costs and an increased mix of higher
margin Zip 250 products that were partially offset by price reductions during
the second half of 1998 and an increase in sales of lower margin Zip OEM drives.
Jaz segment product loss increased to $24.3 million in the first nine months of
1999 from a product loss of $17.6 million in the corresponding period of 1998
due primarily to a second quarter 1999 restructuring charge of $27.0 million and
a decrease in volumes of Jaz disk and drive products shipped during the first
nine months of 1999, offset in part by decreased material and manufacturing
costs and an increased mix of higher margin Jaz 2GB products. Clik! segment
product loss increased to $61.0 million for the first nine months of 1999 from a
product loss of $26.6 million in the corresponding period of 1998 due primarily
to a third quarter restructuring charge of $11.5 million, sales and marketing
product launch costs, manufacturing startup costs and reserves recorded during
1999 for the valuation of Clik! excess fixed asset capacity. The ZipCD segment
had a product loss of $6.1 million for the first nine months of 1999 due
primarily to product development and launch costs incurred as the Company began
shipping ZipCD products in limited quantities in August 1999. Ditto segment
product loss increased to $17.2 million in the first nine months of 1999 from a
product loss of $9.7 million in the corresponding period of 1998 due to a second
quarter 1999 restructuring charge of $5.6 million and a decrease in volumes of
Ditto drive products shipped in the first nine months of 1999 and inventory
valuation reserves recorded in the third quarter.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased by $0.8 million in the
third quarter of 1999 when compared to the corresponding period of 1998, and
increased as a percentage of sales to 20.1% for the third quarter, from 18.5% in
the corresponding period of 1998, primarily as a result of a decrease in sales
during the third quarter of 1999.
Selling, general and administrative expenses decreased by $80.4 million in the
first nine months of 1999 and decreased as a percentage of sales to 20.6%, from
25.6% in the corresponding period in 1998. Included in selling, general and
administrative expenses in 1998 was a special pre-tax charge of $9.4 million
representing expenses associated with cost reduction measures and substantial
marketing and advertising program expenditures which were reduced in 1999.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the third quarter and first nine months of
1999 decreased by $5.9 million, or 25.0%, and $15.6 million, or 20.2%,
respectively, when compared to the third quarter and first nine months of 1998,
and decreased as a percentage of sales to 5.0% and 5.6%, respectively, in the
third quarter and first nine months of 1999, from 6.1% and 6.5%, respectively,
in the third quarter and first nine months of 1998. The decrease in research and
development expenses for the third quarter and first nine months of 1999 was due
primarily to decreased spending for development of Jaz and recently introduced
Clik! products, which was partially offset by increased spending for Zip and
ZipCD and other new product development in the third quarter and first nine
months of 1999.
25
<PAGE>
RESTRUCTURING CHARGES
During the third and nine months ended September 26, 1999, the Company recorded
pre-tax restructuring charges of $20.5 and $62.4 million, respectively, as a
result of steps the Company is taking to organize along functional lines,
consolidate manufacturing and other facilities, discontinue certain products and
refocus the Clik! product platform on the newer Clik! PC Card and OEM drives.
During the quarter ended September 26, 1999, the Company recorded a pre-tax
restructuring charge of $20.5 million as a result of restructuring actions
initiated to consolidate worldwide disk manufacturing, refocus the Clik! product
platform on the newer Clik! PC Card and OEM drives and consolidate leasehold
facilities. The total restructuring charges in connection with these actions are
expected to be approximately $28 million. However, a portion of these charges
will not be recorded until the fourth quarter because employee notifications had
not taken place by September 26, 1999, and certain specific plans associated
with leasehold consolidations had not been finalized as required by Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity." This restructuring
charge included reserves of $6.3 million relating to certain assets and exit
costs such as cancellation fees associated with the cessation of manufacturing
in Avranches, France; $11.5 million of inventory and fixed asset reserves
associated with the older Clik! products; and $2.7 million for write-offs of
intangibles and other miscellaneous charges. This restructuring charge consisted
of cash and non-cash charges of approximately $6 million and $15 million,
respectively.
In connection with the Company's third quarter restructuring actions, the
Company expects a workforce reduction of approximately 140 regular and temporary
employees, consisting primarily of operations employees in Avranches, France and
product development employees in Longmont, Colorado. None of these employees had
been notified or terminated at September 26, 1999. The Company anticipates that
the implementation of the restructuring charge will be substantially complete by
the end of March 2000, with the remainder being completed in the second and
third quarters of 2000. The restructuring charge was included in the condensed,
consolidated statements of operations under the caption "Restructuring
charge(s)" for the three- and nine-month periods ended September 26, 1999. There
were not any indications of permanent impairment of the assets prior to the
restructuring actions.
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 was
taking to organize along functional lines. These actions included the exit of
facilities, headcount reductions, the discontinuance of certain products and
development projects and consolidation of the Company's magnetic technology
expertise at its headquarters in Roy, Utah. The actions included closing the
Company's facilities in Milpitas, California and San Diego, California. The
restructuring charge was comprised of $20.2 million for 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 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 operations in France and Scotland. This restructuring charge
consisted of cash and non-cash charges of approximately $18 million and $24
million, respectively. The restructuring charge was included in the condensed,
consolidated statements of operations under the caption "Restructuring charges"
for the nine-month period ended September 26, 1999. There were not any
indications of permanent impairment of the assets prior to the restructuring
actions.
26
<PAGE>
In connection with the Company's second quarter restructuring actions, the
Company has terminated 466 regular and temporary employees, consisting primarily
of operations and product development employees located in Milpitas, San Diego
and Roy. The Company expects that the implementation of the second quarter
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
Interest income of $1.4 million and $3.7 million in the third quarter and first
nine months of 1999, respectively, increased from $0.8 million and $3.4 million
in the third quarter and first nine months of 1998, respectively. Higher average
cash balances during the third quarter and first nine months of 1999 resulted in
an increase in interest income when compared to the corresponding periods of
1998.
Interest expense of $1.5 million and $5.8 million in the third quarter and first
nine months of 1999, respectively, decreased from $3.6 million and $7.0 million
in the third quarter and first nine months of 1998, respectively. In July 1998,
the Company entered into a debt agreement with Idanta Partners, Ltd. and another
entity affiliated with David J. Dunn, Chairman of the Company's Board of
Directors, under which the Company borrowed $40 million pursuant to a series of
three notes. The Company repaid the principal and interest associated with these
notes upon their maturity on March 31, 1999. As a consequence, interest expense
decreased in 1999 when compared with the corresponding periods of 1998.
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 three and nine months ended September 26, 1999, the Company recorded an
income tax provision of $52.4 and $27.3 million, respectively. The provisions
differ from the benefits computed by applying the Federal statutory rate of 35%
to the pre-tax losses incurred for the three and nine months ended September 26,
1999 by $61.4 million, for each of the periods, primarily due to an increase in
the deferred tax asset valuation allowance and permanent items which are not
deductible for Federal income taxes, which were partially offset by earnings
permanently invested in non-U.S. operations and state income taxes.
As of September 26, 1999, the Company had approximately $18 million of deferred
tax assets related to foreign net operating loss carryovers, which reflected the
benefit of approximately $43 million in future tax deductions, for which the
Company had established a valuation allowance. These carryovers expire at
various dates beginning in 2004.
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Additionally, as of September 26, 1999, the Company had approximately $72
million of deferred tax assets net of deferred tax liabilities, which reflected
the benefit of approximately $185 million in future domestic tax deductions. In
light of the net operating loss in the third quarter of 1999 and the cumulative
net operating losses for 1999 and 1998, in the third quarter of 1999, the
Company fully reserved its net deferred tax assets previously recognized at the
end of the second quarter of 1999 and those recognized during the third quarter
of 1999. These net deferred tax assets relate to temporary differences, tax
credit carry forwards and net operating loss carry forwards. This valuation
allowance was recorded in accordance with SFAS 109, which requires that a
valuation allowance be established when there is significant uncertainty as to
the realizability of the deferred tax assets.
During the third quarter of 1999, the Company increased its deferred tax asset
valuation allowance by approximately $81 million. The Company evaluates the
realizability of its deferred tax assets on a quarterly basis. If the deferred
tax assets are realized in the future, or if a portion or all of the valuation
allowance is no longer deemed to be necessary, the related tax benefits will
reduce future income tax provisions.
SEASONALITY
The Company's Zip and ZipCD 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
products 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 September 26, 1999, the Company had cash and cash equivalents of $118.1
million, temporary investments of $14.7 million, working capital of $147.4
million and a ratio of current assets to current liabilities of 1.4 to 1. During
the first nine months of 1999, the Company generated a total of $27.8 million of
cash and cash equivalents. Operating activities generated $132.8 million in cash
for the first nine months of 1999 compared with using $137.2 million in cash in
the first nine months of 1998. The cash generated from operations in the first
nine months of 1999 was primarily due to a combination of non-cash adjustments,
a reduction in inventory, accounts receivable and income taxes receivable and an
increase in other current liabilities. The primary uses of cash during the first
nine months of 1999 were the repayment upon maturity of the Idanta senior
subordinated notes, payments on capitalized lease obligations and the purchase
of property, plant and equipment.
Net accounts receivable decreased by $46.3 million, due primarily to the timing
of sales and collections during the respective periods The increase of $31.1
million in other current liabilities was due to a combination of accrued
restructuring reserves as a result of restructuring charges taken during the
second and third quarters of 1999, an increase in accrued advertising and
various other accrued liabilities that were partially offset by a decrease in
deferred revenue and accrued payroll and related liabilities. The decrease of
$25.0 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 and third quarters of 1999. The decrease of $9.7
million in income taxes receivable was due primarily to the Company receiving
income tax refunds of $32.0 million during the second quarter of 1999 that were
partially offset by the creation of an additional receivable of $22.3 million
comprised primarily of the tax benefit of the Company's current year net
operating loss carryback. These sources of cash were partially offset by a $3.9
million decrease in accounts payable, due primarily to timing of inventory
receipts and related payments to vendors.
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The Company used $68.8 million of cash in investing activities during the first
nine months of 1999, primarily in the purchase of property, plant and equipment
and temporary investments and the purchase of certain assets from SyQuest,
including intellectual property, inventory and fixed assets. Cash used by
financing activities totaled $36.2 million during the first nine months of 1999
and included $44.3 million in repayment upon maturity of the Idanta senior
subordinated notes and payments on capitalized lease obligations that were
partially offset by $4.6 million of proceeds from the sale of common stock
pursuant to stock options and $3.5 million of proceeds from the issuance of
notes payable and capitalized lease obligations during the first nine months 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 Senior Secured Credit
Facility, the most recent of which was entered into on October 14, 1999, (the
"Credit Facility"). As a result of the most recent amendment, the Credit
Facility was reduced to $75 million and certain financial covenants were amended
to be effective for the period ended September 26, 1999. The Credit Facility
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 the
Federal funds rate plus 2.75%, or at LIBOR plus 3.25%. There were no borrowings
outstanding on the Credit Facility at September 26, 1999. Borrowing availability
under the Credit Facility is based on an agreed upon advance rate on receivables
and inventory not to exceed $75 million. Total availability under the Credit
Facility at October 14, 1999 was $75 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. 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.
The current and long-term portions of capitalized lease obligations and notes
payable at September 26, 1999 were $4.5 million and $3.7 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.
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The Company had $45.5 million of convertible subordinated notes outstanding at
September 26, 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, 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. 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 the 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 future cash flow
from operations and 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
restructuring actions, 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.
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 SFAS 133 to have a material
impact on the Company's results of operations, financial position or liquidity.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The Company's future operating results will depend in large part on the success
of its Zip, Jaz, Clik! and ZipCD products in the market. Although the Company
believes there is 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 its 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 "it" drive (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
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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.
The Company's business strategy is substantially dependent on maximizing sales
of its proprietary Zip and Jaz disks, which generate significantly higher
margins than the related drives. If this strategy is not successful, either
because the Company does not establish a sufficiently large installed base of
Zip and Jaz drives, because the sales mix between disks and drives is below
levels anticipated by the Company, because another party succeeds in producing
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 nine 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 nine 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.
The Company's Jaz products are a maturing product platform and the Company does
not anticipate sales growth in the future for this product platform as a result
of replacement products entering the market, including products introduced by
the Company, and changing customer requirements. The Company took actions
earlier in the year to better position the Jaz product platform for future
profitability, including the cancellation of a Jaz development project and
downsizing of Jaz facilities and workforce. The Company anticipates introducing
additional Jaz product interfaces and enhancements to support the needs of its
customers. The process of managing a mature product and maximizing its
profitability is different than managing a growing product platform. Managing a
maturing product platform includes maintaining the size of the product's
infrastructure and monitoring vendor commitments and inventory levels to prevent
inventory write-offs and cancellation costs. There can be no assurance that the
Company will be successful in managing the maturing Jaz product platform and in
maximizing its profitability in the future.
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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 targeted to digital camera and other
portable consumer electronics manufacturers in addition to the personal computer
markets. The Company does not have prior experience in consumer electronic
channels and, accordingly, there are additional risks that the Clik! products
will not achieve significant market presence or otherwise be successful. The
Company has introduced four different models of the Clik! drive in addition to a
Clik! OEM drive, which will first be shipped in the fourth quarter of 1999.
Three of these models, the Clik! Drive for Digital Cameras, the Clik! Drive Plus
and the Clik! Drive for Mobile Computers, which began shipping in limited
quantities in December 1998, were marketed as add-on storage solutions to
digital cameras that use various formats of flash memory. The Company began
shipping the fourth model, the Clik! PC Card drive, in limited quantities in
June 1999, and is currently marketing this product to notebook and sub-notebook
computer users. The impact of the Clik! PC Card drive on the Company's other
storage solutions has not yet been determined and may have an adverse impact on
future sales. During the third quarter of 1999, the Company recorded a
restructuring charge that included costs to refocus the Clik! product platform
on the newer Clik! PC Card and OEM drives. 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, and other portable consumer electronic manufacturers. To date, no
digital camera or other consumer electronic product incorporating Clik! as a
built-in drive, which we refer to as an OEM drive, has been introduced or
marketed; however, the Agfa Gevaert Group, a manufacturer of digital cameras and
other digital imaging products and systems has begun taking orders for its
digital camera with a Clik! built-in drive.
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 initial
entry into the optical storage market. Market acceptance of the ZipCD product,
which began shipping in limited quantities in August 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 to
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 aftermarket 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.
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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 also include 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, 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.
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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. For example, the
Company's Zip drive shipments, revenue and profitability were negatively
impacted by an ASIC chip shortage during the second and third quarters of 1999.
The ASIC chip is supplied by a sole source supplier. Moreover, difficulties in
obtaining sufficient components may cause the Company to modify the design of
its products to use a more readily available component, and such design
modifications may result in product performance problems. Any or all of these
problems could in turn result in the loss of customers, provide an opportunity
for competing products to achieve market acceptance and otherwise adversely
affect the Company's business and financial results.
The Company is experiencing increased difficulties in retaining employees due in
part to the Company's financial performance and recent restructuring actions.
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 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.
Effective August 31, 1999, Jodie K. Glore resigned as President and Chief
Executive Officer. David J. Dunn, Chairman of the Board of Directors, has
assumed the role of Chief Executive Officer while the Company conducts a search
for a Chief Executive Officer. 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 which began
in early 1999. There can be no assurance that the Company will be successful in
attracting and/or retaining key employees, that the transition to a functional
organization will not result in short-term disruptions or that the transition
will eventually produce the desired results.
During the second and third quarters of 1999, the Company announced plans to
consolidate manufacturing and other facilities, discontinue certain products and
development projects, organize along functional lines and to refocus the Clik!
product platform on the newer Clik! PC Card and OEM drives. These actions
specifically included closing the Company's facilities in Milpitas, California
and San Diego, California and ceasing manufacturing operations in Avranches,
France. There can be no assurance that the Company will be successful in closing
the facilities in the U.S. and ceasing manufacturing operations in France
without incurring significant legal costs or other costs that have not been
accrued for in the restructuring charges. Management expects that these
restructuring actions will reduce future operating and manufacturing expenses.
However, there can be no assurance that the Company will be successful in its
efforts to reduce expenses in future periods.
The Company has implemented 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.
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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. 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.
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
or 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 third 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.
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).
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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 Malaysian government 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 September 26,
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.
36
<PAGE>
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. As more fully discussed below,
the Company believes it is now substantially complete with its Year 2000
efforts. Follow-up testing and implementation of contingency plans will continue
through year end.
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. The Company has
recently introduced ZipCD, an optical CD-RW drive. This drive is manufactured
for the Company by a third party who has reported that the drive is Year 2000
ready.
The Company has completed the review and testing of the software products
developed by the Company. 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 Company's tested software
utility tools and drivers have been found to be Year 2000 ready, except for the
Ditto 16-bit software applications intended for DOS and Windows 3.1 users. No
solution is presently available for the 16-bit software version of the Ditto
software applications. The 16-bit version of the Ditto software was provided by
a third party who no longer supports the 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.
The CopyMachine and Findit software applications have now been determined to be
Year 2000 ready for Windows 3.x and higher, so long as the underlying default
setting in the Windows operating system is set to a four digit date field. The
Company is providing instructions on its Year 2000 web site as to the procedures
to follow to re-set the date field in the Windows operating system. Due to the
legacy nature of the Bernoulli product, the Company will not test software
provided with the Bernoulli drive; however, the Company did internally test the
latest software and drivers released with the Bernoulli drive, Iomega Tools ver.
3.1, which has been determined to be Year 2000 ready. 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.
37
<PAGE>
The Company has completed its review of Nomai branded hardware drive products.
Nomai marketed a rigid magnetic media drive and an optical CD-RW drive. The
rigid magnetic media drive was manufactured by Nomai. A Nomai engineer has
reviewed and determined that the rigid magnetic media drive is Year 2000 ready.
The optical CD-RW drive sold by Nomai was manufactured by third parties. NSTL
tested one version of the Nomai branded optical CD-RW drive and determined it to
be Year 2000 ready. Software provided with Nomai branded optical CD-RW drive was
developed by a third party, who 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. The Company
has not tested, and is not responsible for, third party hardware and software
products which may have been released or bundled with Company products.
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 has obtained Year
2000 compliance information or, where applicable, upgrades/solutions from the
providers of such hardware and applications software. The Company will continue
to 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.
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
certain follow-up testing and implementation efforts through the end of the year
as deemed appropriate. 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.
38
<PAGE>
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 received Year 2000 readiness statements
from its major third-party suppliers which in general indicate Year 2000
readiness, the Company conducted a questionnaire/review with each major supplier
and vendor to review their Year 2000 readiness. The Company is now substantially
complete with the individual reviews of its major suppliers and vendors; with
the exception of several recently-added suppliers who are being reviewed in the
fourth quarter of 1999.
COSTS. Through the third quarter of 1999, the Company incurred approximately
$39.5 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 $2
million in the final quarter 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.
CONTINGENCY PLANS. The Company has prepared, and continues to revise and update,
contingency plans for critical areas to address Year 2000 failures if remedial
efforts are not fully successful. The Company's contingency plans address 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 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 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 worldwide which should
minimize to some degree the adverse impact if any one manufacturing site is
adversely affected. The Company's contingency plans have been based, in part, on
the results of third-party supplier audits. The Company anticipates the need to
revise and update its contingency plans from time to time as additional
information becomes available.
39
<PAGE>
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),
or third party products bundled with the Company's products, 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.
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".
40
<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 and Quarterly Reports on Form 10-Q for the
periods ended March 28, 1999 and June 27, 1999, 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 were related to an alleged arrangement between
Nomai, S.A. and Hi-Val for Hi-Val to distribute Nomai's XHD cartridges.
Plaintiff sought to recover $26 million in alleged, unspecified damages. On
October 18, 1999, the parties engaged in mediation and, based on such mediation,
expects to resolve the matter with a cash payment by Iomega that is immaterial
to the Company's results of operations and financial condition.
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 June 27, 1999, on May 27, 1998, Scott D. Ora filed a complaint
against the Company and other parties. The action, captioned Ora v. Iomega
Corporation, et al., was filed in Superior Court of the State of California for
the County of Los Angeles and alleged that the Company and certain of its former
officers violated certain federal and state securities laws and alleged that Kim
B. Edwards, former Chief Executive Officer and director of the Company, breached
his duties as a director of the Company. The Company successfully removed the
action to the United States District Court for the Central District of
California. On February 9, 1999, the Court dismissed five of the complaint's
original seven causes of action. On August 18, 1999, the Court dismissed the
remaining two causes of action and gave Ora the opportunity to file an amended
complaint with respect to those two counts. On October 8, 1999, the Court also
granted the Company's motion to stay discovery until the Court has ruled on the
sufficiency of any amended pleading. On November 1, 1999, Ora filed an Amended
Complaint repleading the two causes of action dismissed on August 18, and
bringing new related conspiracy causes of action. Management believes that the
named defendants have highly meritorious defenses to the allegations made in
this lawsuit and intends to defend vigorously against these allegations.
As previously disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, on September 10, 1998, a purported class action
lawsuit, Rinaldi et al. v. Iomega Corporation, was filed against the Company in
the Superior Court of Delaware, New Castle County. The suit alleges that a
defect in the Company's Zip drives causes an abnormal clicking noise that may
indicate damage to the Zip drive or disks. The plaintiffs sought relief pursuant
to claims of breach of warranty, violation of the Delaware Consumer Fraud Act,
and negligent design, manufacture and failure to warn. On September 3, 1999, the
Court dismissed the claims of breach of warranty and violation of the Consumer
Fraud Act, granting the plaintiffs the opportunity to amend the latter claim.
The parties are proceeding with discovery relating to the remaining claims. The
Company intends to vigorously defend against this suit.
41
<PAGE>
As previously disclosed in the Company's Quarterly Report on Form 10-Q for the
period ended June 27, 1999, 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. The Court has not set a trial date. On September 17, 1999,
the Company also initiated litigation against Castlewood in the Paris District
Court based on claims of copyright and patent infringement. Additionally, on
September 20, 1999, the Company initiated litigation against Motek, a French
retailer of Castlewood's products, in the Paris District Court.
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 third quarter of 1999
that were not registered under the Securities Act of 1933.
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. The Company filed a current report on Form 8-K dated
August 19, 1999 incorporating under Item 5 (Other Events) a press release
issued by the Company on August 19, 1999 entitled "Iomega Chief Executive
Resigns."
42
<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/ David J. Dunn
-----------------------
Dated: November 9, 1999 David J. Dunn
Chairman and Chief Executive
Officer
/s/ Philip G. Husby
-----------------------
Dated: November 9, 1999 Philip G. Husby
Senior Vice President, Finance
and Chief Financial Officer
43
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report on Form 10-Q:
Exhibit No. Description
10.13 (i) Amendment No. 3 to Credit Agreement, dated October 14,
1999.
27 Financial Data Schedule (only filed as part of electronic copy).
44
[Conformed Copy]
AMENDMENT NO. 3 TO CREDIT AGREEMENT
AMENDMENT dated as of October 14, 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 and Amendment No. 2 dated as of June 15, 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 reduce commitments and increase
pricing, and decrease the level required under the minimum consolidated tangible
net worth and minimum consolidated EBITDA covenants, all as more fully set forth
below;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Defined Terms; References. Unless otherwise specifically defined
herein, each term used herein which is defined in the Credit Agreement has the
meaning assigned to such term in the Credit Agreement. Each reference to
"hereof", "hereunder", "herein" and "hereby" and each other similar reference
and each reference to "this Agreement" and each other similar reference
contained in the Credit Agreement shall, after this Amendment becomes effective,
refer to the Credit Agreement as amended hereby.
SECTION 2. Amendment of Section 1.01; Deletion of Pricing Schedule. (a) The
definition of "Consolidated EBITDA" in Section 1.01 of the Credit Agreement is
amended to replace "and (vi)" with ", (vi)" and to add before the period at the
end thereof the following:
and (vii) the Permitted Third and Fourth 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 "(iv)" with
"(v)" and to add after "(iii) the Permitted Second Quarter 1999 Addback" the
following:
<PAGE>
, (iv) the Permitted Third and Fourth Quarter 1999
Addback
(c) The definitions of "Euro-Dollar Margin" and "Pricing Schedule" in
Section 1.01 of the Credit Agreement, and the Pricing Schedule itself, are
deleted.
(d) Section 1.01 of the Credit Agreement is further amended to insert the
following definition in appropriate alphabetical order:
"Permitted Third and Fourth Quarter 1999 Addback" means special
charges (not including the writeoff of deferred taxes) taken in the third
and fourth Fiscal Quarters of 1999 to the extent such special charges in
the third Fiscal Quarter do not exceed $22,000,000 and in the fourth Fiscal
Quarter do not exceed $8,000,000 (and to the extent that such special
charges exceed such amounts then such special charges will be deemed to
equal such amounts), so long as the cash portion of all such special
charges does not exceed $14,000,000.
Section 3. Amendment of Section 2.04. In Section 2.04(a) of the Credit
Agreement, "(x) the Base Rate Margin (as determined in accordance with the
Pricing Schedule" is replaced with "(x) 2.25%", and "the sum of 2% plus the Base
Rate Margin for such day" is replaced with "the sum of 4.25%". In Section
2.04(b) of the Credit Agreement, "the sum of the Euro-Dollar Margin for such
day" is replaced with "the sum of 3.25%", and the definition of "Euro-Dollar
Margin" is deleted. In Section 2.04(c) of the Credit Agreement, "the sum of 2%
plus the Euro-Dollar Margin for such day" is replaced with "the sum of 5.25%".
Section 4. Amendment of Section 2.06. In Section 2.06(a) of the Credit
Agreement, "at the Commitment Fee Rate (determined daily in accordance with the
Pricing Schedule)" is replaced with "of .625%". In Section 2.06(b) of the Credit
Agreement, "in accordance with the Pricing Schedule" is deleted, and the
following paragraph is added at the end thereof:
"Utilization Fee Rate" means (i) .500% on any day on which Usage
exceeds 66%, and (ii) .250% on any day when Usage exceeds 33% but is equal to or
less than 66%.
Section 5. Amendment of Section 5.11. Section 5.11 of the Credit Agreement
is amended to read in its entirety as follows:
<PAGE>
Consolidated Tangible Net Worth will at no time on or prior to September
30, 1999 be less than $335,000,000, and will at no time thereafter be less than
$350,000,000. For purposes of this Section 5.11, Consolidated Tangible Net Worth
shall be calculated without giving effect to the writeoff of any deferred taxes
on or after September 30, 1999.
Section 6. Amendment of Section 5.13. (a) The chart in Section 5.13 of the
Credit Agreement is amended to replace "$120,000,000" with "$85,000,000"
opposite September 30, 1999, "$85,000,000" opposite December 31, 1999,
"$75,000,000" opposite March 31, 2000 and "$85,000,000" opposite June 30, 2000.
(b) Section 5.13 of the Credit Agreement is further amended by adding the
following sentence at the end thereof:
For purposes of this Section 5.13, Consolidated EBITDA shall be calculated
without giving effect to the writeoff of any deferred taxes on or after
September 30, 1999.
Section 7. Amendment of Section 5.14. The chart in Section 5.14 of the
Credit Agreement is amended to replace "60" with "70" opposite each of December
31, 1999, March 31, 2000 and June 30, 2000.
Section 8. Reduction of Commitments. On the date on which the conditions to
effectiveness set forth in Section 12 below have been satisfied, the aggregate
amount of the Commitments shall automatically and ratably be reduced to
$75,000,000.
Section 9. 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 10. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
Section 11. 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.
<PAGE>
Section 12. 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 October 12, 1999, an amendment fee equal to .25% of such Bank's
Commitment (as reduced pursuant to Section 8 above), 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/ Tracy M. Welch
---------------------
Name: Tracy M. Welch
Title: Treasurer
CITIBANK, N.A.
By: /s/ J. Robert Cotton
---------------------
Name: J. Robert Cotton
Title: Vice President
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK
By: /s/ Unn Boucher
---------------------
Name: Unn Boucher
Title: Vice President
FLEET NATIONAL BANK
By:
---------------------
Name:
Title:
<PAGE>
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS BANK
By:
---------------------
Name:
Title:
FIRST SECURITY BANK, N.A.
By: /s/ Taft G. Meyer
---------------------
Name: Taft G. Meyer
Title: Vice President
KEYBANK NATIONAL ASSOCIATION
By: /s/ Thomas A. Crandell
---------------------
Name: Thomas A. Crandell
Title: Vice President
ABN AMRO BANK N.V.
By: /s/ Lee-Lee Miao
---------------------
Name: Lee-Lee Miao
Title: Group Vice President
By: /s/ Paul S. Faust
---------------------
Name: Paul S. Faust
Title: Vice President
<PAGE>
THE SUMITOMO TRUST & BANKING
CO., LTD.
By: /s/ Stephen A. Stratico
------------------------
Name: Stephen A. Stratico
Title: Vice President
THE NORTHERN TRUST COMPANY
By: /s/ Patrick J. Connelly
--------------------------
Name: Patrick J. Connelly
Title: Vice President
THE CIT GROUP/BUSINESS
CREDIT, INC.
By:
---------------------
Name:
Title:
UNION BANK OF CALIFORNIA, N.A.
By:
---------------------
Name:
Title:
<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. CERTAIN RECLASSIFICATION HAVE BEEN MADE IN PRIOR
PERIOD'S AMOUNTS TO CONFORM TO THE CURRENT PERIOD'S PRESENTATION.
</LEGEND>
<CIK> 0000352789
<NAME> IOMEGA CORPORATION
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUN-27-1999 JAN-1-1999
<PERIOD-END> SEP-26-1999 SEP-26-1999
<CASH> 118,106 118,106
<SECURITIES> 14,695 14,695
<RECEIVABLES> 239,108 239,108
<ALLOWANCES> 51,133 51,133
<INVENTORY> 132,136 132,136
<CURRENT-ASSETS> 498,138 498,138
<PP&E> 387,565 387,565
<DEPRECIATION> 228,494 228,494
<TOTAL-ASSETS> 697,838 697,838
<CURRENT-LIABILITIES> 350,764 350,764
<BONDS> 45,505 45,505
0 0
0 0
<COMMON> 301,041 301,041
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 697,838 697,838
<SALES> 356,625 1,091,618
<TOTAL-REVENUES> 365,625 1,091,618
<CGS> 269,976 835,472
<TOTAL-COSTS> 380,019 1,183,991
<OTHER-EXPENSES> 2,539 3,030
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,489 5,757
<INCOME-PRETAX> (25,995) (97,507)
<INCOME-TAX> 52,351 27,323
<INCOME-CONTINUING> (78,346) (124,830)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (78,346) (124,830)
<EPS-BASIC> (0.29) (0.46)
<EPS-DILUTED> (0.29) (0.46)
</TABLE>
