UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
1-12333
(Commission file number)
Iomega Corporation
(Exact name of registrant as specified in its charter)
Delaware 86-0385884
(State of Incorporation) (IRS employer identification number)
1821 West Iomega Way, Roy, UT 84067
(Address of principal executive offices) (ZIP Code)
(801) 778-1000
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------------ -----------------------------------------
Common Stock, par value
$.03-1/3 per share New York Stock Exchange
Rights to Purchase Series
C Junior Participating
Preferred Stock, $0.01
par value per share New York Stock Exchange
6-3/4% Convertible
Subordinated Notes due 2001 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No _______
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.____
The aggregate market value of Common Stock held by non-affiliates of
the registrant at January 31, 1999, was $1,702,661,625, based upon the last
reported sales price of the Common Stock as reported by the New York Stock
Exchange. The number of shares of the registrant's Common Stock outstanding at
January 31, 1999, was 268,274,768.
Documents incorporated by reference:
o Specifically identified portions of the Company's Annual Report to
Stockholders for the year ended December 31, 1998, into Part I and
Part II of Form 10-K.
o Specifically identified portions of the Company's Definitive Proxy
Statement for its 1999 annual meeting of stockholders into Part
III of Form 10-K .
<PAGE>
PART I
This Annual Report on Form 10-K contains a number of forward-looking statements,
including, without limitation, information with respect to Iomega(1)
Corporation's ("Iomega" or the "Company") plans to establish and maintain
original equipment manufacturer ("OEM") relationships and license its Zip(R),
Jaz(R) and Clik!(TM) technologies to third parties, the Company's manufacturing
strategies, cost control and cost-reduction initiatives, relationships with
third parties, the availability of key components, current and future product
development projects, including the anticipated availability of new products
expected to be shipped in 1999, including, without limitation, a Clik! drive
designed to fit into a PCMCIA slot for slimline notebook computers and an
internal Zip 250MB drive, the expectation that the first cameras with built-in
Clik! drives will reach the market during 1999, anticipated products to be
engineered, manufactured or marketed in 1999 by third parties under licensing
arrangements, efforts to protect its intellectual property rights, the possible
effects of another party succeeding in producing and selling Zip-, Jaz- or
Clik!-compatible disks without infringing or violating the Company's
intellectual property rights, the possible effects of adverse outcomes in
litigation or in resolutions of infringement claims asserted by third parties,
the expected decline in first quarter revenue as compared to fourth quarter
revenue and the expected results of operations for the first quarter of 1999.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes", "anticipates", "plans", "expects",
"intends" and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause actual
events or the Company's actual results to differ materially from those indicated
by such forwarding-looking statements. These factors include, without
limitation, market acceptance of, and demand for, the Company's drive and
removable disk products, manufacturing issues, including availability of certain
key components of the Iomega Zip, Jaz and Clik! drives and disks, sales mix
between disks and drives, sales mix of OEM drive sales versus retail and
distribution sales, product development delays, quality issues, the Company's
success in filling a number of key management vacancies, including the
appointment of a new Chief Financial Officer and a new head of the global
Product, Sales and Marketing function, intellectual property rights, the outcome
of litigation described in Part I, Item 3 of this Annual Report on Form 10-K and
the other factors set forth under the captions "Factors Affecting Future
Operating Results", "Year 2000 Readiness" and "Disclosures About Market Risk"
included under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Part II of this Annual Report on Form 10-K.
ITEM 1. BUSINESS:
The Company designs, manufactures and markets innovative personal and
professional storage solutions, based on removable-media technology, for users
of personal computers and consumer electronics devices. The Company's primary
data storage solutions include disk drives and disks marketed under the
trademarks Zip, Jaz and Clik!. The Company's Zip and Jaz storage systems are
designed to provide users with the benefits of high capacity and rapid access
generally associated with hard disk drives and the benefits of media storage
generally associated with floppy disk drives and disks, including expandable
storage capacity and data transportability, management and security. The
Company's Clik! storage systems are designed to provide a miniaturized
removable-media storage solution for use in notebook computers and a variety of
hand-held electronic devices.
- --------------------------
(1) Iomega, Zip, Jaz, Bernoulli and the stylized "i" logo are trademarks of
Iomega Corporation registered in the United States and certain other countries;
Clik!, ZipPlus, Ditto, Ditto Max, n hand, Zip Built-In, AutoDetect and RecordIt
are trademarks of Iomega Corporation. All other products and brand names
mentioned are the property of their respective owners.
<PAGE>
Iomega Storage Solutions
The Company believes its Zip, Jaz and Clik! disk drives and disks
address key information storage and management needs of personal computer users
and various electronic device users by providing affordable, easy-to-use storage
solutions that combine the high capacity and rapid access of hard disk drives
with the benefits of media removability generally associated with floppy disk
drives. The Company's Clik! disk drives and disks provide an affordable storage
solution for portable digital products from digital cameras and handheld
personal computers ("HPCs") to notebook computers. Specifically, the Company's
Zip, Jaz and Clik! products are designed to offer the following benefits to
personal computer users:
Expandable Storage Capacity
As personal computer users and other electronic device users (in the case of
Clik!) are increasingly forced to expand their primary storage capacity
(generally provided by the hard disk drive incorporated in the computer or flash
memory in the case of consumer electronic devices), Zip, Jaz and Clik! provide
an easy and efficient way to do so. The Zip, Jaz and Clik! drives can be easily
connected or installed and offer unlimited additional storage capacity, in
increments of 40 megabytes ("MBs") in the case of Clik!, 100 or 250MBs in the
case of Zip and 1 or 2 gigabytes ("GBs") in the case of Jaz.
Media Removability
The Company's Zip and Jaz products store data on high-capacity removable disks,
thus enabling personal computer users to:
o take programs and files from an office computer to use on a home or
laptop computer;
o share or transfer programs and files with other personal computer
users;
o organize data by storing different files on different disks;
o create a "separate personal computer" for each person using the
computer (such as different family members) -- each user can
store his or her software and data on a single disk that can be removed
from the computer and privately stored when that person is not using
the computer;
o remove particularly sensitive or valuable information from the computer
for storage in a different location, thus protecting it against
viewing, modification or damage by another user of the computer; and
o create easily-accessible backup copies of important electronic data.
The Company's Clik! products store data on high-capacity removable disks, thus
enabling users of various consumer electronic devices to:
o download high resolution photos from CompactFlash(TM) or Smart
Media(TM) memory cards on a single Clik! disk without having to return
to a personal computer;
o carry e-mails, web pages, presentations, price lists, contact lists,
letters and memos for a laptop or handheld computer on a single Clik!
disk;
o have a removable storage solution for various HPCs and notebook
computers; and
o take programs and files from an office computer to use on a home or
laptop computer.
Data Backup
The Company's Zip, Jaz and Clik! storage systems, offer a convenient and
effective way for personal computer users to create backup copies of their
programs and files.
<PAGE>
Attractive Price, Performance and Features
The Company believes that its storage systems provide a combination of price,
performance and features that make them attractive data storage solutions for
their target markets. Zip offers data access times, transfer rates and storage
capacity that greatly exceed those offered by conventional floppy disk drives
and disks, along with the benefits of removable media, at a price that is
attractive to mass-market customers. Jaz offers many performance features
comparable to those of most other data storage devices (including conventional
hard disk drives), at a competitive price. Clik! offers compact storage and
higher capacity than current mobile storage solutions at an attractive price for
a variety of hand-held electronic device customers.
Products
The Company offers products targeted at both the mass market and the
high-performance market. Zip drives and Clik! drives were designed to achieve
price levels that the Company deems crucial to mass-market consumers. The Jaz
1GB and 2GB drives, on the other hand, are principally targeted to more
professionally-demanding customers, while still offering affordability. Iomega's
Zip, Jaz and Clik! products continued to be recognized by industry publications
and trade groups during 1998, receiving a number of prestigious awards,
including: Info World's "Industry Innovations Award - The Best and the
Brightest" (Zip); MacHome Journal "Home Choice Award - Removable Media Drive"
(Zip); PC Computing's "MVP Award" (Zip); PC World's "Best Buy Zip ATAPI" (Zip);
Computer Currents' "Best Removable Drive" (Jaz); Computer Shopper's "Best
Removable/Backup Drive" (Jaz); PC Computing's "MVP Award" (Jaz); and Popular
Science's "Best of What's New" (Clik!).
The following table lists the principal data storage devices currently
being offered by the Company:
<PAGE>
<TABLE>
Typical
Product Interface Retail
Family Capacity Model (Year introduced) Price (2) Technology
- ------ -------- ----- -------------------- --------- -----------------
<S> <C> <C> <C> <C> <C>
Zip Drives:
100MB External Parallel Port (1995) $ 99.95 Composite
SCSI (1995) 99.95 winchester heads
USB (1998) 129.95
Internal 3.5" ATAPI (1997) 99.95
Notebook 15 MM ATAPI (1997) 199.95
12.7 MM ATAPI (1998) 199.95
250MB External Parallel Port (1998) 199.95
SCSI (1998) 199.95
Zip Disks:
100MB (1995) $ 9.99 Advanced
250MB (1998) 16.66 flexible media
Clik! Drives:
40MB Various drive bundles Composite
(see description below) (1998) winchester heads
Clik! Disks:
40MB (1998) $ 9.99 Advanced
flexible media
Jaz Drives:
1GB External SCSI (1995) $299.95 Thin-film heads
Internal 3.5" SCSI (1995) 279.95
2GB External SCSI (1998) 349.95
Internal 3.5" SCSI (1998) 349.95
Jaz Disks:
1GB (1995) $ 84.95 Dual rigid media
2GB (1998) 99.95
</TABLE>
(2) Indicates the minimum advertised price or, if none, the typical price at
which the drive and disks are sold at retail. Disk prices represent per unit
purchase price in multi-packs.
Zip Products
Since their introduction in March 1995 and through the end of 1998,
more than 21 million Zip drives have been shipped. Designed as an affordable
mass-market product, Zip drives address multiple needs of personal computer
users: data storage, archiving, hard drive expansion, data transportability,
distributing files (including multimedia presentations), data security and
backup. Zip drives use durable, high-capacity flexible media and Winchester-type
composite nanoslider heads with a special airbearing surface combined with a
linear voice coil motor. Zip drives provide high capacity and rapid access and
can be used for a number of data storage purposes. The original Zip 100MB disks
provide users of personal computers, including Apple/Macintosh-compatible
personal computers, with a minimum of 70 times the capacity of, and up to 20
times faster performance than, traditional floppy disks. Zip drives operate with
leading operating systems for personal computers and workstations, including
Windows 98, Windows 95, Windows NT, Windows 3.x, Macintosh and OS/2. Software
included with the Zip drives provide a data storage solution by helping users
organize, copy, move and backup their data and offers software read/write
protection, which further enables users to secure and protect their data. All
models feature a compact design, operation lights and a finger slot for easy
cartridge insertion and removal.
Zip drives carry a one-year limited warranty. Certain OEM customers
have a three-year limited warranty on the Company's Zip drives. Prior to 1998,
Zip disks had a limited lifetime warranty except where local law prohibited such
warranties. Beginning in 1998, Zip disks carry a limited five-year warranty.
<PAGE>
Zip 100MB External. Originally introduced in 1995, Zip 100MB external drives are
now available in three interface models: parallel port, SCSI and USB. The
parallel port version is for use with IBM compatible PCs, the SCSI version for
use with SCSI-enabled (either built in or through the addition of an adapter
board with an external connector) computers and the USB version for use with PCs
and the latest Apple computer models such as the G3 and iMac. The SCSI version
of the Zip 100MB drive offers faster performance than the parallel port and USB
versions of the drive, featuring a maximum sustained data transfer rate of up to
1.4MBs per second. All external models feature a window for viewing the
cartridge label.
Zip 100MB Internal. Originally introduced in February 1996 (with an IDE
interface), the 3.5-inch form factor Zip 100MB drive is now available with an
ATAPI interface for both OEMs and retail channels. In 1997, the Company
introduced a 15 mm version for the notebook computer market. This was followed
with a 12.7 mm version in 1998. The ATAPI version features a maximum sustained
transfer rate of 1.4MBs per second. The notebook versions are sold to OEMs for
incorporation into notebook computers and external models.
Zip 250MB. Introduced in the fourth quarter of 1998, the Zip 250MB drive was
designed to meet demand for higher storage capacity fueled by the prevalence of
graphics in most applications, the emergence of audio and video files and the
proliferation of internet downloads. In addition to two and one-half times the
capacity of the original Zip 100MB drive, the ZIP 250MB drive has increased
performance by one and one-half times and reads and writes to Zip 100MB
cartridges allowing sharing of files with users of Zip 100MB drives. The SCSI
version of the Zip 250MB drive offers faster performance than the parallel port
version of the drive, featuring a maximum sustained transfer rate up to 1.4MBs
per second.
The Zip 250MB is available as an external drive with either parallel
port or SCSI interfaces. A 3.5-inch form factor internal Zip 250MB drive with an
ATAPI interface is expected to be available in 1999.
OEMs. As of March 1999, the following PC companies incorporate, or have
announced plans to incorporate, Zip 100MB drives in selected models of their
lines of personal computers as a standard or optional feature: Acer, Apple,
Chicony, Clevo, Compal, Compaq, Dell, Fujitsu Limited ("Fujitsu"), Gateway,
Hewlett-Packard, Hitachi - Japan, IBM, LaCie Limited, Micron Electronics, NEC
Corporation ("NEC"), Packard Bell, Sharp, Siemens, Sony, Toshiba Corporation
("Toshiba") and Umax.
Clik! Products
Clik! is a miniaturized removable-media storage solution for use in a
variety of hand-held consumer electronics devices such as digital cameras,
personal digital assistants ("PDAs"), audio recorders, mobile telephones,
hand-held global positioning system ("GPS") units and palm top and notebook
computers. The Company began shipping limited quantities of its Clik! drive for
digital cameras and 40MB Clik! disks in December 1998. The Company also began
shipping limited quantities of its Clik! drive for mobile computers and its
Clik! Drive Plus bundle for digital cameras, notebook computers and Windows CE
products in early 1999.
Clik! drives are designed to connect to virtually any portable digital or
desktop product and to allow consumers to easily share information between
products and synchronize information back to a desktop computer. For digital
cameras, Clik! disks are like tiny rolls of film since they are designed to
store more than current mobile storage solutions and at a lower cost. The 40MB
Clik! disk will hold approximately 60-80 "megapixel" images or hundreds of lower
resolution images. The handheld Clik! Mobile Drive weighs less than seven ounces
and Clik! 40MB disks are 2" by 2", approximately half the size of a credit card.
A Clik! drive designed to fit into a PCMCIA slot for slimline notebook computers
and the first digital camera with a built-in Clik! drive are expected to be
available in 1999.
The Clik! Drive for Mobile Computers is available with a typical retail
price of $199. The Clik! Drive for Digital Cameras is available for a typical
retail price of $249. The Clik! Drive Plus is available with a typical retail
price of $299. The 40 MB disks sell for a typical retail price as low as $9.99
per disk, when purchased in a 10-pack.
Clik! drives carry a one-year limited warranty. Clik! disks have a limited
five-year warranty.
<PAGE>
OEMs. At the end of 1998, the Company had announced the following OEM partners
for Clik!: AGFA, Compaq, Sharp and Varo Vision. The Company has signed licensing
or co-development agreements with Citizen Watch Co., Ltd. ("Citizen"),
Matsushita Communication Industrial Co., Ltd. ("MCI") and NEC that grant
non-exclusive rights to manufacture and market Clik! mobile storage drives to
other OEMs and consumers worldwide and for use in their own portable electronic
products.
Jaz Products
Jaz products address the high-performance needs of personal computer
and other system users in several areas: professional applications (graphics,
desktop publishing, software development, IT/MIS, CAD/CAM, audio and video),
corporate users (sales force automation and backup) and personal computer
enthusiasts (multimedia and worldwide web applications). Jaz drives incorporate
many advanced technological features including tri-pad thin-film recording
heads, dynamic head loading and drag and drop motorized cartridge ejection. Jaz
disks feature a dual rigid platter cartridge and a proprietary disk capture
system that secures the dual disk platters when not installed in a drive,
eliminating rattle and reducing the possibility of losing valuable information.
The drives operate with leading operating systems for personal computers and
workstations, including Windows 98, Windows 95, Windows NT, Windows 3.x,
Macintosh and OS/2. Software included with Jaz drives provide a data storage
solution by helping users organize, copy, move and backup their data and offers
software read/write protection, which further enables users to secure and
protect their data.
The external versions of the drives weigh approximately two pounds,
feature design enhancements similar to those introduced with external Zip
drives, including a unique colored casing, a window to allow visibility of the
label on the cartridge being used and operating lights. Additional features
include an auto-switching power supply to allow operation in different countries
and auto-sensing SCSI termination.
Jaz drives carry a one-year limited warranty. Prior to 1998, Jaz disks
had a limited lifetime warranty except where local law prohibited such
warranties. Beginning in 1998, Jaz disks carried a limited five-year warranty.
Jaz 1GB. The Company began shipping Jaz 1GB drives and Jaz 1GB disks in December
1995. The Jaz 1GB drive offers data transfer rates comparable to those of many
current hard disk drives, with an average sustained transfer rate of 5.4 MBs per
second, 12 millisecond average seek time and 17.5 millisecond average access
time. Using 1GB disks, Jaz is capable of storing 1,000 24-bit full color
pictures, 56 minutes of video (2X CD-ROM quality data), or 1.7 hours of audio
(CD-quality, stereo). The Jaz 1GB drive is available in external and internal
SCSI versions. An adapter, the Jaz Traveler, is offered to connect the external
drive to a PC's parallel port connector.
Jaz 2GB. Due to the demand for an even higher capacity drive, the Company began
shipping Jaz 2GB, a 2-gigabyte storage solution, in February 1998. The Jaz 2GB
removable drive utilizes an ultra-SCSI interface, includes a complete software
suite, provides twice the capacity and up to 40 percent faster performance than
the original Jaz 1GB drive. With an average sustained transfer rate of 7.4
megabytes per second, Jaz 2GB is fast enough to deliver full-screen, full-motion
video. The Jaz 2GB drive is also capable of reading and writing to Jaz 1GB
disks. The Jaz 2GB drive is available in external and internal SCSI versions.
Ditto Products
In March 1999, the Company announced that it had entered into an agreement to
sell certain assets associated with its Ditto tape product line to Tecmar
Technologies, Inc. ("Tecmar"). Under the terms of the agreement, Tecmar will pay
the Company $3.0 million for intellectual property and exclusive rights to the
Company's Ditto product line which includes the Ditto 2GB, 10GB DittoMax Pro and
the 7GB Ditto Max drives. As part of the agreement, Tecmar will also obtain
certain software rights, intellectual property rights, equipment, the Ditto
brand name for tape and tape-related products and product logos. No Iomega
facilities or employees will be transferred to Tecmar in connection with the
transaction. The Company will continue to sell its current Ditto finished goods
inventory for three months following the closing of the sale; after which,
Tecmar will buy the Company's remaining finished goods inventory. The Company
will also continue to sell existing Ditto cartridges for a period of time. The
Company will provide warranty support for its Ditto 2GB and Ditto Max products
until the warranties expire and will provide technical support for Ditto
products sold by the Company. Tecmar will provide out-of-warranty service for
Ditto 2GB and Ditto Max tape drive customers.
Marketing and Sales
Marketing
The Company believes that broadening the distribution of its products
through strategic marketing alliances with a variety of key companies within the
computer and consumer electronic industries is a critical element in the
Company's strategic goal of being the supplier of choice for smart, portable
solutions for personal computers and the growing market of consumer electronic
devices. The Company's initial marketing strategy for the introduction of its
new products has been to generate consumer awareness of, and demand for, such
products by focusing on aftermarket sales to existing users of personal
computers through leading computer retail channels. The Company has also focused
and will continue to focus on establishing and maintaining OEM relationships
with leading personal computer manufacturers for Zip and Jaz products and
consumer electronic manufacturers for Clik! products as well as granting
royalty-based licenses that allow third-party manufacturers to produce and sell
the Company's drives to OEMs and other customers for their own accounts. Sales
of Zip drives to OEM customers increased to over 55% of total Zip drive unit
sales in 1998, as compared to approximately 32% in 1997. To support and foster
increased Zip OEM sales, Iomega initiated a broad-based Zip Built-In(TM)
campaign during 1997.
During 1998, the Company announced the following three marketing
programs to improve the role of the Company's products in the business and
personal lives of its customers: Record/Play, Beyond-PC and software tools.
Record/Play enables authors, artists, music producers and, eventually, video and
film producers to protect their copyrighted property. Record/Play also enables
businesses to protect confidential or proprietary business and client
information. The Company's Zip, Jaz and Clik! disks carry an embedded serial
number that allows content to be encrypted, thus allowing content to be replayed
but not re-recorded. Beyond-PC promotes the installation of the Company's
storage technologies on digital appliances other than the PC. Zip drives are
being designed into, or made compatible with, scanners, set-top boxes,
projection systems, music and audio devices, medical devices and printers. By
the end of 1998, Beyond-PC had garnered support from non-PC makers such as
WebSurfer Inc. (TV set-top boxes for internet access), Microtek International,
Inc. (stand-alone scanners), Lexmark and NEC (external compatibility with
printers), Roland Corporation (music recorders), 360 Systems (broadcast-quality
sound record/playback), InFocus Systems Inc. (projection systems) and Stryker
Endoscopy (digital capture for high-resolution medical images). Software tools
for the Company's Zip, Jaz and Clik! drives are provided by the Company to
improve customer satisfaction and to increase media consumption. The software
tools are available as a free download on the Company's website (www.iomega.com)
and include such tools as Iomega RecordIt, Norton Zip Rescue and Iomega
Photoprinter. Iomega RecordIt, when used with the Company's Zip, Jaz and Clik!
disks, allows a PC or Mac computer to be used as a digital audio recorder.
Norton Zip Rescue is a disaster recovery software tool that is stored on a
single 100MB or 250MB Zip disk that allows Zip drive users to perform system
recovery quickly and easily. Iomega Photoprinter, primarily designed for the
Clik! drive for digital cameras, allows users to view JPG, bitmap and pic images
in thumbnail views and allows users to size images up to 8x10. Iomega
Photoprinter also works with Zip and Jaz drives as well as hard drives.
The Company's worldwide marketing group is responsible for positioning
and promoting the Company's products. The Company participates in various
industry tradeshows, including CeBit, COMDEX and MacWorld, and seeks to generate
coverage of its products in a wide variety of trade publications. During 1998,
the Company continued major print advertising campaigns for its Zip, Jaz and
Ditto products and television advertising campaigns in support of its Zip
products with an emphasis on the Company's Zip Built-In campaign aimed at
increasing awareness of the availability of, and demand for, Zip storage
solutions as a built-in feature in personal computers.
Retail Distribution
Retail outlets for the Company's products include computer superstores,
consumer electronic superstores, mail order catalogs, office supply superstores,
specialty computer stores and other retail outlets. The Company sells its
products to retail channels directly as well as indirectly through distributors.
The Company's products are sold at a retail level by most of the leading
retailers of computer products in the United States and Europe. Retailers
carrying the Company's products include Best Buy, Circuit City, CompUSA, Costco
Warehouse, Fry's Electronics, MicroCenter, OfficeDepot, Office Max, Sam's Club
and Staples in the U.S.; and Dixons, FINAC, Media Markt, PC World and Vobis in
Europe. Distributors include CMS Peripherals, Ingram Micro, Merisel, MicroAge
and Tech Data in the U.S.; Actebis, Computer 2000, Ingram Micro Europe and Karma
International in Europe; and Gennett Technologies, Q*Soft Australia Pty. Ltd.
and Sunkyong Distribution Ltd. in Asia.
<PAGE>
Strategic Marketing Alliances
In addition to sales through retail and distribution channels, the
Company has entered into a number of strategic marketing alliances with a
variety of companies within the computer and consumer electronic industries.
These alliances include OEM arrangements providing for certain of the Company's
products to be incorporated in new computer systems and portable electronic
devices at the time of purchase. During 1998, the Company continued to gain
significant industry support from major PC companies that began, or announced
plans to begin, incorporating Zip drives into their computer systems as standard
or optional features. At the end of 1998, the Company's OEM partners included,
among others: Acer, Apple, Chicony, Clevo, CNF, Compal, Compaq, Dell, Fujitsu,
Gateway, Hewlett-Packard, Hitachi, IBM, LaCie Limited, Lexmark, Micron
Electronics, Microtek, NEC, Packard Bell, Sharp, Siemens, Sony, Toshiba, Umax,
and VST. The Company is beginning to gain significant industry support from
major consumer electronic companies that have announced plans to begin to
incorporate Clik! drives into their computer systems as standard or optional
features. At the end of 1998, the Company had announced the following OEM
partners for Clik!: AGFA, Compaq, Sharp and Varo Vision. The Company has signed
licensing or co-development agreements with Citizen, MCI and NEC that grant
non-exclusive rights to manufacture and market Clik! mobile storage drives to
other OEMs and consumers worldwide and for use in their own portable electronic
products.
The Company's strategic alliances also include private-branding and
co-branding arrangements with major vendors of computer products covering the
resale of the Company's products by such companies as Maxell, Fuji and Verbatim
who offer Zip drives in Japan and Zip disks globally in packages which feature
Iomega's name in addition to the partner's name.
International
The Company sells its products outside of North America primarily
through international distributors and retailers. The Company has increased its
sales and marketing efforts in the European and Asian markets in the past
several years and has established several sales offices in both Europe and Asia.
Prior to 1997, the Company had been invoicing predominantly in foreign
currencies in Europe. In 1997 and 1998, the majority of sales to European
customers were denominated in U.S. dollars. Sales to Asian customers are
typically denominated in U.S. dollars with the exception of Japan, where sales
are primarily invoiced in the Japanese Yen. In total, sales outside of the
United States represented 34%, 39% and 34% for the years ended December 31,
1998, 1997 and 1996, respectively.
Sales
As is common practice in the industry, the Company's arrangements with
its retail and distribution customers generally allow customers, in the event of
a price decrease, credit equal to the difference between the price originally
paid and the new decreased price on units in the customers' inventories on the
date of the price decrease. When a price decrease is anticipated, the Company
establishes reserves for amounts estimated to be reimbursed to qualifying
customers. In addition, distribution and retail customers generally have the
right to return excess inventory within specified time periods. The Company
establishes reserves for inventory returns. There can be no assurance that these
reserves will be sufficient or that any future returns or price protection
charges will not have a material adverse effect on the Company's results of
operations and financial condition.
The Company sells its products primarily through computer product
distributors, retailers and OEMs. Accordingly, since the Company grants credit
to its customers, a substantial portion of outstanding accounts receivable are
due from computer product distributors, certain large retailers and OEMs. At
December 31, 1998, the customers with the ten highest outstanding accounts
receivable balances totaled $124.0 million, or 42% of gross accounts receivable,
with one customer accounting for $29.3 million, or 10% of gross accounts
receivable. If any one or a group of these customers' receivable balances should
be deemed uncollectible, it would have a material adverse effect on the
Company's results of operations and financial condition.
During the year ended December 31, 1998, sales to Ingram Micro, Inc., a
distributor, accounted for 16% of sales. During the year ended December 31,
1997, sales to Ingram Micro, Inc., accounted for 14% of sales. No other single
customer accounted for more than 10% of the Company's sales in 1998 or 1997.
Seasonality and Other Fluctuations of Revenue
Iomega's Zip products are targeted to the retail consumer market and to
personal computer OEMs. The Company's Jaz products are targeted primarily to the
retail consumer market. The Company's Clik! products are targeted to the retail
consumer market and to various consumer electronic device 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.
Due to first quarter seasonality and component constraints associated with
ramping new products, the Company publicly stated in January 1999 that it
expected first quarter 1999 results to be approximately breakeven with the
possibility of a small profit or loss. However, there can be no assurance that
the expected results will be realized.
Revenues and growth rates for any prior quarter are not necessarily
indicative of revenues or growth rates to be expected in any future quarter.
Manufacturing
The Company's products are manufactured by the Company at facilities in
Penang, Malaysia and Roy, Utah and by independent parties who manufacture
products for the Company on a contract basis. Manufacturing activity generally
consists of assembling various components, subcomponents and prefabricated parts
manufactured by outside vendors. Since the first quarter of 1997, a substantial
portion of the Company's Zip drives and Jaz drives and disks have been
manufactured in the Penang, Malaysia facility that was purchased by the Company
in September 1996.
During 1995, the Company was unable to produce enough of its products
to fill all of its orders and, therefore, turned to third-party manufacturers to
help satisfy demand. During 1996, the Company purchased a 376,000 square-foot,
manufacturing facility in Penang, Malaysia to serve as an additional
manufacturing site for the Company's Zip drives and Jaz drives and disks. During
1998, the Company announced plans to open a new manufacturing facility in Roy,
Utah to serve as a regional manufacturing facility to produce products to be
sold in the Americas. Utah was selected as a new manufacturing location because
of its favorable economics from a logistical perspective and good geographic
proximity to both OEM customers and the Company's core Zip research and
development team. Regional manufacturing is part of the Company's move toward
the virtual enterprise model that provides cost savings and reduces the
Company's required investment in inventory. Although the Company believes it is
positioned (either through existing capacity or planned additional capacity) to
produce the majority of its products in the future, it still intends to use
certain third-party manufacturers for the foreseeable future. There can be no
assurance that the Company will not from time to time encounter difficulties in
providing necessary levels of manufacturing capacity; that it will be successful
in managing relationships with third-party manufacturers; or that third-party
manufacturing will be able to meet the Company's quality requirements or
third-party quantity requirements for manufactured products. The Company
currently has third-party manufacturing relationships with MegaMedia Corporation
and Sentinel N.V. (which produce a significant majority of all Zip disks).
During 1996 and 1997, the Company granted non-exclusive worldwide
licenses to MCI and NEC, respectively, to manufacture and sell Zip drives under
MCI's and NEC's brand names, as well as to OEMs. MCI commenced shipping drives
in April 1997, and NEC commenced shipping drives in May 1997. In 1998, the
Company granted Toshiba a non-exclusive worldwide license to redesign,
manufacture and market slimline internal Zip drives and external
PCMCIA-connected Zip solutions. Toshiba has announced plans to manufacture and
market slimline Zip drives to OEM notebook manufacturers worldwide and into the
beyond-PC applications market in 1999. Toshiba is also expected to engineer and
manufacture slimline Zip drives for the Company to be included in a substantial
portion of Iomega-branded notebook OEM and future smaller form factor retail Zip
drives. In 1998, the Company granted non-exclusive worldwide licensing or
co-development agreements to Citizen, MCI and NEC to manufacture and sell Clik!
drives for use in their own portable electronic products, to other OEMs and
consumers worldwide. These agreements increase competition faced by the Company,
including price competition, since the Company does not control the price at
which Citizen, MCI or NEC sells products for its own account. The Company
receives (or will receive) royalties on units sold to third parties by Citizen,
MCI and NEC.
Certain components incorporated in, or used in, the manufacture of the
Company's products are currently available only from single or sole source
suppliers. In particular, media used in Zip disks is currently obtained
exclusively from Fuji Photo Film and certain integrated circuits used in Zip
drives are obtained exclusively from L.S.I. Logic Corporation. The Company has
experienced difficulty in the past, and may experience difficulty in the future,
in obtaining a sufficient supply of key components on a timely basis. The
Company continues to develop relationships with qualified manufacturers with the
goal of securing high-volume manufacturing capabilities and controlling the cost
of current and future models of the Company's products; however, there can be no
assurance that the Company will be able to obtain a sufficient supply of
components on a timely basis or realize any future cost savings. For example,
sales were adversely affected during the second and third quarters of 1997 due
to a shortage of certain integrated circuits for Zip drives and supplier quality
problems. Sales were also adversely affected in the fourth quarter of 1997 due
to a shortage of components for notebook Zip drives. Sales may be adversely
affected for these or similar reasons in the future.
The Company purchases a portion of its single, sole and limited source
components pursuant to purchase orders without guaranteed supply arrangements.
The inability to obtain sufficient components and equipment, to obtain or
develop alternative sources of supply at competitive prices and quality or to
avoid manufacturing delays could prevent the Company from producing sufficient
quantities of its products to satisfy market demand (or, in the case of a
component purchased exclusively from one supplier, the Company could be
prevented from producing any quantity of the affected product(s) until such
component becomes available from an alternative source), delay product
shipments, increase the Company's material or manufacturing costs or cause an
imbalance in the inventory levels of certain components. Moreover, difficulties
in obtaining sufficient components may cause the Company to modify the design of
its products to use a more readily available component; and such design
modifications may result in product performance problems. Any or all of these
problems could in turn result in the loss of customers, provide an opportunity
for competing products to achieve market acceptance and otherwise adversely
affect the Company's business and financial results.
The Company had a backlog at the end of January 1999 of approximately
$71 million, compared to a backlog at the end of January 1998 of approximately
$220 million. The backlogs at the end of January 1999 and 1998 were related to
both orders with scheduled shipment dates in future months and delays in new
product introductions. The purchase agreements or purchase orders pursuant to
which orders are made generally allow the customer to cancel orders without
penalty, and the Company has experienced some cancellations or rescheduling of
orders in backlog. Moreover, it is common in the industry during periods of
product shortages or perceived product shortages for customers to engage in
practices such as double ordering in order to increase a customer's allowance of
available product. Accordingly, the Company's backlog as of any particular date
should not be relied upon as an indication of the Company's actual sales for any
future period.
Product Development
An important element of the Company's business strategy is the ongoing
enhancement of existing products and the development of new products. During
1997 and 1998, the Company's efforts were primarily focused on the development
of the Company's Clik! products and enhancing the features, developing different
system interfaces, developing higher capacity and performance versions,
enhancing and expanding compatibility with various computers and operating
systems and reducing the production costs of its existing Zip and Jaz products.
Moreover, the Company is looking at advanced head/media systems for future
platforms beyond the current family of Jaz products and plans to increase its
efforts in the areas of software utilities and solutions, which will continue to
emphasize "ease of use" functionality.
Clik!, a miniaturized removable-media storage solution for use in
notebook computers and a variety of handheld electronic devices, began shipping
late in the fourth quarter of 1998 in limited volumes. Clik! (successor to the
n hand technology announced in 1996) represents the Company's first product
which is primarily targeted to digital camera and other consumer electronic
manufacturers. The Company believes Clik! has the potential to open up several
new markets for removable magnetic recording devices. The Company does not have
prior experience in these channels. Accordingly, there are additional risks that
the Clik! products will not achieve significant market presence or otherwise be
successful.
During 1998, 1997 and 1996, the Company's research and development
expenses were $101.5 million, $78.0 million and $42.1 million, respectively (or
6.0%, 4.5% and 3.5%, respectively of net sales). Increased research and
development spending in 1998 was primarily related to increased spending for new
product development, including Clik! development, and continued development and
enhancement of Zip, Jaz and other products.
The Company operates in an industry that is subject to both rapid
technological change and rapid change in consumer demands. The Company's future
success will depend in significant part on its ability to continually develop
and introduce, in a timely manner, new removable-media disk drive products with
improved features and to develop and manufacture those new products within a
cost structure that enables the Company to sell such products through effective
channels at lower prices than those of competing products. There can be no
assurance that the Company will be successful in developing, manufacturing and
marketing new and enhanced products that meet both the performance and price
demands of the data storage market.
Competition
The Company believes that its Zip and Jaz products compete with other
data storage devices, such as fixed hard drives (for upgrade), magnetic
cartridge disk drives (that use either floppy or rigid media), magnetic tape
drives, magneto optical drives, optical disk drives and "floptical" disk drives.
The Company believes that its Clik! products compete with other data storage
devices including various formats of flash memory, certain fixed hard drives and
magnetic cartridge disk drives (that use either floppy or rigid media). Current
competing solutions of removable media data storage devices include LS-120, or
SuperDisk, (product co-developed by the consortium of Compaq Computer, Imation,
O.R. Technology and MKE), HiFD (product co-developed by Sony Corporation and
Fuji Photo Film Co., Ltd.), UHD144 (product in development by Caleb Technology
Corporation), Orb (product developed by Castlewood Systems, Inc.), Pro-FD
(product in development by Samsung Electro-Mechanics Co., Ltd.), Microdrive
(product in development by IBM), Memorystick (product developed by Sony
Corporation), and the new CD-R and CD-RW drives. Although the Company believes
that its Zip, Jaz and Clik! products offer advantages over the other
removable-media storage devices and other storage solutions available today, the
Company believes that the price, performance and usability levels of existing
removable-media products have improved and will continue to improve and that
other companies will introduce new removable-media storage devices and new
non-removable storage solutions. Accordingly, the Company believes that its Zip,
Jaz and Clik! products will face increasingly intense competition.
The Company believes that in order to compete successfully against
current and future sources of competition, it will be necessary to further
reduce the manufacturing costs of its products, thus enabling the Company to
sell its products at lower prices. As new and competing removable-media storage
solutions are introduced, it is possible that any such solution that achieves a
significant market presence or establishes a number of significant OEM
relationships will emerge as an industry standard or achieve a leading market
position. If such is the case, there can be no assurance that the Company's
products would achieve significant market acceptance.
To the extent that Zip and Jaz drives are used for incremental primary
storage capacity, they compete with non-removable media storage devices such as
conventional hard disk drives, which are offered by companies such as Seagate
Technology, Western Digital Corporation, Quantum Corporation and Maxtor
Corporation, as well as integrated computer manufacturers such as NEC, IBM,
Fujitsu, Hitachi, Ltd. and Toshiba. In addition, the leading suppliers of
conventional hard disk drives could at any time determine to enter the
removable-media storage market.
The Company believes that it is currently the only source of supply for
the disks used in its Zip, Jaz and Clik! drives. It is possible that other
sources of supply for disks used in Zip or Jaz drives will emerge as a result of
another party succeeding in producing disks that are compatible with Zip, Jaz
and Clik! drives without infringing the Company's proprietary rights or as a
result of licenses granted by the Company to other parties.
In the OEM market, the Company competes with the vendors mentioned
above, as well as with the manufacturers of personal computers, who may elect to
manufacture data storage devices themselves.
The Company has entered into license agreements with MCI and NEC for
the manufacture and sale of Zip drives. The Company has signed licensing or
co-development agreements with Citizen, MCI and NEC that grants non-exclusive
rights to manufacture and sell Clik! mobile storage drives to other OEMs and
consumers worldwide and for use in its own portable electronic products.
Accordingly, the Company faces competition from such licensees and expects to
compete in the future with any other licensees of the Company's products. In
addition, the Company has granted certain companies the right to purchase drives
or disks from the Company (generally at a discount to the price paid by retail
channels) and resell such products under private brand names; the Company's
products may become subject to increased price competition from such private
branded resellers. Price competition from other resellers of the Company's
products, whether or not the Company has a manufacturing relationship with any
such party, may result in increased pressure on the Company to reduce the prices
at which its products are sold to such resellers or others or to offer rebates.
The Company continually evaluates its prices and may elect to reduce prices or
offer rebates in the future. Reductions in the prices at which the Company sells
its products or any rebates offered by the Company would adversely affect gross
margins to the extent such reductions or rebates are not offset by reductions in
the cost of manufacturing such products.
The Company believes that most consumers distinguish among competitive
data storage products on the basis of some or all of the following criteria:
price (cost per unit and cost per megabyte of storage capacity), performance
(speed and capacity), functionality (reliability, product size, removability,
transportability and size of installed base of users), ease of installation and
use and security of data. Price is a particularly important factor with respect
to the Company's mass-market products (the Zip and Clik! drives). Additional
competitive considerations, particularly in the OEM market, are the size (form
factor) of the drive and the interface type with which the drive is compatible.
Winchester drives are available in 5.25-inch, 3.5-inch, 2.5-inch and 1.8-inch
form factors. The most common form factor for Winchester and floppy drives is
3.5-inches. The Company currently offers 3.5-inch Zip and Jaz drives. The most
common system interface for the OEM market is ATAPI. The Company currently
offers internal Zip drives in ATAPI and SCSI interface models and internal Jaz
drives in SCSI interface models.
The data storage industry is highly competitive, and the Company
expects that competition will substantially increase in the future. In addition,
the data storage industry is characterized by rapid technological development.
The Company competes with a number of companies that have greater financial,
manufacturing and marketing resources than the Company. The availability of
competitive products with superior performance, functionality, ease of use,
security or substantially lower prices could adversely affect the Company's
business.
Proprietary Rights
The Company relies on a combination of patent, copyright and trade
secret laws to protect its technology. While the Company currently intends to
vigorously enforce its intellectual property rights, there can be no assurance
that the steps taken by the Company to protect its technology and enforce its
rights will be successful. The Company has filed approximately 300 U.S. and
foreign patent applications relating to its Zip, Jaz and Clik! drives and disks,
although there can be no assurance that such patents will be issued. The Company
holds more than 120 individually or jointly owned U.S. and foreign patents
relating to its Zip, Jaz, Clik! and Bernoulli(R) technologies. There can be no
assurance that any patents obtained by the Company will provide substantial
value or protection to the Company, that their validity will not be challenged
or that affirmative defenses to infringement will not be asserted. The validity
of certain of the Company's patents has been challenged by parties against whom
infringement claims have been asserted. If another party were to succeed in
producing and selling Zip-, Jaz- or Clik!- compatible disks in volume, without
infringing or violating the Company's intellectual property rights, the
Company's sales would be adversely affected and such adverse effects could be
material. It is also possible that the price at which the Company sells its
proprietary disks could be adversely affected by the availability of such disks
from other parties. Moreover, because the Company's Zip, Jaz and Clik! disks
have higher gross margins than the Zip, Jaz and Clik! drives, the Company's net
income would be disproportionately affected by any such sales shortfall. Due to
the rapid technological change that characterizes the Company's industry, the
Company believes that the success of its products will also depend on the
technical competence and creative skill of its personnel in addition to legal
protections afforded its existing drive and disk technology.
As is typical in the data storage industry, from time to time, the
Company has been, and may in the future be, notified of claims that it may be
infringing certain patents, trademarks and other intellectual property rights of
third parties. It is not possible to predict the outcome of such claims and
there can be no assurance that such claims will be resolved in the Company's
favor. If one or more of such claims is resolved unfavorably, there can be no
assurance that such outcomes will not have a material adverse effect on the
Company's business or financial results. The data storage industry has been
characterized by significant litigation relating to infringement of patents and
other intellectual property rights. The Company has in the past been engaged in
infringement litigation, both as plaintiff and defendant. There can be no
assurance that future intellectual property claims will not result in
litigation. If infringement were established, the Company could be required to
pay substantial damages or be enjoined from manufacturing and selling the
infringing product(s) in one or more countries, or both. In addition, the costs
of engaging in intellectual property litigation may be substantial regardless of
outcome, and there can be no assurance that the Company will be able to obtain
any necessary licenses on satisfactory terms.
Certain technology used in the Company's products is licensed on a
royalty-bearing basis from third parties, including certain patent rights
relating to Zip products. The termination of a license arrangement could have a
material adverse effect on the Company's business and financial results.
Employees
As of December 31, 1998, the Company employed 4,865 persons worldwide,
consisting of 3,489 in manufacturing, 477 in general management and
administration, 321 in research and development, 222 in sales, marketing and
service, 225 in customer satisfaction and 131 in product management. None of the
Company's employees are subject to a collective bargaining agreement, and the
Company has never experienced a work stoppage. The Company's success will depend
in large part upon the services of a number of key employees. The loss of the
services of one or more of these key employees could have a material adverse
effect on the Company. Effective March 24, 1998, Kim B. Edwards resigned as
President and Chief Executive Officer of the Company. Effective October 22,
1998, the Company announced the appointment of Jodie K. Glore as Chief Executive
Officer and President of the Company. Mr. Glore was also elected to serve as a
member of the Company's Board of Directors. During the interim period, the
position was filled by James E. Sierk, a member of the Company's Board of
Directors. Effective June 5, 1998, Leonard C. Purkis resigned as Senior Vice
President, Finance and Chief Financial Officer. Dan E. Strong, Vice President
and Corporate Controller, has assumed the role of interim Chief Financial
Officer while the Company conducts a search for a new Senior Vice President,
Finance and Chief Financial Officer. The Company is in the process of conducting
a search for an Executive Vice President to head the global Product, Sales and
Marketing function. Jodie K. Glore has assumed this role during the interim
period. In January 1999, the Company announced organizational changes designed
to focus the Company's 1999 corporate priorities of growing revenue and
improving profitability and asset utilization. With this organizational
realignment, the Company is now organized around business functions as opposed
to its previous structure of decentralized product business units. As a result
of this organizational change, two members of the Company's senior management
team, Ted Briscoe, formerly President of the Company's personal storage
division, and Fred Forsyth, formerly President of the Company's professional
products division, will be leaving the Company. 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.
Government Contracts
No material portion of the Company's business is subject to
renegotiations of profits or termination of contracts at the election of the
United States government.
Environmental Matters
Compliance with federal, state and local environmental protection laws
had no material effect on the Company in 1998 and is not expected to have a
material effect in 1999.
ITEM 2. PROPERTIES:
The Company's executive offices, certain distribution facilities,
certain manufacturing facilities and certain research and development facilities
are located in leased offices and warehouses in the Roy, Utah area. The Company
leases warehouse facilities in North Carolina to serve as its principal
distribution center for North America. In addition, the Company also leases
office space in various locations throughout North America for local sales,
marketing and technical support personnel as well as other locations used for
warehouses and for research and development activities. The Company has
announced plans to open a new manufacturing facility in Roy, Utah during 1999 to
serve as a regional manufacturing facility to produce products to be sold in the
Americas. The manufacturing facility will be located in a leased warehouse in
the Roy, Utah area.
Additionally, the Company leases office space in Geneva, Switzerland
for use as its international headquarters, and in Utrecht, the Netherlands for
use by its European logistics and distribution personnel. The Company also
leases office space throughout Europe and Asia for local sales, marketing and
technical support personnel. In September 1996, the Company purchased a 376,000
square foot manufacturing facility in Penang, Malaysia.
The Company owns substantially all equipment used in its facilities
through either outright purchases or capital leases.
ITEM 3. LEGAL PROCEEDINGS:
Except as set forth below, in management's opinion, there are no
material pending legal proceedings, other than ordinary routine litigation
incidental to its business, to which the Company or any of its subsidiaries is a
party or to which any of their property is subject.
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 Company intends to vigorously defend against this suit.
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
complaint alleges tortious interference with contract, tortious interference
with prospective economic advantage, unfair business practices, and conspiracy
against Iomega, and other claims against the other parties. The claims are
related to an alleged arrangement between Nomai, S.A. and Hi-Val for Hi-Val to
distribute Nomai's XHD cartridges. Plaintiff seeks to recover $26 million in
alleged, unspecified damages. The Company intends to vigorously defend against
this complaint.
Beginning on February 10, 1998, several purported class action
complaints were filed in the United States District Courts for the District of
Utah and the Southern District of New York, against the Company and certain of
its former officers on behalf of certain persons who purchased the Company's
common stock during the period from September 22, 1997 to January 22, 1998.
These cases have now been consolidated in the District of Utah and a
consolidated class action complaint, Karacand v. Kim B. Edwards, Leonard C.
Purkis and Iomega Corporation, was filed on July 8, 1998. A separate individual
suit, Ora v. Iomega Corporation, et al., was filed on May 27, 1998, in Superior
Court of the State of California for the County of Los Angeles. The Karacand
complaint alleges that the Company and certain of its former officers violated
certain federal securities laws; the Ora complaint alleges that the Company and
certain of its former officers violated certain federal and state securities
laws and alleges that Mr. Edwards breached his duties as a director of the
Company. Both complaints seek an unspecified amount of damages. Management
believes that the named defendants have highly meritorious defenses to the
allegations made in these lawsuits. The Company intends to vigorously defend
against such allegations.
On February 25, 1998, the Company was served with a complaint in a
purported class action filed in the Supreme Court of the State of New York,
entitled Christian Champod v. Iomega Corporation. The named plaintiff claims to
have commenced the action on behalf of a purported class consisting of certain
persons who purchased Iomega Ditto tape drives since February 18, 1992, and a
subclass consisting of such purchasers who called the Company's "800" or "888"
telephone number for technical assistance and/or customer service and were
charged a fee for the call. The complaint claims violations of certain
provisions of the New York General Business Law and fraudulent inducement, based
on, among other things, alleged advertising and product packaging
representations regarding the Ditto products' ability to "read" certain
non-Ditto cartridges. Additionally, the complaint alleges that Iomega's product
packaging, indicating that a customer could call a toll free "800" or "888"
telephone number for technical assistance, implicitly, but falsely, represented
that the customer could receive free telephone technical support. The Company
intends to vigorously defend against such allegations.
On July 23, 1997, the Company initiated litigation against SyQuest
Technology, Inc. ("SyQuest") in the United States District Court in the District
of Delaware for infringing the Company's U.S. Patent No. 5,644,444, U.S. Design
Patent No. D378,518 and the Company's registered trademark "JET". The complaint
sought monetary damages and injunctive relief enjoining SyQuest from further
infringement. The matter was scheduled for trial in April 1999; however, the
trial date has been delayed as a result of SyQuest's filing of a voluntary
petition in the United States Bankruptcy Court under Chapter 11 of the U.S.
Bankruptcy Code in November 1998. The Company also filed complaints on March 6,
1998 and April 29, 1998 in the Paris District Court alleging claims of copyright
and patent infringement. On January 13, 1999, the Company announced that it had
entered into a definitive agreement to purchase certain assets of SyQuest,
including all of its intellectual property, and its inventory and fixed assets
in the U.S., for $9.5 million in cash, subject to certain closing conditions and
adjustments (see Note 16 of the Company's 1998 Annual Report to Stockholders,
which section is incorporated herein by reference). One of the conditions of the
proposed purchase was approval by the U.S. Bankruptcy Court, which was obtained
on February 24, 1999. As part of the agreement, the Company would release
SyQuest and SyQuest would release the Company from all claims in connection with
patent and trademark infringement litigation pending between the parties in
Delaware and in Paris, France.
The Company continues to be committed to vigorously protecting and
enforcing its intellectual property rights and to attacking unfair competition.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matters were submitted to a vote of the Company's security holders
during the quarter ended December 31, 1998.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company as of March 1, 1999 were as
follows:
Name Age Position
Jodie K. Glore 51 Chief Executive Officer, President and Director
L. Scott Flaig 55 Executive Vice President and Chief Operating Officer
James A. Taylor 52 Executive Vice President and Chief Marketing Officer
Dan E. Strong 40 Vice President, Corporate Controller and Interim
Chief Financial Officer
Laurie B. Keating 45 Senior Vice President, General Counsel and Secretary
James C. Kelly 41 Senior Vice President, Product Development and Chief
Technology Officer
Anton J. Radman, Jr. 46 Senior Vice President, Strategic Business
Development
Roxie Craycraft 44 Acting Vice President, Customer Service and
Applications
Kevin O'Connor 40 Vice President, Human Resources
Robert J. Simmons 36 Vice President and Treasurer
Jodie K. Glore joined the Company as Chief Executive Officer and
President on October 22, 1998. From 1994 to 1998, Mr. Glore served as President
and Chief Operating Officer of Rockwell Automation, the leading supplier of
industrial automation products, systems and software in North America, and a
division of Rockwell International. From January 1992 until January 1994, Mr.
Glore served as Senior Vice President for the Industrial Computer and
Communications Group ("ICCG"), which later became known as the Automation Group
of Rockwell International. From September 1985 until January 1992, Mr. Glore
served in various management positions at Square D Company, including Corporate
Vice President of Sales and Marketing, Vice President and General Manager of
Square D's Automation Products Division and Vice President and General Manager
of Square D's Power Equipment Business. Prior to that, Mr. Glore was employed
for six years at Allen Bradley, now part of Rockwell Automation, in various
supervisory and managerial positions including, new product development, market
planning services and product marketing.
L. Scott Flaig joined the Company in November 1997. From 1996 to 1997,
Mr. Flaig was an adjunct professor at Northwestern University, lectured at top
business schools across the country and performed consulting services in the
area of supply chain management. From 1992 to 1995, Mr. Flaig was Senior Vice
President, Worldwide Operations for Dell Computer Corporation based in Austin,
Texas. He has also held senior operations management positions at Ernst & Young,
Digital Equipment Corporation and Xerox.
<PAGE>
James A. Taylor joined the Company as Executive Vice President and
Chief Marketing Officer in April 1998. From 1996 to 1998, Mr. Taylor served as
Senior Vice President of Global Marketing at Gateway 2000, Inc. From 1994 to
1996, Mr. Taylor served as Executive Managing Director and General Manager at
Hill & Knowlton, an international public relations firm. Prior to that, Mr.
Taylor served as Executive Managing Director of Yankelovich Partners, an
international marketing research and public opinion firm and as a partner with
Ernst & Young as National Director of Marketing.
Dan E. Strong assumed the role of Interim Chief Financial Officer in
June 1998. Mr. Strong was promoted to Corporate Controller in January 1997, and
Vice President and Corporate Controller in January 1998. Mr. Strong has held
various management positions within the finance and accounting organizations of
the Company from January 1985 to June 1994 and from September 1995 to December
1996. From June 1994 through September 1995, Mr. Strong was Vice President and
Chief Financial Officer of Pro Image Inc., a retailer of licensed sports
apparel.
Laurie B. Keating joined the Company as Senior Vice President, General
Counsel and Secretary in January 1997. Previously, Ms. Keating served as Senior
Vice President, General Counsel and Secretary of Sybase, Inc., a software
company, which she joined in March 1989 as General Counsel and Secretary. Prior
to that, Ms. Keating, from May 1987 to March 1989, served as Group Counsel at
Tandem Computers Incorporated, a fault-tolerant computer maker and software
provider.
James C. Kelly was appointed Senior Vice President, Product Development
and Chief Technology Officer in January 1999. Mr. Kelly joined the Company in
June 1991 and his previous positions with the Company have included President
and Vice President and General Manager of the Mobile Storage Division, Vice
President of Tape Engineering and Director of Tape Engineering. Previously, Mr.
Kelly served as a Staff Engineer at Cipher Data Products from November 1984 to
June 1991.
Anton J. Radman, Jr. has been Senior Vice President, Strategic
Business Development since April 1995. Mr. Radman joined the Company in April
1980 and his previous positions with the Company have included Senior Vice
President, Sales and Marketing; Senior Vice President, Corporate Development;
President of the Bernoulli Optical Systems Co. ("BOSCO") subsidiary of the
Company; Vice President, Research and Development, Vice President, OEM
Products and Sales Manager and Senior Vice President, Micro Bernoulli Division.
Roxie Craycraft was appointed as Acting Vice President, Customer
Service and Applications in January 1999. Mr. Craycraft joined the Company in
January 1996 and his previous positions with the Company have included Director,
Materials & Inventory and Vice President, Customer Satisfaction. Previously, Mr.
Craycraft was employed at Gates Corporation from 1975 to 1995 and served in
various supervisory and managerial positions, including Corporate Materials
Manager; Managing Director, Asia/Pacific in Hong Kong; Plant Manager and
Business Manager.
Kevin O'Connor joined the Company as Vice President, Human Resources in
January 1997. Mr. O'Connor came to the Company from Dell Computer Corporation
where he held several senior human resource positions. While at Dell, from
October 1995 to December 1996, Mr. O'Connor was Vice President, Human Resources
Asia Pacific; from July 1994 to September 1995, he was Vice President, Human
Resources North America; and from May 1993 to June 1994, he was Director, Human
Resources Worldwide Operations. Prior to his employment with Dell, Mr. O'Connor
spent six years as a Senior Group Manager of Human Resources with the Frito Lay
Division of Pepsico.
Robert J. Simmons joined the Company as Treasurer in January 1996. In
January 1998, he was promoted to Vice President, Treasurer. He was Assistant
Treasurer of Oracle Corporation, a software company, from June 1989 to January
1996.
Executive officers are elected on an annual basis and serve at the
discretion of the Board of Directors.
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS:
The information required by this item is found in the section entitled
"Securities" of the Company's 1998 Annual Report to Stockholders, which section
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA:
The information required by this item is found in the tables entitled
"Trends in Operations" and "Financial Conditions and Trends" of the Company's
1998 Annual Report to Stockholders, which tables are incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
The information required by this item is found in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of the Company's 1998 Annual Report to Stockholders, which section
is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
A discussion of the Company's exposure to, and management of, market
risk is contained in the section entitled "Disclosures About Market Risk" of the
Company's 1998 Annual Report to Stockholders, which section is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
The information required by this item is contained in the section
entitled "Financial Highlights" of the Company's 1998 Annual Report to
Stockholders, which section is incorporated herein by reference, and in the
financial statements and schedule referred to in the Index to Consolidated
Financial Statements and Consolidated Financial Statement Schedule, filed as a
part of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
Not applicable.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
The information required by this item appears in the sections of the
Company's Proxy Statement for its 1999 annual meeting of stockholders entitled
"Item One - ELECTION OF DIRECTORS" and "-- STOCK OWNERSHIP INFORMATION --
Section 16(a) Beneficial Ownership Reporting Compliance", which sections are
incorporated herein by reference and in Part I of this Annual Report on Form
10-K under the heading "EXECUTIVE OFFICERS OF THE COMPANY" except for the
following information about Messrs. Nolan and Sheehan, who are retiring from the
Board upon the expiration of their terms at the 1999 Annual Meeting of
Stockholders.
John E. Nolan, age 71, has been a partner at the law firm of Steptoe &
Johnson LLP since 1963. He has served as counsel for Chrysler and Ford in major
environmental cases, for Aleyska in the Trans-Alaska Pipeline case and for the
New York Stock Exchange. He is a member of the Center for Public Resources'
Panel of Distinguished Neutrals, a Mediator for the United States Court of
Appeals for the District of Columbia Circuit and an arbitrator of major
governmental and business cases. He is a director of Hooper Holmes, Inc.
The Honorable John E. Sheehan, age 69, an entrepreneur since 1976, is a
director and the principal stockholder of several of the privately owned
enterprises which he founded. He is Chairman and Chief Executive Officer of
Rhome Management Co., which provides oversight to his various corporate
interests. He is also a member of the Executive Committee of the Associates of
the Harvard Business School and Chairman Emeritus of the Board of Trustees of
the U.S. Naval Academy Alumni Association. Mr. Sheehan is a former member of the
Board of Governors of the Federal Reserve System.
ITEM 11. EXECUTIVE COMPENSATION:
The information required by this item appears in the sections of the
Company's Proxy Statement for its 1999 annual meeting of stockholders entitled
"ITEM ONE - ELECTION OF DIRECTORS - DIRECTOR Compensation", "-- Executive
Compensation" and "-- Compensation Committee Interlocks and Insider
Participation" which sections are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
The information required by this item is contained in the section of
the Company's Proxy Statement for its 1999 annual meeting of stockholders
entitled "ITEM ONE - ELECTION OF DIRECTORS - STOCK OWNERSHIP INFORMATION --
Ownership by Management and Principal Stockholders", which section is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
The information required by this item is contained in the sections of
the Company's Proxy Statement for its 1999 annual meeting of stockholders
entitled "ITEM ONE - ELECTION OF DIRECTORS EXECUTIVE COMPENSATION -- Employment
and Severance Agreements", which section is incorporated herein by reference.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
(a) The following documents are filed as part of, or are included
in, this Annual Report on Form 10-K:
1. The financial statements listed in the Index to Consolidated
Financial Statements and Consolidated Financial Statement
Schedule, filed as a part of this Annual Report on Form
10-K.
2. The financial statement schedule listed in the Index to
Consolidated Financial Statements and Consolidated Financial
Statement Schedule, filed as a part of this Annual Report on
Form 10-K.
3. The exhibits listed in the Exhibit Index filed as a part of this Annual
Report on Form 10-K.
(b) Reports on Form 8-K: No reports on Form 8-K were filed by the
Company during the last quarter of the year ended December 31,
1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
IOMEGA CORPORATION
By: /s/Jodie K. Glore
-------------------------------------
Jodie K. Glore
Chief Executive Officer and President
Date: March 25, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- --------------------------------- ------------------------------------- ----------
<S> <C> <C>
/s/ Jodie K. Glore
- --------------------------------- Chief Executive Officer and President ) March 25, 1999
Jodie K. Glore )
)
/s/ Dan E. Strong )
- --------------------------------- Vice President, Corporate Controller )
Dan E. Strong and Interim Chief Financial Officer ) March 25, 1999
(Principal financial and accounting )
officer) )
)
)
/s/ David J. Dunn Chairman of the Board of Directors ) March 25, 1999
- --------------------------------- )
David J. Dunn )
)
)
/s/ John W. Barter Director ) March 25, 1999
- --------------------------------- )
John W. Barter )
)
)
/s/ Robert P. Berkowitz Director ) March 25, 1999
- --------------------------------- )
Robert P. Berkowitz )
)
)
/s/ John R. Myers Director ) March 25, 1999
- --------------------------------- )
John R. Myers )
)
)
/s/ John E. Nolan Director ) March 25, 1999
- --------------------------------- )
John E. Nolan )
)
/s/ M. Bernard Puckett Director ) March 25, 1999
- --------------------------------- )
M. Bernard Puckett )
)
)
/s/ John M. Seidl Director ) March 25, 1999
- --------------------------------- )
John M. Seidl )
)
<PAGE>
/s/ John E. Sheehan Director ) March 25, 1999
- --------------------------------- )
The Honorable John E. Sheehan )
)
)
/s/ James E. Sierk Director ) March 25, 1999
- --------------------------------- )
James E. Sierk )
)
</TABLE>
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED
FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements appear in the Company's
1998 Annual Report to Stockholders and are incorporated herein by reference:
DESCRIPTION
-----------
Report of Independent Public Accountants
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
The following schedule is included in this Annual Report on Form 10-K:
DESCRIPTION Page Reference
---------- --------------
Report of Independent Public Accountants on Consolidated
Financial Statement Schedule....................... 25
II - Valuation and Qualifying Accounts...................... 26
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
To Iomega Corporation:
We have audited in accordance with generally accepted auditing
standards, the consolidated financial statements included in Iomega
Corporation's annual report to stockholders incorporated by reference in this
Form 10-K, and have issued our report thereon dated January 19, 1999 (except
with respect to the matter discussed in Note 6, as to which the date is January
29, 1999.) Our audit was made for the purpose of forming an opinion on those
statements taken as a whole. The schedule listed in the index on page 24 is the
responsibility of the Company's management and is presented for the purpose of
complying with Securities and Exchange Commission's rules and is not part of the
basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
- -----------------------
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
January 19, 1999
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions
Balance at charged to Balance
beginning costs and at end of
Description of period expenses Deductions period
- ------------------------------ --------- ---------- ---------- --------
(in thousands)
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL
ACCOUNTS:
Year ended December 31, 1998 $ 11,266 $ 805 $ (2,009)* $ 10,062
Year ended December 31, 1997 $ 8,992 $ 3,598 $ (1,324)* $ 11,266
Year ended December 31, 1996 $ 1,861 $ 9,022 $ (1,891)* $ 8,992
PRICE PROTECTION AND
VOLUME REBATES:
Year ended December 31, 1998 $ 28,499 $ 89,033 $ (69,936)** $ 47,596
Year ended December 31, 1997 $ 17,041 $ 44,956 $ (33,498)** $ 28,499
Year ended December 31, 1996 $ 1,633 $ 24,480 $ (9,072)** $ 17,041
- ---------------
* Represents write-offs of Accounts Receivable
** Credits granted against Accounts Receivable
</TABLE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included or incorporated by reference in this Form 10-K into the
Company's previously filed Registration Statements on Form S-8, File Nos.
2-87671, 33-13083, 33-20432, 33-23822, 33-41083, 33-54438, 33-59027, 33-62029,
333-15335, 333-26375, 333-43775, 333-41955 and 333-64921.
/S/ ARTHUR ANDERSEN LLP
- -----------------------
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
March 25, 1999
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this Annual Report on Form
10-K:
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C> <C> <C>
3.(i).1 (13) Restated Certificate of Incorporation of the Company, as amended.
3.(ii).1 (17) By-Laws of the Company, as amended.
4.1 (7) Indenture, dated March 13, 1996, between the Company and State Street
Bank and Trust Company.
4.2 (3) Rights Agreement, dated as of July 28, 1989, between the Company and
The First National Bank of Boston, as Rights Agent.
4.2 (a) (4) Amendment No. 1, dated September 24, 1990, to Rights Agreement dated
as of July 28, 1989 between the Company and The First National Bank
of Boston.
4.3 Instruments with respect to other long-term debt of the Company
and its Consolidated subsidiaries are omitted pursuant to Item
601(b) (4)(iii) of Regulation S-K since the total amount
authorized under each such omitted Instrument does not exceed 10
percent of the total assets of the Company and its
subsidiaries on a consolidated basis. The Company hereby
agrees to furnish a copy of any such instrument to the Securities
and Exchange Commission upon request.
** 10.1 (1) 1981 Stock Option Plan of the Company, as amended.
** 10.2 (1) 1987 Stock Option Plan of the Company, as amended.
** 10.3 (1) 1987 Director Stock Option Plan of the Company, as amended.
** 10.4 (16) 1995 Director Stock Option Plan of the Company, as amended.
** 10.5 (2) Form of Indemnification Agreement between the Company and each of
its directors.
** 10.6 1997 Stock Incentive Plan, as amended.
** 10.7 (11) Iomega Corporation Nonqualified Deferred Compensation Plan.
** 10.8 (5) Employment Letter, dated November 29, 1993, between the Company and
Kim Edwards.
** 10.9 (6) Iomega Incentive Plan for Kim B. Edwards.
10.10 (3) Rights Agreement, dated as of July 28, 1989, between the Company and
The First National Bank of Boston, as Rights Agent.
10.11 (a) (4) Amendment No. 1, dated September 24, 1990, to Rights Agreement dated
as of July 28, 1989 between the Company and The First National
Bank of Boston.
10.12 (7) Indenture, dated March 13, 1996, between the Company and State Street
Bank and Trust Company.
10.13 (12) $200 million Credit Agreement, dated March 11, 1997.
10.13 (a) (12) Pledge Agreement, dated March 11, 1997.
10.13 (b) (12) Security Agreement, dated March 11, 1997.
10.13 (c) (14) First Amendment to $200 million Credit Agreement, dated January 23,
1998.
10.13 (d) (15) Waiver of Credit Agreement, dated March 29, 1998.
10.13 (e) (17) Amended and Restated Credit Agreement, dated July 15, 1998.
10.13 (f) Amendment No. 1 to Credit Agreement, dated January 29, 1999.
10.14 (8) Lease Agreement, dated January 25, 1996 between the Company and
Boyer Iomega LLC, by the Boyer Company, L.C., its Manager.
10.15 (9) Agreement for the Sale and Purchase of Assets in Malaysia, dated
September 13, 1996, between the Company and Quantum Corporation.
10.15 (a) (9) Exhibit A to the Agreement for the Sale and Purchase of Assets in
Malaysia, dated September 13, 1996, between the Company and Quantum
Corporation - Preliminary Form of Secured Promissory Note.
10.15 (b) (9) Exhibit B to the Agreement for the Sale and Purchase of Assets in
Malaysia, dated September 13, 1996, between the Company and Quantum
Corporation - The Indemnification Agreement.
10.16 (14) Lease Agreement, dated May 13, 1997, between the Company and Liberty
Property Limited Partnership.
10.17 (15) Letter Agreement between the Company and James E. Sierk, dated March
25, 1998.
10.18 (a) (15) Severance Agreement and General Release between the Company and
Kim B. Edwards, dated April 15, 1998.
10.18 (b) (15) Secured Promissory Note, dated April 15, 1998.
10.18 (c) (15) Pledge Agreement between the Company and Kim B. Edwards, dated April
15, 1999.
10.18 (d) (15) Non-Competition and Non-Recruitment Agreement between the Company
and Kim B. Edwards, dated April 15, 1998.
** 10.19 (17) 1998 Bonus Plan.
10.20 (a) (18) Senior Subordinated Promissory Note Agreement, Idanta Partners Ltd.
and Dunn Family Trust, dated July 8, 1998.
10.20 (b) (18) $20 Million Senior Subordinated Promissory Note, Idanta
Partners Ltd.,
dated July 1, 1998.
10.20 (c) (18) $7.5 Million Senior Subordinated Promissory Note, Idanta Partners Ltd.,
dated July 8, 1998.
10.20 (d) (18) $12.5 Million Senior Subordinated Promissory Note, Dunn Family Trust,
dated July 8, 1998.
** 10.21 Employment Letter, dated October 13, 1999, between the Company and
Jodie K. Glore.
** 10.22 Form of Executive Employment Agreement between the Company and certain
executive officers of the Company, dated October 1, 1998.
13.1 Portions of the Company's 1998 Annual Report
(which is not deemed to be "filed" except to
the extent that portions thereof are expressly
incorporated by reference in this Annual Report
of Form 10-K).
21.1 Subsidiaries of the Company.
23.1 Consent of Independent Public Accountants (appears on page 27 of this
Annual Report on Form 10-K).
27. Financial Data Schedule (only filed as part of electronic copy).
- ---------------------------
** Management contract or compensation plan or arrangement required to
be filed as an exhibit pursuant to Item 14(c) of Form 10-K.
</TABLE>
<TABLE>
<S> <C>
(1) Incorporated herein by reference to the exhibits to the
Company's Annual Report on Form 10-K for the year ended
December 31, 1991 (File No. 0-11963).
(2) Incorporated herein by reference to the exhibits to the Company's
Annual Report on Form 10-K for the year ended December 31, 1992
(File No. 0-11963).
(3) Incorporated herein by reference to the exhibits to the Company's
Current Report on Form 8-K filed on August 12, 1989 (File No. 0-11963).
(4) Incorporated herein by reference to the exhibits to the Company's
Amendment No. 1 to Current Report on Form 8-K filed on September 25, 1990
(File No. 0-11963).
(5) Incorporated herein by reference to the exhibits to the Company's
Annual Report on Form 10-K for the period ended December 31, 1994
(File No. 0-11963).
(6) Incorporated herein by reference to the Exhibits to the Company's
Quarterly Report on Form 10-Q for the period ended October 1, 1995
(File No. 0-11963).
(7) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-3 (File No. 33-64995).
(8) Incorporated herein by reference to the exhibits to the Company's
Annual Report on Form 10-K for the period ended December 31, 1995
(File No. 0-11963).
(9) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the period ended September 29, 1996
(File No. 0-11963).
(10) Incorporated herein by reference to the exhibits to the Company's
Annual Report on Form 10-K for the period ended December 31, 1996
(File No. 1-12333).
(11) Incorporated herein by reference to the exhibits to the Company's
Registration Statement on Form S-8 (File No.333-43775).
(12) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the period ended March 30, 1997
(File No. 1-12333).
(13) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the period ended June 29, 1997
(File No. 1-12333).
(14) Incorporated herein by reference to the exhibits to the Company's
Annual Report on Form 10-K for the period ended December 31, 1997
(File No. 1-12333).
(15) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the period ended March 29, 1998
(File No. 1-12333).
(16) Incorporated herein by reference to Appendix to the Company's
definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders (File No. 1-12333).
(17) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the period ended June 28, 1998
(File No. 1-12333).
(18) Incorporated herein by reference to the exhibits to the Company's
Quarterly Report on Form 10-Q for the period ended September 27, 1998
(File No. 1-12333).
</TABLE>
EXHIBIT 10.6
IOMEGA CORPORATION
1997 STOCK INCENTIVE PLAN
(as amended through October 30, 1998)
1. PURPOSE
The purpose of this 1997 Stock Incentive Plan (the "Plan") of Iomega
Corporation, a Delaware corporation (the "Company"), is to advance the interests
of the Company's stockholders by enhancing the Company's ability to attract,
retain and motivate persons who make (or are expected to make) important
contributions to the Company by providing such persons with equity ownership
opportunities and thereby better aligning the interests of such persons with
those of the Company's stockholders. Except where the context otherwise
requires, the term "Company" shall include any present or future subsidiary
corporations of Iomega Corporation as defined in Section 424(f) of the Internal
Revenue Code of 1986, as amended, and any regulations promulgated thereunder
(the "Code").
2. ELIGIBILITY
All of the Company's employees, officers, directors, consultants and
advisors are eligible to be granted options or restricted stock (each, an
"Award") under the Plan to purchase shares of the Company's common stock, $0.03
1/3 par value per share (the "Common Stock"). Any person who has been granted an
Award under the Plan shall be deemed a "Participant".
3. ADMINISTRATION, DELEGATION
(a) Administration by Board of Directors. The Plan will be administered
by the Board of Directors of the Company (the "Board"). The Board shall have
authority to grant Awards and to adopt, amend and repeal such administrative
rules, guidelines and practices relating to the Plan as it shall deem advisable.
The Board may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Award in the manner and to the extent it shall
deem expedient to carry the Plan into effect and it shall be the sole and final
judge of such expediency. All decisions by the Board shall be made in the
Board's sole discretion and shall be final and binding on all persons having or
claiming any interest in the Plan or in any Award. No director or person acting
pursuant to the authority delegated by the Board shall be liable for any action
or determination relating to or under the Plan made in good faith.
(b) Delegation to Executive Officers. To the extent permitted by
applicable law, the Board may delegate to one or more executive officers of the
Company the power to make Awards and exercise such other powers under the Plan
as the Board may determine, provided that the Board shall fix the maximum number
of shares subject to Awards and the maximum number of shares subject to Awards
for any one Participant to be made by such executive officers in any calendar
year.
(c) Appointment of Committees. To the extent permitted by applicable
law, the Board may delegate any or all of its powers under the Plan to one or
more committees or subcommittees of the Board (a "Committee"). The Board shall
appoint one such Committee consisting of not less than two members, each of whom
shall be an "outside director" within the meaning of Section 162(m) of the Code
and a "non-employee director" as defined in Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). All references
in the Plan to the "Board" shall mean a Committee or the Board or the executive
officer referred to in Section 3(b) to the extent of such delegation.
4. STOCK AVAILABLE FOR AWARDS
(a) Number of Shares. Subject to adjustment under Section 4(c), Awards
may be made under the Plan for up to 12,000,000 shares of Common Stock. If any
Award expires or is terminated, surrendered or canceled without having been
fully exercised or is forfeited in whole or in part or results in any Common
Stock not being issued, the unused Common Stock covered by such Award shall
again be available for the grant of Awards under the Plan, subject, however, in
the case of Incentive Stock Options (as hereinafter defined), to any limitation
required under the Code. Shares issued under the Plan may consist in whole or in
part of authorized but unissued shares or treasury shares.
(b) Per-Participant Limit. Subject to adjustment under Section 4(c),
the maximum number of shares with respect to which an Award may be granted to
any Participant under the Plan shall be 500,000 shares per calendar year or, in
the case of an initial Award made in connection with the employment of a new
employee, 1,000,000 shares in the initial calendar year of such employee?s
employment. The per-participant limit described in this Section 4(b) shall be
construed and applied consistently with Section 162(m) of the Code.
(c) Adjustment to Common Stock. In the event of any stock split, stock
dividend, recapitalization, reorganization, merger, consolidation, combination,
exchange of shares, liquidation, spin-off or other similar change in
capitalization or event, or any distribution to holders of Common Stock other
than a normal cash dividend, (i) the number and class of securities available
under this Plan, (ii) the number and class of security and exercise price per
share subject to each outstanding Option, and (iii) the repurchase price per
security subject to each outstanding Restricted Stock Award, shall be
appropriately adjusted by the Company (or substituted Awards may be made, if
applicable). Such adjustment shall be made by the Board, whose determination in
that respect shall be final, binding an conclusive. If this Section 4(c) applies
and Section 7(e) also applies to any event, Section 7(e) shall be applicable to
such event, and this Section 4(c) shall not be applicable.
5. STOCK OPTIONS
(a) General. The Board may grant options to purchase Common Stock
(each, an "Option") and determine the number of shares of Common Stock to be
covered by each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option, including conditions
relating to applicable federal or state securities laws, as it considers
necessary or advisable. An Option which is not intended to be an Incentive Stock
Option (as hereinafter defined) shall be designated a "Nonstatutory Stock
Option".
(b) Incentive Stock Options. An Option that the Board intends to be an
"incentive stock option" as defined in Section 422 of the Code (an "Incentive
Stock Option") shall only be granted to employees of the Company and shall be
subject to and shall be construed consistently with the requirements of Section
422 of the Code. The Company shall have no liability to a Participant, or any
other party, if an Option (or any part thereof) which is intended to be an
Incentive Stock Option is not an Incentive Stock Option.
(c) Exercise Price. The Board shall establish the exercise price at the
time each Option is granted and specify it in the applicable option agreement.
The exercise price of each Incentive Stock Option granted under the Plan shall
be no less than 100% of the Fair Market Value (as defined in paragraph (f)(2) of
this Section 5) of the Common Stock at the time such Option is granted. The
exercise price of each Nonstatutory Stock Option shall be no less than 25% of
the Fair Market Value of the Common Stock at the time such Option is granted;
provided however, that the maximum number of shares of Common Stock subject to
Nonstatutory Stock Options granted in any calendar year at below 100% of Fair
Market Value shall not exceed 10% of the total number of shares of Common Stock
subject to Options granted in the prior calendar year (or, with respect to the
first year of the Plan, in 1997).
(d) Duration of Options. Each Option shall be exercisable at such times
and subject to such terms and conditions as the Board may specify in the
applicable option agreement. No Option will be granted for a term in excess of
10 years, except those options granted in foreign jurisdictions which can be
granted for a term of up to 11 years.
(e) Exercise of Option. Options may be exercised only by delivery to
the Company of a written notice of exercise signed by the proper person together
with payment in full as specified in Section 5(f) for the number of shares for
which the Option is exercised.
(f) Payment Upon Exercise. Common Stock purchased upon the exercise of
an Option granted under the Plan shall be paid for as follows:
(1) in cash or by check, payable to the order of the Company;
(2) except as the Board may otherwise provide in an Option,
(i) delivery of an irrevocable and unconditional undertaking by a credit worthy
broker to deliver promptly to the Company sufficient funds to pay the exercise
price, (ii) delivery by the Participant to the Company of a copy of irrevocable
and unconditional instructions to a credit worthy broker to deliver promptly to
the Company cash or a check sufficient to pay the exercise price; or (iii)
delivery of shares of Common Stock owned by the Participant valued at their fair
market value as determined by the Board in good faith ("Fair Market Value"),
which Common Stock was owned by the Participant at least six months prior to
such delivery;
(3) to the extent permitted by the Board and explicitly
provided in the Option (i) by delivery of a promissory note of the Participant
to the Company on terms agreed to and determined by the Board, (ii) by reduction
in the amount of any liability owed by the Company to the Participant, including
any liability attributable to the Participant's participation in any
Company-sponsored deferred compensation program or arrangement, or (iii) by
payment of such other lawful consideration as the Board may determine; or
(4) any combination of the above permitted forms of payment.
6. RESTRICTED STOCK
(a) Grants. The Board may grant Awards entitling recipients to acquire
shares of Common Stock, subject to the right of the Company to repurchase all or
part of such shares at their issue price or other stated or formula price from
the recipient in the event that conditions specified by the Board in the
applicable Award are not satisfied prior to the end of the applicable
restriction period or periods established by the Board for such Award (each,
"Restricted Stock Award"); provided, however, that the maximum number of shares
of Common Stock subject to Restricted Stock Awards granted in any calendar year
at below 100% of Fair Market Value shall not exceed 10% of the total number of
shares of Common Stock subject to Awards made in the prior calendar year (or,
with respect to the first year of the Plan, in 1997).
(b) Terms and Conditions. The Board shall determine the terms and
conditions of any such Restricted Stock Award, including the conditions for
repurchase (or forfeiture) and the issue price (which shall not be less than the
par value of the Common Stock), if any. Any stock certificates issued in respect
of a Restricted Stock Award shall be registered in the name of the Participant
and, unless otherwise determined by the Board, deposited by the Participant,
together with a stock power endorsed in blank, with the Company (or its
designee). At the expiration of the applicable restriction periods, the Company
(or such designee) shall deliver the certificates no longer subject to such
restrictions to the Participant or if the Participant has died, to the
beneficiary designated, in a manner determined by the Board, by a Participant to
receive amounts due or exercise rights of the Participant in the event of the
Participant's death (the "Designated Beneficiary"). In the absence of an
effective designation by a Participant, Designated Beneficiary shall mean the
Participant's estate.
7. GENERAL PROVISIONS APPLICABLE TO AWARDS
(a) Transferability of Awards. Except as the Board may otherwise
determine or provide in an Award, Awards shall not be sold, assigned,
transferred, pledged or otherwise encumbered by the person to whom they are
granted, either voluntarily or by operation of law, except by will or the laws
of descent and distribution, and, during the life of the Participant, shall be
exercisable only by the Participant. References to a Participant, to the extent
relevant in the context, shall include references to authorized transferees.
(b) Documentation. Each Award under the Plan shall be evidenced by a
written instrument in such form as the Board shall determine. Each Award may
contain terms and conditions in addition to those set forth in the Plan.
(c) Board Discretion. Except as otherwise provided by the Plan, each
type of Award may be made alone in addition to any other type of Award. The
terms of each type of Award made under the Plan need not be identical, and the
Board need not treat Participants uniformly.
(d) Termination of Status. The Board shall determine the effect on an
Award of the disability, death, retirement, authorized leave of absence or other
change in the employment or other status of a Participant and the extent to
which, and the period during which, the Participant, the Participant's legal
representative, conservator, guardian or Designated Beneficiary may exercise
rights under the Award.
(e) Acquisition Events; Dissolution or Liquidation
(1) Consequences of Acquisition Events. Upon the occurrence of
an Acquisition Event (as defined below), or the execution by the Company of any
agreement with respect to an Acquisition Event, the Board shall provide that
outstanding Awards shall be assumed, or equivalent Awards shall be substituted,
by the acquiring or succeeding corporation (or an affiliate thereof), provided
that any such Options substituted for Incentive Stock Options shall satisfy, in
the determination of the Board, the requirements of Section 424(a) of the Code;
provided, however, that if any successor corporation refuses to assume or
substitute such Awards, then the Board shall: (i) upon written notice to the
Participants, provide that all then unexercised Options will become exercisable
in full as of a specified date (the "Acceleration Date") prior to the
Acquisition Event and will terminate immediately prior to the consummation of
such Acquisition Event, except to the extent exercised by the Participants
between the Acceleration Date and the consummation of such Acquisition Event
(provided that, in the event of an Acquisition Event under the terms of which
holders of Common Stock will receive upon consummation thereof a cash payment
for each share of Common Stock surrendered pursuant to such Acquisition Event
(the "Acquisition Price"), the Board may provide that all outstanding Options
shall terminate upon consummation of such Acquisition Event and each Participant
shall receive, in exchange therefor, a cash payment equal to the amount (if any)
by which (A) the Acquisition Price multiplied by the number of shares of Common
Stock subject to such outstanding Options (whether or not then exercisable),
exceeds (B) the aggregate exercise price of such Options); and (ii) provide that
all Restricted Stock Awards then outstanding shall become free of all
restrictions prior to the consummation of the Acquisition Event.
An "Acquisition Event" shall mean: (a) any merger or consolidation
which results in the voting securities of the Company outstanding immediately
prior thereto continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving or acquiring entity)
less than 50% of the combined voting power of the voting securities of the
Company or such surviving or acquiring entity outstanding immediately after such
merger or consolidation; (b) any sale of all or substantially all of the assets
of the Company; or (c) the acquisition of "beneficial ownership" (as defined in
Rule 13d-3 under the Exchange Act) of securities of the Company representing 50%
or more of the combined voting power of the Company's then outstanding
securities (other than through a merger or consolidation or an acquisition of
securities directly from the Company) by any "person", as such term is used in
Sections 13(d) and 14(d) of the Exchange Act other than the Company, any trustee
or other fiduciary holding securities under an employee benefit plan of the
Company or any corporation owned directly or indirectly by the stockholders of
the Company in substantially the same proportion as their ownership of stock of
the Company.
(2) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Board shall notify each
Participant as soon as practicable prior to the effective date of such proposed
event. The Board, in its discretion, may upon written notice to the
Participants, (i) provide that all then unexercised Options will become
exercisable in full as of a specified date and for a specified period of time
prior to such proposed event and (ii) provide that all Restricted Stock Awards
then outstanding shall become free of all restrictions immediately prior to the
effectiveness of such proposed event.
(3) Assumption of Options Upon Certain Events. The Board may
grant Awards under the Plan in substitution for stock and stock-based awards
held by employees of another corporation who become employees of the Company as
a result of a merger or consolidation of the employing corporation with the
Company or the acquisition by the Company of property or stock of the employing
corporation. The substitute Awards shall be granted on such terms and conditions
as the Board considers appropriate in the circumstances.
(f) Withholding. Each Participant shall pay to the Company, or make
provision satisfactory to the Board for payment of, any taxes required by law to
be withheld in connection with Awards made to such Participant no later than the
date of the event creating the tax liability. The Board may allow Participants
to satisfy such tax obligations in whole or in part in shares of Common Stock,
including shares retained from the Award creating the tax obligation, valued at
their Fair Market Value. The Company may, to the extent permitted by law, deduct
any such tax obligations from any payment of any kind otherwise due to a
Participant.
(g) Amendment of Award. The Board may amend, modify or terminate any
outstanding Award, including but not limited to, substituting therefor another
Award of the same or a different type, changing the date of exercise or
realization, and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that the Participant's consent to such action shall be required
unless the Board determines that the action, taking into account any related
action, would not materially and adversely affect the Participant.
(h) Conditions on Delivery of Stock. The Company will not be obligated
to deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Award have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and delivery of such shares have been satisfied,
including any applicable securities laws and any applicable stock exchange or
stock market rules and regulations, and (iii) the Participant has executed and
delivered to the Company such representations or agreements as the Company may
consider appropriate to satisfy the requirements of any applicable laws, rules
or regulations.
(i) Acceleration. The Board may at any time provide that any Options
shall become immediately exercisable in full or in part, or that any Restricted
Stock Awards shall be free of all restrictions, as the case may be.
8. MISCELLANEOUS
(a) No Right To Employment or Other Status. No person shall have any
claim or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
time to dismiss or otherwise terminate its relationship with a Participant free
from any liability or claim under the Plan, except as expressly provided in the
applicable Award.
(b) No Rights As Stockholder. Subject to the provisions of the
applicable Award, no Participant or Designated Beneficiary shall have any rights
as a stockholder with respect to any shares of Common Stock to be distributed
with respect to an Award until becoming the record holder of such shares.
(c) Effective Date and Term of Plan. The Plan shall become effective on
the date on which it is adopted by the Board, but no Award granted to a
Participant designated as subject to Section 162(m) by the Board shall become
exercisable, vested or realizable, as applicable to such Award, unless and until
the Plan has been approved by the Company's stockholders. No Awards shall be
granted under the Plan after the completion of ten years from the date on which
the Plan was adopted, by the Board but Awards previously granted may extend
beyond that date.
(d) Amendment of Plan. The Board may amend, suspend or terminate the
Plan or any portion thereof at any time, provided that no Award granted to a
Participant designated as subject to Section 162(m) by the Board after the date
of such amendment shall become exercisable, realizable or vested, as applicable
to such Award (to the extent that such amendment to the Plan was required to
grant such Award to a particular Participant), unless and until such amendment
shall have been approved by the Company's stockholders.
(e) Stockholder Approval. For purposes of this Plan, stockholder
approval shall mean approval by a vote of the stockholders in accordance with
the requirements of Section 162(m) of the Code.
(f) Governing Law. The provisions of the Plan and all Awards made
hereunder shall be governed by and interpreted in accordance with the laws of
the State of Delaware, without regard to any applicable conflicts of law.
EXHIBIT 10.13 (f)
AMENDMENT NO. 1 TO CREDIT AGREEMENT
AMENDMENT dated as of January 29, 1999 to the Amended and Restated
Credit Agreement dated as of July 15, 1998 (the "Credit Agreement") among IOMEGA
CORPORATION (the "Borrower"), the BANKS party thereto (the "Banks"), CITIBANK,
N.A., as Administrative Agent, and MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as
Documentation Agent (the "Documentation Agent").
W I T N E S S E T H :
WHEREAS, the parties hereto desire to amend the minimum Consolidated
EBITDA financial covenant in the Credit Agreement for the periods ending on or
closest to March 31, 1999 and June 30, 1999;
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. Defined Terms; References. Unless otherwise specifically
defined herein, each term used herein which is defined in the Credit Agreement
has the meaning assigned to such term in the Credit Agreement. Each reference to
"hereof", "hereunder", "herein" and "hereby" and each other similar reference
and each reference to "this Agreement" and each other similar reference
contained in the Credit Agreement shall, after this Amendment becomes effective,
refer to the Credit Agreement as amended hereby.
SECTION 2. Reduction of Minimum Consolidated EBITDA. The chart in
Section 5.13 of the Credit Agreement is amended by changing the numbers set
forth opposite the dates March 31, 1999 and June 30, 1999 from "$57,500,000" to
"$25,000,000" and from "$120,000,000" to "$90,000,000", respectively.
SECTION 3. Representations of Borrower. The Borrower represents and
warrants that (i) the representations and warranties of the Borrower set forth
in Article 4 of the Credit Agreement will be true on and as of the date hereof
and (ii) no Default will have occurred and be continuing on such date.
SECTION 4. Governing Law. This Amendment shall be governed by and
construed in accordance with the laws of the State of New York.
<PAGE>
SECTION 5. Counterparts. This Amendment may be signed in any number of
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
SECTION 6. Effectiveness. This Amendment shall become effective as of
the date hereof when 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/ Robert J. Simmons
-----------------------------------
Name: Robert J. Simmons
Title: Vice President & 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: /s/ Frank Benesh
-----------------------------------
Name: Frank Benesh
Title: Vice President
BANK OF AMERICA NATIONAL
TRUST AND SAVINGS BANK
By: /s/ Kevin Mc Mahon
-----------------------------------
Name: Kevin Mc Mahon
Title: Managing Director
<PAGE>
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: Vice President
By: /s/ Paul S. Faust
-----------------------------------
Name: Paul S. Faust
Title: Vice President
THE SUMITOMO TRUST & BANKING
CO., LTD.
By: /s/ Eleanor M. Chan
-----------------------------------
Name: Eleanor M. Chan
Title: Senior Vice President and
Manager
THE NORTHERN TRUST COMPANY
By: /s/ John E. Burda
-----------------------------------
Name: John E. Burda
Title: Vice President
<PAGE>
THE CIT GROUP/BUSINESS
CREDIT, INC.
By: /s/ Cecil Chinery
-----------------------------------
Name: Cecil Chinery
Title: Vice President
By: /s/ Robert Castine
-----------------------------------
Name: Robert Castine
Title: Vice President
UNION BANK OF CALIFORNIA, N.A.
By: /s/ Glenn Leyrer
-----------------------------------
Name: Glenn Leyrer
Title: Vice President
EXHIBIT 10.21
October 13, 1998
Mr. Jodie K. Glore
7960 North River Road
River Hills, WI 53217
Dear Jodie:
On behalf of the Board of Directors of Iomega Corporation, I am pleased to offer
you the position of President and Chief Executive Officer of the Company. In
this capacity, you will be responsible for strategic and operational leadership,
reporting to the Board. We would like you to join us as soon as you can wrap up
your current responsibilities, preferably by December 1, 1998. You will, of
course, be elected to the Board of Directors effective the day you join us.
The compensation arrangements that we are offering are outlined below:
Base Salary
Your salary will be $600,000 per year, payable in bi-weekly installments in
accordance with Iomega's normal payroll procedures, subject to withholding taxes
and other normal deductions. Salary increases are determined by the Board on the
advice of the Compensation Committee based on assessed performance. The first
salary review will be undertaken after one year. It is our intent in the future
to revise executive salaries every other year in furtherance of our objective of
emphasizing the incentive compensation elements, both annual and long term, of
our total compensation packages.
<PAGE>
Annual Incentive
Your annual incentive award will be targeted at 100% of salary. Actual awards
will vary from the target based on the achievement of specific goals and the
Board's assessment of performance. As currently constituted, the incentive
opportunity is uncapped. We anticipate establishing goals for 1999 in
cooperation with you shortly after you join us. Recognizing that you will need
time to assess the Company's capabilities and develop a sound business plan, we
will guarantee a 1999 annual incentive award of at least $600,000. You would
receive a pro rata award for the period of service in 1998 at this same level
(e.g., $50,000 for service in December 1998).
Our normal practice is to determine and pay annual incentive awards in cash by
mid-March following the close of the fiscal year on December 31st.
Long Term Incentives
As you know, we have reconfigured our long-term incentive program for executives
during the past few months. The grant that we would make to you would consist of
the following elements:
- - A grant of 225,000 non-qualified stock options effective when you join
the Company. These options will be priced at market, carry a ten-year
term, and vest over five years at the rate of 20% on each of the first
through the fifth anniversaries of grant.
- - A grant of 75,000 performance-accelerated non-qualified options, priced
at market, with a ten-year term, and a normal vesting schedule of 20%
per year on each of the third through seventh anniversaries of grant.
These options may vest earlier based on the attainment of financial and
customer satisfaction goals. These goals have not yet been established,
and we look to your participation in the development of these goals for
the entire executive team.
<PAGE>
- - A grant of 75,000 performance units, the value of which will be
determined over the three-year period January 1, 1999 through December
31, 2001 based on the attainment of financial and customer service
goals that need to be set by September 30, 1999. These units have a
maximum potential value of $10 each, or $750,000 in aggregate.
The three elements described above represent an annual grant under the long-term
incentive program as recently redesigned. We anticipate you will be receiving
future grants under this program. In addition, we will make two grants of
options to you as a special incentive to drive Iomega's performance to higher
levels. These grants are as follows:
- - 1,000,000 non-qualified options when you join Iomega, priced at market,
carrying a ten-year term, and vesting at the rate of 33.3% on each of
the first through third anniversaries of grant.
- - 500,000 non-qualified options when you join Iomega, priced at market,
carrying a ten-year term, and vesting at the rate of 20% on each of the
first through fifth anniversaries of grant.
Benefits
Iomega provides a comprehensive program of employee benefits, including:
- - Medical expense protection, including hospitalization, major medical
and dental coverage
- - Section 401(k) retirement plan
- - Vacation and holidays
<PAGE>
- - Participation in the Executive Life Insurance Program at two times
annual base salary, subject to medical underwriting
- - Participation in the Executive Long Term Disability Program
- - Participation in the Executive Tax Planning Services provided by Price
Waterhouse.
Perquisites
Iomega's executive perquisites are not as extensive as those you currently enjoy
at Rockwell. In recognition of this, we will provide a one-time payment to you
of $100,000, subject to withholding taxes, payable upon the commencement of
employment.
Prior Compensation Opportunities
You will be leaving certain incentive opportunities and retirement benefits Aon
the table@ when you leave Rockwell. Our outside compensation consultant (David
Swinford of Pearl Meyer & Partners) has net present valued these opportunities
as follows:
- - Rockwell supplemental retirement benefit accrued to date: $802,000
- - Your 1998 annual incentive award was expected to be approximately
$300,000
- - Amounts accrued to date under the current performance unit cycle are
approximately $700,000.
In place of term life insurance, you have elected a survivor benefit equal to
your base salary payable for ten years after your death while an active employee
or a $1,000,000 lump sum payment after your retirement.
<PAGE>
Our objective is to make you whole on the compensation opportunities that you
are leaving behind, but to do so in a way that is tailored to your needs. Our
thoughts at this time are to provide:
- - An additional 300,000 non-qualified options, priced at market, with a
ten-year term and vesting on your date of employment
- - If you forfeit your FY1998 incentive award by virtue of leaving
Rockwell, an additional sign-on bonus of $300,000 would be paid to
replace your 1998 Rockwell bonus
- - Replacement of the accrued performance unit amount, supplemental
pension and survivor benefit (to the extent its value exceeds Iomega's
coverage) with a package of equivalent value. I suggest that Pearl
Meyer & Partners work with your advisors to develop an approach for our
mutual consideration.
Relocation
Iomega provides comprehensive relocation assistance, as described in the
attached policy. I understand from our discussions that you may have some
special circumstances - I welcome an opportunity to discuss these with you in
order to ensure as smooth a transition for you and Sandy as possible.
Severance and Change in Control Protection
We have every confidence that your relationship with Iomega will be a long and
prosperous one. However, in the unlikely event that the Board should terminate
you for reasons other than cause before December 31, 2001, we will continue your
salary, target annual incentive and benefits for twenty-four months, and vest
any additional options that would have vested by or on the next anniversary of
your employment.
<PAGE>
We will provide a higher level of protection in the case of a change in control.
If your employment is terminated by the Company other than for cause or by you
for good reason, your salary, annual bonus at target, and benefits will be
continued for 36 months. However, these payments would be reduced (or in the
case of benefits, eliminated) once subsequent employment is obtained during the
period. Fifty percent of any options not yet vested on the date of the change in
control will vest automatically on that date. The remaining options will vest
over two years if you remain employed or immediately if and when you are
terminated other than for cause.
Summary of Compensation Arrangements
Base Salary: $600,000
Annual Incentive: $600,000 target; uncapped opportunity;
guaranteed for 1999
Stock Options: 2,025,000 options with immediate to five-year
vesting 75,000 performance-accelerated options
Performance Units: 75,000 covering 1/1/99 - 12/31/01, with
$750,000 maximum value
Benefits: Iomega's standard package
Special package to be developed with advisors
Sign-on bonus: $100,000 plus an additional $300,000 if you
forfeit your FY 1998 Rockwell bonus
Severance protection: 12 months' salary, annual incentive and
benefits continuance, plus full vesting of
options which would have vested by or on the
next anniversary date of your employment if
terminated by the Company other than for
cause prior to 12/31/01
Change in control: 36 months' salary, annual incentive and
benefits continuation plus full vesting of
options and performance unit awards if
terminated, other than for cause, within two
years following a change in control.
<PAGE>
Other Provisions
We have agreed that if you join Iomega and buy a house but decide to purchase a
lot and build a new home, Iomega will guarantee you against loss on the sale of
the original home for a period up to three years.
The start of your employment is contingent upon your acceptance of this offer
and the terms and conditions described in this letter and your signature to the
enclosed Agreement. As you will note, this offer for a position constitutes an
at-will relationship with Iomega. This means that both you and Iomega share the
right to sever the employment relationship at any time, for any reason or no
reason, and with or without notice.
Please fax a copy of the signed offer letter (indicating the date that you will
begin work) and relocation agreement to me at Iomega's offices. In the meantime,
if you have any questions, please contact me at (619) 452-9690.
Jodie, on a more personal note, I couldn't be more pleased than I am with your
interest in Iomega. I hope you will accept our offer. I am sure that you will do
an excellent job for us and we are all looking forward to working with you. If
there is anything we can do to facilitate matters or be of assistance to you or
Sandy, please let me know.
Best regards.
Sincerely,
/s/ David J. Dunn /s/ Jodie K. Glore
- --------------------------------- --------------------------
David J. Dunn, Chairman Jodie K. Glore - Accepted
Board of Directors Date: October 21, 1998
EXHIBIT 10.22
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (Agreement), dated as of
October 1, 1998, is by and between Iomega Corporation, a Delaware corporation
(Company) and ____________ (Executive).
RECITALS
WHEREAS, Executive has served as a key member of the Company's
management team and the Company wants to retain Executive's services in the best
interests of the Company and its stockholders; and
WHEREAS, Executive is desirous of continuing in the management team
pursuant to the terms of this Agreement;
NOW, THEREFORE, the Company and Executive, in consideration of the
terms set forth herein and other valuable consideration, agree as follows.
EMPLOYMENT OF EXECUTIVE
1. EMPLOYMENT. Executive is employed by the Company on an at-will basis, which
means that either Executive or the Company may terminate the employment
relationship at any time for any reason, with or without cause.
2. SEVERANCE. If Executive's employment is terminated by the Company, other
than for "Cause" as defined herein, before November 1, 1999, and Executive
executes a General Release releasing all claims and causes of action
Executive may have against the Company, its officers, directors and
employees, excluding claims (i) under this Agreement, (ii) under any option
agreement or performance unit agreement between Executive and the Company,
or (iii) with respect to unreimbursed business expenses incurred by
Executive in connection with Company business, the Company will pay
Executive "Severance" as defined herein. Severance, for this purpose, shall
be Executive's current annual compensation, base and estimated bonus, as of
the date of termination, less any compensation Executive may receive for
subsequent employment in the one-year period following termination.
Severance payments shall be made on the Company's regular payroll schedule
with the bonus component of Severance to be included in the final payment.
3. EMPLOYEE BENEFITS. Subject to the terms and conditions of the Company's
employee benefit plans, following not-for-Cause termination the Company
will continue to provide employee benefits to Executive until: (a)
Executive becomes eligible for similar benefits in subsequent employment
without any exclusion for pre-existing conditions of Executive or his or
her dependents; or (b) Executive discontinues participation in the employee
benefit plan through failure to contribute, or otherwise; or (c) the
expiration of one year after the date of termination; whichever date shall
first occur.
4. CAUSE. "Cause" shall mean: (i) any act of personal dishonesty by the
Executive in connection with his or her responsibilities as an employee, or
(ii) conviction of the Executive of a felony, or (iii) a wanton or willful
act by the Executive in violation of either the Company's own interest or
of Executive's duties or of Executive's expected standard of conduct, or
(iv) violations by the Executive of Executive's obligations as an employee
of the Company which are demonstrably willful and deliberate on the
Executive's part after written demand for performance from the Company
which describes the basis for the Company's belief that the Executive has
not substantially performed his or her duties.
<PAGE>
NON-DISCLOSURE AND NON-DISPARAGEMENT
5. NON-DISCLOSURE. Executive acknowledges his or her obligations, both during
and after the term of Executive's employment with the Company, under a
non-disclosure agreement previously entered into between Executive and the
Company. Any breach of Executive's non-disclosure obligations to the
Company shall, in addition to all other remedies available to the Company,
result in the immediate release of the Company from any obligations it
would otherwise have to provide further payments or benefits under this
Agreement.
6. RETURN OF DOCUMENTS. Upon termination, for any reason, of Executive's
employment with the Company, all documents, records, and materials relating
to the Company's business, whether stored electronically or in a written or
printed form, or otherwise, including but not limited to notes, notebooks,
rolodex files, telephone lists, computer or data processing disks and
tapes, marketing plans, financial plans and studies, customer lists, names
of business contacts, policies and procedures, and any materials prepared,
compiled or acquired by Executive relating to any aspect of the Company or
its business, products, plans or proposals, and all copies thereof, then in
Executive's or a related party's possession, custody or control, whether
prepared by Executive or others, shall be returned to the Company. Related
parties shall include each person or entity associated with or related to
Executive at the time of the termination of Executive's employment with the
Company. Executive also agrees to participate in an exit interview upon the
termination of Executive's employment with the Company.
7. EMPLOYMENT INVENTIONS. Executive acknowledges that certain innovations,
products and processes invented or discovered by Executive during
Executive's employment with the Company are the property of the Company and
have been assigned to the Company under an agreement previously entered
into between Executive and the Company. Any breach of Executive's
obligations to the Company with respect to the assignment of inventions
shall, in addition to all other remedies available to the Company, result
in the immediate release of the Company from any obligations it would
otherwise have to provide further payments or benefits under this
Agreement.
8. NON-DISPARAGEMENT. During and after the term of Executive's employment with
the Company, Executive agrees not to disparage, orally or in writing, the
Company, its officers, executives, management, operations, products,
designs, or any other aspects of the Company's affairs to any third person
or entity; and the Company agrees that none of its executive officers shall
disparage, orally or in writing, Executive or the performance of
Executive's duties at the Company to any third person or entity.
NON-SOLICITATION
9. NON-SOLICITATION OF EMPLOYEES. Executive agrees that during Executive's
employment with the Company and for one year following Executive's
voluntary or involuntary termination of employment with the Company,
Executive shall not, directly or indirectly, in any capacity (including but
not limited to, as an individual, a sole proprietor, a member of a
partnership, a stockholder, investor, officer, or director of a
corporation, an executive, agent, associate, or consultant of any person,
firm or corporation or other entity) hire any person from, attempt to hire
any person from, or solicit, induce, persuade, or otherwise cause any
person to leave his or her employment with the Company. Any breach of
Executive's obligations under this paragraph shall, in addition to all
other remedies available to the Company, result in the immediate release of
the Company from any obligations it would otherwise have to provide further
payments or benefits under this Agreement.
10. NON-SOLICITATION OF CUSTOMERS. Executive agrees that during Executive's
employment with the Company and for one year following Executive's
voluntary or involuntary termination of employment with the Company,
Executive shall not, directly or indirectly, in any capacity, solicit the
business of any customer of the Company except on behalf of the Company, or
attempt to induce any customer of the Company to cease or reduce its
business with the Company; provided that following the termination of
Executive's employment with Company he or she may solicit a customer of the
Company to purchase goods or services that do not compete directly or
indirectly with those then offered by the Company. Any breach of
Executive's obligations under this paragraph shall, in addition to all
other remedies available to the Company, result in the immediate release of
the Company from any obligations it would otherwise have to provide further
payments or benefits under this Agreement.
NON-COMPETITION
11. CONFIDENTIAL/PROPRIETARY INFORMATION. Executive acknowledges and agrees
that in Executive's position at the Company, Executive will have access to,
knowledge of and use of the Company's trade secrets, proprietary
information, business operations, business know-how, employee information,
and customer information. Executive acknowledges that such information is
critical to the successful operation of Company's business, that it would
be impossible for Executive to discard all knowledge of such information
upon separation of employment with the Company, and that it would be unfair
to the Company for such information to be used by an Executive in a
business that competes or attempts to compete with the Company. Executive
recognizes and agrees that the Company fills a narrow, specific niche in
the computer storage device industry. A limited number of entities located
throughout the world compete worldwide with the company in the data storage
device industry. As a result of this worldwide market, Executive agrees
that this covenant not to compete extends worldwide and cannot be written
more narrowly.
12. NON-COMPETITION. Executive agrees that during Executive's employment with
the Company, and for one year following the termination of Executive's
employment with the Company for whatever reason, Executive will not
directly or indirectly perform services for an entity, including
Executive's self, which actually or potentially competes with the Company.
For the purposes of this section only and not for purposes of any antitrust
related market definition or analysis, an entity (which includes but is not
limited to a person, partnership, joint venture, or corporation) will be
considered to compete with the Company if such entity (or in the case of a
multi-billion dollar, multi-division corporation, the division thereof for
which services are proposed to be performed by Executive) or any of its
affiliates engages directly or indirectly in the removable media storage
device market segment as all or part of its business. Examples of such
entities include: Syquest, Castlewood, Imation, Sony, HP Storage Division,
Seagate Removable Storage Division, and their affiliates. These examples
are provided for illustration purposes and are not intended to be an
all-inclusive list or to limit the preceding terms in any way. For the
purposes of this Non-Competition Section, performing services shall include
but not be limited to positions as employee, consultant, officer, joint
venturer, owner in full or in part (excluding ownership consisting solely
of not more than 1% of the outstanding stock of a publicly held company),
partner, and director. Any breach of Executive's obligations under this
paragraph shall, in addition to all other remedies available to the
Company, result in the immediate release of the Company from any
obligations it would otherwise have to provide further payments or benefits
under this Agreement.
ADDITIONAL PROVISIONS
13. SUCCESSOR IN INTEREST.
(a) COMPANY'S SUCCESSORS. Any successor to the Company (whether
direct or indirect and whether by purchase, lease, merger,
consolidation, liquidation or otherwise) or to all or
substantially all of the Company's business and/or assets shall
assume the obligations of the Company under this Agreement and
agree expressly to perform the Company's obligations under this
Agreement in the same manner and to the same extent as the
Company would be required to perform such obligations in the
absence of a succession. For all purposes under this Agreement,
the term "Company" shall include any successor to the Company's
business and/or assets which executes and delivers the assumption
agreement described in this subsection or which becomes bound by
the terms of this Agreement by operation of law.
(b) Executive's Successors. The terms of this Agreement and all
rights of the Executive hereunder shall inure to the benefit of,
and be enforceable by, the Executive's personal or legal
representative, executors, administrators, successors, heirs,
distributees, devisees and legatees.
14. NEW EMPLOYMENT. Executive shall inform the Company immediately of any
change in his or her employment status during the period that Executive is
receiving Severance.
15. SEVERABILITY. The invalidity or unenforceability of any provision or
provisions of this Agreement shall not affect the validity or
enforceability of any other provision hereof, which shall remain in full
force and effect.
16. EMPLOYMENT TAXES. All payments made pursuant to this Agreement will be
subject to withholding of applicable income and employment taxes.
17. REMEDIES: NO IMPLIED WAIVERS. The parties shall attempt in good faith to
resolve any dispute arising out of or relating to this Agreement by
negotiation. If the dispute has not been resolved by negotiation within 30
days, the parties shall endeavor to resolve it by mediation. Unless the
parties otherwise provide, the mediator shall be selected from the CPR
Panels of Distinguished Neutrals. Any dispute which remains unresolved 30
days after appointment of a mediator shall be settled by arbitration by a
sole arbitrator in accordance with the CPR Rules for Non-Administrated
Arbitration, and judgment upon the award rendered by the arbitrator may be
entered by any court having jurisdiction thereof. The reference in this
Agreement to particular breaches resulting in an immediate release of the
Company from certain of its obligations shall not mean that other material
breaches would not also create a right on the part of the Company to
discontinue all payments and benefits under this Agreement or to be
relieved of other obligations. No delay or omission by either party in
exercising any right under this Agreement will operate as a waiver of that
or any other rights. A waiver or consent given by the Company on one
occasion is effective only in that instance and will not be construed as a
bar or waiver of any right on any other occasion.
18. SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF. The parties recognize that
irreparable injury to the Company will result from a material breach of the
Assignment of Inventions, Non-Disclosure, , Non-Disparagement,
Non-Solicitation, or Non-Compete provisions in pargraph 5-12 of this
Agreement, and that monetary damages will be inadequate to rectify such
injury. Accordingly, notwithstanding the dispute resolution provisions in
the foregoing paragraph, the Company shall be entitled to one or more
preliminary or permanent orders: (i) restraining or enjoining any act which
would constitute a material breach of paragraph 5-12 of this Agreement,
and (ii) compelling the performance of any obligation which, if not
performed, would constitute a material breach of paragraph 5-12 of this
Agreement.
19. ENTIRE AGREEMENT. Except with respect to the terms of any written
employment agreement, if any, by and between the Company and Executive that
is signed on behalf of the Company, no agreements, representations or
understandings (whether oral or written and whether express or implied)
which are not expressly set forth in this Agreement have been made or
entered into by either party with respect to the subject matter hereof.
20. GOVERNING LAW. This Agreement shall be interpreted, construed and governed
in accordance with the laws of the State of Delaware, without giving effect
to the choice of law rules thereof.
IN WITNESS WHEREOF, Executive and the Company have executed this Agreement as of
the date hereinabove written.
IOMEGA CORPORATION
By:/s/ Laurie B. Keating
--------------------------------
Name: Laurie B. Keating
Title: Senior Vice President
and General Counsel
---------------------------------
[Executive]
<TABLE>
Iomega Corporation and Subsidiaries
Financial Highlights
<CAPTION>
For years ended December 31,
(in thousands, except per share and employee data) 1998 1997
--------------- ---------------
<S> <C> <C>
Sales $ 1,694,385 $ 1,739,972
Gross margin 422,934 547,662
Operating expenses 498,900 369,956
Net income (loss) $ (54,222) $ 115,352
--------------- ---------------
Net income (loss) per common share
Basic $ (0.20) $ 0.45
--------------- ---------------
Diluted $ (0.20) $ 0.42
--------------- ---------------
Share price (1)
High $ 13.25 $ 16.41
Low $ 3.06 $ 7.06
--------------- ----------------
Employees 4,865 4,816
--------------- ---------------
</TABLE>
<TABLE>
Quarterly Financial Information
<CAPTION>
For year ended December 31, 1998
(in thousands, except per share data) Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total Year
----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Sales $ 407,500 $ 393,831 $ 391,766 $ 501,288 $ 1,694,385
Gross margin 102,136 94,224 87,647 138,927 422,934
Net income (loss) (18,576) (39,910) (14,777) 19,041 (54,222)
Net income (loss) per common share
Basic $ (0.07) $ (0.15) $ (0.06) $ 0.07 $ (0.20)
Diluted $ (0.07) $ (0.15) $ (0.06) $ 0.07 $ (0.20)
For year ended December 31, 1997
(in thousands, except per share data) Quarter 1 Quarter 2 Quarter 3 Quarter 4 Total Year
----------- ----------- ----------- ----------- -------------
Sales $ 361,344 $ 400,162 $ 431,700 $ 546,766 $ 1,739,972
Gross margin 107,279 117,459 140,327 182,597 547,662
Net income 23,014 26,209 30,008 36,121 115,352
Net income per common share(1)
Basic $ 0.09 $ 0.10 $ 0.12 $ 0.14 $ 0.45
Diluted $ 0.08 $ 0.09 $ 0.11 $ 0.13 $ 0.42
(1) Share prices and net income per common share have been retroactively adjusted to reflect a stock split
(see Note 2 to Consolidated Financial Statements).
</TABLE>
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
TRENDS IN OPERATIONS
The following table indicates the trends in certain components of the
consolidated statements of operations for each of the last five years.
<CAPTION>
Years ended December 31, 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
(in thousands, except per share and employee data)
Sales $ 1,694,385 $ 1,739,972 $ 1,212,769 $ 326,225 $ 141,380
Cost of sales 1,271,451 1,192,310 879,989 235,838 92,453
----------- ----------- ----------- ----------- -----------
Gross margin 422,934 547,662 332,780 90,387 48,927
----------- ----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative 386,304 291,930 190,719 57,189 36,862
Research and development 101,496 78,026 42,101 19,576 15,438
Restructuring reversal - - - - (2,491)
Purchased in-process technology 11,100 - - - -
----------- ----------- ----------- ----------- -----------
Total operating expenses 498,900 369,956 232,820 76,765 49,809
----------- ----------- ----------- ----------- -----------
Operating income (loss) (75,966) 177,706 99,960 13,622 (882)
Interest and other income (expense) (7,459) (391) (5,977) (1,983) 908
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes (83,425) 177,315 93,983 11,639 26
Benefit (provision) for income taxes 29,203 (61,963) (36,655) (3,136) (1,908)
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (54,222) $ 115,352 $ 57,328 $ 8,503 $ (1,882)
=========== =========== =========== =========== ===========
Net income (loss) per common share (1)
Basic $ (0.20) $ 0.45 $ 0.23 $ 0.04 $ (0.01)
=========== =========== =========== =========== ===========
Diluted $ (0.20) $ 0.42 $ 0.21 $ 0.03 $ (0.01)
=========== =========== =========== =========== ===========
Total employees 4,865 4,816 2,926 1,667 886
=========== =========== =========== =========== ===========
</TABLE>
(1) Net income per common share has been retroactively adjusted to reflect
all prior period stock splits.
<PAGE>
BUSINESS SEGMENT INFORMATION
The Company is organized into four business segments based primarily on the
nature of the Company's products and customers. The Company's Zip segment
involves the development, manufacture, distribution and sales of personal
storage products and applications, including Zip disk and drive systems to
original equipment manufacturers ("OEMs"), retailers and distributors throughout
the world. The Company's Jaz segment involves the development, manufacture,
distribution and sales of professional storage products and applications,
including Jaz disk and drive systems and the Buz multimedia producer to
retailers, distributors and resellers throughout the world. The Company's Ditto
segment involves the development, manufacture, distribution and sales of the
Ditto family of tape backup drives and tape cartridges to retailers,
distributors and resellers throughout the world. The Company's Clik! segment
involves the development, manufacture, distribution and sales of Clik! mobile
drives and 40 MB disks for use with portable digital products such as digital
cameras, handheld personal computers and notebook computers to retailers,
distributors, OEMs and resellers throughout the world. Clik! products began
shipping late in the fourth quarter of 1998 in limited volumes. The following
table indicates the trends in sales, units and product profit margin for
significant business segments for each of the last three years.
<TABLE>
Sales, Units and Profit by Significant Business Segment
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
(In thousands)
<S> <C> <C> <C>
Sales:
Zip $ 1,183,020 $ 1,159,076 $ 746,395
Jaz 416,888 459,721 304,605
Ditto 81,074 118,320 127,563
Clik! 2,125 - -
Drive units:
Zip 9,472 6,960 3,653
Jaz 713 818 575
Ditto 455 769 930
Disk units:
Zip 59,054 42,575 23,244
Jaz 3,095 2,785 1,269
Ditto 1,392 1,767 495
Product profit margin (1):
Zip $ 150,702 $ 285,562 $ 164,744
Jaz 4,746 48,968 21,249
Ditto (14,309) 1,852 17,148
Clik! (37,052) (5,981) (909)
(1) Product profit margin is defined as sales and other income directly related
to a segment's operations less both fixed and variable manufacturing,
research and development and selling, general and administrative expenses
directly related to a segment's operations. Product profit margin does not
include general corporate expenses of $170 million, $147 million and $108
million in 1998, 1997 and 1996, respectively.
</TABLE>
STOCK SPLIT
All shares, per share amounts and stock options for 1997 and 1996 have been
retroactively restated to reflect the stock split described in Note 2 to the
Consolidated Financial Statements.
<PAGE>
<TABLE>
RESULTS OF OPERATIONS
The following table sets forth certain financial data as a percentage of sales
for the years ended December 31, 1998, 1997 and 1996:
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Sales 100.0% 100.0% 100.0%
Cost of sales 75.0 68.5 72.6
-------- -------- --------
Gross margin 25.0 31.5 27.4
-------- -------- --------
Operating expenses:
Selling, general and administrative 22.8 16.8 15.7
Research and development 6.0 4.5 3.5
Purchased in-process technology 0.7 - -
-------- -------- --------
Total operating expenses 29.5 21.3 19.2
-------- -------- --------
Operating income (loss) (4.5) 10.2 8.2
Net interest and other expense (0.4) - (0.5)
-------- -------- --------
Income (loss) before income taxes (4.9) 10.2 7.7
Benefit (provision) for income taxes 1.7 (3.6) (3.0)
-------- -------- --------
Net income (loss) (3.2)% 6.6% 4.7%
======== ======== ========
</TABLE>
Seasonality
The Company's Zip products are targeted primarily to the personal computer OEM
and retail consumer markets. The Company's Jaz and Ditto products are targeted
primarily to the retail consumer market. The Company's Clik! products are
targeted to the retail consumer market and to consumer electronics 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. Due to first quarter seasonality and component constraints
associated with ramping new products, the Company expects first quarter 1999
results to be approximately breakeven with the possibility of a small profit or
loss. However, there can be no assurance that the expected results will be
realized.
1998 As Compared to 1997
Sales. Sales decreased by $45.6 million, or 2.6%, in 1998 as compared to 1997.
This decrease was due primarily to price reductions on Zip and Jaz disk and
drive products and a higher mix of lower priced OEM Zip drive shipments. These
price reductions and mix changes were partially offset by an increase in volumes
of Zip drives, Zip disks and Jaz disks. Total drive sales of $983.0 million
represented a decrease of 13.7% as compared to 1997. However, total drive unit
shipments increased by 24.5% as compared to 1997. Total disk sales of $699.5
million represented an increase of 10.3% as compared to 1997. Total disk unit
shipments increased by 34.8% as compared to 1997.
Sales of Zip products in 1998 and 1997, respectively, totaled approximately $1.2
billion and accounted for 69.8% of total sales in 1998, as compared with 66.6%
of total sales in 1997. Zip drive unit shipments increased by 36.1% from 1997,
while Zip disk unit shipments increased by 38.7%. The increase in both disk and
drive units shipped was primarily offset by price reductions during 1998 and an
increase in sales of Zip OEM drives that have lower prices than drives sold to
distributors and retailers. Sales of Zip OEM drives accounted for over 55% of
total Zip drive shipments in 1998, compared to approximately 32% in 1997.
Jaz product sales in 1998 totaled $416.9 million, or 24.6% of total sales,
representing a 9.3% decrease from 1997. Jaz drive unit shipments decreased by
12.8% from 1997, while Jaz disk unit shipments increased by 11.1%.
Ditto product sales in 1998 were $81.1 million, or 4.8% of total sales,
representing a 31.5% decline from 1997. Ditto drive unit shipments decreased by
40.8% as compared to 1997, while Ditto disk unit shipments decreased by 21.2%.
Geographically, sales in the Americas were approximately $1.1 billion in 1998
and in 1997 and accounted for 67.1% of total sales in 1998, as compared to
61.0% of total sales in 1997. Sales in Europe were $427.7 million, or 25.2% of
total sales, in 1998, as compared to $520.0 million, or 29.9% of total sales, in
1997. Sales in Asia were $130.3 million, or 7.7% of total sales, in 1998, as
compared to $159.0 million, or 9.1% of total sales, in 1997.
Gross Margin. The Company's overall gross margin was 25.0% in 1998, as compared
to 31.5% in 1997. The decrease in gross margin was due primarily to price
reductions on Zip and Jaz drive and disk products. In addition, a higher
percentage of Zip drives were shipped to the OEM channel in 1998, as compared to
1997. Prices and margins are lower for drives sold to the OEM channel than for
drives sold to distribution and retail channels. The decrease in gross margin
percentage in 1998 was partially offset by reductions in component material
costs and per unit manufacturing overhead costs for the Zip and Jaz product
lines. Future gross margin percentages will continue to be impacted by the
percentage of OEM drive sales versus retail and distribution sales. Future gross
margin percentages will also depend on sales volumes of Zip, Jaz and Clik!
disks, which generate significantly higher gross margins than the corresponding
drives, and on the mix between disks and drives, and the mix between Zip, Jaz
and Clik! products. Additionally, management expects that sales of Clik!
products during early 1999 will initially have a negative impact on gross
margins due to start-up costs associated with early production volumes. The
Company is targeting overall gross margin percentages to be in the mid to upper
twenty percent range for fiscal 1999. However, there can be no assurance that
such margin percentages will be realized.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $94.4 million in 1998, as compared to 1997,
and increased as a percentage of sales to 22.8% in 1998 from 16.8% in 1997.
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 implemented by the Company to improve financial performance
and included $6.0 million of employee severance and outplacement charges, $2.7
million of cash and non-cash write-offs for facility-related assets and $0.7
million of other miscellaneous charges. In the course of implementing the above
measures during the third and fourth quarters of 1998, the Company determined
that actual employee severance and outplacement charges were less than
originally expected; however, this excess was more than offset by the higher
than expected facility-related charges. At December 31, 1998, the reserves
related to special charges totaled $5.2 million, of which $0.7 million related
to the second quarter special pre-tax charge of $9.4 million and $4.5 million
related to the additional facility charges in the third and fourth quarters of
1998. Excluding the $9.4 million special charge, selling, general and
administrative expenses increased by $85.0 million and represented 22.2% of
sales in 1998. The increased expenses in 1998 were primarily due to a
combination of substantial marketing and advertising program expenditures,
increased spending on other, non-advertising related sales and marketing
activities primarily due to international expansion, increased spending on
customer satisfaction programs and an increase in other general and
administrative expenses, comprised mainly of information system expenditures and
legal fees. Management is focused on maintaining selling, general and
administrative expenses in a range of 15% to 20% of sales. However, the
Company's success in achieving a reduction in the percentage of selling, general
and administrative expenses depends in part on the levels of sales achieved
during 1999 and there can be no assurance that the Company's cost reduction
measures and other efforts to reduce the percentage of sales represented by
selling, general and administrative expenses will be successful.
Research and Development Expenses. Research and development expenses increased
by $23.5 million, or 30.1% in 1998, when compared to 1997, and increased as a
percentage of sales to 6.0% in 1998, from 4.5% in 1997. This increase was
primarily the result of increased spending for new product development,
including Clik! development, during the period. The remainder of the increase
was the result of expenditures related to the continued development and
enhancement of Zip, Jaz and other products. Management is targeting the level of
spending for research and development during 1999 to be in the range of 3% to 5%
of sales to support planned new product development and existing product
enhancements. However, the Company's success in achieving the reduction in the
percentage of research and development expenses depends in part on the levels of
sales achieved during 1999 and there can be no assurance that efforts to reduce
the percentage of sales represented by research and development expenses will be
successful.
Acquisition and Purchased In-Process Technology. During 1998, the Company
acquired a majority interest in Nomai, S.A. ("Nomai"), a France-based
manufacturer of removable storage systems, for approximately $45 million, of
which approximately $36 million was classified as goodwill. The goodwill is
being amortized on a straight-line basis over seven years. The Company's current
plans for Nomai include: 1) enhancement and distribution of Nomai's existing
CD-RW drive, 2) production of the Company's Clik! disks, 3) continued production
of 1.44 MB floppy disks and 4) development and production of other potential
products. However, there can be no assurance that the Company will be successful
in implementing these plans or achieving profitability from Nomai operations. In
the event that the Company is not successful, the goodwill may become impaired
and therefore may require a writedown prior to the scheduled amortization.
Upon completion of the Nomai acquisition, the Company immediately expensed $11.1
million representing purchased in-process technology that has not yet reached
technological feasibility and has no alternative future use. The value assigned
to purchased in-process technology, based on the income method prepared by an
independent third party, was determined by identifying research projects in
areas for which technological feasibility had not been established. These
projects included a 2 GB Design Drive and Cartridge, DVD and CD-RW interface
technology and servo writer technology with estimated values of $9.3 million,
$1.3 million and $0.5 million, respectively. The value was determined by
estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from such
projects, and discounting the net cash flows back to their present value. The
discount rate included a risk adjusted discount rate of 26% to take into account
the uncertainty surrounding the successful development of the purchased
in-process technology. The valuation included material cash inflows from
in-process technology through 2003 with revenues commencing in 1999 and ramping
significantly in 2000 before tapering off in 2001 and 2002. Research and
development costs are quite significant in 1999 before tapering off. The 2 GB
Design Drive utilizes validated inductive heads and media. This project was
approximately 60% complete at the time of the valuation and the expected
timeframe for achieving this product release was assumed to be in the second
half of 1999. The DVD and CD-RW interface technology could allow easy
connectivity and differentiation from other DVD and CD-RW drives. The DVD and
CD-RW interface technology was assumed to be nearing the prototype stage in
development at the time of the valuation. The remaining efforts for this project
were assumed to be completed in 1999. The servo writer technology could greatly
reduce the time to transfer track following servo signals to magnetic media. The
project was approximately 20% complete at the time of the valuation. Significant
remaining development efforts must be completed in the next 12 to 18 months in
order for Nomai's process to become implemented in a commercially viable
timeframe. If these projects are not successfully developed, the Company's
future revenue and profitability may be adversely affected. Additionally, the
value of other intangible assets acquired may become impaired.
Other Income and Expense. The Company recorded interest income of $4.2 million
in 1998, as compared to $6.9 million in 1997, due to decreased available cash,
cash equivalent and temporary investment balances in 1998. Interest expense was
$10.2 million in 1998, as compared to $6.4 million in 1997. The increase in
interest expense during 1998 was primarily due to increased average borrowings
outstanding under the Company's Credit Facility during the period. The increase
in interest expense was also due to the Company entering into a subordinated
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. These factors
were partially offset by the retirement of a promissory note for the purchase of
the Company's manufacturing facility in Malaysia and the repayment of other term
notes during 1997.
Also included in other income and expense were bank charges, miscellaneous
royalty income, gains and losses on disposal of assets and foreign currency
gains and losses.
Income Taxes. For 1998, the Company recorded an income tax benefit of $29.2
million, representing an effective income tax rate of approximately 35%. The
Company expects its effective tax rate to remain at approximately 35% for 1999.
However, differences between the currently anticipated mix and the actual mix of
foreign income versus domestic income, along with the ability of the Company to
permanently invest foreign earnings outside of the U.S. and its ability to meet
the requirements for favorable tax treatment in certain jurisdictions outside of
the U.S. could impact the Company's effective tax rate.
1997 As Compared to 1996
Sales. Sales increased by $527.2 million, or 43%, in 1997 as compared to 1996.
This increase was due primarily to higher sales of Zip and Jaz products and such
increase reflected higher sales volumes of both drives and disks, which were
partially offset by price reductions. Combined Zip and Jaz sales totaled $1.6
billion, or 93% of total sales, in 1997, as compared to $1.1 billion, or 87% of
total sales, in 1996. Sales of Zip drives to OEM customers increased to
approximately 32% of total Zip drive unit sales in 1997, as compared to
approximately 5% in 1996. Ditto product sales decreased in 1997, as total Ditto
sales were $118.3 million, or 7% of sales, in 1997, as compared to $127.6
million, or 10% of sales, in 1996. Other sales declined to $2.9 million in 1997,
as compared to $34.2 million, or 3% of sales, in 1996.
International sales represented $679 million, or 39% of total sales, in 1997, as
compared to $406 million, or 34% of total sales, in 1996. Sales in Europe were
$520 million, or 30% of total sales, in 1997, as compared to $296 million, or
24% of total sales, in 1996. Sales in Asia were $159 million, or 9% of total
sales, in 1997, as compared to $110 million, or 9% of total sales, in 1996.
Sales in the Americas increased in total from $807 million, or 66% of total
sales, in 1996, to $1.1 billion, or 61% of total sales, in 1997.
Gross Margin. The Company's overall gross margin was 31.5% in 1997, as compared
to 27.4% in 1996. The increase in gross margin was due primarily to reductions
in component material costs and per unit manufacturing overhead costs for the
Zip and Jaz product lines combined with an increase in 1997 in the ratio of disk
sales to drive sales for the Jaz product line when compared to 1996. The ratio
of disk sales to drive sales for the Zip product line was relatively flat for
1997 when compared to 1996, but in the fourth quarter of 1997, the ratio was
significantly lower than in prior quarters. The improvements in Zip and Jaz
product gross margins were partially offset by price reductions enacted during
the year for both product lines and lower gross margins resulting from an
increase in the proportion of Zip drives sold into the OEM channel. Gross margin
for Jaz products was also adversely affected during 1997 by costs of
approximately $3.1 million associated with a recall of approximately 75,000 Jaz
disks. Gross margins on Ditto products were lower in 1997, as compared to 1996,
as material and overhead cost reductions were more than offset by price
reductions.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased by $101.2 million in 1997, as compared to
1996, and increased as a percentage of sales from 15.7% in 1996 to 16.8% in
1997. Included in selling, general and administrative expenses in 1996 was a
special charge of $9.1 million representing expenses associated with the
transition of manufacturing capacity from Roy, Utah to Penang, Malaysia and the
relocation of the Company's European headquarters to Geneva, Switzerland and its
European logistics and distribution function to Utrecht, the Netherlands.
Excluding this charge, selling, general and administrative expenses would have
represented 15.0% of sales in 1996. The increased expenses in 1997 were
primarily the result of increases in advertising expenses incurred to increase
market awareness of Zip and Jaz products and a new "Zip Built-In" campaign
developed to generate greater consumer demand for OEM Zip drives. In addition,
the increase was affected by the growth in headcount throughout the world,
predominantly in the sales and marketing functions; variable selling expenses;
increased legal expenses; and increased fixed administrative expenses.
Research and Development Expenses. Research and development expenses increased
by $35.9 million in 1997, as compared to 1996, and increased as a percentage of
sales to 4.5% in 1997, from 3.5% in 1996. This increase was primarily the result
of expenditures related to the development and enhancement of Zip, Jaz and Ditto
product lines, as well as continued development expenses related to new products
such as Clik! and Buz, among others.
Other Income and Expense. The Company recorded interest income of $6.9 million
in 1997, as compared to $3.1 million in 1996, due to increased available cash,
cash equivalent and temporary investment balances in 1997. Interest expense was
$6.4 million in 1997, compared to $8.9 million in 1996. This decrease was due to
decreased average borrowings outstanding during 1997, resulting in large part
from the repayment of amounts borrowed under an European financing agreement,
the retirement of a promissory note for the purchase of the Company's
manufacturing facility in Malaysia and the repayment of other term notes during
1997. Also included in other income and expense were bank charges, royalty
income, gains and losses on disposal of assets and foreign currency gains and
losses.
Income Taxes. For 1997, the Company recorded an income tax provision of $62.0
million, representing an effective tax rate of 35%. The effective tax rate
decreased from 39% in 1996 due to tax advantages associated with the relocation
of manufacturing capacity to Malaysia and the relocation of the Company's
European headquarters from Germany to Switzerland.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company had cash and cash equivalents of $90.3
million, working capital of $225.9 million and a ratio of current assets to
current liabilities of 1.6 to 1. During 1998, the Company used a total of $69.6
million of cash and cash equivalents. The primary components were the purchase
of property, plant and equipment and the reduction of accounts payable, accrued
liabilities and income taxes payable, offset in part by decreases in accounts
receivable and inventory. These items were partially funded by debt and the sale
of temporary investments.
Accounts payable decreased by $108.3 million, due primarily to timing of
inventory receipts and related payments to vendors. Income taxes payable
decreased as a result of the payment of 1997 income taxes. Income taxes
receivable increased due to the carryback of the Company's current year net
operating loss against prior year tax payments which will result in a tax refund
during 1999. These uses of cash were partially offset by a $54.2 million
decrease in net accounts receivable and a decrease in inventory of $84.3
million. The decrease in accounts receivable was due primarily to the timing of
sales and collections during the respective periods and a decrease in the days
sales outstanding ("DSO") from 46 days in the fourth quarter in 1997 to 42 days
in the fourth quarter of 1998. The decrease in inventory was due primarily to
improved supply chain management and changes to the Company's procurement and
manufacturing processes to a demand pull model during 1998.
The Company used $103.3 million of cash in investing activities during 1998,
primarily in the purchase of property, plant and equipment and the Company's
acquisition of Nomai during 1998, offset in part by the sale of temporary
investments. Cash provided by financing activities totaled $37.0 million during
1998, and included $80.0 million of proceeds from borrowings on the Company's
Credit Facility that were offset by $87.8 million in payments on the Company's
Credit Facility and capitalized lease obligations. There were no borrowings
outstanding on the Company's Credit Facility at December 31, 1998. During 1998,
the Company borrowed $40.0 million from Idanta Partners Ltd. and another entity
affiliated with David J. Dunn, Chairman of the Company's Board of Directors, to
finance the acquisition of Nomai.
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 January 1999, the Company and the
lenders agreed to several amendments to and waivers under the Credit Facility
(as most recently amended, effective January 29, 1999, the "Credit Facility").
The Credit Facility is a $150 million secured revolving line of credit that
expires on July 14, 2000, and is secured by accounts receivable, domestic
inventory, domestic intellectual property, general intangibles, equipment,
personal property, investment property and a pledge of 65% of the stock of
certain of the Company's subsidiaries. Borrowing availability under the Credit
Facility is based on an agreed upon advance rate on receivables and inventory
not to exceed $150 million with a floor of $110 million through May 1999. Under
the Credit Facility, the Company may borrow at a base rate, which is the higher
of prime or the sum of 0.5% plus the Federal funds rate plus a margin of 0.88%
to 1.63%, for the first year, and thereafter between 0.0% and 1.63% depending on
the Company's earnings before interest expense, income taxes, depreciation and
amortization ("EBITDA") and utilization of the Credit Facility, or at LIBOR plus
a margin of 2.0% to 2.75%, for the first year, and thereafter between 1.25% and
2.75% depending on the Company's EBITDA and utilization of the Credit Facility.
Total availability under the Credit Facility at December 31, 1998 was $143.2
million, and there were no borrowings outstanding. In January 1999, the Company
obtained waivers from landlords which allow Citicorp USA, Inc. (the Credit
Facility Security Agent) access to additional security interests. The additional
security interests resulted in an increase in the total availability under the
Credit Facility to $150 million. Among other restrictions, the Credit Facility
treats a change of control (as defined) as an event of default and requires the
maintenance of minimum levels of consolidated tangible net worth, EBITDA and
certain other covenants. On January 29, 1999, the Company obtained an amendment
to the Credit Facility with respect to the minimum consolidated EBITDA financial
covenant for the periods ending on March 28, 1999 and June 27, 1999. As of
December 31, 1998, the Company was in compliance with all covenants under the
Credit Facility. 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 at December
31, 1998 were $4.3 million and $4.1 million, respectively. The current and
long-term portions of notes payable at December 31, 1998 were $0.1 million and
$0.5 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 principal and interest associated with
these notes are payable on March 31, 1999. The initial interest rate is 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 had $45.7 million of convertible subordinated notes outstanding at
December 31, 1998, which bear interest at 6.75% per year and mature on March 15,
2001. Additions to property, plant and equipment during 1998 totaled $97.5
million, partially offset by $2.7 million in proceeds from capital leases.
The Company expects to generate positive cash flow for 1999. The Company
believes that its balance of cash and cash equivalents, together with current
and future sources of available financing, will be sufficient to fund the
Company's operations during the next twelve months. However, whether the Company
will achieve a positive cash flow for 1999, and the precise amount and timing of
the Company's future financing needs, including the funds necessary to repay the
senior subordinated notes due March 31, 1999 related to the Nomai transaction,
cannot be determined at this time and will depend on a number of factors,
including the market demand for the Company's products, the availability of
critical components, the progress of the Company's product development efforts
and the success of the Company in managing its inventory, accounts receivable
and accounts payable.
On January 13, 1999, the Company announced that it had entered into a definitive
agreement to purchase certain assets of SyQuest Technology, Inc., ("SyQuest"),
including all of its intellectual property and its inventory and fixed assets in
the U.S., for $9.5 million in cash, subject to certain closing conditions and
adjustments. Conditions to closing include the Company's acquisition of the
inventory and equipment assets of SyQuest's subsidiary in Malaysia, for
additional consideration. SyQuest Malaysia's assets are being offered for sale
separately by a Receiver and Manager appointed in Malaysia. Provided all
conditions are met, the Company anticipates a first quarter 1999 closing.
OTHER MATTERS
In June 1998, the Financial Accounting Standards Board 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.
This statement is effective for financial statements issued for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company has not
determined if it will adopt SFAS 133 prior to its effective date. The Company
does not expect this statement to have a material impact on the Company's
results of operations, financial position or liquidity.
FACTORS AFFECTING FUTURE OPERATING RESULTS
This Annual Report contains a number of forward-looking statements, including,
without limitation, statements referring to expected first quarter results; the
sufficiency of cash, cash equivalent and temporary investment balances and
available sources of financing; the Company having positive cash flows in 1999;
projected effective tax rates; the impact on gross margins of the sales mix
between disks and drives and the mix between OEM sales and sales through other
channels; anticipated levels for selling, general and administrative and
research and development expenses; the impact of Clik! drives and disks and
other new products introduced during 1998 or 1999; anticipated availability of
new products expected to be shipped in 1999, including, without limitation, a
Clik! drive on a PCMCIA card for slimline notebook computers; the expectation
that the first cameras with built-in Clik! drives will reach the market during
1999; the possible effects on future sales due to supplier quality issues and
component shortages; efforts to be undertaken by the Company to improve its
manufacturing supply chain management; the maintenance of stringent quality
assurance standards; the impact of new accounting pronouncements on the
Company's results of operations, financial position or liquidity; the success of
the Company's Six Sigma quality initiatives in achieving substantial product and
process quality improvements and in reducing costs; the possible effects of any
adverse outcomes in legal proceedings; the current plans for Nomai; the
Company's Year 2000 readiness; the impact of the Euro conversion on the
Company's business or financial condition; the impact of organization changes on
the Company's revenue, profitability and asset utilization; and the Company's
efforts to protect its intellectual property rights. Any statements contained
herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes", "expects", "anticipates", "plans" and similar expressions are
intended to identify forward-looking statements. There are a number of important
factors that could cause actual events or the Company's actual results to differ
materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth below. The factors
discussed below do not reflect the potential impact of any mergers or
acquisitions that have not closed as of the end of fiscal 1998. The Company does
not assume any obligation to update any forward-looking statements made herein.
Because the Company is relying on its Zip, Jaz and Clik! products for the
substantial majority of its sales in 1999, the Company's future operating
results will depend in large part on the success of those products in the
market. Although the Company believes there is a market demand for removable
data storage solutions for personal computers and other devices, there can be no
assurance that the Company will be successful in establishing Zip, Jaz and Clik!
as the preferred solutions for those market needs. The extent to which Zip, Jaz
and Clik! 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), HiFD (product co-developed
by Sony Corporation and Fuji Photo Film Co., Ltd.), the UHD144 (product in
development by Caleb Technology Corporation), the Orb (product developed by
Castlewood Systems, Inc.), the Pro-FD (product in development by Samsung
Electro-Mechanics Co., Ltd.), Microdrive (product in development by IBM),
Memorystick (product developed by Sony Corporation), various formats of flash
memory, CD-R and CD-RW drives, announced developments of rewritable DVD drives
and media, and announced products in development by Terastor Corporation; the
success of any third party in creating and marketing media intended for use with
the Company's drive products; the success of the Company in meeting targeted
availability dates for 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 and Clik!, 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 and Clik! 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 with which the
Company's products can be used.
The Company's business strategy is substantially dependent on maximizing sales
of its proprietary Zip, Jaz and Clik! disks, which generate significantly higher
margins than the related drives. If this strategy is not successful, either
because the Company does not establish a sufficiently large installed base of
Zip, Jaz and Clik! drives, because the sales mix between disks and drives is
below levels anticipated by the Company, because another party succeeds in
producing or marketing disks that are compatible with any of the Company's drive
products without infringing the Company's proprietary rights, or for any other
reason, the Company's sales would be adversely affected, and its results of
operations would be disproportionately adversely affected.
Sales of Zip products in 1998 accounted for a significant majority of the
Company's revenues in 1998. 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 should not be assumed to be an indication of future sales
levels. In the fourth quarter of 1998, the Company introduced the Zip 250
product. The market acceptance of the Zip 250 product and its impact on other
Zip products has not yet been determined and, therefore, may have an adverse
impact on future sales. In addition, the Company has experienced and may in the
future experience significant fluctuations in its quarterly operating results.
Moreover, because the Company's expense levels (including budgeted selling,
general, and administrative and research and development expenses) are based in
part on expectations of future sales levels, a shortfall in expected sales could
result in a disproportionate adverse effect on the Company's net income and cash
flow. For example, in 1998, the Company's operating expenses as a percentage of
sales fell outside of management's operating model resulting in a net operating
loss for the year. In addition, the Company's stock price, like other
high-technology companies' stock prices, could be subject to fluctuations in
response to actual or anticipated variations in operating results, as well as
changes in analysts' earnings estimates, announcements of new products or
developments by the Company or its competitors, market conditions in the
information technology industry, as well as general economic conditions and
other factors external to the Company.
Clik!, a miniaturized removable-media storage solution for use in a variety of
handheld electronic devices, represents the Company's first product which is
primarily targeted to digital camera and other consumer electronics
manufacturers. The Company does not have prior experience in these channels.
Accordingly, there are additional risks that the Clik! products will not achieve
significant market presence or otherwise be successful.
Management of the Company's inventory levels has become increasingly complex.
The Company's customers frequently adjust their ordering patterns in response to
various factors including: the Company's perceived ability to meet demand, the
Company's and competitors' inventory supply in the retail and distribution
channel, timing of new product introductions, seasonal fluctuations, Company and
customer promotions, the consolidation of customer distribution centers, pricing
considerations and the attractiveness of the Company's products as compared with
competing products. Customers may increase orders during times of shortages,
cancel orders if the channel is filled with currently available products, or
delay orders in anticipation of new products. Any excess supply could result in
price reductions and inventory writedowns, which in turn could adversely affect
the Company's results of operations.
The Company has evolved from an after market business to a business that
includes a significant volume of OEM sales. In an OEM business, a high
proportion of sales are concentrated among a small number of customers. Although
the Company believes its relationships with OEM customers are generally good, as
the concentration of sales to OEM customers continues to evolve, a relatively
small number of major customers will represent a business risk that loss of one
or more accounts could adversely affect the Company's financial condition or
operating results. The Company's customers are generally not obligated to
purchase any minimum volume and are generally able to terminate their
relationship with the Company at will. If changes in purchase volume or customer
relationships resulted in decreased demand for the Company's drives, whether by
loss of or delays in orders, the Company's financial condition or operating
results could be adversely affected.
The Company continues to refine the design of its Zip and Jaz products in an
effort to improve product performance and reduce manufacturing costs. In
addition, the Company depends on independent parties for the supply of critical
components for its Zip, Jaz and Clik! 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 and Clik! products are, or will
be, relevant to any 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. For example, the Company's Jaz 2 GB product, originally scheduled for
shipment in the fourth quarter of 1997, did not ship until February 1998 and
thus had a material adverse effect on the results of operations for the fourth
quarter of 1997 and the first quarter of 1998. Future operating results will
also depend on the Company's ability to effectively manage obsolescence risks
associated with products that are phased out and its success in ramping to
volume production of new or enhanced products. Future operating results will
also depend on intellectual property and antitrust matters including the
possibility that infringement claims asserted from time to time against the
Company could require the Company to pay royalties to a third party in order to
continue to market and distribute one or more of the Company's current or future
products, and the possibility that the Company would be required to devote
unplanned resources to developing modifications to its products or marketing
programs.
During the second quarter of 1998, the Company announced the implementation of a
comprehensive series of cost reductions intended to improve financial
performance. During the second half of 1998, the Company reduced operating
expenses when compared to the second quarter of 1998 levels as a result of
efforts to decrease advertising and other sales and marketing expenses, legal
expenses, information system costs and other discretionary spending. Although
the Company was successful in reducing operating expenses during the second half
of 1998, there can be no assurance that the Company will be successful in
maintaining these cost reduction measures or that the Company will be successful
in other efforts to reduce operating expenses in future periods. The Company is
also in the process of implementing Six Sigma quality initiatives intended to
make substantial product and process quality improvements and reduce costs.
However, there can be no assurance that the Company's quality initiatives will
be successful in providing substantial product and process improvements or in
reducing costs.
A significant portion of the Company's revenues are generated in Europe and
Asia. The Company's existing infrastructure outside of the United States is less
mature and developed than in the United States. Consequently, future sales and
operating income from these regions are less predictable than in the United
States. In addition, operating expenses may increase as those operations mature
and increase in size. The Company's international sales transactions are
generally denominated in U.S. dollars. Fluctuation in the value of foreign
currencies relative to the U.S. dollar that are not sufficiently hedged by
foreign customers could result in lower sales and have an adverse effect on
future operating results (see "Disclosures About Market Risk" below). For
example, management believes that sales in Asia were adversely affected during
the fourth quarter of 1997 and during 1998 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 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.
The Company's success will depend in large part upon the services of a number
of key employees. The loss of the services of one or more of these key employees
could have a material adverse effect on the Company. The Company's success will
also depend in significant part upon its ability to continue to attract highly
skilled personnel to fill a number of vacancies. Effective March 24, 1998, Kim
B. Edwards resigned as President and Chief Executive Officer of the Company.
Effective October 22, 1998, the Company announced the appointment of Jodie K.
Glore as President and Chief Executive Officer of the Company. Mr. Glore was
also elected to serve as a member of the Company's Board of Directors. During
the interim period, the position was filled by James E. Sierk, a member of the
Company's Board of Directors. Effective June 5, 1998, Leonard C. Purkis resigned
as Senior Vice President, Finance and Chief Financial Officer. Dan E. Strong,
Vice President and Corporate Controller, has assumed the role of interim Chief
Financial Officer while the Company conducts a search for a new Senior Vice
President, Finance and Chief Financial Officer. In January 1999, the Company
announced organizational changes designed to focus the Company's 1999 corporate
priorities of growing revenue and improving profitability and asset utilization.
With this organizational realignment, the Company is now organized around
business functions as opposed to its previous structure of decentralized product
business units. As a result of this organizational change, two members of the
Company's senior management team, Ted Briscoe, formerly President of the
Company's personal storage division, and Fred Forsyth, formerly President of the
Company's professional products division, have stated plans to leave the
Company. There can be no assurance that the Company will be successful in
attracting and/or retaining key employees, or that the transition to a
functional organization will not result in short-term disruptions, or that the
transition will eventually produce the desired results.
The Company recently transitioned to new computer hardware and software for its
financial, accounting, inventory control, order processing, supply chain
management and other management information systems. The successful operation of
these new systems is crucial to the efficient operation of the Company's
business. There can be no assurance that the new systems will be adequate to
support the Company's operations or that they will operate without interruption
or failure. Problems with initial operation of the new systems could cause
substantial difficulties in operations, planning, financial reporting and
management and thus could have a material adverse effect on the Company's
business, financial condition and results of operations.
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).
DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various interest rate and foreign currency exchange
rate risks that arise in the normal course of business. The Company uses
borrowings comprised primarily of variable rate debt to finance its operations.
The Company has international operations resulting in receipts and payments in
currencies that differ from the functional currency of the Company.
The Company's functional currency is the U.S. dollar.
The Company attempts to reduce foreign currency exchange rate risks by utilizing
financial instruments, including derivative transactions pursuant to Company
policies. The Company uses forward contracts to hedge those assets and
liabilities that, when remeasured according to generally accepted accounting
principles, impact the consolidated statement of operations. All forward
contracts entered into by the Company are components of hedging programs and are
entered into for the sole purpose of hedging an existing or anticipated currency
exposure, not for speculation or trading purposes. The contracts are primarily
in European currencies, the Singapore dollar and the Japanese yen. The contracts
have maturities that do not exceed three months. The Company has a substantial
presence in Malaysia. In September 1998, the ruling party in Malaysia fixed the
Malaysian Ringgit to the U.S. dollar. The Company experienced a loss related to
the fixing of the currency. The Company has 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
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 December 31,
1998, 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.
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 which meets regularly and has responsibility to oversee the
implementation of Year 2000 initiatives. The Year 2000 Committee reports
regularly to an executive management committee.
Products. Under the direction of the Year 2000 Committee, the Company is
undertaking a systematic review and testing of its products, both hardware and
software. Hardware testing is 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 and Ditto
hardware products tested to date are Year 2000 ready when used in an operating
system and with other products which themselves are Year 2000 ready. The Company
is testing its software utility tools and drivers internally. When used in an
operating system and with other products which themselves are Year 2000 ready,
the tested software utility tools and drivers have been found to be Year 2000
ready, except for Findit and CopyMachine software applications used with Zip and
Jaz drives, and the Ditto 16-bit software applications intended for DOS and
Windows 3.1 users. For Windows 95 and higher users, a 32-bit Year 2000 upgrade
is available, on the Company's web site without charge, for Findit and
CopyMachine. No solution is presently available for users of the 16-bit software
versions of Findit, CopyMachine and the 16-bit Ditto software applications
intended for DOS and Windows 3.1 users. 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 as the Company continues its review.
The Company anticipates completing the review and testing of all its current
release products by the first quarter of 1999. The Company has started to
inventory and assess the Year 2000 impact on its legacy products, some of which
are scheduled for testing in the first quarter of 1999. 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,
the specific operating system utilized, other software applications utilized and
the Year 2000 readiness of each.
Internal IT Systems. During 1998, the Company implemented new HP computer
hardware and Oracle software for its financial, accounting, inventory control,
order processing, supply chain management and other management information
systems. According to the respective vendors, the hardware operating systems and
software currently in use by the Company are in various stages of Year 2000
readiness. The respective vendors are providing Year 2000 software upgrades when
Year 2000 deficiencies are identified. In January 1999, the Company began
testing the hardware operating systems and software applications in use by the
Company to confirm Year 2000 readiness. The Company has identified other
hardware and applications software used in its IT systems and is in the process
of obtaining Year 2000 compliance information from the providers of such
hardware and applications software. The Company will assess and remedy, as
deemed necessary, Year 2000 issues it identifies with respect to critical IT
systems utilized by the Company.
Internal Non-IT Systems. The Company has substantially completed inventorying
its non-IT systems. Once completed, the Company will assess the Year 2000 issues
regarding its non-IT systems and determine appropriate testing and remediation.
The Company anticipates completing the inventorying and assessment of its major
non-IT systems and beginning any necessary testing and implementation efforts
for business critical non-IT systems in the first quarter of 1999.
Material Third-Party Relationships. The Company has significant relationships
with various third parties (many located outside of the U.S.) and the failure of
any of these third parties to achieve Year 2000 compliance could have a material
impact on the Company's business, operating results and financial condition.
These third parties include energy and utility suppliers, financial
institutions, material and product suppliers, transportation providers,
communications vendors, including value added network vendors and the Company's
significant customers. While the Company has received Year 2000 readiness
statements from its major third-party suppliers which in general indicate Year
2000 readiness, the Company is in the process of conducting an
audit/questionnaire with each major supplier and vendor to confirm their Year
2000 readiness. The audit/questionnaire process will continue into the second
quarter of 1999.
General. During 1998, the Company incurred approximately $36 million in costs to
improve the Company's IT systems and for Year 2000 readiness efforts. Of this
amount, 98% 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, of which
approximately one-half is being capitalized and one-half expensed. This system
hardware and software was implemented to upgrade and improve the Company's IT
systems and to facilitate Year 2000 readiness. The balance was expended for
hardware and software testing, third-party consulting costs, third-party audits
and reviews and internal employee allocated costs. The Company anticipates
incurring an additional $6 million in 1999 in connection with Year 2000
readiness efforts, including additional system hardware and software,
third-party consulting fees, third-party audits and reviews, product software
and hardware testing costs and allocated employee costs. The Company has set a
goal of having substantially all Year 2000 readiness efforts completed by the
third quarter of 1999.
The Company is preparing contingency plans for critical areas to address Year
2000 failures if remedial efforts are not fully successful. The Company's
contingency plans are expected to target the Company's most reasonably likely
worst case scenarios and to include items such as maintaining an inventory
buffer, providing for redundant IT systems and establishing alternative
third-party logistics. The Company's contingency plans will be based in part on
the results of third-party supplier audits, and thus are not fully developed at
this time. Completion of initial contingency plans is targeted for the third
quarter of 1999 (which plans will thereafter be revised from time to time as
deemed appropriate).
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.
The Company recently acquired approximately 98% of Nomai and is presently in the
process of raising the awareness of, as well as inventorying and assessing, the
Year 2000 issues applicable to Nomai and its operations. The Company anticipates
having substantially completed the inventory and assessment of Year 2000 issues
for its subsidiary Nomai in the first quarter of 1999. Nomai branded hardware
and software products are scheduled to be tested in the first quarter of 1999.
No assurance can be given that the Company will not be materially adversely
affected by Year 2000 issues. Although the Company is not currently aware of any
material operational issues with preparing its internal IT and non-IT systems
for the Year 2000, the Company may experience material unanticipated problems
and costs caused by undetected errors or defects in its internal IT and non-IT
systems. In addition, the failure of third parties to timely address their Year
2000 issues could have a material adverse impact on the Company's business,
operations and financial condition. If, for example, third party suppliers
become unable to deliver necessary components, the Company would be unable to
timely manufacture products and meet customer order requirements. Similarly, if
international shipping and freight forwarders were unable to ship product, the
Company would be unable to deliver product to sales channels.
Additionally, there can be no assurance that the Company will not be the subject
of lawsuits regarding the failure of the Company's products (former or present)
in the event they are not Year 2000 ready. Despite the testing and remediation
efforts undertaken by the Company, the Company's products may contain errors or
defects associated with the Year 2000. Known or unknown errors or defects in the
Company's products could result in delay or loss of revenue, diversion of
development resources, damage to the Company's reputation or increased service
and warranty costs, any of which could materially adversely affect the Company's
business, operating results and financial condition. In addition, because the
computer systems in which the Company's products are used involve different
hardware, software and firmware components from different manufacturers, it may
be difficult to determine which component in a system caused a Year 2000 issue.
As a result, the Company may be subjected to Year 2000 related lawsuits
independent of whether its products are Year 2000 ready. Any Year 2000 related
suits, if adversely determined, could have a material adverse affect on the
Company's business, operating results and financial condition.
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 and actual
events and results could differ materially from those anticipated. Specific
factors that might cause such material differences 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.
<PAGE>
<TABLE>
Financial Conditions and Trends
<CAPTION>
December 31, (in thousands) 1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and temporary
investments $ 90,273 $ 196,241 $ 108,312 $ 1,023 $ 19,793
Trade receivables, net 233,662 280,182 210,733 105,955 18,892
Inventories 165,132 246,383 171,920 98,703 17,318
Total assets 830,159 961,639 687,192 266,227 75,833
Current portion of notes payable 101 - 33,770 47,640 -
Related party notes payable 40,000 - - - -
Accounts payable and accrued liabilities 313,820 439,113 249,099 151,087 25,739
Current portion of capitalized lease
obligations 4,307 5,505 4,114 782 -
Working capital 225,886 338,166 270,735 12,623 34,818
Long-term obligations 4,607 2,939 19,176 4,032 1,031
Convertible subordinated notes 45,655 45,683 45,733 - -
Property, plant and equipment cash
additions during year 94,775 85,871 73,457 45,232 7,083
----------- ----------- ----------- ----------- -----------
</TABLE>
Securities
Iomega Common Stock is traded on the New York Stock Exchange under the symbol
IOM. As of December 31, 1998, there were 7,651 holders of record of Common
Stock. The Company has not paid cash dividends on its Common Stock in the past
and has no present intention to do so in the future. The following table
reflects the high and low sales prices for 1998 and 1997. The stock prices for
the first three quarters of 1997 have been retroactively adjusted for a stock
split (see Note 2 to the Company's Consolidated Financial Statements). The
Company's Credit Facility limits the amount of cash dividends that can be paid.
<TABLE>
Price Range of Common Stock
<CAPTION>
1998 1997
---- ----
High Low High Low
<S> <C> <C> <C> <C>
1st Quarter $13.25 $6.88 $ 9.88 $ 7.06
2nd Quarter 8.81 5.50 11.81 7.63
3rd Quarter 6.06 3.56 14.56 9.56
4th Quarter 8.69 3.06 16.41 11.00
</TABLE>
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 90,273 $ 159,922
Temporary investments - 36,319
Trade receivables, less allowance for doubtful accounts
of $10,062 and $11,266, respectively 233,662 280,182
Inventories 165,132 246,383
Income taxes receivable 24,974 -
Deferred income taxes 49,827 47,996
Other current assets 20,246 11,982
------------ ------------
Total current assets 584,114 782,784
------------ ------------
Property, plant and equipment, at cost:
Machinery and equipment 267,289 196,671
Buildings 23,929 21,517
Leasehold improvements 39,587 26,473
Furniture and fixtures 22,974 15,014
Construction in process 19,448 12,544
------------ ------------
373,227 272,219
Less: Accumulated depreciation and amortization (165,112) (96,550)
------------ ------------
208,115 175,669
------------ ------------
Intangibles, net 33,580 -
------------ ------------
Other assets 4,350 3,186
------------ ------------
$ 830,159 $ 961,639
============ ============
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets.
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Current liabilities:
Current portion of notes payable $ 101 $ -
Related party notes payable 40,000 -
Accounts payable 160,977 257,281
Accrued payroll, vacation and bonus 21,048 31,728
Deferred revenue 33,114 42,423
Income taxes payable - 22,440
Accrued advertising 30,226 32,628
Other accrued liabilities 68,455 52,613
Current portion of capitalized lease obligations 4,307 5,505
------------ ------------
Total current liabilities 358,228 444,618
------------ ------------
Capitalized lease obligations, net of current portion 4,119 2,939
------------ ------------
Deferred income taxes 4,903 10,334
------------ ------------
Notes payable, net of current portion 488 -
------------ ------------
Convertible subordinated notes, 6.75%, due 2001 45,655 45,683
------------ ------------
Commitments and contingencies (Note 5)
Stockholders' equity:
Preferred Stock, $0.01 par value; authorized 4,750,000 shares,
none issued - -
Series C Junior Participating Preferred Stock; authorized
250,000 shares, none issued - -
Common Stock, $0.03 1/3 par value; authorized 400,000,000
shares; issued 268,186,096 and 262,264,830 shares,
respectively 8,937 8,741
Additional paid-in capital 286,206 273,826
Less: 809,542 and 829,210 Common Stock treasury shares,
respectively, at cost (6,088) (6,099)
Deferred compensation - (336)
Retained earnings 127,711 181,933
------------ ------------
Total stockholders' equity 416,766 458,065
------------ ------------
$ 830,159 $ 961,639
============ ============
The accompanying notes to consolidated financial statements are an
integral part of these balance sheets.
</TABLE>
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Sales $ 1,694,385 $ 1,739,972 $ 1,212,769
Cost of sales 1,271,451 1,192,310 879,989
------------ ------------ ------------
Gross margin 422,934 547,662 332,780
------------ ------------ ------------
Operating expenses:
Selling, general and administrative 386,304 291,930 190,719
Research and development 101,496 78,026 42,101
Purchased in-process technology 11,100 - -
------------ ------------ ------------
Total operating expenses 498,900 369,956 232,820
------------ ------------ ------------
Operating income (loss) (75,966) 177,706 99,960
Interest income 4,239 6,931 3,080
Interest expense (10,163) (6,443) (8,875)
Other expense (1,535) (879) (182)
------------ ------------ ------------
Income (loss) before income taxes (83,425) 177,315 93,983
Benefit (provision) for income taxes 29,203 (61,963) (36,655)
------------ ------------ ------------
Net income (loss) $ (54,222) $ 115,352 $ 57,328
============ ============ ============
Net income (loss) per common share (Notes 1 and 2):
Basic $ (0.20) $ 0.45 $ 0.23
============ ============ ============
Diluted $ (0.20) $ 0.42 $ 0.21
============ ============ ============
Weighted average common shares outstanding 265,286 259,182 246,725
============ ============ ============
(Note 2)
Weighted average common shares outstanding -
assuming dilution (Note 2) 265,286 282,401 275,194
============ ============ ============
The accompanying notes to consolidated financial statements are an
integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<CAPTION>
Additional
Common Stock Paid-In Deferred Retained Treasury
Shares Amount Capital Compensation Earnings Stock Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 235,277,340 $ 7,843 $ 45,590 $ - $ 9,253 $ - $ 62,686
Sale of shares pursuant to
exercise of stock options
at an average price of $0.25
cash per share 9,691,408 323 2,145 - - - 2,468
Tax benefit from dispositions
of employee stock - - 24,335 - - - 24,335
Deferred compensation related to
Executive Compensation
Agreement - - 1,005 (1,005) - - -
Amortization of deferred
compensation - - - 336 - - 336
Purchase of 600,000 Common
Shares at an average price
of $7.27 cash per share - - - - - (4,363) (4,363)
Net proceeds from public
offering of Common Stock 11,500,000 383 190,767 - - - 191,150
Conversion of convertible
subordinated notes to
Common Shares 54,068 2 265 - - 267
Recognition of compensation from
Employee Stock Purchase Plan - - 43 - - - 43
Issuance of Common Shares under
Employee Stock Purchase Plan 32,036 - - - - - -
Net income - - - - 57,328 - 57,328
----------- ------- -------- ------------ -------- -------- --------
Balances at December 31, 1996 256,554,852 8,551 264,150 (669) 66,581 (4,363) 334,250
Sale of shares pursuant to
exercise of stock options
at an average price of
$0.70 cash per share 5,693,693 190 3,801 - - - 3,991
Tax benefit from dispositions
of employee stock - - 5,767 5,767
Amortization of deferred
compensation - - - 333 - - 333
Purchase of 229,210 Common
Shares at an average price
of $7.57 cash per share - - - - - (1,736) (1,736)
Conversion of convertible
subordinated notes to
Common Shares 10,129 - 50 - - - 50
Issuance of Common Shares under
Employee Stock Purchase Plan 6,156 - 58 - - - 58
Net income - - - - 115,352 - 115,352
----------- ------- -------- ------------ -------- -------- --------
The accompanying notes to consolidated financial statements are an
integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (continued)
(In thousands, except share data)
<CAPTION>
Additional
Common Stock Paid-In Deferred Retained Treasury
Shares Amount Capital Compensation Earnings Stock Total
----------- ------- -------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1997 262,264,830 $ 8,741 $273,826 $ (336) $181,933 $ (6,099) $458,065
Sale of shares pursuant to
exercise of stock options
at an average price of
$0.68 cash per share 5,659,417 188 3,687 - - - 3,875
Tax benefit from dispositions
of employee stock - - 7,435 - - - 7,435
Amortization of deferred
compensation - - - 168 - - 168
Forfeiture of deferred
compensation - - (168) 168 - - -
Purchase of 43,467 Common
Shares at an average price
of $10.70 cash per share - - - - - (465) (465)
Conversion of convertible
subordinated notes to
Common Shares 5,670 - 28 - - - 28
Issuance of Common Shares under
Employee Stock Purchase Plan 222,532 7 1,322 - - - 1,329
Issuance of Restricted Common
Shares to Directors in lieu
of compensation 33,647 1 132 - - - 133
Issuance of 63,135 Treasury
Shares at an average price
of $6.65 to a Director in
lieu of compensation - - (56) - - 476 420
Net loss - - - - (54,222) - (54,222)
----------- ------- -------- ------------ -------- -------- --------
Balances at December 31, 1998 268,186,096 $ 8,937 $286,206 $ - $127,711 $ (6,088) $416,766
=========== ======= ======== ============ ======== ======== ========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
IOMEGA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<CAPTION>
Years Ended December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (54,222) $ 115,352 $ 57,328
Non-cash revenue and expense adjustments:
Depreciation and amortization 68,280 39,272 24,650
Purchased in-process technology 11,100 - -
Deferred income tax provision (benefit) (7,262) 397 (34,761)
Tax benefit from dispositions of
employee stock 7,435 5,767 24,335
Other 8,772 703 975
Changes in assets and liabilities:
Trade receivables, net 54,229 (69,449) (104,778)
Inventories 84,335 (74,463) (73,217)
Other current assets (6,594) 15,662 (23,971)
Accounts payable (108,324) 111,437 51,062
Accrued liabilities (13,723) 58,747 49,481
Income taxes (47,414) 19,830 (2,531)
------------ ------------ ------------
Net cash provided by (used in)
operating activities (3,388) 223,255 (31,427)
------------ ------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment,
net of lease proceeds (94,775) (85,871) (73,457)
Proceeds from sale of assets - - 3,906
Purchase of Nomai S.A., net of cash acquired (41,902) - -
Purchase of temporary investments - (59,918) -
Sale of temporary investments 36,319 23,599 -
Net decrease (increase) in other assets (2,943) 246 (358)
------------ ------------ ------------
Net cash used in investing activities (103,301) (121,944) (69,909)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from sales of Common Stock 5,283 3,991 2,468
Proceeds from issuance of related party
notes payable 40,000 - -
Proceeds from issuance of notes payable 80,000 87,295 834,473
Payments on notes payable and capitalized
lease obligations (87,778) (139,251) (858,234)
Proceeds from issuance of convertible
subordinated notes, net of offering
costs of $2,869 - - 43,131
Proceeds from issuance of public offering
of Common Stock, net of offering
costs of $10,099 - - 191,150
Purchase of Common Stock (465) (1,736) (4,363)
------------ ------------ ------------
Net cash provided by (used in)
financing activities 37,040 (49,701) 208,625
------------ ------------ ------------
Net change in cash and cash equivalents (69,649) 51,610 107,289
Cash and cash equivalents at beginning of year 159,922 108,312 1,023
------------ ------------ ------------
Cash and cash equivalents at end of year $ 90,273 $ 159,922 $ 108,312
============ ============ ============
Supplemental schedule of non-cash investing
and financing activities:
Property, plant and equipment financed under
note payable and capitalized lease obligations $ 2,675 $ 3,342 $ 28,367
============ ============ ============
The accompanying notes to consolidated financial statements are an
integral part of these statements.
</TABLE>
<PAGE>
IOMEGA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Operations
The Company designs, manufactures and markets innovative personal and
professional storage solutions, based on removable-media technology, for users
of personal computers and consumer electronics devices. The Company's primary
data storage solutions include disk drives and disks marketed under the
trademarks Zip, Jaz and Clik! and tape drives and tapes marketed under the
trademark Ditto. Retail outlets for the Company's products include mail order
catalogs, computer superstores, office supply superstores, specialty computer
stores and other retail outlets. The Company sells its products to retail
channels directly as well as indirectly through distributors. In addition to
sales through these retail channels, the Company has marketing alliances with a
variety of companies within the computer and consumer electronics industries.
These alliances include original equipment manufacturers ("OEMs") and value
added reseller arrangements that provide for certain of the Company's products
to be incorporated in new computers and other systems at the time of purchase.
Sources of Supply
Certain components incorporated in, or used in the manufacture of, the
Company's products are currently only available from sole source suppliers. The
Company purchases a portion of its sole source and limited source components and
equipment pursuant to purchase orders without guaranteed supply arrangements.
Supply shortages resulting from a change in a supplier or resulting from
unavailability from a particular supplier could cause a delay in manufacturing
and a possible loss of sales, which would have a material adverse effect on
operating results.
Manufacturing Relationships
The Company uses independent parties to manufacture for the Company, on
a contract basis, a portion of the Company's products or components. Not all of
the Company's manufacturing relationships are covered by binding contracts and,
even certain of the relationships subject to binding contracts, are subject to
unilateral termination by the Company's manufacturing partners. Shortages
resulting from a change in a manufacturing arrangement could cause a delay in
manufacturing and a possible loss of sales, which would have a material adverse
effect on operating results.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
Actual results could differ from these estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Iomega
Corporation and its majority-owned subsidiaries after elimination of all
material intercompany accounts and transactions.
Revenue Recognition
The Company's customers include OEMs, end users, retailers and
distributors. Revenue, less reserves for returns, is generally recognized upon
shipment to the customer.
In addition to reserves for returns, the Company defers recognition of
revenue on estimated excess inventory in the distribution and retail channels.
For this purpose, excess inventory is the amount of inventory which exceeds the
channels' 30-day requirements as estimated by management. The gross margin
associated with deferral of revenue for returns and estimated excess channel
inventory totaled $33.1 million, $42.4 million and $15.7 million at December 31,
1998, 1997 and 1996, respectively, and is included in deferred revenue in the
accompanying consolidated balance sheets.
Price Protection and Volume Rebates
The Company has agreements with certain of its customers which, in the
event of a price decrease, allow those customers (subject to certain
limitations) credit equal to the difference between the price originally paid
and the reduced price on units in the customers' inventories at the date of the
price decrease. When a price decrease is anticipated, the Company establishes
reserves against gross accounts receivable for amounts estimated to be
reimbursed to the qualifying customers.
In addition, the Company records reserves at the time of shipment for
estimated volume rebates. These reserves for volume rebates and price protection
credits totaled $47.6 million, $28.5 million and $17.0 million at December 31,
1998, 1997 and 1996, respectively, and are netted against accounts receivable in
the accompanying consolidated balance sheets.
Inventories
Inventories include direct materials, direct labor and manufacturing
overhead costs and are recorded at the lower of cost (first-in, first-out) or
market and consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
1998 1997
---------- ----------
<S> <C> <C>
Raw materials $ 62,613 $ 130,049
Work-in-process 8,482 18,714
Finished goods 94,037 97,620
---------- ----------
$ 165,132 $ 246,383
========== ==========
</TABLE>
Property, Plant and Equipment
When property is retired or otherwise disposed of, the book value of
the property is removed from the asset and related accumulated depreciation and
amortization accounts, and the net resulting gain or loss is included in the
determination of income. Depreciation is provided based on the straight-line
method over the following estimated useful lives of the property:
Machinery and equipment 2 - 5 years
Leasehold improvements 5 years
Furniture and fixtures 10 years
Buildings 25 years
Advertising
The Company expenses the cost of advertising the first time the
advertising takes place, except cooperative advertising with distributors and
retailers, which is accrued at the time of sale. For the years ended December
31, 1998, 1997 and 1996, advertising expenses totaled approximately $123.3
million, $96.3 million and $70.0 million, respectively.
<PAGE>
Intangibles
Goodwill and other intangible assets are amortized using the
straight-line method over the estimated useful life of the asset, subject to
periodic review for impairment whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recoverable. The
current estimated useful life for the Company's goodwill is seven years.
Accumulated amortization of goodwill at December 31, 1998 was $2.5 million.
Warranty Costs
A one-year limited warranty is generally provided on the Company's Zip,
Jaz and Clik! drives. Certain OEM customers have a three-year limited warranty
on the Company's Zip drive. A two-year limited warranty is generally provided on
Ditto drives and media. Prior to 1998, Zip and Jaz disks had a limited lifetime
warranty. Beginning in 1998, Zip and Jaz disks carried a limited five-year
warranty. Clik! disks have a limited five-year warranty. The Company accrues for
warranty costs based on estimated warranty return rates and costs to repair.
Actual warranty costs are charged against this accrual.
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 year. Diluted net income per
common share ("Diluted EPS") reflects the potential dilution that could occur if
stock options or other contracts to issue common stock were exercised or
converted into common stock. Diluted EPS for 1997 and 1996 was determined under
the assumption that the convertible subordinated notes were converted on January
1, 1997 and March 1, 1996, respectively. The computation of Diluted EPS does not
assume exercise or conversion of securities that would have an antidilutive
effect on net income per common share. Net income per common share amounts and
share data have been restated for all periods presented to reflect Basic and
Diluted EPS and the stock split described in Note 2.
Following is a reconciliation of the numerator and denominator of Basic EPS to
the numerator and denominator of Diluted EPS for all periods presented (in
thousands, except per share data):
<TABLE>
<CAPTION>
Net
Income (Loss) Shares Per-Share
(Numerator) (Denominator) Amount
--------- ----------- ---------
<S> <C> <C> <C>
December 31, 1998
Basic EPS $ (54,222) 265,286 $ (0.20)
Effect of options - -
Effect of convertible
subordinated notes - -
--------- -----------
Diluted EPS $ (54,222) 265,286 $ (0.20)
========= ===========
December 31, 1997
Basic EPS $ 115,352 259,182 $ 0.45
Effect of options - 13,967
Effect of convertible
subordinated notes 2,004 9,252
--------- -----------
Diluted EPS $ 117,356 282,401 $ 0.42
========= ===========
December 31, 1996
Basic EPS $ 57,328 246,725 $ 0.23
Effect of options - 20,745
Effect of convertible
subordinated notes 1,578 7,724
--------- -------------
Diluted EPS $ 58,906 275,194 $ 0.21
========= =============
</TABLE>
For the year ended December 31, 1998, stock options and convertible subordinated
notes are not included in the calculation of Diluted EPS as their inclusion
would be antidilutive. For the year ended December 31, 1998, there were
outstanding options to purchase 6,028,501 shares that had an exercise price
greater than the average market price of the common shares for the four
preceding quarters. At December 31, 1997 and 1996, there were outstanding
options to purchase 973,475 and 344,750 shares of common stock, respectively,
that were not included in the computation of Diluted EPS because the exercise
prices were greater than the average market price of the common shares for the
four preceding quarters.
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 net income.
Income Taxes
The Company recognizes a liability or asset for the deferred tax
consequences of temporary differences between the tax bases of assets or
liabilities and their reported amounts in the financial statements. These
temporary differences will result in taxable or deductible amounts in future
years when the reported amounts of the assets or liabilities are recovered or
settled. The deferred tax assets are reviewed periodically for recoverability
and valuation allowances are provided, as necessary.
Cash Equivalents and Temporary Investments
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with maturities of three or fewer
months to be cash equivalents. Cash equivalents primarily consist of investments
in money market mutual funds, commercial paper, option rate preferred stock and
taxable municipal bonds and notes and are recorded at cost, which approximates
market.
Instruments with maturities in excess of three months are classified as
temporary investments. The Company has classified its entire portfolio of
temporary investments at December 31, 1997, as held-to-maturity. These temporary
investments consisted primarily of commercial paper and municipal bonds. At
December 31, 1997, all temporary investments had maturities of less than six
months. There were no temporary investments at December 31, 1998.
Fair Value of Financial Instruments
The fair value of the convertible subordinated notes was approximately
$68.9 million at December 31, 1998. The book value of all other financial
instruments approximates fair value. The estimated fair values have been
determined using appropriate market information and valuation methodologies.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board 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.
This statement is effective for financial statements issued for all fiscal
quarters of fiscal years beginning after June 15, 1999. The Company has not
determined if it will adopt SFAS 133 prior to its effective date. The Company
does not expect this statement to have a material impact on the Company's
results of operations, financial position or liquidity.
<PAGE>
Reclassifications
Certain reclassifications have been made in prior years' consolidated
financial statements to conform to the current year's presentation.
(2) STOCK SPLIT
In November 1997, the Board of Directors declared a two-for-one common
stock split which was effected in the form of a 100% Common Stock dividend paid
on December 22, 1997 to stockholders of record at the close of business on
December 1, 1997.
This stock dividend was accounted for as a stock split and has been
retroactively reflected in the accompanying consolidated financial statements.
In connection with the stock split, proportional adjustments were made to
outstanding stock options and other outstanding obligations of the Company to
issue shares of Common Stock.
(3) ACQUISITION
On July 1, 1998, the Company purchased a majority interest in Nomai,
S.A. ("Nomai"), a France-based manufacturer of removable storage systems, from
Nomai's principal and other major shareholders, for 188 French francs per share,
or approximately $21 million. The interest in Nomai owned by the Company as of
July 1, 1998 constituted approximately 54% of the total shares of Nomai
outstanding on that date. As required by French law, the Company conducted a
tender offer, offering all other shareholders of Nomai the opportunity to sell
their shares to the Company for 188 French francs per share. The tender offer
was completed in August 1998 and resulted in the Company owning approximately
98% of Nomai's outstanding shares. On July 1, 1998, the Company also acquired,
for a purchase price of $3 million, certain non-infringing technology owned by
Nomai and used in the manufacture of disk products Nomai claimed to be
compatible with certain of the Company's Zip and Jaz drives. 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
purchased in-process technology and goodwill. Goodwill of approximately $36
million arising from the acquisition is being amortized on a straight-line basis
over seven years. Goodwill was increased by $2.4 million in the fourth quarter
of 1998 following the Company's receipt of additional information related to the
original valuation of fixed assets, inventory and other miscellaneous assets and
liabilities in the fourth quarter.
Upon completion of the Nomai acquisition, the Company immediately
expensed $11.1 million representing purchased in-process technology that has not
yet reached technological feasibility and has no alternative future use. The
value assigned to purchased in-process technology, based on the income method
prepared by an independent third party, was determined by identifying research
projects in areas for which technological feasibility had not been established.
These projects included a 2 GB Design Drive and Cartridge, DVD and CD-RW
interface technology and servo writer technology with estimated values of $9.3
million, $1.3 million and $0.5 million, respectively. The value was determined
by estimating the costs to develop the purchased in-process technology into
commercially viable products, estimating the resulting net cash flows from such
projects, and discounting the net cash flows back to their present value. The
discount rate included a risk adjusted discount rate of 26% to take into account
the uncertainty surrounding the successful development of the purchased
in-process technology. The valuation included material cash inflows from
in-process technology through 2003 with revenues commencing in 1999 and ramping
significantly in 2000 before tapering off in 2001 and 2002. Research and
development costs are quite significant in 1999 before tapering off. The 2 GB
Design Drive utilizes validated inductive heads and media. This project was
approximately 60% complete at the time of the valuation and the expected
timeframe for achieving this product release was assumed to be in the second
half of 1999. The DVD and CD-RW interface technology could allow easy
connectivity and differentiation from other DVD and CD-RW drives. The DVD and
CD-RW interface technology was assumed to be nearing the prototype stage in
development at the time of the valuation. The remaining efforts for this project
were assumed to be completed in 1999. The servo writer technology could greatly
reduce the time to transfer track following servo signals to magnetic media. The
project was approximately 20% complete at the time of the valuation. Significant
remaining development efforts must be completed in the next 12 to 18 months in
order for Nomai's process to become implemented in a commercially viable
timeframe. If these projects are not successfully developed, the Company's
future revenue and profitability may be adversely affected. Additionally, the
value of other intangible assets acquired may become impaired.
The following unaudited pro forma combined financial data presents the
results of operations of the Company as if the acquisition had been effective at
the beginning of the periods presented (in millions, expect per share data):
<TABLE>
<CAPTION>
Years ended December 31,
1998 1997
-------- --------
(Unaudited)
<S> <C> <C>
Revenue $ 1,710 $ 1,764
Net income (loss) (53) 105
Diluted EPS $ (0.20) $ 0.37
</TABLE>
The foregoing unaudited pro forma results of operations reflect the
effect of certain pro forma adjustments including (1) the amortization of the
goodwill resulting from the acquisition, (2) the recognition of increased
interest expense resulting from debt incurred for the acquisition, (3) the
adjustment for purchased in-process technology resulting from the acquisition
and (4) the adjustment of income taxes to reflect a combined federal and state
income tax rate.
(4) INCOME TAXES
Income (loss) before income taxes consisted of the following:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
U.S. $ (74,120) $ 89,864 $ 88,095
Non-U.S. (9,305) 87,451 5,888
----------- ----------- -----------
$ (83,425) $ 177,315 $ 93,983
=========== =========== ===========
</TABLE>
<PAGE>
<TABLE>
The income tax benefit (provision) consists of the following:
<CAPTION>
December 31,
1998 1997 1996
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Current Income Taxes:
U. S. Federal $ 26,418 $ (48,303) $ (36,341)
U. S. State 3,559 (6,141) (4,153)
Non-U.S. (497) (2,183) (1,278)
----------- ----------- -----------
29,480 (56,627) (41,772)
----------- ----------- -----------
Deferred Income Taxes:
U. S. Federal (247) (4,790) (201)
U. S. State (30) (546) (23)
Non-U.S. 9,525 - (6,000)
Change in valuation
allowance (9,525) - 11,341
----------- ----------- -----------
(277) (5,336) 5,117
----------- ----------- -----------
Benefit (provision)
for income taxes $ 29,203 $ (61,963) $ (36,655)
=========== ============ ===========
</TABLE>
The tax benefits associated with nonqualified stock options and
disqualifying dispositions of incentive stock options increased the current tax
receivable by $7.4 million in 1998, and reduced taxes currently payable by $5.8
million and $24.3 million in 1997 and 1996, respectively. Such benefits were
recorded as an increase to additional paid-in capital.
<PAGE>
Deferred tax assets and liabilities are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities. They are measured by applying the enacted tax rates and laws in
effect for the years in which such differences are expected to reverse. The
significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
December 31,
1998 1997
---------- ----------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Accounts receivable reserves $ 17,405 $ 10,461
Inventory reserves 4,752 3,743
Fixed asset reserves 2,412 1,297
Accrued expense reserves 28,112 29,505
Foreign tax credits 2,366 2,183
Accelerated depreciation 1,843 -
Foreign net operating loss carryovers 9,525 -
Other 531 807
---------- ----------
Total deferred tax assets 66,946 47,996
Valuation allowance (9,525) -
---------- ----------
Total net deferred tax assets $ 57,421 $ 47,996
========== ==========
Deferred tax liabilities:
Tax on unremitted foreign earnings $ 12,497 $ 9,665
Accelerated depreciation - 669
---------- ----------
Total net deferred tax liabilities 12,497 10,334
========== ==========
Total net deferred tax assets $ 44,924 $ 37,662
========== ==========
As reported on the balance sheet:
Deferred tax assets $ 49,827 $ 47,996
Deferred tax liabilities 4,903 10,334
---------- ----------
$ 44,924 $ 37,662
========== ==========
</TABLE>
The Company has established a valuation allowance for net operating
loss carryovers related to certain foreign operations. Management believes that,
based on a number of factors, the available objective evidence creates
sufficient uncertainty regarding the realizability of these foreign net
operating loss carryovers. These carryovers are dependent upon future income
related to these foreign operations.
Although realization of the net deferred tax assets is not assured,
management believes that it is more likely than not that all of the net deferred
tax assets will be realized. The amount of net deferred tax assets considered
realizable, however, could be reduced in the near term based on changing
conditions.
The differences between the benefit (provision) for income taxes at the
U.S. statutory rate and the Company's effective rate are summarized as follows:
<PAGE>
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Benefit (provision) at
U.S. statutory rate $ 29,199 $ (62,061) $ (32,894)
Non-deductible items (5,424) (792) (1,566)
State income taxes, net
of federal benefit 3,337 (7,093) (4,923)
Decrease (increase) in
deferred asset valuation
allowance (9,525) - 11,341
Foreign income taxes (497) (2,183) (7,610)
Foreign earnings taxed at
less than U.S. rates 17,589 11,598 -
Other (5,476) (1,432) (1,003)
----------- ----------- -----------
Benefit (provision) for
income taxes $ 29,203 $ (61,963) $ (36,655)
=========== ============= ===========
</TABLE>
Cash paid for income taxes was $28.5 million in 1998, $34.4 million
in 1997 and $49.0 million in 1996. The Company also received tax refunds of
approximately $29.9 million during 1998.
U.S. taxes have not been provided for unremitted foreign earnings
of $74.8 million. These earnings are considered to be permanently invested in
non-U.S. operations. The residual U.S. tax liability, if such amounts were
remitted, would be approximately $29.2 million.
(5) COMMITMENTS AND CONTINGENCIES
Litigation
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 a clicking noise that may indicate damage to the Zip drive or
disks. The Company intends to vigorously defend against such allegations.
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
complaint alleges tortious interference with contract, tortious interference
with prospective economic advantage, unfair business practices, and conspiracy
against Iomega, and other claims against the other parties. The claims are
related to an alleged arrangement between Nomai, S.A. and Hi-Val for Hi-Val to
distribute Nomai's XHD cartridges. Plaintiff seeks to recover $26 million in
alleged, unspecified damages. The Company intends to vigorously defend against
such allegations.
Beginning February 10, 1998, several purported class action complaints
were filed in the United States District Courts for the District of Utah and the
Southern District of New York, against the Company and certain of its former
officers on behalf of certain persons who purchased the Company's common stock
during the period from September 22, 1997 to January 22, 1998. These cases have
now been consolidated in the District of Utah and a consolidated class action
complaint, Karacand v. Kim B. Edwards, Leonard C. Purkis and Iomega Corporation,
was filed on July 8, 1998. A separate individual suit, Ora v. Iomega
Corporation, et al., was filed on May 27, 1998, in Superior Court of the State
of California for the County of Los Angeles. The Karacand complaint alleges that
the Company and certain of its former officers violated certain federal
securities laws; the Ora complaint alleges that the Company and certain of its
former officers violated certain federal and state securities laws and alleges
that Mr. Edwards breached his duties as a director of the Company. Both
complaints seek an unspecified amount of damages. Management believes that the
named defendants have highly meritorious defenses to the allegations made in
these lawsuits. The Company intends to vigorously defend against such
allegations.
<PAGE>
On February 25, 1998, the Company was served with a complaint in a
purported class action filed in the Supreme Court of the State of New York,
entitled Christian Champod v. Iomega Corporation. The named plaintiff claims to
have commenced the action on behalf of a purported class consisting of certain
persons who purchased Iomega Ditto tape drives since February 18, 1992, and a
subclass consisting of such purchasers who called the Company's "800" or "888"
telephone number for technical assistance and/or customer service and were
charged a fee for the call. The complaint claims violations of certain
provisions of the New York General Business Law and fraudulent inducement, based
on, among other things, alleged advertising and product packaging
representations regarding the Ditto products' ability to "read" certain
non-Ditto cartridges. Additionally, the complaint alleges that Iomega's product
packaging, indicating that a customer could call a toll free "800" or "888"
telephone number for technical assistance, implicitly, but falsely, represented
that the customer could receive free telephone technical support. The Company
intends to vigorously defend against such allegations.
On July 23, 1997, the Company initiated litigation against SyQuest
Technology, Inc. ("SyQuest") in the United States District Court in the District
of Delaware for infringing the Company's U.S. Patent No. 5,644,444, U.S. Design
Patent No. D378,518 and the Company's registered trademark "JET". The complaint
sought monetary damages and injunctive relief enjoining SyQuest from further
infringement. The matter was scheduled for trial in April 1999; however, the
trial date has been delayed as a result of SyQuest's filing of a voluntary
petition in the United States Bankruptcy Court under Chapter 11 of the U.S.
Bankruptcy Code in November 1998. The Company also filed complaints on March 6,
1998 and April 29, 1998 in the Paris District Court alleging claims of copyright
and patent infringement. On January 13, 1999, the Company announced that it had
entered into a definitive agreement to purchase certain assets of SyQuest,
including all of its intellectual property, and its inventory and fixed assets
in the U.S., for $9.5 million in cash, subject to certain closing conditions and
adjustments (see Note 16). As part of the agreement, the Company would release
SyQuest and SyQuest would release the Company from all claims in connection with
patent and trademark infringement litigation pending between the parties in
Delaware and in Paris, France. SyQuest's bankruptcy filing could impact the
Company's ability to recover any damages awarded to it against SyQuest.
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.
The Company is involved in other lawsuits and claims generally
incidental to its business.
It is the opinion of management, after discussions with legal counsel,
that the ultimate dispositions of these lawsuits and claims will not have a
material adverse effect on the Company's financial position or results of
operations.
Lease Commitments
The Company conducts a substantial portion of its operations from
leased facilities and leases certain equipment used in its operations. Aggregate
lease commitments under noncancelable operating leases in effect at December 31,
1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Lease
Years Ending December 31, Commitments
-----------
<S> <C>
1999 $ 15,478
2000 10,500
2001 6,988
2002 6,131
2003 5,666
Thereafter 23,661
-----------
$ 68,424
</TABLE>
<PAGE>
Total rent expense for the years ended December 31, 1998, 1997, and
1996 was approximately $13.6 million, $7.4 million and $3.8 million,
respectively.
The following is a schedule of future minimum lease payments under
capital leases together with the present value of net minimum lease payments at
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
Future Minimum
Years Ending December 31, Lease Payments
--------------
<S> <C>
1999 $ 4,572
2000 2,093
2001 1,337
2002 191
2003 131
Thereafter 736
--------------
Total net minimum lease payments 9,060
Less amount representing interest (634)
--------------
Present value of net minimum lease payments 8,426
Less current portion (4,307)
--------------
$ 4,119
==============
</TABLE>
Cash Bonus Plan
The Company has a management incentive cash bonus plan that provides
for payments to officers and key employees based on the Company's financial
performance, certain operational excellence and other performance initiatives
and an individual performance modifier. At December 31, 1998, the Company had
accrued $3.5 million for management bonuses which will be paid in February 1999.
At December 31, 1997, approximately $10.4 million was accrued for management
bonuses which were paid in February 1998.
Executive Compensation Agreement
In 1995, the Company adopted a bonus plan for the Chief Executive
Officer that provided for bonus payments of cash and up to 240,000 shares of
common stock, subject to a three-year vesting schedule, contingent upon the
achievement of certain objectives. The cash payment was fully accrued at
December 31, 1995 and paid during 1996. In January 1996, the Compensation
Committee approved the issuance of the full 240,000 shares of common stock at a
cost equal to par value. Under this plan, 80,000 vested shares were issued in
January 1997 and another 80,000 vested shares were issued in January 1998. An
additional 40,000 shares were issued in April 1998 pursuant to a Severance
Agreement and General Release entered into between the Company and its former
Chief Executive Officer. The remaining 40,000 unissued shares were forfeited as
part of the agreement. Compensation related to the shares which were not
forfeited has been reflected in the accompanying consolidated financial
statements.
Profit Sharing Plan
The Company has a profit sharing plan that provides for payments to all
eligible employees of their share of a pool that is based on the Company's
annual income before income taxes. Employees must complete one year of
continuous employment to be eligible. Employees receive a share of the profit
sharing pool based upon their annual salary as a ratio to total annual salaries
of all eligible employees. A portion of the profit sharing pool is paid
throughout the year on a quarterly basis. The Company did not accrue for any
profit sharing for 1998. The Company paid approximately $1.9 million in profit
sharing for 1997 in February 1998 and approximately $1.9 million in profit
sharing for 1996 in February 1997.
<PAGE>
Executive Employment Agreements
In 1998, the Company entered into employment agreements with certain
executive officers of the Company that included specified severance benefits in
the event that the executive's employment with the Company was involuntarily
terminated prior to November 1, 1999 or within one year following the
appointment of a new chief executive officer. The agreement provides severance
equal to the executive's current annual compensation, base and estimated bonus,
as of the date of termination, less any compensation the executive may receive
for subsequent employment during the one-year period following termination.
Severance payments shall be made on the Company's regular payroll schedule with
the bonus component of the severance to be included in the final payment. The
agreement also provides for benefits continuation until the executive becomes
eligible for similar benefits in subsequent employment up to a maximum of one
year from the executive's termination date.
Foreign Exchange Contracts
The Company has commitments to sell and purchase foreign currencies
relating to forward exchange contracts in order to hedge against future currency
fluctuations.
At December 31, 1998, outstanding forward exchange sales (purchase)
contracts, which all mature in March 1999, were as follows:
<TABLE>
<CAPTION>
Contracted
Forward
Amount Rate
----------- ----------
<S> <C> <C>
British Pound (945,000) 0.60
Dutch Guilder (2,360,000) 1.87
French Franc 72,620,000 5.57
German Mark (6,800,000) 1.66
Irish Punt (510,000) 0.67
Japanese Yen 965,000,000 114.06
Singapore Dollar (5,250,000) 1.64
Swiss Franc (2,930,000) 1.35
</TABLE>
The contracts are revalued at the month-end spot rate. Gains and losses
on foreign currency contracts intended to be used to hedge operating
requirements are reported currently in income. Gains and losses on foreign
currency contracts intended to meet firm commitments are deferred and are
recognized as part of the cost of the underlying transaction being hedged. At
December 31, 1998, all of the Company's foreign currency contracts were being
used to hedge operating requirements. The Company's theoretical risk in these
transactions is the cost of replacing, at current market rates, these contracts
in the event of default by the counterparty.
<PAGE>
(6) NOTES PAYABLE
Line of Credit
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 January 1999,
the Company and the lenders agreed to several amendments to and waivers under
the Credit Facility (as most recently amended, effective January 29, 1999, the
"Credit Facility"). The Credit Facility is a $150 million secured revolving line
of credit that expires on July 14, 2000, and is secured by accounts receivable,
domestic inventory, domestic intellectual property, general intangibles,
equipment, personal property, investment property and a pledge of 65% of the
stock of certain of the Company's subsidiaries. Borrowing availability under the
Credit Facility is based on an agreed upon advance rate on receivables and
inventory not to exceed $150 million with a floor of $110 million through May
1999. Under the Credit Facility, the Company may borrow at a base rate, which is
the higher of prime or the sum of 0.5% plus the Federal funds rate plus a margin
of 0.88% to 1.63%, for the first year, and thereafter between 0.0% and 1.63%
depending on the Company's earnings before interest expense, income taxes,
depreciation and amortization ("EBITDA") and utilization of the Credit Facility,
or at LIBOR plus a margin of 2.0% to 2.75%, for the first year, and thereafter
between 1.25% and 2.75% depending on the Company's EBITDA and utilization of the
Credit Facility. Total availability under the Credit Facility at December 31,
1998 was $143.2 million, and there were no borrowings outstanding. The weighted
average outstanding balance was $49.0 million during the ten-month period the
loan was outstanding in 1998. The weighted average interest rate was 7.2%. In
January 1999, the Company obtained waivers from landlords which allow Citicorp
USA, Inc. (the Credit Facility Security Agent) access to additional security
interests. The additional security interests resulted in an increase in the
total availability under the Credit Facility to $150 million. Among other
restrictions, the Credit Facility treats a change of control (as defined) as an
event of default and requires the maintenance of minimum levels of consolidated
tangible net worth, EBITDA and certain other covenants. On January 29, 1999, the
Company obtained an amendment to the Credit Facility with respect to the minimum
consolidated EBITDA financial covenant for the periods ending on March 28, 1999
and June 27, 1999. As of December 31, 1998, the Company was in compliance with
all covenants under the Credit Facility. Depending on its financial performance
in future quarters, the Company may be required to seek further covenant waivers
and amendments under the Credit Facility. There can be no assurance that the
Company will be able to obtain any such waivers or amendments on terms
acceptable to the Company, if at all. Loss of the Credit Facility may require
the Company to find an alternative source of funding which could have a material
adverse effect on the Company's business and financial results.
RELATED PARTY NOTES
In July 1998, the Company borrowed a total of $40 million from Idanta
Partners Ltd. and another entity affiliated with David J. Dunn, Chairman of the
Company's Board of Directors, pursuant to a series of three senior subordinated
notes. The principal and interest associated with these notes are payable on
March 31, 1999. The initial interest rate is 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. Accrued interest related to these notes at December
31, 1998 was $1.9 million.
Cash paid for interest was $8.1 million, $5.9 million and $8.9 million
in 1998, 1997 and 1996, respectively, including interest on capital leases.
Included in interest expense for 1998, 1997 and 1996, respectively, was $1.1
million, $1.0 million and $1.0 million of amortization of deferred charges
associated with obtaining the debt and applicable amendments.
(7) CONVERTIBLE SUBORDINATED NOTES
In March 1996, the Company issued $46.0 million of convertible
subordinated notes. The net proceeds from the issuance of the notes totaled
$43.1 million and were used to pay down other debt and for operating
requirements. The notes bear interest at 6.75% per year and interest is payable
semi-annually. The notes mature on March 15, 2001. The notes are unsecured and
subordinated to all existing and future senior indebtedness of the Company and
are effectively subordinated to all existing and future indebtedness and other
liabilities of the Company's subsidiaries.
The notes are convertible into Common Stock of the Company at the
option of the holder at or before maturity, unless previously redeemed or
repurchased, at a conversion price of $4.938 per share (equivalent to a
conversion rate of approximately 202.52 shares per $1,000 principal amount of
notes), subject to adjustment in certain events. Through December 31, 1998,
holders have converted a cumulative $345,000 of convertible subordinated notes
into 69,867 shares of Common Stock.
The notes are redeemable at any time on or after March 15, 1999, in
whole or in part, at the option of the Company, at declining redemption prices,
102.7% for 1999 and 101.35% for 2000, together with accrued interest, if any, to
the redemption date.
If any repurchase event, as defined in the indenture agreement, occurs,
each holder of notes may require the Company to repurchase all or any part of
such holder's notes at 100% of the principal amount thereof plus accrued
interest to the repurchase date.
<PAGE>
(8) PREFERRED STOCK
The Company has authorized the issuance of up to 5,000,000 shares of
Preferred Stock, $0.01 par value per share. The Company's Board of Directors has
the authority, without further shareholder approval, to issue Preferred Stock in
one or more series and to fix the rights and preferences thereof. At December
31, 1998, 250,000 shares were designated as Series C Junior Participating
Preferred Stock and the remaining 4,750,000 shares were undesignated.
Series C Junior Participating Preferred Stock
In July 1989, the Company designated 250,000 shares of Preferred Stock
as Series C Junior Participating Preferred Stock ("Series C Stock") in
connection with its Shareholder Rights Plan (see Note 9). Each share of the
Series C Stock will: (1) have a liquidation preference of $1,500 per share; (2)
have rights to dividends, subject to the rights of any series of Preferred Stock
ranking prior and superior to the Series C Stock, when and if declared by the
Board of Directors; (3) not be redeemable; and (4) have voting rights which
entitle the holder to 1,500 votes per share.
(9) PREFERRED STOCK PURCHASE RIGHTS
In July 1989, the Company adopted a Shareholder Rights Plan and
declared a dividend of one-fifteenth of one preferred stock purchase right for
each outstanding share of Common Stock. Under certain conditions, each right may
be exercised to purchase one one-hundredth of a share of Series C Stock at an
exercise price of $15. The rights will be exercisable only if a person or group
has acquired beneficial ownership of 20% or more of the Common Stock or
announced a tender or exchange offer that would result in such a person or group
owning 30% or more of the Common Stock. The Company generally will be entitled
to redeem the rights at $0.01 per right at any time until the tenth day
following public announcement that a 20% stock position has been acquired and in
certain other circumstances.
If any person or group becomes a beneficial owner of 25% or more of the
Common Stock (except pursuant to a tender or exchange offer for all shares at a
fair price as determined by the outside members of the Board of Directors) or if
a 20% stockholder consolidates or merges into or engages in certain self-dealing
transactions with the Company, each right not owned by a 20% stockholder will
enable its holder to purchase such number of shares of Common Stock as is equal
to the exercise price of the right divided by one-half of the current market
price of the Common Stock on the date of the occurrence of the event. In
addition, if the Company engages in a merger or other business combination with
another person or group in which it is not the surviving corporation or in
connection with which its Common Stock is changed or converted, or if the
Company sells or transfers 50% or more of its assets or earning power to another
person, each right that has not previously been exercised will entitle its
holder to purchase such number of shares of Common Stock of such other person as
is equal to the exercise price of the right divided by one-half of the current
market price of such Common Stock on the date of the occurrence of the event.
The Company intends to adopt a new Shareholder Rights Plan upon the expiration
of the existing plan in 1999.
(10) STOCK COMPENSATION PLANS
At December 31, 1998, the Company had five stock-based compensation
plans, which are described below. The Company accounts for these plans under
Accounting Principles Board Opinion No. 25, under which no compensation cost has
been recognized. Had compensation cost for the Company's five stock-based
compensation plans been determined based on the fair value of the option at the
grant dates for awards under those plans consistent with Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123"), the Company's net income (loss) and earnings per share would have been
adjusted to the pro forma amounts indicated below (all per share amounts have
been restated to reflect changes made through the Company's adoption of
Statement of Financial Accounting Standards No. 128, "Earnings per Share" and
for the stock split described in Note 2):
<PAGE>
<TABLE>
<CAPTION>
For years ended December 31,
1998 1997 1996
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Net income (loss) As reported $ (54,222) $ 115,352 $ 57,328
========== ========== ==========
Pro forma $ (63,787) $ 109,793 $ 54,351
========== ========== ==========
Basic EPS As reported $ (0.20) $ 0.45 $ 0.23
========== ========== ==========
Pro forma $ (0.24) $ 0.42 $ 0.22
========== ========== ==========
Diluted EPS As reported $ (0.20) $ 0.42 $ 0.21
========== ========== ==========
Pro forma $ (0.24) $ 0.39 $ 0.20
========== ========== ==========
</TABLE>
Because the SFAS 123 method of accounting has not been applied to
options granted prior to January 1, 1995, and due to the nature and timing of
option grants, the resulting pro forma compensation costs may not be indicative
of future compensation costs.
Stock Price Assumptions
The fair value of each option grant has been estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions used for grants in 1998, 1997 and 1996, in calculating compensation
cost: expected stock price volatility of 60%, 55% and 67%, respectively, a
risk-free interest rate of 4.97% for 1998, 6.04% for 1997 and 5.65% for 1996,
and an expected average life of 3.87 years for 1998, 3.5 years for 1997 and 3.75
years for 1996.
Stock Incentive Plans
The Company has three stock incentive plans: the 1981 Stock Option Plan
(the "1981 Plan"), the 1987 Stock Option Plan (the "1987 Plan") and the 1997
Stock Incentive Plan (the "1997 Plan"). The 1981 and 1987 plans have expired and
no further grants may be made under these plans; however, all remaining
outstanding options previously granted under these plans remain in effect. The
1997 Plan provides for the grant of incentive stock options ("ISOs") intended to
qualify under Section 422 of the Internal Revenue Code, nonstatutory stock
options ("NSOs") and restricted stock awards. Under the 1997 Plan, the Company
may grant options for up to 12,000,000 shares of Common Stock to the Company's
officers, key employees, directors, consultants and advisors. The exercise price
of ISOs granted under the 1997 Plan may not be less than 100%; NSOs may be
granted with exercise prices below the fair market value of the Common Stock as
of the date of grant, subject to certain limitations. The duration of options
awarded under these plans may not exceed ten years from the date of grant,
except for those options granted in non-U.S. jurisdictions, which can be granted
for a term of up to 11 years. In February 1999, the Company's Board of Directors
approved an increase in the number of shares of Common Stock available for
issuance pursuant to awards granted under the 1997 Plan from 12,000,000 shares
to 20,500,000 shares, subject to stockholder approval at the 1999 Annual Meeting
of Stockholders. At December 31, 1998, the Company had reserved 20,165,305
shares of Common Stock pursuant to awards granted under the plan or to be
granted under these plans.
The following table presents the aggregate options and restricted stock
awards granted, exercised and forfeited under the 1981, 1987 and 1997 plans for
the years ended December 31, 1998, 1997 and 1996 and at their respective
weighted-average exercise prices. All options and option prices have been
restated for the stock split described in Note 2.
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
---------------------- -------------------- --------------------
Weighted Avg. Weighted Avg. Weighted Avg.
Shares Exercise Shares Exercise Shares Exercise
(000's) Price (000's) Price (000's) Price
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 17,469 $ 3.95 21,782 $ 2.32 23,328 $ 0.44
Granted 7,373 6.28 2,303 11.61 7,814 5.45
Exercised (5,489) 0.64 (5,620) 0.72 (9,104) 0.26
Forfeited (2,605) 5.87 (996) 3.80 (256) 2.53
-------- --------- -------- --------- -------- ---------
Outstanding at end of year 16,748 5.76 17,469 3.95 21,782 2.32
======== ======== ========
Options exercisable
at year-end 5,089 3.91 5,934 1.28 6,804 0.37
Weighted average fair value of
options granted during the
year $ 3.11 $ 5.33 $ 2.95
The number of shares available for future grant under the 1997 Plan totaled 3,416,825 at December 31, 1998.
</TABLE>
Director Stock Option Plans
The Company has a 1987 Director Stock Option Plan (the "1987 Director
Plan") and a 1995 Director Stock Option Plan (the "1995 Director Plan"), which
was amended during 1997 and 1998. The 1987 Director Plan has expired and no
further options may be granted under this plan; however, outstanding options
previously granted under this plan remain in effect. Under the 1995 Director
Plan, the Company may grant options for up to 2,400,000 shares of Common Stock.
This Plan currently provides for the grant to each non-employee director of the
Company, on his or her initial election as a director, of an option to purchase
50,000 shares of Common Stock. In addition to the initial option grant, each
non-employee director is granted an option to purchase 10,000 shares of Common
Stock on each anniversary of his or her initial election following the full
vesting of the initial option grant. All options generally become exercisable in
five equal annual installments, commencing approximately one year from the date
of grant, provided the holder continues to serve as a director of the Company.
Directors entitled to receive an initial or annual option can instead elect to
receive a series of monthly options covering, in total, the same number of
shares that the single option grant would have covered. Under both plans, the
exercise price per share of the option is equal to the fair market value of the
Company's Common Stock on the date of grant of the option. Any options granted
under either plan must be exercised no later than ten years from the date of
grant. All options granted under the plans are nonstatutory. At December 31,
1998, the Company had reserved 3,137,000 shares of Common Stock for issuance
upon exercise of options granted or to be granted under these plans.
<PAGE>
The following table presents the options granted, exercised and
forfeited under the 1987 and 1995 Director Plans for the years ended December
31, 1998, 1997 and 1996 at their respective weighted-average exercise prices.
All options and option prices have been restated for the stock split described
in Note 2.
<TABLE>
1998 1997 1996
---------------------- -------------------- --------------------
Weighted Avg. Weighted Avg. Weighted Avg.
Shares Exercise Shares Exercise Shares Exercise
Stock Options (000's) Price (000's) Price (000's) Price
------------- -------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 932 $ 1.65 886 $ 0.20 1,500 $ 0.20
Granted 99 7.41 120 11.41 - -
Exercised (75) 0.13 (74) 0.13 (614) 0.19
Forfeited (125) 5.06 - - - -
-------- --------- -------- --------- -------- ---------
Outstanding at
end of year 831 1.96 932 1.65 886 0.20
======== ========= ======== ========= ======== =========
Options exercisable
at year-end 603 0.50 437 0.35 288 0.26
Weighted average
fair value of
options granted
during the year $ 3.11 $ 5.34 $ -
</TABLE>
The number of shares available for future grant under the 1995 Director
Plan was 2,306,000 at December 31, 1998.
The following table summarizes information about awards outstanding
under all plans at December 31, 1998. All relevant data has been restated for
the stock split described in Note 2.
<TABLE>
Outstanding Exercisable
------------------------------------------------ ------------------------------
Number (000's) Weighted-Avg. Number (000's)
Range of Outstanding Remaining Weighted-Avg. Exercisable Weighted-Avg.
Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
---------------- ------------- ---------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$0.13 to $4.13 6,201 6.3 years $ 1.91 3,955 $ 1.43
$4.18 to $9.25 9,651 8.9 years 6.43 1,233 5.89
$9.63 to $14.42 1,067 8.4 years 12.07 295 12.01
$14.47 to $21.66 560 8.6 years 16.02 159 16.13
$20.07 to $23.07 100 7.4 years 22.97 50 22.97
------------- ---------------- -------------- ------------- --------------
17,579 8.0 years 5.58 5,692 3.55
============= ================ ============== ============= ==============
</TABLE>
(11) EMPLOYEE STOCK PURCHASE PLANS
The Company adopted two Employee Stock Purchase Plans (one primarily
for U.S. employees and the other for certain international employees) that took
effect on January 1, 1998. Under these plans, participants are able to purchase
shares of the Company's Common Stock through specified payroll deductions (or by
other means for international employees). Offerings to purchase shares of the
Company's stock begin each January 1 and July 1. Each offering commencement date
begins a six-month period during which payroll deductions will be made and held
for the purchase of stock at the end of each six-month period at a price equal
to 85% of the Common Stock's closing price at the end of the six-month period.
An aggregate of 3,000,000 shares of Common Stock was reserved for issuance under
these plans. At December 31, 1998, a total of 222,532 shares have been purchased
pursuant to these plans.
(12) RETIREMENT PLAN
The Iomega Retirement and Investment Savings Plan (the "IRIS Plan")
permits eligible employees to make tax deferred investments through payroll
deductions. Each year the Company may contribute to the IRIS Plan at the
discretion of the Board of Directors, based on the prior year's earnings of the
Company. The IRIS Plan is subject to compliance with Section 401(k) of the
Internal Revenue Code and the Employee Retirement Income Securities Act of 1974
("ERISA"). Under the terms of the IRIS Plan, all employee contributions are
immediately vested in full. Employer matching contributions are based on a
four-year vesting schedule. After four years of service, employees become
immediately vested in all matching contributions. The Company contributed
approximately $1,347,000 and $900,000 to the IRIS Plan for the years ended
December 31, 1997 and 1996, respectively. The Company has accrued $1.5 million
for contributions to the IRIS Plan for the year ended December 31, 1998.
(13) NONQUALIFIED DEFERRED COMPENSATION PLAN
In 1998, the Company offered a nonqualified deferred compensation plan
to a select group of management and highly compensated employees that provides
the opportunity to defer a specified percentage of their cash compensation.
Participants may elect to defer up to 50% of annual base salary and up to 100%
of bonus. The Company's obligations under this plan are unfunded, for tax
purposes and for purposes of Title I of ERISA and unsecured general obligations
of the Company to pay in the future the value of the deferred compensation
adjusted to reflect the performance, whether positive or negative, of selected
investment measurement options, chosen by each participant, during the deferral
period.
(14) BUSINESS SEGMENT INFORMATION
The Company has four reportable segments based primarily on the nature
of the Company's customers and products: Zip, Jaz, Ditto and Clik!. The Zip
segment involves the development, manufacture, distribution and sales of
personal storage products and applications, including Zip disk and drive systems
to OEMs, retailers and distributors throughout the world. The Jaz segment
involves the development, manufacture, distribution and sales of professional
storage products and applications, including Jaz disk and drive systems and the
Buz multimedia producer to retailers, distributors and resellers throughout the
world. The Ditto segment involves the development, manufacture, distribution and
sales of the Ditto family of tape backup drives and tape cartridges to
retailers, distributors and resellers throughout the world. The Clik! segment
involves the development, manufacture, distribution and sales of Clik! mobile
drives and 40 MB disks for use with portable digital products such as digital
cameras, handheld personal computers and notebook computers to retailers,
distributors, OEMs and resellers throughout the world. Clik! products began
shipping in limited quantities during the fourth quarter of 1998. The "Other"
category includes products such as Bernoulli, floppy disks, CD-RW drives and
other miscellaneous items.
The Company evaluates performance based on product profit margin for
each segment. Product profit margin is defined as sales and other income
directly related to a segment's operations, less both fixed and variable
manufacturing, research and development and selling, general and administrative
expenses directly related to a segment's operations. The accounting policies of
the segments are the same as those described in Note 1 "Operations and
Significant Accounting Policies". Intersegment sales, eliminated in
consolidation, are not material. Segment assets consist of inventory and fixed
assets. The Company allocates corporate fixed assets to the operating segments
based on capital expenditure and cost of sales ratios for the applicable
operating segments.
The information in the following tables is derived directly from the
segments' internal financial reporting information used for corporate management
purposes. The expenses, assets and liabilities attributable to corporate
activity are not allocated to the operating segments.
<PAGE>
<TABLE>
Reportable Operating Segment Information
<CAPTION>
1998 1997 1996
--------- --------- ---------
(In millions)
<S> <C> <C> <C>
Sales:
Zip $ 1,183 $ 1,159 $ 746
Jaz 417 460 305
Ditto 81 118 128
Clik! 2 - -
Other 11 3 34
--------- --------- ---------
Total sales $ 1,694 $ 1,740 $ 1,213
========= ========= =========
Product profit margin:
Zip $ 151 $ 286 $ 165
Jaz 5 49 21
Ditto (14) 2 17
Clik! (37) (6) (1)
Other (10) (7) 6
--------- --------- ---------
Total product profit margin 95 324 208
--------- --------- ---------
General corporate expenses (170) (147) (108)
Interest income 4 7 3
Interest expense (10) (6) (9)
Other expense (2) (1) -
--------- --------- ---------
Income (loss) before
income taxes $ (83) $ 177 $ 94
========= ========= =========
Depreciation and amortization:
Zip $ 36 $ 19 $ 8
Jaz 15 9 5
Ditto 11 7 5
Clik! 1 - -
Other 5 4 7
--------- --------- ---------
Total depreciation and
amortization $ 68 $ 39 $ 25
========= ========= =========
Capital expenditures:
Zip $ 57 $ 54 $ 59
Jaz 21 26 35
Ditto 4 8 8
Clik! 15 1 -
Other - - -
--------- --------- ---------
Total capital expenditures $ 97 $ 89 $ 102
========= ========= =========
Assets (1):
Zip $ 233 $ 243 $ 171
Jaz 96 137 86
Ditto 13 32 28
Clik! 18 1 -
Other 13 9 13
--------- --------- ---------
Total assets $ 373 $ 422 $ 298
========= ========= =========
</TABLE>
(1) Assets consist of inventory and net fixed assets as these are the only
assets allocated to the applicable segments.
<PAGE>
A significant amount of the Company's revenues are generated outside of the
United States. The Company has its European headquarters in Geneva, Switzerland
and has its European distribution center in the Netherlands. The European
headquarters and distribution center were moved from Germany in the first
quarter of 1997. The Company has a sales office and distribution center in
Singapore to support the existing customer base in Asia and further develop the
sales region. The Singapore sales office and distribution center were opened
during the first half of 1996. In late 1996, the Company purchased a
manufacturing facility in Malaysia. All sales from Malaysia are to affiliated
companies. Inventory is transferred from the United States and Malaysian
operations to affiliates at an arms-length price as determined by an independent
economic study. Research and development costs are allocated from the United
States operations to the Switzerland subsidiary based on a cost sharing
agreement as determined by an independent economic study. Also, the Switzerland
subsidiary pays the United States operations a royalty, determined by an
independent economic study, for the rights to existing technologies. Following
is a summary of the Company's United States and significant non-U.S. country
revenues and the United States and significant non-U.S. country long-lived asset
locations. Revenues are attributed to individual countries based on the location
of sales to unaffiliated customers.
Geographic Information
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
(In millions)
<S> <C> <C> <C>
Revenue:
United States $ 1,112 $ 1,039 $ 793
Germany 95 136 103
Other countries 487 565 317
--------- --------- ---------
Total $ 1,694 $ 1,740 $ 1,213
========= ========= =========
Long-lived assets (1):
United States $ 150 $ 120 $ 91
Malaysia 47 49 35
France 39 - -
Other countries 10 10 3
--------- --------- ---------
Total $ 246 $ 179 $ 129
========= ========= =========
</TABLE>
(1) Long-lived assets consist of all long-term assets other than
deferred tax assets.
(15) OTHER MATTERS
Significant Customers
During 1998, 1997 and 1996, sales to Ingram Micro, Inc. accounted
for 16%, 14% and 15%, respectively, of the Company's consolidated sales. Sales
to Ingram Micro, Inc. consisted of product sales from all of the Company's
operating segments. No other customer accounted for 10% or more of consolidated
sales.
Concentration of Credit Risk
The Company markets its products primarily through computer product
distributors, retailers and OEMs. Accordingly, as the Company grants credit to
its customers, a substantial portion of outstanding accounts receivable are due
from computer product distributors, certain large retailers and OEMs. At
December 31, 1998, the customers with the ten highest outstanding accounts
receivable balances totaled $124.0 million or 42% of the gross accounts
receivable, compared to $140.9 million, or 44% of gross accounts receivable, at
December 31, 1997. At December 31, 1998, the outstanding accounts receivable
balance from one customer was $29.3 million or 10% of gross accounts receivable,
compared to the accounts receivable balance from one customer of $31.6 million,
or 10% of gross accounts receivable, at December 31, 1997. If any one or a group
of these customers' receivable balances should be deemed uncollectable, it would
have a material adverse effect on the Company's results of operations and
financial condition.
Related Party Transactions
During 1996, the Company purchased inventory items totaling $841,000
from a vendor having a common director with the Company.
In March 1998, the Company loaned Kim B. Edwards, former President and
Chief Executive Officer of the Company $5,000,000 in the form of a full-recourse
Secured Promissory Note (the "Note") pursuant to a Severance Agreement and
General Release. The Note bears interest at the rate of 5.7% and is payable in
five annual payments together with any accrued interest beginning in April 1999.
The Note is secured by a first priority security interest in 2,561,000 shares of
the Company's Common Stock owned by Edwards, the certificate for which has been
delivered to the Company as collateral. The Severance Agreement and General
Release between Edwards and the Company included a non-competition and
non-recruitment provision for consideration equal to the accrued interest on the
Note.
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
Board, Iomega Corporation, pursuant to a series of three senior subordinated
notes. The principal and interest associated with these notes are payable on
March 31, 1999 (see Note 6).
(16) SUBSEQUENT EVENT
On January 13, 1999, the Company announced that it had entered into a
definitive agreement to purchase certain assets of SyQuest Technology, Inc.,
("SyQuest"), including all of its intellectual property and its inventory and
fixed assets in the U.S., for $9.5 million in cash, subject to certain closing
conditions and adjustments. Conditions to closing include the Company's
acquisition of the inventory and equipment assets of SyQuest's subsidiary in
Malaysia, for additional consideration. SyQuest Malaysia's assets are being
offered for sale separately by a Receiver and Manager appointed in Malaysia.
Provided all conditions are met, the Company anticipates a first quarter 1999
closing. The Company will not assume any material obligations or liabilities of
SyQuest or assume SyQuest's accounts receivable or claims against third parties.
Warranty service and customer support obligations for products sold by SyQuest
will remain the responsibility of SyQuest. SyQuest has filed a motion in the
United States Bankruptcy Court seeking the necessary approval of the asset sale
in order for the proposed transaction to close. As part of the agreement, the
Company would release SyQuest and SyQuest would release the Company from all
claims in connection with patent and trademark infringement litigation pending
between the parties in Delaware and in Paris, France.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Iomega Corporation:
We have audited the accompanying consolidated balance sheets of Iomega
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Iomega
Corporation and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
January 19, 1999
(except with respect to the matter
discussed in Note 6, as to which the
date is January 29, 1999)
<PAGE>
<TABLE>
BOARD OF DIRECTORS CORPORATE OFFICERS
<S> <C>
David J. Dunn 3,5. Jodie K. Glore
Chairman of the Board of Directors, Chief Executive Officer and President
Iomega Corporation
Managing Partner of Idanta Partners L. Scott Flaig
Executive Vice President and Chief
Jodie K. Glore 3 Operating Officer
Chief Executive Officer and President,
Iomega Corporation James A. Taylor
Director, BF Goodrich Executive Vice President and
Chief Marketing Officer
John W. Barter 1,3
Director, BMC Software Inc., and Dan E. Strong
Louisiana-Pacific Corporation Vice President, Corporate Controller and
Interim Chief Financial Officer
Robert P. Berkowitz 1
Private Consultant Laurie Bartlett Keating
Senior Vice President, General
John R. Myers 4,6 Counsel and Secretary
Private Consultant
Director, Curtiss-Wright Corporation James C. Kelly
Senior Vice President,
John E. Nolan 1,2,5 Product Development and Chief
Partner, Steptoe & Johnson, LLP Technology Officer
M. Bernard Puckett 4 Anton J. Radman, Jr.
Director, R.R. Donnelley & Sons Company; Senior Vice President,
IMS Health; P-Com, Inc.; Strategic Business Development
Neilson Media Research; and Software.com
Roxie Craycraft
John M. Seidl 4 Acting Vice President, Customer
Chairman, President and CEO Service and Applications
CellNet Data Systems, Inc.
Director, St. Mary's Land and Exploration Company Kevin O'Connor
Vice President, Human Resources
The Honorable John E. Sheehan 1,2
Chairman of the Board and Founder, Robert J. Simmons
Rhome Management Company Vice President and Treasurer
James E. Sierk 3,6
Director, Ames Rubber Corporation
Committees
1 Audit Committee
2 Ethics and Compliance Committee
3 Executive Committee
4 management Development and Compensation Committee
5 Nominating and Governance Committee
6 Operations and Technology Committee
</TABLE>
<PAGE>
<TABLE>
CORPORATE INFORMATION
<S> <C>
CORPORATE HEADQUARTERS STOCK TRANSFER AGENT AND REGISTRAR
Iomega Corporation American Stock Transfer and Trust Company
1821 West Iomega Way 40 Wall Street, 46th Floor
Roy, Utah 84067 New York, New York 10005
(801) 332-1000 (718) 921-8260
STOCK EXCHANGE LISTING INDEPENDENT PUBLIC ACCOUNTANTS
New York Stock Exchange Arthur Andersen LLP
Ticker Symbol: IOM 15 West South Temple, Suite 700
Salt Lake City, Utah 84101
ANNUAL STOCKHOLDERS' MEETING
Iomega's Annual Meeting of ATTORNEYS
Stockholders will convene Hale and Dorr LLP
at 11:00 a.m., local time, 60 State Street
on April 20, 1999: Boston, Massachusetts 02109
Salt Lake City Marriott
75 South West Temple
Salt Lake City, UT 84101
INVESTOR INQUIRIES
Communications regarding investor
records, including duplicate mailings,
changes of address or ownership,
transfer of shares and list
certificates, should be directed
to the Company's stock transfer agent.
All other inquiries should be
directed to Iomega's Investor Relations
department.
FOR 10-K AND STOCK HELD IN STREET NAME
A copy of Iomega's 1998 Form 10-K as
filed with the Securities and Exchange
Commission may be obtained by contacting
Iomega's Investor Relations department
in writing or by calling the Iomega
Investor Information Line or by accessing
Iomega's Web site at www.iomega.com.
If your stock is held in "street name"
and you would like to receive information
directly from the Company, please send
your request to the Iomega Investor
Relations department.
IOMEGA INVESTOR RELATIONS
Tyler Thatcher
Director, Investor Relations
Corporate Headquarters
Iomega's Investor
Information Line: (801) 332-3585
Toll Free Fax-Back
Line: (888) 88-IOMEGA
</TABLE>
<PAGE>
PRODUCT INFORMATION
Inquiries regarding the Company's products should be addressed to Corporate
Communications at Corporate headquarters. OEM product descriptions and OEM
listings do not include all OEM products or all OEMs. product descriptions are
accurate as of February 1999
and are subject to change.
(C)1999 Iomega Corporation. Iomega, Zip, Jaz, Ditto, Bernoulli and the stylized
"I" logo are registered trademarks of, and Zip Built-In, the Zip Built-In logo,
Clik!, Ditto Max, IomegaWare and the IomegaWare logo, The SuperFloppy preferred
by millions, NZR and Record/Play are trademarks of, Iomega Corporation. All
other product and brand names are the property of the respective owners with
which they are associated.
EXHIBIT 21.1
SUBSIDIARIES OF IOMEGA CORPORATION
Subsidiary Name Jurisdiction or Incorporation
Iomega Europe GmbH (in disolution) Germany
Iomega GmbH Germany
Iomega Canada Inc. Delaware
Iomega Pacific PTE Ltd Singapore
Iomega Singapore Ltd Delaware
Iomega (Bermuda) Ltd. Bermunda
Iomega Australia PTY Ltd. Australia
Iomega Overseas B.V. The Netherlands
Iomega International SA Switzerland
Iomega (Malaysia) SDN BHD Malaysia
Iomega Japan Corporation KK Japan
Iomega SARL Switzerland
Iomega Korea Korea
Iomega Hong Kong Ltd. Hong Kong
Iomega Nomai SA France
Iomega Nomus, Inc. Delaware
Iomega Albi Media Manufacturing SARL France
Iomega Myrica Ltd. France
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS. THE COMPANY HAS RESTATED EARNINGS PER SHARE FOR
FISCAL YEARS ENDING DECEMBER 31, 1996 TO BASIC AND DILUTED EARNINGS PER
SHARE TO BE IN ACCORDANCE WITH STATEMENT OF FINANCIAL ACCOUNTING STANDARDS
(SFAS) SFAS NO. 128: EARNINGS PER SHARE. CERTAIN RECLASSIFICATION HAVE BEEN MADE
TO PRIOR YEARS' AMOUNTS TO CONFORM TO THE CURRENT YEAR'S PRESENTATION.
</LEGEND>
<MULTIPLIER> 1,000
<CIK> 0000352789
<NAME> Iomega Corporation
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1998 JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1998 DEC-31-1997 DEC-31-1996
<CASH> 90,273 159,922 108,312
<SECURITIES> 0 36,319 0
<RECEIVABLES> 293,425 321,474 251,594
<ALLOWANCES> 59,763 41,292 40,861
<INVENTORY> 165,132 246,383 171,920
<CURRENT-ASSETS> 584,114 782,784 557,718
<PP&E> 373,227 272,219 187,125
<DEPRECIATION> 165,112 96,550 61,083
<TOTAL-ASSETS> 830,159 961,639 687,192
<CURRENT-LIABILITIES> 358,228 444,618 286,983
<BONDS> 45,655 45,683 45,733
0 0 0
0 0 0
<COMMON> 295,143 282,567 272,701
<OTHER-SE> 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 830,159 961,639 687,192
<SALES> 1,694,385 1,739,972 1,212,769
<TOTAL-REVENUES> 1,694,385 1,739,972 1,212,769
<CGS> 1,271,451 1,192,310 879,989
<TOTAL-COSTS> 1,770,351 1,562,266 1,112,809
<OTHER-EXPENSES> 1,535 879 182
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 10,163 6,443 8,875
<INCOME-PRETAX> (83,425) 177,315 93,983
<INCOME-TAX> (29,203) 61,963 36,655
<INCOME-CONTINUING> (54,222) 115,352 57,328
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (54,222) 115,352 57,328
<EPS-PRIMARY> (.20) .45 .23
<EPS-DILUTED> (.20) .42 .21
</TABLE>
