UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 28, 1999
COMMISSION FILE NUMBER 1-12333
Iomega Corporation
(Exact name of registrant as specified in its charter)
Delaware 86-0385884
(State or other jurisdiction (IRS employer identification number)
of incorporation or organization)
1821 West Iomega Way, Roy, UT 84067
(Address of principal executive offices)
(801) 332-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of March 28, 1999.
Common Stock, par value $.03 1/3 268,858,255
(Title of each class) (Number of shares)
<PAGE>
IOMEGA CORPORATION
TABLE OF CONTENTS
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements
Condensed consolidated balance sheets at March 28, 1999
and December 31, 1998................................... 3
Condensed consolidated statements of operations for the quarters
ended March 28, 1999 and March 29, 1998................. 5
Condensed consolidated statements of cash flows for the quarters
ended March 28, 1999 and March 29, 1998................. 6
Notes to condensed consolidated financial statements......... 7
Item 2. Management' Discussion and Analysis of Financial
Condition and Results of Operations..................... 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................ 31
Item 2. Changes in Securities and Use of Proceeds.................... 32
Item 4. Submission of Matters to a Vote of Security Holders.......... 33
Item 6. Exhibits and Reports on 8-K.................................. 33
Signatures............................................................ 34
Exhibit Index......................................................... 35
This Quarterly Report on Form 10-Q contains a number of forward-looking
statements, including, without limitation, statements referring to expected
second quarter results; the expected sufficiency of cash and cash equivalent
balances and available sources of financing; expected positive cash flow for
1999; projected effective tax rates; the impact on gross margins of the sales
volumes of disks, sales mix between disks and drives, the mix between OEM sales
and sales through other channels, and the mix between Zip, Jaz and Clik!
products; targeted levels for gross margin, selling, general and administrative
expenses and research and development expenses; the success of the Company's Six
<PAGE>
Sigma quality and virtual enterprise model initiatives in achieving substantial
product and process quality improvements and in reducing costs; the impact of
the Euro conversion on the Company's business or financial condition; the impact
of organizational changes, including recently announced plans to consolidate
facilities and reduce headcount, on the Company's revenue, profitability and
asset utilization; expected sales levels due to seasonal demand; the timing of
the SyQuest Malaysian asset purchase; anticipated hedging strategies; estimated
additional expenditures associated with the Company's efforts to address Year
2000 issues; and the anticipated Year 2000 compliance of the Company's computer
and non-IT systems hardware and utility software products and third-party
suppliers. Any statements contained herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "believes", "anticipates", "plans", "expects", "intends"
and similar expressions are intended to identify forward-looking statements.
There are a number of important factors that could cause actual events or the
Company's actual results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation, those set
forth under the captions "Liquidity and Capital Resources", "Factors Affecting
Future Operating Results", "Disclosures About Market Risk", "Year 2000
Readiness" included under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 2 of Part I of this Quarterly
Report on Form 10-Q. The factors discussed below do not reflect the potential
impact of any future acquisitions, mergers or dispositions. The Company does not
assume any obligation to update any forward-looking statements made herein.
<PAGE>
IOMEGA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
<TABLE>
March 28, December 31,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 93,964 $ 90,273
Trade receivables, net 227,560 233,662
Inventories 158,018 165,132
Income taxes receivable 22,824 24,974
Deferred income taxes 45,155 49,827
Other current assets 20,629 20,246
------------- -------------
Total current assets 568,150 584,114
------------- -------------
PROPERTY, PLANT AND EQUIPMENT, at cost 378,808 373,227
Less: Accumulated depreciation
and amortization (183,567) (165,112)
------------- -------------
Net property, plant and equipment 195,241 208,115
------------- -------------
INTANGIBLES, net 32,629 33,580
OTHER ASSETS 7,628 4,350
------------- -------------
$ 803,648 $ 830,159
============= =============
</TABLE>
The accompanying notes to condensed consolidated
financial statements are an integral part of these balance sheets.
<PAGE>
IOMEGA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS'EQUITY
(In thousands, except share data)
<TABLE>
March 28, December 31,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Related party notes payable (Note 4) $ 40,000 $ 40,000
Current portion of notes payable 101 101
Accounts payable 144,201 160,977
Other current liabilities 140,680 152,843
Current portion of capitalized
lease obligations 3,477 4,307
------------- -------------
Total current liabilities 328,459 358,228
------------- -------------
CAPITALIZED LEASE OBLIGATIONS AND
NOTES PAYABLE, net of current portions 3,569 4,607
------------- -------------
DEFERRED INCOME TAXES 5,261 4,903
------------- -------------
CONVERTIBLE SUBORDINATED NOTES,
6.75%, due 2001 45,505 45,655
------------- -------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value;
authorized 4,750,000 shares,
none issued - -
Series C, Junior Participating
Preferred Stock, authorized
250,000 shares, none issued - -
Common Stock, $.03 1/3 par value;
authorized 400,000,000 shares,
issued 269,667,797 and
268,186,096 shares at March 28,
1999 and December 31, 1998,
respectively 8,988 8,937
Additional paid-in capital 289,674 286,206
Less: 809,542 Common Stock treasury
shares at March 28, 1999 and
December 31, 1998, respectively,
at cost (6,088) (6,088)
Retained earnings 128,280 127,711
------------- -------------
Total stockholders' equity 420,854 416,766
------------- -------------
$ 803,648 $ 830,159
============= =============
</TABLE>
The accompanying notes to condensed consolidated
financial statements are an integral part of these balance sheets.
<PAGE>
<TABLE>
IOMEGA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For the Quarter Ended
March 28, March 29,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
SALES $ 386,212 $ 407,500
COST OF SALES 292,476 305,364
------------- -------------
Gross margin 93,736 102,136
------------- -------------
OPERATING EXPENSES:
Selling, general and administrative 69,941 107,942
Research and development 20,713 23,133
------------- -------------
Total operating expenses 90,654 131,075
------------- -------------
OPERATING INCOME (LOSS) 3,082 (28,939)
Interest and other income (expense),
net (2,205) 437
------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES 877 (28,502)
Benefit (provision) for income taxes (308) 9,926
------------- -------------
NET INCOME (LOSS) $ 569 $ (18,576)
============= =============
NET INCOME (LOSS) PER COMMON SHARE (Note 1):
Basic $ 0.00 $ (0.07)
============= =============
Diluted $ 0.00 $ (0.07)
============= =============
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING (Note 1) 268,390 262,238
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - Assuming Dilution (Note 1) 273,087 262,238
</TABLE>
The accompanying notes to condensed consolidated
financial statements are an integral part of these statements.
<PAGE>
<TABLE>
IOMEGA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Three Months Ended
For the Quarter Ended
March 28, March 29,
1999 1998
------------ -------------
(Unaudited)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income (Loss) $ 569 $ (18,576)
Non-Cash Revenue and Expense Adjustments:
Depreciation and amortization 22,271 12,885
Deferred income tax provision (benefit) 5,030 (17,575)
Tax benefit from dispositions of
employee stock 688 696
Other 804 741
Changes in Assets and Liabilities:
Trade receivables, net 6,102 30,912
Inventories 7,114 (67,249)
Other current assets (383) (1,423)
Accounts payable (16,776) (37,631)
Accrued liabilities (12,163) (15,048)
Income taxes 2,150 (8,895)
------------ -------------
Net cash provided by (used in)
operating activities 15,406 (121,163)
------------ -------------
Cash Flows from Investing Activities:
Purchase of property, plant and equipment (8,881) (24,068)
Sale of temporary investments - 36,319
Net (increase) decrease in other assets (3,647) 10
------------ ------------
Net cash provided by (used in)
investing activities (12,528) 12,261
------------ ------------
Cash Flows from Financing Activities:
Proceeds from sale of Common Stock 2,681 1,353
Proceeds from issuance of notes payable - 30,000
Payments on capitalized lease obligations (1,868) (1,524)
Purchase of Common Stock - (358)
------------ ------------
Net cash provided by financing
activities 813 29,471
------------ ------------
Net Increase (Decrease) in Cash and
Cash Equivalents 3,691 (79,431)
Cash and Cash Equivalents at Beginning of Period 90,273 159,922
------------ ------------
Cash and Cash Equivalents at End of Period $ 93,964 $ 80,491
============ ============
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Property, plant and equipment financed
under capitalized lease obligations $ - $ 1,223
============ ============
</TABLE>
The accompanying notes to condensed consolidated
financial statements are an integral part of these statements.
<PAGE>
IOMEGA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SIGNIFICANT ACCOUNTING POLICIES
In the opinion of the Company's management, the accompanying condensed
consolidated financial statements reflect all adjustments (consisting only
of normal recurring adjustments) which are necessary to present fairly the
financial position of the Company as of March 28, 1999 and December 31,
1998, the results of operations for the quarters ended March 28, 1999 and
March 29, 1998, and cash flows for the quarters ended March 28, 1999 and
March 29, 1998.
The results of operations for the quarter ended March 28, 1999 is not
necessarily indicative of the results to be expected for the entire year or
for any future period.
These unaudited condensed consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes
included in or incorporated into the Company's latest Annual Report on Form
10-K.
Pervasiveness of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
Principles of Consolidation - The condensed consolidated financial
statements include the accounts of Iomega Corporation and its
majority-owned subsidiaries after elimination of all material intercompany
accounts and transactions.
Revenue Recognition - The Company's customers include original equipment
manufacturers, end users, retailers, distributors and value added
manufacturers. 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
<PAGE>
IOMEGA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
excess channel inventory totaled $20.7 million and $33.1 million at March
28, 1999 and December 31, 1998, respectively, and is included in "Other
current liabilities" in the accompanying condensed consolidated balance
sheets.
Price Protection and Volume Rebates - The Company has agreements with
certain of its customers which, in the event of a price decrease, allow
those customers (subject to certain limitations) credit equal to the
difference between the price originally paid and the reduced price on units
in the customers' inventories at the date of the price decrease. When a
price decrease is anticipated, the Company establishes reserves against
gross accounts receivable for amounts estimated to be reimbursed to the
qualifying customers.
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 $43.4 million and $47.6 million at March 28,
1999 and December 31, 1998, respectively, and are netted against accounts
receivable in the accompanying condensed consolidated balance sheets.
Foreign Currency Translation - For purposes of consolidating foreign
operations, the Company has determined the functional currency for its
foreign operations to be the U.S. dollar. Therefore, translation gains and
losses are included in the determination of income.
Cash Equivalents and Temporary Investments - For purposes of the statements
of cash flows, the Company considers all highly liquid debt instruments
purchased with maturities of three or fewer months to be cash equivalents.
Cash equivalents primarily consist of investments in money market mutual
funds, commercial paper, auction rate, money market preferred stock
investments and taxable and non-taxable municipal bonds and notes and are
recorded at cost, which approximates market. Instruments with maturities in
excess of three months are classified as temporary investments. There were
no temporary investments at March 28, 1999 and December 31, 1998.
Inventories - Inventories include direct materials, direct labor and
manufacturing overhead costs and are recorded at the lower of cost
(first-in, first-out) or market and consist of the following (in
thousands):
March 28, December 31,
1999 1998
---------- ----------
Raw materials $ 59,476 $ 62,613
Work-in-process 16,714 8,482
Finished goods 81,828 94,037
---------- ----------
$ 158,018 $ 165,132
<PAGE>
IOMEGA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Other Current Liabilities - Other current liabilities consist of the
following (in thousands):
March 28, December 31,
1999 1998
--------- ----------
Accrued payroll, vacation and bonus $ 18,363 $ 21,048
Deferred revenue 20,654 33,114
Accrued advertising 35,598 30,226
Other accrued liabilities 66,065 68,455
--------- ----------
$ 140,680 $ 152,843
Reclassifications - Certain reclassifications were made to the prior
periods' condensed consolidated financial statements to conform with the
current period presentation.
Net Income (Loss) Per Common Share - Basic net income (loss) per common
share (Basic EPS) excludes dilution and is computed by dividing net income
(loss) by the weighted average number of common shares outstanding during
the period. Diluted net income per common share (Diluted EPS) reflects the
potential dilution that could occur if stock options or other contracts to
issue common stock were exercised or converted into common stock. The
computation of Diluted EPS does not assume exercise or conversion of
securities that would have an antidilutive effect on net income per common
share. In periods where losses are recorded, common stock equivalents would
decrease the loss per share and are therefore not added to the weighted
average shares outstanding.
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):
Net
Income (Loss) Shares Per Share
(Numerator) (Denominator) Amount
For the Quarter Ended
March 28, 1999
Basic EPS $ 569 268,390 $ 0.00
Effect of options - 4,697
Effect of convertible
subordinated notes - -
---------- ------- ---------
Diluted EPS $ 569 273,087 $ 0.00
========== ======= =========
March 29, 1998
Basic EPS $ (18,576) 262,238 $ (0.07)
Effect of options - -
Effect of convertible
subordinated notes - -
---------- ------- ---------
Diluted EPS $ (18,576) 262,238 $ (0.07)
========== ======= =========
<PAGE>
IOMEGA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Recent Accounting Pronouncement - 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 pronouncement to have a material impact on the Company's
results of operations, financial position or liquidity.
(2) ACQUISITION
During 1998, the Company purchased approximately 54% of the capital stock
of Nomai, S.A. ("Nomai"), a France-based manufacturer of removable storage
systems, from Nomai's principal and other major shareholders. As required
by French law, the Company conducted a tender offer, offering all other
shareholders of Nomai the opportunity to sell their shares to the Company
at the same price as was paid to the principal and other major
shareholders. The initial purchase and the tender offer resulted in the
Company owning substantially all of Nomai's outstanding shares. The total
purchase price of the acquisition was approximately $45 million ($42
million, net of cash acquired).
The transaction was accounted for as a purchase and, on this basis, the
excess purchase price over the estimated fair value of net tangible assets
has been allocated, based upon an independent third-party valuation, to
purchased in-process technology and goodwill. The Company recorded a
non-cash, pre-tax charge of $11.1 million related to purchased in-process
technology, representing the appraised value of technology still in the
development stage that was not considered to have reached technological
feasibility and had no alternative future use. Goodwill of approximately
$32 million arising from the acquisition is being amortized on a
straight-line basis over seven years. 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, except per share data):
March 28, 1999 March 29, 1998
Revenue $ 386 $ 416
Net income (loss) 1 (21)
Diluted EPS $ 0.00 $ (0.08)
<PAGE>
IOMEGA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
(3) INCOME TAXES
For the quarter ended March 28, 1999, the Company recorded an income tax
provision at an effective rate of approximately 35%. This tax rate was
based on the Company's projected mix of domestic and non-U.S. pre-tax
income for 1999.
U.S. taxes have not been provided for unremitted non-U.S. earnings which
are considered to be permanently invested in non-U.S. operations.
Cash paid for income taxes was $1.1 million for the first quarter of 1999
and $16.5 million for the corresponding period in 1998.
(4) DEBT
Notes Payable - On March 11, 1997, the Company entered into a $200 million
Senior Secured Credit Facility with Morgan Guaranty Trust Company of New
York, Citibank, N.A. and a syndicate of other lenders. During 1998 and
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 March 28, 1999 was $147.8 million, and there
were no borrowings outstanding. Among other restrictions, the Credit
Facility treats a change of control (as defined) as an event of default and
requires the maintenance of minimum levels of consolidated tangible net
worth, 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 March 28, 1999, 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
<PAGE>
IOMEGA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
require the Company to find an alternative source of funding which could
have a material adverse effect on the Company's business and financial
condition.
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 initial interest rate was 8.7% per
annum, increasing through January 1, 1999 to 12.7% per annum. The proceeds
of these notes were used for the cash purchase of Nomai. The Company used
internally generated funds to repay the principal and interest associated
with these notes upon their maturity on March 31, 1999.
Capital Leases - The Company has entered into various agreements to obtain
capital lease financing for the purchase of certain manufacturing
equipment, software, office furniture and other equipment. The leases have
terms ranging from 36- to 60-months and mature at various dates from July
1998 to January 2001. Principal and interest payments under the various
agreements are payable monthly or quarterly. Interest rates are fixed and
range from 7.1% to 10.2% per annum. The leases are secured by the
underlying leased equipment, software and furniture.
Cash paid for interest was $2.3 million and $1.9 million, respectively, for
the first quarters of 1999 and 1998, including interest on capital leases.
Included in interest expense for the first quarters of 1999 and 1998,
respectively, was $0.4 million and $0.2 million of amortization of deferred
charges associated with obtaining the debt.
(5) BUSINESS SEGMENT INFORMATION
The accounting policies of the Company's business segments are the same as
those described in Note 1 "Significant Accounting Policies". The Company's
reportable segments as of March 28, 1999 are consistent with the Company's
reportable segments as of December 31, 1998, as described in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
Intersegment sales, eliminated in consolidation, are not material. The
Company evaluates performance based on product profit margin for each
segment. Product profit margin is defined as sales and other income
directly related to a segment's operations, less both fixed and variable
manufacturing, research and development and selling, general and
administrative expenses directly related to a segment's operations. The
expenses attributable to corporate activity are not allocated to the
operating segments. The information in the following table is derived
directly from the segments' internal financial information used for
corporate management purposes.
<PAGE>
IOMEGA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Reportable Operating Segment Information
March 28, March 29,
1999 1998
--------- ---------
(In millions)
Sales:
Zip $ 302 $ 267
Jaz 63 110
Ditto 10 31
Clik! 5 -
Other 6 -
--------- ---------
Total sales $ 386 $ 408
========= =========
Product profit margin:
Zip $ 51 $ 29
Jaz (3) (3)
Ditto (1) (1)
Clik! (13) (8)
Other (6) (1)
--------- ---------
Total product profit
margin 28 16
--------- ---------
General corporate
expenses (25) (45)
Interest income 1 2
Interest expense (3) (1)
Other expense - (1)
--------- ---------
Income (loss) before
income taxes $ 1 $ (29)
========= =========
In March 1999, the Company announced that it had sold certain assets
associated with its Ditto segment, including intellectual property,
exclusive manufacturing rights, certain software and intellectual property
rights, equipment, brand names and product logos. The Company will continue
to sell its current Ditto finished goods inventory for three months
following the closing of the sale, after which, the buyer will purchase the
Company's remaining finished goods inventory. The Company will also
continue to sell Ditto cartridges for a period of time.
(6) OTHER MATTERS
Significant Customers - During the quarter ended March 28, 1999, sales to
Ingram Micro, Inc. accounted for approximately 11.0% of consolidated sales.
During the quarter ended March 29, 1998, sales to Ingram Micro, Inc.
accounted for 14.3% of consolidated sales. No other single customer
accounted for more than 10% of the Company's sales for these periods.
<PAGE>
IOMEGA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONCLUDED)
(UNAUDITED)
Forward Exchange Contracts - The Company has commitments to sell and
purchase foreign currencies relating to forward exchange contracts in order
to hedge against future currency fluctuations.
At March 28, 1999 outstanding forward exchange sales (purchase) contracts,
which all mature in June 1999, were as follows:
Contracted
Currency Amount Forward Rate
Australian Dollar (320,000) 0.64
British Pound (560,000) 0.61
European Euro 7,110,000 0.91
Japanese Yen 320,000,000 116.06
Korean Won (175,000,000) 1,233.00
Singapore Dollar (5,000,000) 1.71
Swiss Franc (1,250,000) 1.44
The contracts are revalued at the month-end spot rate. Gains and losses on
foreign currency contracts intended to be used to hedge operating
requirements are reported currently in income. Gains and losses on foreign
currency contracts intended to meet firm commitments are deferred and are
recognized as part of the cost of the underlying transaction being hedged.
At March 28, 1999, all of the Company's foreign currency contracts were
being used to hedge operating requirements. The Company's theoretical risk
in these transactions is the cost of replacing, at current market rates,
these contracts in the event of default by the counterparty.
(7) 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. The Company's purchase of SyQuest's
U.S. assets closed on April 6, 1999. As part of the agreement, the Company
released SyQuest and SyQuest released the Company from all claims in
connection with patent and trademark infringement litigation pending
between the parties in Delaware and in Paris, France. The Company has also
entered into an agreement to purchase certain assets from SyQuest's
subsidiary in Malaysia. These assets are being offered for sale separately
by a Receiver and Manager appointed in Malaysia at an estimated purchase
price of approximately $3.0 million.
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company reported sales of $386.2 million and net income of $0.6 million, or
$0.00 per diluted share, in the first quarter of 1999. This compares to sales of
$407.5 million and a net loss of $18.6 million, or $(0.07) per diluted share, in
the first quarter of 1998. Management expects 1999 second quarter results from
operations to be comparable to the first quarter of 1999, excluding special
charges. However, there can be no assurance that the expected results will be
realized. The expected second quarter 1999 special charges will be the result of
the Company's announced plans to consolidate facilities and reduce headcount
during the second quarter of 1999. The Company plans to consolidate its magnetic
technology expertise at its headquarters in Roy, Utah and will be closing its
Milpitas, California facility and, after a transition period, will also be
closing its San Diego, California facility.
SALES
Sales for the quarter ended March 28, 1999 decreased by $21.3 million, or 5.2%,
when compared to the corresponding period of 1998, primarily as a result of
price reductions on Zip and Jaz disk and drive products, lower than expected Jaz
sales volumes and a significant decline in Ditto sales. Total drive sales of
$228.5 million decreased by 8.2% as compared to the first quarter of 1998. Total
unit drive shipments for the quarter ended March 28, 1999 increased by 24.7% as
compared to the first quarter of 1998. Total disk sales of $151.6 million
decreased by 4.5% as compared to the first quarter of 1998. Total unit disk
shipments for the quarter ended March 28, 1999 increased by 30.8% as compared to
the first quarter of 1998.
Sales of Zip products in the first quarter of 1999 totaled $301.5 million, or
78.1% of total sales, and represented a 13.3% increase from the first quarter of
1998. Zip unit drive shipments increased by 42.5% from the first quarter of
1998, while Zip unit disk shipments increased by 38.5%. Sales of Zip OEM drives
accounted for approximately 53% of total Zip drive shipments in the first
quarter of 1999, compared to approximately 58% in the first quarter of 1998.
Jaz product sales in the first quarter of 1999 were $62.7 million, or 16.2% of
total sales, representing a 43.2% decrease from the first quarter of 1998. Jaz
unit drive shipments decreased by 44.7% as compared to the first quarter of
1998, while Jaz unit disk shipments decreased by 31.5%.
Ditto product sales in the first quarter of 1999 were $10.1 million, or 2.6% of
total sales, representing a 67.3% decline from the first quarter of 1998. Ditto
unit drive shipments decreased by 80.9% as compared to the first quarter of
1998, while Ditto unit disk shipments decreased by 55.1%. In March 1999, the
Company announced that it had sold certain assets and rights associated with its
Ditto product line. The sales price of $3.0 million for the Ditto assets and
rights consisted of $1.0 million in cash and a $2.0 million note which matures
in installments over a period of two years. The Company recorded $1.0 million
from the sale during the first quarter of 1999 and will record the remainder of
the sales price over the life of the note. The Company will continue to sell its
current Ditto finished goods inventory through June 1999, after which the buyer
will purchase the Company's remaining finished goods inventory. The Company will
also continue to sell Ditto cartridges for a period of time.
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Clik! product sales in the first quarter of 1999 were $5.1 million, or 1.3% of
total sales. The Company began shipping Clik! products in limited quantities
during the fourth quarter of 1998. The Company also shipped limited quantities
during the first quarter of 1999 due to component shortages.
Geographically, sales in the Americas were $250.0 million, or 64.7% of total
sales, in the first quarter of 1999, as compared to $298.5 million, or 73.3% of
total sales, in the first quarter of 1998. Sales in Europe were $103.3 million,
or 26.7% of total sales, in the first quarter of 1999, as compared to $89.3
million, or 21.9% of total sales, in the first quarter of 1998. Sales in Asia
were $32.9 million, or 8.5% of total sales, in the first quarter of 1999, as
compared to $19.8 million, or 4.8% of total sales, in the first quarter of 1998.
GROSS MARGIN
The Company's overall gross margin was 24.3% in the first quarter of 1999, as
compared to 25.1% in the first quarter of 1998. This decrease in gross margin
for the first quarter of 1999, when compared to the corresponding period of
1998, was due primarily to price reductions on Zip and Jaz drive and disk
products and lower than expected Jaz volumes. These price reductions were
partially offset by reductions in component material costs and per unit
manufacturing overhead.
Future gross margin percentage will be impacted by the mix between OEM drive
sales, which generally provide lower gross margins than sales through other
channels, and retail sales, as well as other factors. Gross margins for the
remainder of 1999 will also depend on sales volumes of Zip, Jaz and Clik! disks,
which generate significantly higher gross margins than the corresponding drives,
and on the mix between disks and drives, and between Zip, Jaz and Clik!
products. The Company is targeting overall gross margin percentages to be in the
mid to upper twenty percent range for the second half of 1999. However, there
can be no assurance that such margin percentages will be realized.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased by $38.0 million, or
35.2%, in the first quarter of 1999, when compared to the corresponding period
of 1998 and decreased as a percentage of sales to 18.1% in the first quarter of
1999, from 26.5% in the first quarter of 1998. The decrease was primarily due to
the Company's substantial marketing and advertising program expenditures in the
first quarter of 1998. In addition, other general and administrative expenses,
comprised mainly of legal fees and information system expenditures, were lower
in the first quarter of 1999 when compared to the corresponding period of 1998.
Management is focused on maintaining selling, general and administrative
expenses in a range of 15% to 20% of sales during the second half of 1999.
However, the Company's success in achieving this depends in part on the levels
of sales achieved during the second half of 1999 and there can be no assurance
that the Company's cost reduction measures, reorganization and other efforts to
reduce the percentage of sales represented by selling, general and
administrative expenses will be successful.
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses for the first quarter of 1999 decreased by
$2.4 million, or 10.5%, when compared to the first quarter of 1998, and
decreased as a percentage of sales to 5.4% in the first quarter of 1999, from
5.7% in the first quarter of 1998. The decrease in research and development
expense for the first quarter of 1999, when compared to the corresponding period
of 1998, was primarily due to decreased spending for development of Clik! and
Zip 250 products during the period as the Company began shipping Clik! and Zip
250 products in limited quantities during the fourth quarter of 1998. Management
is targeting the level of spending for research and development during the
second half of 1999 to be in the range of 3% to 5% of sales to support planned
new product development and existing product enhancements. However, the
Company's success in achieving this depends in part on the levels of sales
achieved during the second half of 1999 and there can be no assurance that
efforts to reduce the percentage of sales represented by research and
development expenses will be successful.
OTHER INCOME AND EXPENSE
The Company recorded interest income of $1.1 million in the first quarter of
1999, as compared to $1.7 million in the first quarter of 1998. Decreased
average cash balances during the first quarter of 1999 resulted in a decrease in
interest income when compared to the corresponding period of 1998. Interest
expense was $2.8 million in the first quarter of 1999, as compared to $1.2
million in the first quarter of 1998. The increase in interest expense during
the first quarter of 1999 was primarily due to the Company entering into debt
agreements with Idanta Partners, Ltd. and another entity affiliated with David
J. Dunn, Chairman of the Company's Board of Directors, in July 1998, under which
the Company borrowed $40 million pursuant to a series of three notes.
Also included in other income and expense were bank charges, miscellaneous
royalty income, gains and losses on disposal of assets and foreign currency
gains and losses.
INCOME TAXES
For the first quarter of 1999, the Company recorded an income tax provision of
$0.3 million, representing an effective income tax rate of approximately 35%.
The Company expects its effective tax rate to remain at approximately 35% for
the remainder of 1999. However, differences between the currently anticipated
mix and the actual mix of non-U.S. income versus domestic income, along with the
ability of the Company to permanently invest non-U.S. earnings outside of the
U.S. and its ability to meet the requirements for favorable tax treatment in
certain jurisdictions outside of the U.S. could impact the Company's effective
tax rate.
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SEASONALITY
The Company's Zip products are targeted primarily to the personal computer OEM
and retail consumer markets. The Company's Jaz products are targeted primarily
to the distribution and retail consumer market. The Company's Clik! products are
targeted to the retail consumer market and to consumer OEMs. Management believes
the markets for the Company's products are generally seasonal, with a higher
proportional share of total sales occurring in the fourth quarter and sales
slowdowns commonly occurring during the first quarter and summer months.
Accordingly, revenues and growth rates for any prior quarter are not necessarily
indicative of the revenues or growth rates to be expected in any future quarter.
LIQUIDITY AND CAPITAL RESOURCES
At March 28, 1999, the Company had cash and cash equivalents of $94.0 million,
working capital of $239.7 million, and a ratio of current assets to current
liabilities of 1.7 to 1. During the first quarter of 1999, the Company generated
a total of $3.7 million of cash and cash equivalents. The primary sources of
cash were reductions in accounts receivable and inventory and non-cash expenses.
These sources of cash were partially offset by the reductions in accounts
payable and accrued liabilities and the purchase of property, plant and
equipment.
Inventory decreased by $7.1 million, due primarily to improved supply chain
management and changes to the Company's procurement and manufacturing processes
to a demand pull model initiated during 1998. The decrease of $6.1 million in
accounts receivable was due primarily to the timing of sales and collections
during the respective periods and seasonally lower sales in the first quarter of
1999 when compared to the fourth quarter of 1998. These sources of cash were
partially offset by a $16.8 million decrease in accounts payable, due primarily
to timing of inventory receipts and related payments to vendors. The decrease of
$12.2 million in accrued liabilities was due primarily to reductions in deferred
revenue and accrued payroll and related liabilities that were partially offset
by an increase in accrued advertising.
The Company used $12.5 million of cash in investing activities during the first
quarter of 1999, primarily in the purchase of property, plant and equipment and
an increase in other assets. Cash provided by financing activities totaled $0.8
million during the first quarter of 1999, and included $2.7 million of proceeds
from the sale of Common Stock that were partially offset by $1.9 million in
payments on capitalized lease obligations during the first quarter of 1999.
On March 11, 1997, the Company entered into a $200 million Senior Secured Credit
Facility with Morgan Guaranty Trust Company of New York, Citibank, N.A. and a
syndicate of other lenders. During 1998 and 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").
<PAGE>
IOMEGA CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 March 28, 1999 was $147.8
million, and there were no borrowings outstanding. Among other restrictions, the
Credit Facility treats a change of control (as defined) as an event of default
and requires the maintenance of minimum levels of consolidated tangible net
worth, 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 March 28, 1999, 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 condition.
The current and long-term portions of capitalized lease obligations at March 28,
1999 were $3.5 million and $3.5 million, respectively. The current and long-term
portions of notes payable at March 28, 1999 were $0.1 million and $0.1 million,
respectively. In July, 1998, the Company borrowed a total of $40 million from
Idanta Partners Ltd. and another entity affiliated with David J. Dunn, Chairman
of the Company's Board of Directors, pursuant to a series of three senior
subordinated notes. The initial interest rate was 8.7% per annum, increasing
through January 1, 1999 to 12.7% per annum. The proceeds of these notes were
used for the cash purchase of Nomai. The Company used internally generated funds
to repay the principal and interest associated with these notes upon their
maturity on March 31, 1999.
The Company had $45.5 million of convertible subordinated notes outstanding at
March 28, 1999, which bear interest at 6.75% per year and mature on March 15,
2001.
The Company expects to generate positive cash flow for 1999. The Company expects
that its balance of cash and cash equivalents, together with current and future
sources of available financing, will be sufficient to fund the Company's
operations during the next twelve months. However, whether the Company will
achieve a positive cash flow for 1999, and the precise amount and timing of the
Company's future financing needs cannot be determined at this time, and will
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
depend on a number of factors, including the market demand for the Company's
products, the availability of critical components, the progress of the Company's
product development efforts, the success of the Company in managing its
inventory, accounts receivable and accounts payable and the success of the
Company's efforts to consolidate facilities and reduce headcount.
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. The Company's purchase of SyQuest's U.S. assets closed on April 6,
1999. As part of the agreement, the Company released SyQuest and SyQuest
released the Company from all claims in connection with patent and trademark
infringement litigation pending between the parties in Delaware and in Paris,
France. The Company has also entered into an agreement to purchase certain
assets from SyQuest's subsidiary in Malaysia. These assets are being offered for
sale separately by a Receiver and Manager appointed in Malaysia at an estimated
purchase price of approximately $3.0 million. Provided all conditions are met,
the Company anticipates a second quarter 1999 closing of its purchase of the
SyQuest Malaysian assets.
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 pronouncement to have a material impact on the Company's
results of operations, financial position or liquidity.
FACTORS AFFECTING FUTURE OPERATING RESULTS
Because the Company is relying on its Zip, Jaz 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
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
by Sony Corporation and Fuji Photo Film Co., Ltd.), the UHD144 (product in
development by Caleb Technology Corporation), the Orb (product developed by
Castlewood Systems, Inc.), the Pro-FD (product in development by Samsung
Electro-Mechanics Co., Ltd.), the Microdrive (product in development by IBM),
the Memorystick (product developed by Sony Corporation), various formats of
flash memory, CD-R and CD-RW drives, announced developments of rewritable DVD
drives and media, and announced products in development by Terastor Corporation;
the success of any third party in creating and marketing media intended for use
with the Company's drive products without infringing the Company's proprietary
rights; 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, laptop and palmtop computers
and other devices 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 and the first quarter of 1999 accounted for a
significant majority of the Company's revenues. However, these sales may not be
indicative of the long-term demand for Zip products. Accordingly, the sales
levels experienced by the Company in any prior period should not be assumed to
be an indication of future sales levels. In the fourth quarter of 1998, the
Company introduced the Zip 250 product. The market acceptance of the Zip 250
product and its impact on other Zip products has not yet been determined and,
therefore, may have an adverse impact on future sales. In addition, the Company
has experienced and may in the future experience significant fluctuations in its
quarterly operating results. Moreover, because the Company's expense levels
(including budgeted selling, general, and administrative and research and
development expenses) are based in part on expectations of future sales levels,
a shortfall in expected sales could result in a disproportionate adverse effect
on the Company's results of operations and cash flow. For example, in 1998, the
Company's operating expenses as a percentage of sales fell outside of
management's operating model resulting in a net operating loss for the year. In
addition, the Company's stock price, like other high-technology companies' stock
prices, could be subject to fluctuations in response to actual or anticipated
variations in operating results, as well as changes in analysts' earnings
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. 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, Jaz and Clik! 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.
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All of the factors described above for Zip, Jaz and Clik! products are, or will
be, relevant to the other products currently sold by the Company and 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.
In early 1998, the Company began implementing a virtual enterprise model to
improve profitability and asset utilization. The virtual enterprise model is
based upon a demand pull model, in which production schedules are set to meet
expected customer sell-through demand, and includes making changes to the
Company's procurement and manufacturing processes and supply chain management.
As part of this new model, suppliers have been asked to arrange for supply hubs
to provide inventory delivery in a pull or just-in-time fashion. If the Company
is not successful in meeting its commitments to suppliers as a result of actual
supply requirements being different from anticipated supply requirements, or for
any other reason, the Company's relationships with suppliers could be damaged,
resulting in component problems, shortages or other factors affecting the supply
of the Company's products. There can be no assurance that the Company will be
successful in implementing the virtual enterprise model or that the
implementation will result in improved profitability and asset utilization.
Many components incorporated in, or used in the manufacture of, the Company's
products are currently available only from single or sole source suppliers. In
particular, media used in Zip disks is obtained exclusively from Fuji Photo Film
and certain integrated circuits used in Zip drives are obtained exclusively from
LSI Logic. The Company purchases a portion of its single, sole and limited
source components, including components from Fuji Photo Film and LSI Logic,
pursuant to purchase orders without guaranteed supply arrangements. The
inability to obtain sufficient components and equipment, or to obtain or develop
alternative sources of supply at competitive prices and quality, or to avoid
manufacturing delays could prevent the Company from producing sufficient
quantities of its products to satisfy market demand (or, in the case of a
component purchased exclusively from one supplier, the Company could be
prevented from producing any quantity of the affected product(s) until such
component becomes available from an alternative source), delay product
shipments, increase the Company's material or manufacturing costs or cause an
imbalance in the inventory levels of certain components. The Company has
experienced difficulty in the past, and may experience difficulty in the future,
in obtaining a sufficient supply of certain key components on a timely basis.
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 has announced plans to consolidate facilities and reduce headcount
during the second quarter of 1999 in order to streamline its efforts to focus on
earnings growth. Management believes that the planned consolidation of
facilities and the reduction of headcount will reduce total operating expenses
during the second half of 1999 and future periods. However, there can be no
assurance that the Company will be successful in its efforts to reduce operating
expenses in future periods. The Company is also in the process of implementing
Six Sigma quality initiatives intended to make substantial product and process
quality improvements and to reduce costs. However, there can be no assurance
that the Company's quality initiatives will be successful in providing
substantial product and process improvements and in reducing costs.
A significant portion of the Company's revenues are generated in Europe and
Asia. The Company's existing infrastructure outside of the United States is less
mature and developed than in the United States. Consequently, future sales and
operating income from these regions are less predictable than in the United
States. In addition, operating expenses may increase as those operations mature
and increase in size. The Company's international sales transactions are
generally denominated in U.S. dollars. Weakening 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 through the first quarter of 1999 and will
continue to be adversely affected due to a regional economic downturn and the
devaluation of certain Asian currencies vis-a-vis the U.S. dollar. The Company
cannot predict with any certainty the impact that these or other such events
could have on its foreign operations.
On January 1, 1999, eleven countries of the European Union established fixed
conversion rates between their existing currencies, and adopted the Euro as
their new common legal currency. Since 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.
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 depends 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 also
depends in significant part upon its ability to continue to attract highly
skilled personnel to fill a number of vacancies. 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 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, who joined the Company as Chief Executive Officer and
President in October 1998, has assumed this role during the search period. 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.
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
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
contracts entered into by the Company are components of hedging programs and are
entered into for the sole purpose of hedging an existing or anticipated currency
exposure, not for speculation or trading purposes. The contracts are primarily
in European currencies, the Singapore dollar and the Japanese yen. The contracts
have maturities that do not exceed three months. The Company has a substantial
presence in Malaysia. In September 1998, the ruling party in Malaysia fixed the
Malaysian Ringgit to the U.S. dollar. The Company experienced a loss related to
the fixing of the currency. The Company recognized this loss during 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 March 28,
1999, the analysis indicated that such market movements would not have a
material effect on the Company's consolidated financial position, results of
operations or cash flows. Factors that could impact the effectiveness of the
Company's hedging programs include volatility of the currency markets,
availability of hedging instruments and the Company's ability to accurately
project net asset or liability positions. Actual gains and losses in the future
may differ materially from the Company's analysis depending on changes in the
timing and amount of interest rate and foreign exchange rate movements and the
Company's actual exposure and hedges.
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
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. The Company has completed the review and testing of all its current
release products. Hardware testing was conducted by the National Software
Testing Laboratories ("NSTL") according to NSTL developed standards or
guidelines (NSTL YMark 2000, Version 97.08.15). NSTL has verified that the Zip,
Jaz, Ditto, Buz and Clik! hardware products tested are Year 2000 ready when used
in an operating system and with other products which themselves are Year 2000
ready. The Company tested 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 Ditto software applications
intended for DOS and Windows 3.1 users. The Company continues to investigate the
possibility of providing Year 2000 upgrades for these software applications. The
specific results of hardware and software testing are provided on the Company's
Year 2000 web pages on its web site (www.iomega.com). The Company plans to use
its web site to communicate Year 2000 product issues that may be identified in
the future.
With respect to its legacy products, the Company presently plans to conduct a
Year 2000 review on its Bernoulli drive product. NSTL has tested four Bernoulli
drive models and found them to be Year 2000 ready when used in an operating
system and with other products which themselves are Year 2000 ready. The Company
plans to conduct an internal Year 2000 review of the remaining Bernoulli drive
models. The Company will internally test Company developed software utility
tools and drivers used with Bernoulli drives. Software developed by third
parties which was bundled or sold with Bernoulli drive products will not be
tested by the Company; rather, the third party provider of such software should
be contacted for the Year 2000 readiness of such software products. The Year
2000 review of Bernoulli drive products is expected to be completed by June 30,
1999.
The Company has started Year 2000 testing of currently shipping Nomai branded
CD-RW drives. Software provided with currently shipping CD-RW drives was
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
developed by a third party, who has indicated that such software is Year 2000
compliant; therefore, the Company has not, and does not anticipate testing such
software. The Company anticipates completing the Year 2000 review of all Nomai
branded drive products by the end of the second 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 utilized, 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 appropriate, Year 2000 issues it identifies with respect to critical IT
systems utilized by the Company. The Company does not anticipate any significant
Year 2000 issues with respect to its IT systems and therefore does not
contemplate any significant contingency planning for its IT systems.
Internal Non-IT Systems. The Company has substantially completed inventorying,
assessing and testing its major non-IT systems, as well as implementing any
remedial actions to the extent deemed appropriate. The Company anticipates
completing its Year 2000 review of its major non-IT systems by June 30, 1999.
The Company does not anticipate any significant Year 2000 issues with respect to
its non-IT systems and therefore does not contemplate any significant
contingency planning for its non-IT systems.
Material Third-Party Relationships. The Company has significant relationships
with various third parties (many located outside of the U.S.) and the failure of
any of these third parties to achieve Year 2000 compliance could have a material
impact on the Company's business, operating results and financial condition.
These third parties include energy and utility suppliers, financial
institutions, material and product suppliers, transportation providers,
communications vendors, including value added network vendors and the Company's
significant customers. While the Company has received Year 2000 readiness
statements from its major third-party suppliers which in general indicate Year
2000 readiness, the Company continues in the process of conducting an
audit/questionnaire with each major supplier and vendor to confirm their Year
2000 readiness. The audit/questionnaire process for suppliers is now expected to
be completed in the third quarter of 1999.
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Costs. Through the first quarter of 1999, the Company incurred approximately $38
million in costs to improve the Company's IT systems and for Year 2000 readiness
efforts. Of this amount, 95% 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 and third-party audits and reviews. The Company is not separately tracking
the internal costs for its Year 2000 review activities; such costs are
principally the related payroll costs for the Company's information systems
group. The Company anticipates incurring an additional $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 and product software and hardware testing costs. The Company has set a
goal of having substantially all Year 2000 readiness efforts completed by the
end of the third quarter of 1999.
Contingency Plans. The Company is preparing contingency plans for critical areas
to address Year 2000 failures if remedial efforts are not fully successful. The
Company's contingency plans are expected to target the Company's most reasonably
likely worst case scenarios 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).
General. To supplement the Company's efforts described above, the Company has
engaged outside IT and legal advisors to conduct independent reviews of the
Company's Year 2000 plans.
No assurance can be given that the Company will not be materially adversely
affected by Year 2000 issues. Although the Company is not currently aware of any
material operational issues with preparing its internal IT and non-IT systems
for the Year 2000, the Company may experience material unanticipated problems
and costs caused by undetected errors or defects in its internal IT and non-IT
systems. In addition, the failure of third parties to timely address their Year
2000 issues could have a material adverse impact on the Company's business,
operations and financial condition. If, for example, third party suppliers
become unable to deliver necessary components, the Company would be unable to
timely manufacture products and meet customer order requirements. Similarly, if
international shipping and freight forwarders were unable to ship product, the
Company would be unable to deliver product to sales channels.
Additionally, there can be no assurance that the Company will not be the subject
of lawsuits regarding the failure of the Company's products (former or present)
in the event they are not Year 2000 ready. Despite the testing and remediation
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
A discussion of the Company's exposure to, and management of, market risk
appears in Item 2 of this Form 10-Q under the heading "Disclosures About Market
Risk".
<PAGE>
IOMEGA CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Except as set forth below, or in the Company's Annual Report on Form 10-K for
the year ended December 31, 1998, in management's opinion, there are no material
pending legal proceedings, other than ordinary routine litigation incidental to
its business, to which the Company or any of its subsidiaries is a party or to
which any of their property is subject.
As previously disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, on October 9, 1998, Hi-Val, Inc. filed a complaint
against the Company and other parties, Hi-Val, Inc. v. Nomai, S.A., Nomus, Inc.,
Kevin Scheier and Iomega, in the Superior Court of California, County of Santa
Clara. The claims are related to an alleged arrangement between Nomai, S.A. and
Hi-Val for Hi-Val to distribute Nomai's XHD cartridges. Plaintiff seeks to
recover $26 million in alleged, unspecified damages. During the first quarter
following the Court's order sustaining Iomega's demurrers to the complaint, the
plaintiffs filed an amended complaint which alleges tortious interference with
contract, intentional misrepresentation, tortious interference with prospective
economic advantage, unfair business practices, and conspiracy against Iomega, a
contingent act claim, an unfair competition claim, and other claims against
other parties to the litigation. The Company intends to vigorously defend
against such allegations.
As previously disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, 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 as described in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998. In
March 1999, the Company entered into a Memorandum of Understanding pertaining to
the settlement of this litigation. In addition, the parties have jointly
submitted to the court a stipulation containing the terms of the proposed
settlement.
As previously disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1998, 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 was delayed as a result of SyQuest's
filing of a voluntary petition in the United States Bankruptcy Court under
Chapter 11 of the U.S. Bankruptcy Code in November 1998. The Company also filed
complaints on March 6, 1998 and April 29, 1998 in the Paris District Court
alleging claims of copyright and patent infringement. The Company's definitive
agreement to purchase certain assets of SyQuest, including all of its
intellectual property, and its inventory and fixed assets in the U.S., for $9.5
million in cash closed on April 6, 1999. As part of the agreement, the Company
released SyQuest and SyQuest released the Company from all claims in connection
with patent and trademark infringement litigation pending between the parties in
Delaware and in Paris, France.
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.
<PAGE>
Item 2. Change in Securities and Use of Proceeds
During the first quarter of 1999, the Company issued 30,378 shares of Common
Stock upon conversion of its 6-3/4% Convertible Subordinated Notes due 2001 in
reliance upon the exemption from registration set forth in Section 3(a)(9) of
the Securities Act. No underwriters were engaged in connection with such
issuances. The Company did not sell any other equity securities during the first
quarter of 1999 that were not registered under the Securities Act.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders.
The Company's Annual Meeting of Stockholders was held on April 20, 1999. The
following proposals were adopted by the vote specified below:
Against/
Proposal For Withheld Abstain
- --------------------------- ----------- --------- -------
1. Election of Directors:
Jodie K. Glore 246,493,935 4,730,275 -
M. Bernard Puckett 246,616,801 4,607,409 -
John M. Seidl 246,606,922 4,617,288 -
2. Approval of amendments
to the Company's 1997
Stock Incentive Plan 229,113,952 20,700,890 1,409,368
3. Ratification of Arthur
Andersen LLP as
Independent Auditors 247,453,591 3,060,019 710,600
In addition to the three directors listed above who were elected at the meeting,
the terms of the following directors continued after the meeting: John W.
Barter, David J. Dunn, James E. Sierk, Robert P. Berkowitz, and John R. Meyers.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. The exhibits listed on the Exhibit Index filed as a part of this
Quarterly Report on Form 10-Q are incorporated herein by reference.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the quarter
for which this report on Form 10-Q is filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IOMEGA CORPORATION
------------------
(Registrant)
/s/ Jodie K. Glore
------------------
Dated: May 7, 1999 Jodie K. Glore
Chief Executive Officer
and President
/s/ Dan E. Strong
------------------
Dated: May 7, 1999 Dan E. Strong
Vice President and
Corporate Controller
and Interim Chief
Financial Officer
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report on Form 10-Q:
Exhibit No. Description
- ----------- -----------
10.23 1999 Bonus Plan
27 Financial Data Schedule (only filed as part of electronic copy)
Iomega Corporation
1999 Bonus Plan
The 1999 Bonus Plan ("Plan") for the Chief Executive Officer, Executive Group
and Key Contributors of Iomega Corporation (the "Company") is as follows:
1. Definitions
For purposes of the Plan, the following terms shall have the following meanings:
"Executive Group" means the Chief Executive Officer, Executive Officers and all
other vice presidents of the Corporation.
"Executive Officer" means an executive officer within the meaning of Section 16
of the Securities Exchange Act of 1934.
"Executives" means the members of the Executive Group.
"Key Contributors" means employees who perform management or
management-equivalent duties and responsibilities, who are designated to
participate in the Plan based on their performance and their contributions to
the Company.
2. Bonus for Chief Executive Officer
The Chief Executive Officer's target annual bonus for 1999 shall be equal to
$600,000.
3. Bonus for Executive Group and Key Contributors
Each Executive (other than the Chief Executive Officer) and Key Contributor
shall be assigned a target annual bonus expressed in dollars for Executives and
in dollars or as a percentage of base salary for all other participants. It is
expected that approximately 30 Executives and 400 Key Contributors will
participate in the plan in 1999.
4. Bonus Payment Criteria
The 1999 Plan will utilize a formula, comprised of two performance-related
components and an individual modifier, to determine the annual payout: Corporate
Financial Performance (50% weight for all Executives and 25-50% for all Key
Contributors), Qualitative Imperatives Performance (50% weight for all
Executives and 50-75% weight for all Key Contributors) and an Individual
Performance Modifier (0 to 150% for all Executives and Key Contributors). At
year-end, the Board of Directors will determine the actual percentage payout for
the Corporate Financial Performance component, which determination shall apply
to all participants in the Plan.
Corporate Financial Performance - The consolidated net after-tax income
of the Company and its subsidiaries for fiscal 1999, as reported by the
Company in its audited financial statements for 1999 ("NATP"), must
meet a minimum designated by the Board of Directors (the "Minimum
NATP") for the Corporate Financial Performance component to be funded.
Subject to adjustment under Section 6 below: (i) if NATP equals the
Minimum NATP, the payout will be 100% for the Corporate Financial
Performance component, and (ii) if NATP exceeds the Minimum NATP, then
the percentage payout for the Corporate Financial Performance component
will be equal to NATP divided by Minimum NATP multiplied by 100, and
(iii) if NATP is less than minimum NATP, then the payout for the
Corporate Financial Performance component will be zero.
Qualitative Imperatives Performance - Throughout the year, performance
against qualitative imperatives, designated in writing for each Plan
participant will be tracked via metrics specified for each such
imperative. The qualitative imperatives will be designated by the
participant's manager and the Chief Executive Officer or another
Executive Officer of the Company or, in the case of the Chief Executive
Officer, by the Board. The year-end score for the qualitative
imperatives will be determined by the Board of Directors for the Chief
Executive Officer and
<PAGE>
each Executive Officer, and shall be determined by the Chief Executive
Officer or his or her designee(s) for all other Plan participants. If
NATP is equal to or greater than Minimum NATP, the year-end score for
the Qualitative Imperatives component of each participant's payout may
range from 0-200%. If NATP is less than Minimum NATP, but is equal to
or greater than 75% of Minimum NATP, then the year-end score for the
Qualitative Imperatives component of each participant's payout may
range from 0-100%. If NATP is less than 75% of Minimum NATP, then the
payout on the Qualitative Imperatives component will be zero.
Individual Performance Modifier - In order to better tie an
individual's performance to the Plan, an individual performance
modifier will be utilized. The individual modifier scores can range
from 0 to 150%. The individual performance modifier score will be
applied to the total payout under the Corporate Financial Performance
and Qualitative Imperatives Performance components. The individual
performance modifier will be determined by the Board of Directors for
purposes of the Chief Executive Officer and each Executive Officer, and
shall be determined by the Chief Executive Officer or his or her
designee(s) for all other Plan participants.
5. Profit Sharing Program
The quarterly financial performance will be reviewed by the Board of Directors,
in comparison with the Company's annual operating plan and, if appropriate, the
Board of Directors will authorize the Company to make profit sharing awards to
full-time regular employees who do not participate in any incentive bonus plan
(including this Plan) or sales commission plan. Profit sharing awards, if made,
will generally be paid quarterly on the basis of achievement of specified
quarterly results. Profit sharing payments are targeted at 5% of a participating
employee's Gross Salary and the maximum payment percentage shall not exceed 7.5%
of a participating employee's Gross Salary.
6. Discretionary Authority
The CEO shall have the authority to allocate bonuses and profit sharing payments
payable pursuant to the Plan among the Executive Group (excepting Executive
Officers), Key Contributors and Company employees participating in the Profit
Sharing Program, including the authority to allocate more or less than the
maximum amount otherwise payable under the Plan if he or she determines, in his
or her discretion, that such action is in the best interest of the Company.
The CEO is also authorized to pay a discretionary bonus up to a maximum
aggregate amount of $2.0 million to personnel who generally are not participants
in this Plan. These awards will be limited if the Company does not perform
profitably. The CEO shall report quarterly to the Board of Directors and the
Compensation Committee the aggregate amounts of any discretionary bonuses
awarded for outstanding performance.
After reviewing the recommendations of the Compensation Committee of the Board
of Directors, the Board of Directors shall have the authority to allocate
bonuses among the Executive Officers, including the authority to allocate more
or less than the maximum amount otherwise payable under the Plan if they
determine, in their discretion, that such action is in the best interest of the
Company.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000352789
<NAME> IOMEGA CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> MAR-28-1999
<CASH> 93,964
<SECURITIES> 0
<RECEIVABLES> 284,552
<ALLOWANCES> 56,992
<INVENTORY> 158,018
<CURRENT-ASSETS> 568,150
<PP&E> 378,808
<DEPRECIATION> 183,567
<TOTAL-ASSETS> 803,648
<CURRENT-LIABILITIES> 328,459
<BONDS> 45,505
0
0
<COMMON> 298,662
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<TOTAL-LIABILITY-AND-EQUITY> 803,648
<SALES> 386,212
<TOTAL-REVENUES> 386,212
<CGS> 292,476
<TOTAL-COSTS> 383,130
<OTHER-EXPENSES> 508
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,789
<INCOME-PRETAX> 877
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</TABLE>
