UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 25, 2000
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 June 25, 2000.
Common Stock, par value $.03 1/3 270,664,536
(Title of each class) (Number of shares)
IOMEGA CORPORATION
TABLE OF CONTENTS
PAGE
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 25, 2000
and December 31, 1999..................................... 3
Condensed Consolidated Statements of Operations for the quarters
ended June 25, 2000 and June 27, 1999..................... 5
Condensed Consolidated Statements of Operations for the six months
ended June 25, 2000 and June 27, 1999...................... 6
Condensed Consolidated Statements of Cash Flows for the six months
ended June 25, 2000 and June 27, 1999..................... 7
Notes to Condensed Consolidated Financial Statements........... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 23
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 40
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 42
Item 2. Changes in Securities and Use of Proceeds...................... 42
Item 6. Exhibits and Reports on Form 8-K............................... 42
Signatures.............................................................. 43
Exhibit Index........................................................... 44
This Quarterly Report on Form 10-Q contains a number of forward-looking
statements, including, without limitation, statements referring to: expected
increases in selling, general and administrative expenses and in research and
development expenses; the impact on gross margins of the sales volumes of Zip(R)
and Jaz(R) disks, saLEs mix between disks and drives, the sales mix between Zip
100MB and Zip 250MB drives, the sales mix between OEM and aftermarket channels,
the sales mix between the Company's products, future pricing actions and
potential start-up costs of new products; the expected sufficiency of cash, cash
equivalent and temporary investment balances, cash flows from operations and
future sources of financing; the impact of new accounting pronouncements; the
timing and impact of restructuring activities and other organizational changes;
expected sales levels due to seasonal demand; anticipated hedging strategies;
and, the possible effects of an adverse outcome in legal proceedings described
in Note 8 of Part I. Any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects,"
"intends" and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain these words.
There are a number of important factors that could cause actual events or the
Company's actual results to differ materially from those indicated by such
forward-looking statements. These factors include, without limitation, those set
forth under the caption "Litigation" in Note 8 of Part I, under the captions
"Liquidity and Capital Resources" and "Factors Affecting Future Operating
Results" included under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 2 of Part I and "Quantitative
Disclosures About Market Risk" in Item 3 of Part I of this Quarterly Report on
Form 10-Q. The factors discussed herein do not reflect the potential future
impact of any mergers, acquisitions or dispositions. The Company does not assume
any obligation to update any forward-looking statements made herein.
----------------------------------
Copyright (C) 2000 Iomega Corporation. Iomega, Zip, Jaz, ZipCD, Clik!,
iomegadirect and the stylized "I" logo arE either registered trademarks or
trademarks of Iomega Corporation in the United States and/or other countries.
Certain other product names, brand names and company names may be trademarks or
designations of their respective owners.
<PAGE>
<TABLE>
IOMEGA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
<CAPTION>
June 25, December 31,
2000 1999
------------ ------------
(Unaudited)
<S>
CURRENT ASSETS: <C> <C>
Cash and cash equivalents $ 278,583 $ 172,706
Temporary investments 75,332 38,209
Trade receivables, less allowance
for doubtful accounts of $10,353
and $15,908, respectively 168,716 188,482
Inventories 75,733 94,626
Income taxes receivable 7,459 19,910
Other current assets 16,834 21,585
----------- -----------
TOTAL CURRENT ASSETS 622,657 535,518
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, at cost 315,065 365,036
LESS: Accumulated depreciation and
amortization (206,183) (227,336)
----------- -----------
NET PROPERTY, PLANT AND EQUIPMENT 108,882 137,700
----------- -----------
INTANGIBLES, NET 27,999 31,743
----------- -----------
OTHER ASSETS 2,447 2,848
----------- -----------
$ 761,985 $ 707,809
=========== ===========
</TABLE>
The accompanying notes to condensed
consolidated financial statements are an integral part
of these balance sheets.
<PAGE>
<TABLE>
IOMEGA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands, except share data)
<CAPTION>
June 25, December 31,
2000 1999
----------- -----------
(Unaudited)
<S>
CURRENT LIABILITIES: <C> <C>
Accounts payable $ 104,210 $ 135,615
Other current liabilities
(Note 1) 191,977 198,993
Current portion of capitalized
lease obligations 4,444 5,542
Convertible subordinated notes,
6.75% due 2001 45,505 -
----------- ----------
TOTAL CURRENT LIABILITIES 346,136 340,150
----------- ----------
CAPITALIZED LEASE OBLIGATIONS,
NET OF CURRENT PORTION 781 1,366
----------- ----------
CONVERTIBLE SUBORDINATED NOTES,
6.75%, DUE 2001 - 45,505
----------- ----------
COMMITMENTS AND CONTINGENCIES (NOTE 8)
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.01 par value; authorized
4,600,000 shares; none issued - -
Series A Junior Participating Preferred Stock;
authorized 400,000 shares; none issued - -
Common Stock, $.03 1/3 par value; authorized
400,000,000 shares; issued 271,474,078 and
270,831,769 shares at June 25, 2000 and
December 31, 1999, respectively 9,048 9,027
Additional paid-in capital 295,690 293,627
Less: 809,542 Common Stock treasury shares,
at cost (6,088) (6,088)
RETAINED EARNINGS 116,418 24,222
----------- ----------
TOTAL STOCKHOLDERS' EQUITY 415,068 320,788
----------- ----------
$ 761,985 $ 707,809
=========== ==========
</TABLE>
The accompanying notes to condensed
consolidated financial statements are an integral part
of these balance sheets.
<PAGE>
<TABLE>
IOMEGA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<CAPTION>
FOR THE QUARTER ENDED
---------------------
June 25, June 27,
2000 1999
------------ -----------
(Unaudited)
<S> <C> <C>
Sales $ 303,639 $ 348,781
Cost of sales 183,628 273,020
----------- -----------
GROSS MARGIN 120,011 75,761
----------- -----------
Operating expenses:
Selling, general and administrative 69,254 82,828
Research and development 15,318 23,085
Restructuring charge (reversal) (2,497) 41,909
----------- -----------
TOTAL OPERATING EXPENSES 82,075 147,822
----------- -----------
Operating income (loss) 37,936 (72,061)
Interest income 5,406 1,134
Interest expense (1,387) (1,479)
OTHER INCOME (EXPENSE) (789) 17
----------- -----------
Income (loss) before income taxes 41,166 (72,389)
BENEFIT (PROVISION) FOR INCOME TAXES (796) 25,336
----------- -----------
NET INCOME (LOSS) $ 40,370 $ (47,053)
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ 0.15 $ (0.17)
=========== ===========
Diluted $ 0.15 $ (0.17)
=========== ===========
Weighted average common
shares outstanding 270,638 269,115
=========== ===========
Weighted average common
shares outstanding - assuming dilution 281,351 269,115
=========== ===========
</TABLE>
The accompanying notes to condensed
consolidated financial statements are an integral part
of these balance sheets.
<PAGE>
<TABLE>
IOMEGA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<CAPTION>
FOR THE SIX MONTHS ENDED
------------------------
June 25, June 27,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
Sales $ 648,536 $ 734,993
Cost of sales 400,618 565,496
----------- -----------
GROSS MARGIN 247,918 169,497
----------- -----------
Operating expenses:
Selling, general and administrative 134,500 152,769
Research and development 26,448 43,798
Restructuring charge (reversal) (2,497) 41,909
----------- -----------
TOTAL OPERATING EXPENSES 158,451 238,476
----------- -----------
Operating income (loss) 89,467 (68,979)
Interest income 8,910 2,226
Interest expense (2,834) (4,268)
Other expense (1,613) (491)
----------- -----------
Income (loss) before income taxes 93,930 (71,512)
BENEFIT (PROVISION) FOR INCOME TAXES (1,734) 25,028
----------- -----------
NET INCOME (LOSS) $ 92,196 $ (46,484)
=========== ===========
NET INCOME (LOSS) PER COMMON SHARE:
Basic $ 0.34 $ (0.17)
=========== ===========
Diluted $ 0.33 $ (0.17)
=========== ===========
Weighted average common
shares outstanding 270,543 268,753
=========== ===========
Weighted average common
shares outstanding - assuming dilution 281,293 268,753
=========== ===========
</TABLE>
The accompanying notes to condensed
consolidated financial statements are an integral part
of these balance sheets.
<PAGE>
IOMEGA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED
--------------------------
June 25, June 27,
2000 1999
---------- ----------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 92,196 $ (46,484)
Non-Cash Revenue and Expense Adjustments:
Depreciation and amortization 39,381 46,142
Deferred income taxes - (13,037)
Restructuring charge - 21,070
Bad debts (3,227) 3,761
Tax benefit from dispositions of
employee stock 843 1,061
Other 4,419 972
----------- -----------
133,612 13,485
Changes in Assets and Liabilities:
Trade receivables 22,993 43,902
Inventories 18,893 22,112
Other current assets 4,751 (2,923)
Accounts payable (31,405) (36,880)
Other current liabilities (7,016) 22,813
Income taxes 12,451 12,058
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 154,279 74,567
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment (11,238) (25,688)
Acquisition of SyQuest assets - (12,093)
Purchase of temporary investments (103,701) -
Sale of temporary investments 66,578 -
NET DECREASE (INCREASE) IN OTHER ASSETS 401 (1,955)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (47,960) (39,736)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of Common Stock 1,241 3,706
Proceeds from issuance of notes payable - 3,532
Payments on notes payable and capitalized
lease obligations (1,683) (43,061)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (442) (35,823)
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 105,877 (992)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 172,706 90,273
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 278,583 $ 89,281
=========== ===========
</TABLE>
The accompanying notes to condensed
consolidated financial statements are an integral part
of these balance sheets.
<PAGE>
IOMEGA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) SIGNIFICANT ACCOUNTING POLICIES
In the opinion of the Company's management, the accompanying
unaudited, condensed, consolidated financial statements reflect all
adjustments (consisting only of normal recurring adjustments) which
are necessary to present fairly the financial position of the Company
as of June 25, 2000 and December 31, 1999, the results of operations
for the quarters and six months ended June 25, 2000 and June 27, 1999
and cash flows for the six months ended June 25, 2000 and June 27,
1999.
The results of operations for the quarter and six months ended June
25, 2000 are not necessarily indicative of the results to be expected
for the entire year or for any future period.
These unaudited, condensed, consolidated financial statements should
be read in conjunction with the consolidated financial statements and
notes included in or incorporated into the Company's latest Annual
Report on Form 10-K.
PERVASIVENESS OF ESTIMATES - The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION - These unaudited, condensed, consolidated
financial statements include the accounts of Iomega Corporation and
its wholly-owned subsidiaries after elimination of all material
intercompany accounts and transactions.
REVENUE RECOGNITION - The Company's customers include original
equipment manufacturers ("OEMs"), end users, retailers, distributors
and value-added manufacturers. Some retail and distribution customer
agreements have provisions that allow the customer to return product
under certain conditions within specified time periods. Revenue, less
reserves for returns, is generally recognized upon shipment to the
customer.
In addition to reserves for returns, the Company defers recognition of
revenue on estimated excess inventory in the distribution and retail
channels. For this purpose, excess inventory is the amount of
inventory that exceeds the channels' 30-day requirements as estimated
by management. The gross margin associated with deferral of revenue
for returns and estimated excess channel inventory totaled $31.3
million and $29.8 million at June 25, 2000 and December 31, 1999,
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.
<PAGE>
In addition, the Company records reserves at the time of shipment for
estimated volume and other channel rebates. These reserves for volume
and other channel rebates and price protection credits totaled $29.0
million and $37.8 million at June 25, 2000 and December 31, 1999,
respectively, and are netted against accounts receivable in the
accompanying condensed consolidated balance sheets. During the second
quarter of 2000, the Company reversed approximately $6 million of
reserves associated with prior Zip drive and media rebate programs due
to lower than estimated redemption rates. These programs ended on May
31, 2000.
FOREIGN CURRENCY TRANSLATION - For purposes of consolidating non-U.S.
operations, the Company has determined the functional currency for its
non-U.S. operations to be the U.S. dollar. Therefore, translation
gains and losses are included in the determination of income.
CASH AND CASH EQUIVALENTS - For the purposes of the consolidated
statements of cash flows, cash and cash equivalents include all
marketable securities purchased with maturities of three or fewer
months. Cash equivalents consist primarily of investments in money
market mutual funds, commercial paper, auction rate, money market
preferred stock investments, taxable and non-taxable municipal bonds
and notes and are recorded at cost, which approximates fair value.
TEMPORARY INVESTMENTS - Investments with maturities in excess of three
months are classified as temporary investments. Temporary investments
at June 25, 2000 and December 31, 1999 primarily consist of municipal
notes, common bonds and paper, government securities, commercial paper
and corporate notes, bonds and paper. The Company minimizes its credit
risk associated with temporary investments by using investment grade,
highly liquid securities. At June 25, 2000, the Company has classified
all of its temporary investments as available-for-sale securities. Due
to the grade of the investments, the adjusted cost basis and the
market value of the investments was not materially different at June
25, 2000 and no comprehensive income or loss was recorded for the
second quarter of 2000. At December 31, 1999 the Company classified
$18.3 million of its temporary investments as available-for-sale
securities and the remaining $19.9 million as held-to-maturity. Due to
the timing of purchases (all available-for-sale securities were
purchased after December 28, 1999) and the grade of the investments,
no comprehensive income or loss was recorded in 1999.
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: June 25,
December 31, 2000 1999
<TABLE>
<CAPTION>
(In thousands)
<S> <C> <C>
Raw materials $ 19,093 $ 27,254
Work-in-process 4,209 7,958
Finished goods 52,431 59,414
------------ ------------
$ 75,733 $ 94,626
============ ============
</TABLE>
<PAGE>
OTHER CURRENT LIABILITIES - Other current liabilities consist of the
following:
<TABLE>
<CAPTION>
June 25, December 31,
2000 1999
----------- ------------
(In thousands)
<S> <C> <C>
Accrued payroll, vacation and bonu $ 20,460 $ 13,189
Deferred revenue 31,287 29,832
Accrued warranty 17,923 17,211
Accrued advertising 43,979 36,971
Accrued restructuring charges 8,111 17,843
Purchase commitments 6,529 19,734
Other accrued liabilities 63,688 64,213
----------- -----------
$ 191,977 $ 198,993
=========== ===========
</TABLE>
EARNINGS PER COMMON SHARE - Basic earnings 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 earnings per common share ("Diluted EPS") reflects the
potential dilution that could occur if stock options or other
contracts to issue common stock were exercised or converted into
common stock. Diluted EPS for the quarter and six months ended June
25, 2000 was determined under the assumption that the convertible
subordinated notes were converted on March 27, 2000 and January 1,
2000, respectively. The computation of Diluted EPS does not assume
exercise or conversion of securities that would have an antidilutive
effect on net income (loss) per common share.
Following is a reconciliation of the numerator and denominator of
Basic EPS to the numerator and denominator of Diluted EPS for all
periods presented:
<TABLE>
<CAPTION>
Net
Income (Loss) Shares Per Share
(Numerator) (Denominator) Amount
-------------- --------------- -----------
(In thousands, except per share data)
<S> <C> <C> <C>
FOR THE QUARTER ENDED:
JUNE 25, 2000
Basic EPS $ 40,370 270,638 $ 0.15
Effect of options - 1,497 -
Effect of convertible
subordinated notes 753 9,216 -
----------- ----------- -----------
DILUTED EPS $ 41,123 281,351 $ 0.15
=========== =========== ===========
JUNE 27, 1999
Basic EPS $ (47,053) 269,115 $ (0.17)
Effect of options - - -
Effect of convertible
subordinated notes - - -
----------- ----------- ----------
DILUTED EPS $ (47,053) 269,115 $ (0.17)
=========== =========== ==========
</TABLE>
For the quarter ended June 27, 1999, stock options and convertible
subordinated notes were not included in the calculation of Diluted EPS
as their inclusion would be antidilutive. For the quarters ended June
25, 2000 and June 27, 1999, there were outstanding options to purchase
9,205,564 and 4,444,199 shares, respectively, that had an exercise
price greater than the average market price of the common shares for
the respective quarters.
<TABLE>
<CAPTION>
Net
Income (Loss) Shares Per Share
(Numerator) (Denominator) Amount
-------------- --------------- -----------
(In thousands, except per share data)
<S> <C> <C> <C>
FOR THE SIX MONTHS ENDED:
JUNE 25, 2000
Basic EPS $ 92,196 270,543 $ 0.34
Effect of options - 1,534 -
Effect of convertible
subordinated notes 1,505 9,216 (0.01)
----------- ----------- -----------
DILUTED EPS $ 93,701 281,293 $ 0.33
=========== =========== ===========
JUNE 27, 1999
Basic EPS $ (46,484) 268,753 $ (0.17)
Effect of options - - -
Effect of convertible
subordinated notes - - -
----------- ----------- -----------
DILUTED EPS $ (46,484) 268,753 $ (0.17)
=========== =========== ===========
</TABLE>
For the six months ended June 27, 1999, stock options and convertible
subordinated notes were not included in the calculation of Diluted EPS
as their inclusion would be antidilutive. For the six months ended
June 25, 2000 and June 27, 1999, there were outstanding options to
purchase 9,166,064 and 4,348,199 shares, respectively, that had an
exercise price greater than the average market price of the common
shares for the respective period.
RECLASSIFICATIONS - Certain reclassifications were made to the prior
periods' unaudited, condensed, consolidated financial statements to
conform with the current period presentation.
RECENT ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial
Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS 137
and SFAS 138, is effective for the Company's fiscal year beginning
2001. SFAS 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires
that the Company recognize all derivative instruments as either assets
or liabilities in the condensed consolidated balance sheet and measure
those instruments at fair value. The Company does not expect the
adoption of SFAS 133, as amended, to have a material impact on the
Company's results of operations, financial position or liquidity.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in
Financial Statements". SAB 101 provides guidance on the recognition,
presentation and disclosure of revenue in financial statements. In
June of 2000, the Securities and Exchange Commission issued SAB 101B
which extended the implementation date to the Company's fourth quarter
of 2000. The Company is currently assessing the impact, if any, of SAB
101 on its financial statements.
In May 2000, the FASB's Emerging Issues Task Force ("EITF") issued
EITF 00-14, "Accounting for Certain Sales Incentives". EITF 00-14
provides specific guidance on the accounting for and presentation of
sales incentives offered by companies to their customers. These
incentives include discounts, coupons, rebates and free products or
services. The Company implemented the provisions of EITF 00-14 during
the SECOND QUARTER OF 2000. The implementation did not have a material
impact on the Company's financial statements.
(2) INCOME TAXES
For the quarter ended June 25, 2000, the Company recorded an income
tax provision of $16.1 million on pre-tax income, substantially offset
by a $15.3 million decrease in the valuation allowance for net
deferred tax assets.
The significant components of the Company's deferred taxes are as
follows:
<TABLE>
<CAPTION>
JUNE 25, 2000 DECEMBER 31, 1999
-------------- -----------------
(In thousands)
<S> <C> <C>
Total deferred tax assets $ 99,314 $ 125,361
TOTAL DEFERRED TAX LIABILITIES (49,048) (37,347)
----------- ----------
Net deferred tax assets 50,266 88,014
LESS: VALUATION ALLOWANCE (50,266) (88,014)
----------- ----------
TOTAL NET DEFERRED TAXES $ - $ -
=========== ===========
</TABLE>
During the second quarter of 2000, the Company decreased its deferred
tax asset valuation allowance by approximately $15 million, to $50
million due to a decrease in net deferred tax assets. The Company
evaluates the realizablity of its net deferred tax assets on a
quarterly basis. If the net deferred tax assets change in the future,
if the Company's profitability changes, or if the valuation allowance
requirements change, the valuation allowance may increase or decrease
which will impact future income tax provisions.
As of June 25, 2000, the Company had approximately $13.0 million of
deferred tax assets related to foreign net operating loss
carryforwards, which reflected a benefit of approximately $30.3
million in future tax deductions, for which the Company had
established a valuation allowance. These carryforwards expire at
various dates beginning in 2004.
As of June 25, 2000, the Company had approximately $13.4 million of
deferred tax assets related to domestic net operating loss
carryforwards, which reflected a benefit of approximately $34.4
million in future tax deductions, for which the Company had
established a valuation allowance. These carryforwards expire at
various dates beginning in 2020.
Additionally, as of June 25, 2000, the Company had approximately $23.9
million of domestic deferred tax assets, net of deferred liabilities,
which reflected a benefit of approximately $61.3 million in future tax
deductions.
As of June 25, 2000, the Company had provided approximately $40
million in deferred tax liabilities on approximately $102 million of
unremitted foreign earnings expected to be repatriated some time in
the future. U.S. taxes have not been provided for additional
unremitted foreign earnings of approximately $112 million, which are
considered to be permanently invested in non-U.S. operations. The
residual U.S. tax liabilities, if such amounts were remitted, would be
approximately $44 million. Cash paid for taxes was $0.4 million and
$3.1 million, respectively, for the quarters ended June 25, 2000 and
June 27, 1999.
For the six month period ended June 25, 2000, the Company recorded an
income tax provision of $39.5 million on pre-tax income, substantially
offset by a $37.8 million decrease in the valuation allowance for the
net deferred income taxes. Cash paid for income taxes was $1.4 million
and $4.2 million, respectively, for the first six months of 2000 and
1999.
(3) DEBT
NOTES PAYABLE - The Company cancelled its $75 million Senior Secured
Credit Facility with Morgan Guaranty Trust Company of New York,
Citibank, N.A. and a syndicate of other lenders two months prior to
the Credit Facility's scheduled expiration date of July 14, 2000.
There had been no borrowings under the Credit Facility in over six
quarters.
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 through April 2002. Principal and interest
payments under the various agreements are payable monthly or
quarterly. Interest rates are fixed and range from 7.1% to 10.2%. The
leases are secured by the underlying leased equipment, software and
furniture.
Cash paid for interest was $0.7 and $2.6 million, respectively, for
the quarters ended June 25, 2000 and June 27, 1999, including interest
on capital leases. Included in interest expense for the second quarter
of 2000 and 1999 was $0.4 million of amortization of deferred charges
associated with obtaining the debt. All remaining deferred charges
associated with the cancelled Credit Facility, which totaled $0.2
million, were expensed in the second quarter of 2000.
For the first six months of 2000 and 1999, cash paid for interest was
$2.7 million and $7.3 million, respectively, including interest on
capital leases. Included in interest expense for the first six months
of 2000 and 1999, was $0.9 million and $0.8 million, respectively, of
amortization of deferred charges associated with obtaining the debt.
All remaining deferred charges associated with the cancelled Credit
Facility, which totaled $0.2 million, were expensed in the second
quarter of 2000.
(4) BUSINESS SEGMENT INFORMATION
The Company has four reportable segments based primarily on the nature
of the Company's customers and products: Zip, Jaz, ZipCD(TM) and
Clik!(TM). The Zip segment involves the development, manufacTURE,
distribution and sales of personal storage products and applications,
including Zip disk and drive systems to retailers, distributors and
OEMs throughout the world. The Jaz segment involves the development,
manufacture, distribution and sales of professional storage products
and applications, including Jaz disk and drive systems to distributors
and retailers throughout the world. The Company's ZipCD segment
involves the distribution and sales of CD-RW drives to retailers,
distributors and resellers throughout the world and includes ZipCD disc
and drive systems, which began shipping in limited quantities in August
1999. The Clik! segment involves the development, manufacture,
distribution and sales of Clik! PC Card drives, Clik! OEM drives and
Clik! disks for use with portable digital products such as digital
cameras, audio players, handheld personal computers and notebook
computers to retailers, distributors, OEMs and resellers throughout the
world. The "Other" category includes products such as Ditto, floppy
disks and other Nomai products and other miscellaneous items.
The accounting policies of the segments are the same as those described
in Note 1 "Significant Accounting Policies". Intersegment sales,
eliminated in consolidation, are not material. The Company evaluates
performance based on product profit margin for each segment. Product
profit margin is defined as sales and other income directly related to
a segment's operations, less both fixed and variable manufacturing
costs, research and development expenses and selling, general and
administrative expenses directly related to a segment's operations.
When such costs and expenses exceed sales and other income, product
profit margin is referred to as product loss. The expenses attributable
to corporate activity are not allocated to the operating segments.
The information in the following table is derived directly from the
segments' internal financial information used for corporate management
purposes.
<PAGE>
<TABLE>
<CAPTION>
REPORTABLE OPERATING SEGMENT INFORMATION:
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
June 25, June 27, June 25, June 27,
2000 1999 2000 1999
------------ ----------- ----------- ------------
(In millions) (In millions)
<S> <C> <C> <C> <C>
SALES:
Zip $ 237 $ 274 $ 516 $ 576
Jaz 38 66 90 129
ZipCD 25 - 35 -
Clik! 3 1 5 6
Other 1 8 3 24
----------- ------------ ----------- -----------
TOTAL SALES $ 304 $ 349 $ 649 $ 735
=========== ============ =========== ===========
PRODUCT PROFIT MARGIN (LOSS)
BEFORE RESTRUCTURING CHARGE:
Zip $ 69 $ 33 $ 158 $ 84
Jaz 12 (2) 24 (5)
ZipCD 1 (2) 1 (3)
Clik! (3) (17) (20) (30)
Other (2) (10) (5) (16)
----------- ----------- ----------- -----------
TOTAL PRODUCT PROFIT MARGIN 77 2 158 30
----------- ----------- ----------- -----------
PRODUCT PROFIT MARGIN (LOSS)
AFTER RESTRUCTURING CHARGE:
Zip $ 69 $ 33 $ 158 $ 84
Jaz 13 (32) 25 (35)
ZipCD 1 (2) 1 (3)
Clik! (2) (17) (19) (30)
Other (2) (18) (5) (24)
----------- ----------- ----------- -----------
TOTAL PRODUCT PROFIT MARGIN (LOSS) 79 (36) 160 (8)
----------- ----------- ----------- -----------
COMMON (WITH RESTRUCTURING ALLOCATED TO PPM):
Corporate restructuring charge - (4) - (4)
General corporate expenses (41) (32) (71) (57)
Interest and other income (expense), net 3 - 5 (3)
---------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES $ 41 $ (72) $ 94 $ (72)
=========== =========== =========== ===========
</TABLE>
(5) RESTRUCTURING CHARGES
During the quarter ended June 27, 1999, the Company recorded a pre-tax
restructuring charge of $41.9 MILLION AS A RESULT OF STEPS THE COMPANY
WAS TAKING TO ORGANIZE ALONG FUNCTIONAL LINES (for example,
manufacturing, sales, etc.) as opposed to product lines. These actions
included the exit of facilities, headcount reductions, the
discontinuance of certain products and development projects related to
enhancements and accessories associated with the Jaz product platform
and consolidation of the Company's magnetic technology expertise at its
headquarters in Roy, Utah. These actions included closing the Company's
facilities in Milpitas, California and San Diego, California. The
restructuring charge was comprised of $20.2 million for fixed assets
and inventory related to the discontinuance of certain products and
development projects related to enhancements and accessories associated
with the Jaz product platform; $9.7 million for workforce reduction
costs; $4.3 million for excess leasehold improvements, furniture and
fixtures formerly utilized in the Milpitas and San Diego facilities;
$3.0 million for lease termination costs for facilities located in
Milpitas and San Diego; $4.7 million for workforce reduction costs,
contract cancellation and other exit costs to consolidate the Company's
operations in France and Scotland. This restructuring charge consisted
of cash and non-cash charges of approximately $18 million and $24
million, respectively. There were no indications of permanent
impairment of the assets prior to the restructuring actions.
In connection with the Company's second quarter 1999 restructuring
actions, the Company terminated 466 regular and temporary employees,
consisting primarily of operations and product development employees
located in Milpitas, San Diego and Roy. The Company pays severance on a
continuous basis as opposed to a lump sum payment. In addition, several
of the employees were offered retention packages into the third and
fourth quarters of 1999, and therefore, their severance pay did not
begin until later in 1999. During the second quarter of 2000, the
Company reversed $1.6 million of restructuring reserves associated with
the discontinuance of a development project. The excess restructuring
reserves were a result of the Company negotiating reductions in
purchase commitments or cancellation charges on inventory and fixed
assets and higher than expected proceeds received from equipment sales.
Certain of the facilities in California have not yet been subleased or
cancelled. The Company is continuing to make monthly payments for cash
flow purposes. Certain of the contract cancellations in France are
under dispute and therefore have not been settled. The Company
anticipates completing these restructuring actions by the end of 2000.
Restructuring reserves are included in the Company's other current
liabilities, inventory and property, plant and equipment as of June 25,
2000. Utilization of the second quarter 1999 restructuring reserves
during the quarter ended June 25, 2000 is summarized below:
<PAGE>
<TABLE>
UTILIZED
Balance --------------------------- Balance
MARCH 26, 2000 CASH NON-CASH REVERSALS JUNE 25, 2000
-------------- ------------ -------- ----------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
SECOND QUARTER 1999
RESTRUCTURING ACTIONS:
Discontinued Products/Projects:
Fixed assets (a) $ 7,699 $ - $ (6,017) $ (1,189) $ 493
Purchase commitments (b) 716 (24) - (400) 292
Inventory (a) 532 - (524) (8) -
Severance and benefits (b) 990 (562) - - 428
Other fixed asset charges (a) 3,096 - (2,671) - 425
Lease terminations (b) 1,848 (341) - - 1,507
France/Scotland Consolidation:
Contract cancellation (b)(c) 1,414 - - - 1,414
Severance and benefits (b) 40 - - - 40
Lease cancellations (a) 157 - - - 157
Fixed assets (a) 217 (82) - - 135
Other exit costs (A) 35 - - - 35
----------- ----------- ----------- ----------- -----------
$ 16,744 $ (1,009) $ (9,212) $ (1,597) $ 4,926
=========== =========== =========== =========== ===========
Balance Sheet Breakout:
Inventory reserves $ 532 $ - $ (524) $ (8) $ -
Fixed asset reserves 10,674 - (8,688) (1,189) 797
Liabilities 5,538 (1,009) - (400) 4,129
----------- ---------- ---------- ----------- -----------
$ 16,744 $ (1,009) $ (9,212) $ (1,597) $ 4,926
========= =========== ========== =========== ===========
(a) Amounts represent primarily non-cash charges.
(b) Amounts represent primarily cash charges.
(c ) Amounts relate to commitments associated with the manufacturing
of floppy drives.
</TABLE>
During the third quarter ended September 26, 1999, the Company recorded
a pre-tax restructuring charge of $20.5 million as a result of
restructuring actions initiated to consolidate worldwide disk
manufacturing and refocus the Clik! product platform on the newer Clik!
PC Card and OEM drives. An additional charge of $5.4 million primarily
for severance and benefits was taken in the fourth quarter of 1999 in
connection with these actions. These restructuring charges included
reserves of $10.2 million relating to certain assets and exit costs
such as cancellation fees associated with the cessation of
manufacturing in Avranches, France; $11.5 million of inventory and
fixed asset reserves associated with the older Clik! products; and $2.7
million for write-offs of intangibles and other miscellaneous charges.
These restructuring charges consisted of cash and non-cash charges of
approximately $9 million and $17 million, respectively. There can be no
assurance that the Company will cease manufacturing operations in
France without incurring significant legal or other costs that have not
been accrued for in the restructuring charge. In addition, the Company
has been notified of a tax audit to be conducted in France. There can
be no assurance that the Company will not incur claims or assessments
from this audit that have not been accrued. During the second quarter
of 2000, the Company reversed $0.9 million of restructuring charges
associated with Clik! product streamlining as a result of the Company
negotiating reductions in purchase commitments.
In connection with the Company's 1999 second half restructuring
actions, the Company had a workforce reduction of 123 regular and
temporary employees, consisting primarily of operations employees in
Avranches, France and product development employees in Longmont,
Colorado. The Company anticipates that the implementation of the
restructuring actions within the United States will be complete by the
end of September 2000. However, the legal requirements in France
relating to workforce reductions are very strict and the social plan
approved for the workforce can take up to two years to fully
administrate. Therefore, the restructuring reserves related to
manufacturing cessation in France will take longer to utilize.
Restructuring reserves are included in the Company's other current
liabilities, inventory and property, plant and equipment as of June 25,
2000. Utilization of the second half 1999 restructuring reserves during
the quarter ended June 25, 2000 is summarized below:
<TABLE>
UTILIZED
Balance --------------------------- Balance
MARCH 26, 2000 CASH NON-CASH REVERSALS JUNE 25, 2000
-------------- ------------ -------- ----------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
SECOND HALF 1999
RESTRUCTURING ACTIONS:
Clik! Streamlining:
Fixed assets (a) $ 2,066 $ - $ (539) $ - $ 1,527
Purchase commitments (b) 1,508 - (12) (900) 596
Manufacturing Cessation:
Fixed assets (a) 2,465 - (695) - 1,770
Other assets (a) 275 - - - 275
Other commitments (b) 2,709 (125) - - 2,584
Severance and benefits (b) 1,746 (944) - - 802
SEVERANCE AND BENEFITS (B) 25 (25) - - -
---------- ----------- ----------- ----------- -----------
$ 10,794 $ (1,094) $ (1,246) $ (900) $ 7,554
========== =========== =========== =========== ===========
Balance Sheet Breakout:
Fixed asset reserves (a) $ 4,531 $ - $ (1,234) $ - $ 3,297
Other (a) 47 - - - 47
Inventory reserves (a) 228 - - - 228
LIABILITIES (B) 5,988 (1,094) (12) (900) 3,982
----------- ----------- ----------- ----------- -----------
$ 10,794 $ (1,094) $ (1,246) $ (900) $ 7,554
=========== =========== =========== =========== ==========
(a) Amounts represent primarily non-cash charges.
(b) Amounts represent primarily cash charges.
</TABLE>
(6) OTHER NON-RESTRUCTURING CHARGES
During the first quarter of 2000, the Company recorded other
non-restructuring charges of $7.4 million as cost of sales. The charges
were comprised of $3.7 million for excess Clik! media manufacturing
capacity, $2.8 million to reflect a reduction in the estimated net
realizable value of Clik! PC Card drive inventory, $0.6 million for
excess Clik! PC Card drive manufacturing capacity and $0.3 million for
Clik! PC Card drive purchase commitments.
<PAGE>
(7) OTHER MATTERS
SIGNIFICANT CUSTOMERS - DURING THE QUARTER ended June 25, 2000, sales
to Ingram Micro, Inc. and Tech Data Corporation accounted for 20.6% and
12.1% of consolidated sales, respectively, compared to 14.3% and 10.4%,
respectively, for the corresponding period of 1999. No other single
customer accounted for more than 10% of the Company's sales for these
periods.
During the six months ended June 25, 2000, sales to Ingram Micro, Inc.
accounted for 14.7% of consolidated sales compared to 12.6% for the
corresponding period of 1999. No other single customer accounted for
more than 10% of the Company's sales for these periods.
FORWARD EXCHANGE CONTRACTS - The Company has commitments to sell and
purchase foreign currencies relating to forward exchange contracts in
order to hedge against future currency fluctuations.
At June 25, 2000, outstanding forward exchange sales (purchase)
contracts, which all mature in September 2000, were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Contracted Spot
Currency Amount Forward rate Rate
---------------------- ------------- -------------- ------
European Euro 20,000,000 1.06 1.07
Japanese Yen (422,000,000) 102.78 105.02
Singapore Dollar 2,850,000 1.72 1.73
Swiss Franc (1,800,000) 1.63 1.66
</TABLE>
The contracts are revalued at the month-end spot rate. Gains and losses
on foreign currency contracts intended to be used to hedge operating
requirements are reported currently in income. Gains and losses on
foreign currency contracts intended to meet firm commitments are
deferred and are recognized as part of the cost of the underlying
transaction being hedged. At June 25, 2000, 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 counter-party.
(8) COMMITMENTS AND CONTINGENCIES
LITIGATION
As previously disclosed in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999 and the Company's Quarterly Report on
Form 10-Q for the quarter ended March 26, 2000, on July 6, 1999, THE
COMPANY INITIATED LITIGATION AGAINST CASTLEWOOD SYSTEMS, INC.
("CASTLEWOOD"), IOMEGA CORPORATION V. CASTLEWOOD SYSTEMS, INC., in the
United States District Court in the District of Utah for infringing the
Company's U.S. Patent No. 4,458,273 and U.S. Patent No. 5,854,719 and
for infringing and diluting the Company's registered trademarks
"Iomega", "Zip" and "Jaz". The complaint further alleged that
Castlewood had engaged in federal unfair competition, common law unfair
competition and common law unjust enrichment. The complaint requests
monetary damages and injunctive relief enjoining Castlewood from
further infringement. On August 18, 1999, Castlewood filed an answer
and counterclaims, denying the Company's claims and requesting a
declaratory judgment that the Company's patents are invalid. On
September 9, 1999, the Company filed a reply to the counterclaims,
denying that the patents are invalid. On September 17, 1999, the
Company also initiated litigation against Castlewood in the Paris
District Court based on claims of copyright and patent infringement.
Additionally, on September 20, 1999, the Company initiated litigation
against Motek, a French retailer of Castlewood's products, in the Paris
District Court. On November 15, 1999, Castlewood filed an amended
answer and counterclaims, adding several affirmative defenses. The
Company filed a reply to this amended answer and counterclaims on
January 5, 2000. The court has since denied a motion for a preliminary
injunction with respect to the Company's patent claim, and granted a
motion for a preliminary injunction with respect to the Company's
trademark claims. On April 11, 2000, the Company also initiated
litigation against Castlewood in the United States District Court for
the District of Utah for infringement of the Company's U.S. Patent No.
6,049,444. The Company's complaint requests monetary damages and
injunctive relief enjoining Castlewood from further infringement.
Castlewood's response to the complaint is due on or before September
15, 2000. The Company continues to be committed to vigorously
protecting and enforcing its intellectual property rights and to
attacking unfair competition.
As previously disclosed in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999 and the Company's Quarterly Report on
Form 10-Q for the quarter ended March 26, 2000, on May 27, 1998, SCOTT
D. ORA FILED A COMPLAINT AGAINST THE COMPANY AND OTHER PARTIES. THE
ACTION, CAPTIONED ORA V. IOMEGA CORPORATION, ET AL., was filed in
Superior Court of the State of California for the County of Los Angeles
and alleged that the Company and certain of its former officers
violated certain federal and state securities laws and alleged that Kim
B. Edwards, former Chief Executive Officer and director of the Company,
breached his duties as a director of the Company. The Company
successfully removed the action to the United States District Court for
the Central District of California. On February 9, 1999, the Court
dismissed five of the complaints original seven causes of action. On
August 18, 1999, the Court dismissed the remaining two causes of
action, but gave Ora the opportunity to file an amended complaint with
respect to those two counts. On November 1, 1999, Ora filed an amended
complaint repleading the two causes of action dismissed on August 18,
1999 and bringing two new related conspiracy causes of action. The
amended complaint seeks an unspecified amount of damages. On December
15, 1999, the Company and the individual defendants filed a motion to
dismiss the amended complaint. On April 12, 2000, the Court dismissed
the amended complaint in its entirety, entering judgment in the
Company's favor. On May 7, 2000, the plaintiff filed a notice of appeal
to the Ninth Circuit Court of Appeals. The plaintiff must file an
opening appeal brief on August 29, 2000. The Company intends to defend
vigorously against this appeal.
As previously disclosed in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999 and the Company's Quarterly Report on
Form 10-Q for the quarter ended March 26, 2000, on September 10, 1998,
A PURPORTED CLASS ACTION LAWSUIT, RINALDI ET AL. V. IOMEGA CORPORATION,
was filed against the Company in the Superior Court of Delaware, New
Castle County. The suit alleges that a defect in the Company's Zip
drives causes an abnormal clicking noise that may indicate damage to
the Zip drive or disks. The plaintiffs sought relief pursuant to claims
of breach of warranty, violation of the Delaware Consumer Fraud Act,
and negligent design, manufacture and failure to warn. On September 3,
1999, the Court dismissed the claims of breach of warranty and
violation of the Consumer Fraud Act, granting the plaintiffs the
opportunity to amend the latter claim. On January 31, 2000, the
plaintiffs filed an amended complaint, reasserting their claim under
the Delaware Consumer Fraud Act and on February 28, 2000, the Company
moved to dismiss this amended claim. With respect to this motion, on
April 10, 2000, the Attorney General of the State of Delaware filed a
brief in opposition, and, on July 27, 2000, by subpoena, also requested
documents from the Company relating to its advertising in Delaware for
the period January 1998 through December 1999. The Court has not yet
decided the motion to dismiss, and the Company is in the process of
responding to the Attorney General's subpoena. On April 25, 2000, the
plaintiffs moved to further amend their complaint to add an additional
plaintiff who is a Delaware resident, which amendment the Court allowed
on May 23, 2000 over the Company's opposition. In connection with the
same matter, on February 28, 2000, two of the plaintiffs served on the
Company a "Notice of Claim" under Section 17.46(b) of the Texas
Deceptive Trade Practices Act asserting allegations similar to those
made in connection with the plaintiffs' Delaware Consumer Fraud Act
claim (the "Texas Claim"). The Texas Claim purports to be on behalf of
the two plaintiffs and a class of others similarly situated in the
State of Texas, and demands relief of $150 for each Zip drive purchased
by a class member, $100 for mental anguish damages to each class member
and attorneys' fees and costs. Formal litigation in connection with the
Texas Claim has not been commenced. The Company intends to vigorously
defend against this suit and the Texas Claim. Although the Company does
not expect this suit or the Texas Claim to have a material adverse
effect on the Company's ongoing business, results of operations or
financial condition, an adverse judgment or settlement could have a
material adverse effect on the operating results reported by the
Company for the period in which any such adverse judgment or settlement
occurs.
As previously disclosed in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999, ON JUNE 15, 1999, A PATENT
INFRINGEMENT LAWSUIT, VALITEK, INC. V. IOMEGA CORPORATION, was filed
against the Company in the United States District Court for the Eastern
District of Pennsylvania. The suit alleges patent infringement. The
complaint requests injunctive relief enjoining the Company from the
alleged infringement and monetary damages. The Company intends to
vigorously defend against this suit.
As previously disclosed in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999, on December 29, 1999, the Company
filed a request in Geneva, Switzerland for arbitration against Marc
Frouin, Herve Frouin and Marine Frouin, the former principal
shareholders of Nomai S.A. ("Nomai"), which is now a subsidiary of the
Company. The arbitration request sought indemnification from the former
shareholders for breaches of numerous representations and warranties
under the Stock Purchase Agreement pursuant to which the Company
acquired Nomai. On July 26, 2000, the Company entered into an agreement
with the former shareholders settling any claims the Company had or may
in the future have against the former shareholders. Under the
settlement agreement, the Company will receive approximately CHF 6
million (approximately U.S. $3.6 million as of June 25, 2000), which
represented substantially all of the amounts remaining in the escrow
created at the time of the acquisition. This will be accounted for as a
reduction of goodwill.
As previously disclosed in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999, on February 18, 2000, Maitre
Jean-Jacques Savenier, the Commissaire a l'execution du PLAn
(bankruptcy trustee) filed a complaint against the Company's
subsidiary, Nomai. Maitre Jean-Jacques Savenier claims that Nomai has
not complied with investment and employment related commitments made by
Nomai's former management before the Commercial Court in 1997. In 1997,
Nomai acquired certain assets from RPS Media SA in bankruptcy, with the
consent and under the supervision of the Commercial Court of Albi,
pursuant to French bankruptcy law provisions. The action seeks a daily
penalty against Nomai of FF 100,000 (approximately $15,000) until Nomai
invests FF 48,000,000 (approximately $7.4 million) and hires 100
people. The Company intends to vigorously defend against the lawsuit.
On May 18, 2000, Conseil & Technique, Soterem and IDCC (subcontractors
under a research and development contract) filed a lawsuit before the
Commercial Court of Toulouse, France against Nomai's former subsidiary
Albi Media Manufacturing, SARL ("AMM"). Iomega's subsidiary Nomai is
obligated to indemnify for and defend against the lawsuit pursuant to
the agreement whereby Nomai divested its ownership of AMM to a new
owner. Neither Iomega nor Nomai are parties to the lawsuit. The lawsuit
alleges breach of contract and other claims relating to a research and
development project among AMM and the plaintiffs. The lawsuit claims
total damages of 67 million French francs. An initial procedural
hearing was held in the case in June 2000, and the next hearing is
scheduled for September 2000.
It is the opinion of management, after discussions with legal counsel,
that, except as discussed above, the ultimate dispositions of these
lawsuits and claims will not have a material adverse effect on the
Company's financial position or results of operations.
STOCK OPTION EXCHANGE PROGRAM
On April 19, 2000, the Company's shareholders approved an Employee
Stock Option Exchange Program ("the Exchange Program"), pursuant to
which the Company has granted approximately 1.1 million new stock
options at an exercise price of $3.59 in exchange for approximately 1.8
million previously outstanding stock options which had exercise prices
above $3.59. The new options issued under the Exchange Program are
subject to variable plan accounting in accordance with FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving
Stock Compensation". Under variable plan accounting, the Company is
required to recognize compensation expense in its statement of
operations for any increase in the market price of the Company's Common
Stock above $4.00 (the market price of July 1, 2000 which is the
effective date of FASB Interpretation No. 44). This compensation
expense must be recorded on a quarterly basis until the option is
exercised, forfeited or expires unexercised. The impact of the new
options granted under the Exchange Program on the Company's financial
statements will depend on quarterly fluctuations in the Company's
Common Stock price and the dates of exercises, forfeitures or
cancellations of the new options by employees. Depending on these
factors, the Company could be required to record significant
compensation expense during the next ten years. Moreover, because the
precise amount of the compensation expense will depend on the market
price of the Common Stock at the end of each quarterly period, the
Company will not be able to forecast in advance the amount of
compensation expense that it will incur in any future period.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS:
The Company's fiscal calendar was recently approved for fiscal 2001 which
management believes better aligns the Company's fiscal quarters with its
customer's fiscal quarters. The quarters for 2001 will end on the following
dates compared to the corresponding dates for 2000:
2001 2000
----- ------
Q1 April 1 March 26
Q2 July 1 June 25
Q3 Sept. 30 Sept. 24
Q4 Dec. 31 Dec. 31
Under the calendar for fiscal 2001, the first quarter of 2001 will have 5 more
days than the first quarter of 2000 and the fourth quarter of 2001 will have 5
less days than the fourth quarter of 2000. The Company plans to continue its
practice of releasing earnings on the third Thursday following quarter end.
BUSINESS SEGMENT INFORMATION
The Company has four reportable segments based primarily on the nature of the
Company's customers and products: Zip, Jaz, ZipCD and Clik!. The Zip segment
involves the development, manufacture, distribution and sales of personal
storage products and applications, including Zip disk and drive systems to
retailers, distributors and OEMs throughout the world. The Jaz segment involves
the development, manufacture, distribution and sales of professional storage
products and applications, including Jaz disk and drive systems to distributors
and retailers throughout the world. The Company's ZipCD segment involves the
distribution and sales of CD-RW drives to retailers, distributors and resellers
throughout the world and includes ZipCD disc and drive systems, which began
shipping in limited quantities in August 1999. The Clik! segment involves the
development, manufacture, distribution and sales of Clik! PC Card drives, Clik!
OEM drives and Clik! disks for use with portable digital products such as
digital cameras, audio players, handheld personal computers and notebook
computers to retailers, distributors, OEMs and resellers throughout the world.
The "Other" category includes products such as Ditto, floppy disks and other
Nomai products and other miscellaneous items.
The accounting policies of the segments are the same as those described in Note
1 "Significant Accounting Policies". Intersegment sales, eliminated in
consolidation, are not material. The Company evaluates performance based on
product profit margin for each segment. Product profit margin is defined as
sales and other income directly related to a segment's operations, less both
fixed and variable manufacturing costs, research and development expenses and
selling, general and administrative expenses directly related to a segment's
operations. When such costs and expenses exceed sales and other income, product
profit margin is referred to as product loss. The expenses attributable to
corporate activity are not allocated to the operating segments.
The information in the following table is derived directly from the segments'
internal financial information used for corporate management purposes.
<PAGE>
<TABLE>
<CAPTION>
REPORTABLE OPERATING SEGMENT INFORMATION:
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
June 25, June 27, June 25, June 27,
2000 1999 2000 1999
------------ ----------- ----------- ------------
(In millions) (In millions)
<S> <C> <C> <C> <C>
SALES:
Zip $ 237 $ 274 $ 516 $ 576
Jaz 38 66 90 129
ZipCD 25 - 35 -
Clik! 3 1 5 6
Other 1 8 3 24
----------- ------------ ----------- -----------
TOTAL SALES $ 304 $ 349 $ 649 $ 735
=========== ============ =========== ===========
PRODUCT PROFIT MARGIN (LOSS)
BEFORE RESTRUCTURING CHARGE:
Zip $ 69 $ 33 $ 158 $ 84
Jaz 12 (2) 24 (5)
ZipCD 1 (2) 1 (3)
Clik! (3) (17) (20) (30)
Other (2) (10) (5) (16)
----------- ----------- ----------- -----------
TOTAL PRODUCT PROFIT MARGIN 77 2 158 30
----------- ----------- ----------- -----------
PRODUCT PROFIT MARGIN (LOSS)
AFTER RESTRUCTURING CHARGE:
Zip $ 69 $ 33 $ 158 $ 84
Jaz 13 (32) 25 (35)
ZipCD 1 (2) 1 (3)
Clik! (2) (17) (19) (30)
Other (2) (18) (5) (24)
----------- ----------- ----------- -----------
TOTAL PRODUCT PROFIT MARGIN (LOSS) 79 (36) 160 (8)
----------- ----------- ----------- -----------
COMMON (WITH RESTRUCTURING ALLOCATED TO PPM):
Corporate restructuring charge - (4) - (4)
General corporate expenses (41) (32) (71) (57)
Interest and other income (expense), net 3 - 5 (3)
---------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES $ 41 $ (72) $ 94 $ (72)
=========== =========== =========== ===========
</TABLE>
RESULTS OF OPERATIONS
The Company reported sales of $304 million and net income of $40 million, or
$0.15 per diluted share, in the second quarter of 2000, which included $15
million, or $0.05 per diluted share, attributable to a decrease in the Company's
valuation allowance for net deferred tax assets, and also included $3 million,
or $0.01 per diluted share, attributable to a reversal of restructuring reserves
previously recorded. This compares to sales of $349 million and a net loss of
$47 million, or ($0.17) per diluted share, in the second quarter of 1999, which
included a pre-tax restructuring charge of $42 million, or ($0.10) per diluted
share.
For the first six months of 2000, the Company reported sales of $649 million and
net income of $92 million, or $0.33 per diluted share, which included $35
million, or $0.13 per diluted share, attributable to a decrease in the Company's
valuation allowance for net deferred tax assets, and also included $3 million,
or $0.01 per diluted share, attributable to a reversal of restructuring reserves
previously recorded. This compares to sales of $735 million and a net loss of
$47 million, or ($0.17) per diluted share, for the first six months of 1999,
which included a pre-tax restructuring charge of $42 million, or ($0.10) per
diluted share.
SALES
Sales for the quarter ended June 25, 2000 of $304 million decreased by $45
million, or 13% when compared to $349 million in the corresponding period of
1999. This decrease was primarily a result of reduction in Zip and Jaz sales,
offset in part by sales of ZipCD products.
Zip product sales in the second quarter of 2000 totaled $237 million,
representing a decrease of 14% when compared to sales of $274 million in the
corresponding period of 1999. Sales of Zip products represented 78% of total
sales for the second quarter of 2000, compared to 79% in the corresponding
period of 1999. Zip drive sales of $128 million for the second quarter of 2000
decreased by $21 million, or 15%, when compared to $149 million in the
corresponding period of 1999. Zip drive unit shipments decreased by 27% from the
second quarter of 1999 to the second quarter of 2000. The decline in Zip drive
revenue is primarily a result of lower volumes, price reductions and second
quarter 2000 rebate programs, partially offset by a higher mix of Zip 250MB
sales and a $3 million reversal of reserves for prior Zip drive rebate programs
due to lower than estimated redemption rates. The prior Zip drive rebate
programs ended on May 31, 2000. Zip disk sales of $109 million for the second
quarter of 2000 decreased by $16 million, or 13%, when compared to $125 million
in the corresponding period of 1999. Zip disk unit shipments decreased by 17%
from the second quarter of 1999 to the second quarter of 2000. The decline in
disk revenue was primarily a result of lower volumes and second quarter 2000
rebate programs, partially offset by a $3 million reversal of reserves relating
to prior Zip disk rebate programs due to lower than estimated redemption rates.
The prior Zip disk rebate programs ended on May 31, 2000.
Jaz product sales in the second quarter of 2000 totaled $38 million,
representing a decrease of 42% from the second quarter of 1999. Sales of Jaz
products represented 13% of total sales for the second quarter of 2000, compared
to 19% in the corresponding period of 1999. Jaz drive unit shipments decreased
by 44% as compared to the second quarter of 1999, while Jaz disk unit shipments
decreased by 40%.
ZipCD product sales in the second quarter of 2000 totaled $25 million, or 8% of
total sales. The Company began shipping ZipCD products in limited quantities in
August 1999.
Clik! product sales in the second quarter of 2000 totaled $3 million,
representing an increase of $2 million from the second quarter of 1999. Sales of
Clik! products represented 1% of total sales in the second quarter of 2000,
compared to less than 1% in the corresponding period of 1999. Clik! drive unit
shipments increased by 22,000 units as compared to the second quarter of 1999,
while Clik! disk shipments increased by 50,000 units.
Geographically, sales in the Americas totaled $195 million, or 64% of total
sales, in the second quarter of 2000, as compared to $232 million, or 67% of
total sales, in the second quarter of 1999. This decrease was primarily due to
decreased Zip and Jaz sales, partially offset by ZipCD sales. Sales in Europe
totaled $78 million, or 26% of total sales, in the second quarter of 2000, as
compared to $81 million, or 23% of total sales, in the second quarter of 1999.
Sales in Asia totaled $30 million, or 10% of total sales, in the second quarter
of 2000, as compared to $35 million, or 10% of total sales, in the second
quarter of 1999. This decrease was primarily due to decreased Zip and Jaz sales,
partially offset by increased ZipCD sales.
Sales for the six months ended June 25, 2000 of $649 million decreased by $86
million, or 12%, when compared to $735 million in the corresponding period of
1999. This decrease was primarily a result of reductions in Zip, Jaz and Ditto
sales, offset in part by sales of ZipCD products.
Zip product sales for the first six months of 2000 totaled $516 million,
representing a decrease of 10% when compared to sales of $576 million in the
corresponding period of 1999. Sales of Zip products represented 79% of total
sales for the first six months of 2000, compared to 78% in the corresponding
period of 1999. Zip drive sales of $288 million for the first six months of 2000
decreased by $44 million, or 13%, when compared to $332 million in the
corresponding period of 1999. Zip drive unit shipments decreased by 20% from the
first six months of 1999 to the corresponding period of 2000. The decline in Zip
drive revenue was primarily a result of lower volumes, price reductions and
rebate programs and pricing actions in the first six months of 2000, partially
offset by a higher mix of Zip 250MB sales and a $3 million reversal of reserves
relating to prior Zip drive rebate programs as discussed above. Zip disk sales
of $226 million for the first six months of 2000 decreased by $17 million, or
7%, when compared to $243 million in the corresponding period of 1999. Zip disk
unit shipments decreased by 17% from the first six months of 1999 to the first
six months of 2000. The decline in disk revenue was primarily a result of lower
volumes and first six months 2000 rebate programs, partially offset by a $3
million reversal of reserves relating to prior Zip disk rebate programs as
discussed above and an increased mix of higher margin Zip 250MB disks.
Jaz product sales in the first six months of 2000 totaled $90 million,
representing a decrease of 30% from the corresponding period of 1999. Sales of
Jaz products represented 14% of total sales for the first six months of 2000,
compared to 18% in the corresponding period of 1999. Jaz drive unit shipments
decreased by 40% as compared to the corresponding period of 1999, while Jaz disk
unit shipments decreased by 19%.
ZipCD product sales in the first six months of 2000 totaled $35 million, or 6%
of total sales. The Company began shipping ZipCD products in limited quantities
in August 1999.
Clik! product sales in the first six months of 2000 totaled $5 million,
representing a decrease of $1 million from the corresponding period of 1999 due
to price reductions. Sales of Clik! products represented approximately 1% of
total sales in the first six months of 2000 and 1999. Clik! drive unit shipments
increased by 11,000 units as compared to the first six months of 1999, while
Clik! disk shipments increased by 136,000 units.
For the first six months of 2000, sales in the Americas were $413 million, or
64% of total sales in the first six months of 2000, as compared to $482 million,
or 66% of total sales, for the first six months of 1999. Sales in Europe were
$174 million, or 27% of total sales in the first six months of 2000, as compared
to $185 million or 25% of total sales, for the first six months of 1999. Sales
in Asia were $62 million, or 10% of total sales, in the first six months of
2000, as compared to $68 million, or 9% of total sales, in the first six months
of 1999.
GROSS MARGIN
The Company's overall gross margin was $120 million, or 40%, in the second
quarter of 2000, as compared to $76 million, or 22%, in the second quarter of
1999. This increase in gross margin for the second quarter of 2000 was due to
increased gross margins for all product lines. The gross margin increases were
attributable to an increased mix of higher margin Zip 250MB drives (most of
which are sold as higher margin aftermarket products) and Jaz disks, lower
manufacturing and operating costs in all product lines, the reversal of reserves
relating to prior Zip rebate programs as discussed above and contributions from
the ZipCD products. This increase was partially offset by product price
reductions and second quarter 2000 rebate and pricing programs.
The Company's overall gross margin for the first six months of 2000 was $248
million, or 38%, compared to $170 million, or 23%, for the corresponding period
of 1999. The increase in gross margin for the first six months of 2000 was due
to increased gross margins for all product lines. The gross margin increases
were primarily attributable to an increased mix of higher margin Zip 250MB
drives (most of which are sold as higher margin aftermarket products) and Jaz
disks, lower manufacturing and operating costs in all product lines and the
reversal of reserves relating to prior rebate programs as discussed above. This
increase was partially offset by product price reductions and second quarter
2000 rebate and pricing programs.
Future gross margin percentage will be impacted by the sales mix between
aftermarket and OEM channels, as OEM sales generally provide lower gross margins
than sales through other channels, and by the sales mix of Zip 100MB and Zip
250MB drives and disks. Gross margins for the remainder of 2000 will also depend
on sales volumes of Zip and Jaz disks, which generate significantly higher gross
margins than the corresponding drives, the mix between disks and drives and the
mix between Zip, Jaz, ZipCD and Clik! products, any future pricing actions or
promotions and potential start-up costs associated with new products.
SEGMENT PRODUCT PROFIT MARGIN
In the second quarter of 2000, Zip segment product profit margin of $70 million,
or 29% of Zip sales, increased by $37 million, or 112%, when compared to Zip
segment product profit margin of $33 million, or 12% of Zip sales, in the second
quarter of 1999. This increase was primarily due to an increased mix of higher
margin Zip 250MB drives, decreased Zip manufacturing and operating expenses, the
reversal of reserves relating to prior rebate programs as discussed above and a
higher mix of aftermarket sales. The second quarter improvements were partially
offset by a decrease in shipments of higher margin Zip disks, lower overall
volume shipments of drives, price reductions on Zip drives and rebate promotions
on Zip products conducted in the second quarter to stimulate sales.
Jaz segment product profit margin of $12 million, or 31% of Jaz sales, increased
by $14 million in the second quarter of 2000 when compared to Jaz segment
product loss of $2 million in the second quarter of 1999. This increase was
primarily due to decreased manufacturing and operating costs as a result of the
restructuring actions taken at the end of June 1999, partially offset by lower
disk and drive volumes.
ZipCD segment product profit margin was $1 million, or 3% of ZipCD sales for the
second quarter of 2000. The Company began shipping ZipCD products in limited
quantities during August 1999.
Clik! segment product loss of $3 million decreased by approximately $14 million
in the second quarter of 2000 when compared to Clik! segment product loss of $17
million in the second quarter of 1999. This improvement was primarily due to
decreased manufacturing and operating costs.
For the first six months of 2000, Zip product profit margin of $158 million, or
31% of Zip sales, increased by $74 million, or 87%, when compared to the
corresponding period of 1999. The increase was primarily due to an increased mix
of higher margin Zip 250MB drives, a higher mix of aftermarket sales, decreased
Zip manufacturing and operating expenses and a reversal of reserves related to
prior rebate programs as discussed above. The six month improvements were
partially offset by price reductions and overall lower volume shipments of
drives and disks.
Jaz segment product profit margin of $23 million, or 27% of Jaz sales, increased
by $30 million for the first six months of 2000 when compared to the
corresponding period of 1999. The increase was attributable to lower overall
operating expenses, partially offset by lower disk and drive volumes.
ZipCD segment product profit margin was $1 million, or 2% of ZipCD sales for the
first six months of 2000. The Company began shipping ZipCD products in limited
quantities during August 1999.
Clik! segment product loss of $20 million for the first six months of 2000
decreased by $10 million when compared to the corresponding period of 1999. This
improvement was primarily due to lower manufacturing and operating expenses,
partially offset by price reductions.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses of $69 million for the second
quarter of 2000 decreased by $14 million, or 16%, when compared to the second
quarter of 1999, and decreased slightly as a percentage of sales to 23% from 24%
in the second quarter of 1999. The decrease was primarily attributable to the
overall decrease in marketing and sales programs.
Selling, general and administrative expenses of $135 million for the first six
months of 2000 decreased by $18 million, or 12%, when compared to the first six
months of 1999, and remained relatively constant as a percentage of sales with
the corresponding period of 1999 at 21%. The decrease was primarily attributable
to the overall decrease in marketing and sales programs.
Management expects selling, general and administrative expenses, in absolute
dollars, to increase from second quarter of 2000 levels during the remainder of
2000 due to planned additional advertising and promotional expenses in the
United States, Europe, Asia and Latin America.
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses of $15 million for the second quarter of 2000
decreased by $8 million, or 34%, when compared to the second quarter of 1999,
and decreased as a percentage of sales to 5% from 7% in the second quarter of
1999. The decrease was attributable to decreased spending on Jaz, Zip and Clik!
projects.
Research and development expenses of $26 million for the six months ended June
25, 2000 decreased by $17 million, or 40%, when compared to the corresponding
period of 1999. Research and development expenses decreased as a percentage of
sales to 4% from 6% in the first six months of 1999. The decrease is
attributable to decreased spending on Zip, Jaz and Clik! projects.
Management expects research and development expenses, in absolute dollars, to
increase from second quarter of 2000 levels during the remainder of 2000 as a
result of planned increases in resources dedicated to new product development
and existing product enhancements.
RESTRUCTURING CHARGES
During the quarter ended June 27, 1999, the Company recorded a pre-tax
restructuring charge of $42 million as a RESULT OF STEPS THE COMPANY WAS TAKING
TO ORGANIZE ALONG FUNCTIONAL LINES (for example, manufacturing, sales, etc.) as
opposed to product lines. These actions included the exit of facilities,
headcount reductions, the discontinuance of certain products and development
projects related to enhancements and accessories associated with the Jaz product
platform and consolidation of the Company's magnetic technology expertise at its
headquarters in Roy, Utah. These actions included closing the Company's
facilities in Milpitas, California and San Diego, California. The restructuring
charge was comprised of $20 million for fixed assets and inventory related to
the discontinuance of certain products and development projects related to
enhancements and accessories associated with the Jaz product platform; $10
million for workforce reduction costs; $4 million for excess leasehold
improvements, furniture and fixtures formerly utilized in the Milpitas and San
Diego facilities; $3 million for lease termination costs for facilities located
in Milpitas and San Diego; $5 million for workforce reduction costs, contract
cancellation and other exit costs to consolidate the Company's operations in
France and Scotland. This restructuring charge consisted of cash and non-cash
charges of approximately $18 million and $24 million, respectively. There were
no indications of permanent impairment of the assets prior to the restructuring
actions.
In connection with the Company's second quarter 1999 restructuring actions, the
Company terminated 466 regular and temporary employees, consisting primarily of
operations and product development employees located in Milpitas, San Diego and
Roy. The Company pays severance on a continuous basis as opposed to a lump sum
payment. In addition, several of the employees were offered retention packages
into the third and fourth quarters of 1999, and therefore, their severance pay
did not begin until later in 1999. During the second quarter of 2000, the
Company reversed $2 million of restructuring reserves associated with the
discontinuance of a development project. The excess restructuring reserves were
a result of negotiating reductions in purchase commitments or cancellation
charges on inventory and fixed assets and higher than expected proceeds received
from equipment sales. Certain of the facilities in California have not yet been
subleased or cancelled. The Company is continuing to make monthly payments for
cash flow purposes. Certain of the contract cancellations in France are under
dispute and therefore have not been settled. The Company anticipates completing
these restructuring actions by the end of 2000.
Restructuring reserves are included in the Company's other current liabilities,
inventory and property, plant and equipment as of June 25, 2000. Utilization of
the second quarter 1999 restructuring reserves during the quarter ended June 25,
2000 is summarized below:
<PAGE>
<TABLE>
UTILIZED
Balance --------------------------- Balance
MARCH 26, 2000 CASH NON-CASH REVERSALS JUNE 25, 2000
-------------- ------------ -------- ----------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
SECOND QUARTER 1999
RESTRUCTURING ACTIONS:
Discontinued Products/Projects:
Fixed assets (a) $ 7,699 $ - $ (6,017) $ (1,189) $ 493
Purchase commitments (b) 716 (24) - (400) 292
Inventory (a) 532 - (524) (8) -
Severance and benefits (b) 990 (562) - - 428
Other fixed asset charges (a) 3,096 - (2,671) - 425
Lease terminations (b) 1,848 (341) - - 1,507
France/Scotland Consolidation:
Contract cancellation (b)(c) 1,414 - - - 1,414
Severance and benefits (b) 40 - - - 40
Lease cancellations (a) 157 - - - 157
Fixed assets (a) 217 (82) - - 135
Other exit costs (A) 35 - - - 35
----------- ----------- ----------- ----------- -----------
$ 16,744 $ (1,009) $ (9,212) $ (1,597) $ 4,926
=========== =========== =========== =========== ===========
Balance Sheet Breakout:
Inventory reserves $ 532 $ - $ (524) $ (8) $ -
Fixed asset reserves 10,674 - (8,688) (1,189) 797
Liabilities 5,538 (1,009) - (400) 4,129
----------- ---------- ---------- ----------- -----------
$ 16,744 $ (1,009) $ (9,212) $ (1,597) $ 4,926
========= =========== ========== =========== ===========
(a) Amounts represent primarily non-cash charges.
(b) Amounts represent primarily cash charges.
(c ) Amounts relate to commitments associated with the manufacturing
of floppy drives.
</TABLE>
During the third quarter ended September 26, 1999, the Company recorded a
pre-tax restructuring charge of $21 million as a result of restructuring actions
initiated to consolidate worldwide disk manufacturing and refocus the Clik!
product platform on the newer Clik! PC Card and OEM drives. An additional charge
of $5 million primarily for severance and benefits was taken in the fourth
quarter of 1999 in connection with these actions. These restructuring charges
included reserves of $10 million relating to certain assets and exit costs such
as cancellation fees associated with the cessation of manufacturing in
Avranches, France; $12 million of inventory and fixed asset reserves associated
with the older Clik! products; and $3 million for write-offs of intangibles and
other miscellaneous charges. These restructuring charges consisted of cash and
non-cash charges of approximately $9 million and $17 million, respectively.
There can be no assurance that the Company will cease manufacturing operations
in France without incurring significant legal or other costs that have not been
accrued for in the restructuring charge. In addition, the Company has been
notified of a tax audit to be conducted in France. There can be no assurance
that the Company will not incur claims or assessments from this audit that have
not been accrued. During the second quarter of 2000, the Company reversed $1
million of restructuring reserves associated with Clik! product streamlining as
a result of the Company negotiating reductions in purchase commitments.
In connection with the Company's 1999 second half restructuring actions, the
Company had a workforce reduction of 123 regular and temporary employees,
consisting primarily of operations employees in Avranches, France and product
development employees in Longmont, Colorado. The Company anticipates that the
implementation of the restructuring actions within the United States will be
complete by the end of September 2000. However, the legal requirements in France
relating to workforce reductions are very strict and the social plan approved
for the workforce can take up to two years to fully administrate. Therefore, the
restructuring reserves related to manufacturing cessation in France will take
longer to utilize.
Restructuring reserves are included in the Company's other current liabilities,
inventory and property, plant and equipment as of June 25, 2000. Utilization of
the second half 1999 restructuring reserves during the quarter ended June 25,
2000 is summarized below:
<TABLE>
UTILIZED
Balance --------------------------- Balance
MARCH 26, 2000 CASH NON-CASH REVERSALS JUNE 25, 2000
-------------- ------------ -------- ----------- --------------
(In thousands)
<S> <C> <C> <C> <C> <C>
SECOND HALF 1999
RESTRUCTURING ACTIONS:
Clik! Streamlining:
Fixed assets (a) $ 2,066 $ - $ (539) $ - $ 1,527
Purchase commitments (b) 1,508 - (12) (900) 596
Manufacturing Cessation:
Fixed assets (a) 2,465 - (695) - 1,770
Other assets (a) 275 - - - 275
Other commitments (b) 2,709 (125) - - 2,584
Severance and benefits (b) 1,746 (944) - - 802
SEVERANCE AND BENEFITS (B) 25 (25) - - -
---------- ----------- ----------- ----------- -----------
$ 10,794 $ (1,094) $ (1,246) $ (900) $ 7,554
========== =========== =========== =========== ===========
Balance Sheet Breakout:
Fixed asset reserves (a) $ 4,531 $ - $ (1,234) $ - $ 3,297
Other (a) 47 - - - 47
Inventory reserves (a) 228 - - - 228
LIABILITIES (B) 5,988 (1,094) (12) (900) 3,982
----------- ----------- ----------- ----------- -----------
$ 10,794 $ (1,094) $ (1,246) $ (900) $ 7,554
=========== =========== =========== =========== ==========
(a) Amounts represent primarily non-cash charges.
(b) Amounts represent primarily cash charges.
</TABLE>
<PAGE>
INTEREST AND OTHER INCOME/EXPENSE
Interest income of $5 million and $9 million in the second quarter and first six
months of 2000, respectively, INCREASED FROM $1 MILLION AND $2 million in the
second quarter and first six months of 1999, respectively. Higher average cash
and investment balances and higher interest rates during the second quarter of
2000 resulted in an increase in interest income when compared to the
corresponding quarter of 1999.
Interest expense of $1 million and $3 million during the second quarter and
first six months of 2000, respectively, decreased from $2 million and $4 million
in the second quarter and first six months of 1999, respectively. In July 1998,
the Company entered into a debt agreement with Idanta Partners Ltd. and another
entity affiliated with David J. Dunn, Chairman of the Company's Board of
Directors, under which the Company borrowed $40 million pursuant to a series of
three notes. The Company repaid the principal and interest associated with these
notes upon their maturity on March 31, 1999.
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 quarter ended June 25, 2000, the Company recorded an income tax
provision of $16 million on pre-tax income, substantially offset by a $15
million decrease in the valuation allowance for net deferred tax assets.
During the second quarter of 2000, the Company decreased its deferred tax asset
valuation allowance by approximately $15 million, to $50 million due to a
decrease in net deferred tax assets. The Company evaluates the realizablity of
its net deferred tax assets on a quarterly basis. If the net deferred tax assets
change in the future, if the Company's profitability changes, or if the
valuation allowance requirements change, the valuation allowance may increase or
decrease which will impact future income tax provisions.
As of June 25, 2000, the Company had approximately $13 million of deferred tax
assets related to foreign net operating loss carryforwards, which reflected a
benefit of approximately $30 million in future tax deductions, for which the
Company had established a valuation allowance. These carryforwards expire at
various dates beginning in 2004.
As of June 25, 2000, the Company had approximately $13 million of deferred tax
assets related to domestic net operating loss carryforwards, which reflected a
benefit of approximately $34 million in future tax deductions, for which the
Company had established a valuation allowance. These carryforwards expire at
various dates beginning in 2020.
Additionally, as of June 25, 2000, the Company had approximately $24 million of
domestic deferred tax assets, net of deferred liabilities, which reflected a
benefit of approximately $61 million in future tax deductions.
As of June 25, 2000, the Company had provided approximately $40 million in
deferred tax liabilities on approximately $102 million of unremitted foreign
earnings expected to be repatriated some time in the future. U. S. taxes have
not been provided for additional unremitted foreign earnings of approximately
$112 million, which are considered to be permanently invested in non-U.S.
operations. The residual U.S. tax liabilities, if such amounts were remitted,
would be approximately $44 million. Cash paid for taxes was less than $1 million
and $3 million, respectively, for the quarters ended June 25, 2000 and June 27,
1999.
For the six month period ended June 25, 2000, the Company recorded an income tax
provision of $40 million on pre-tax income, substantially offset by a $38
million decrease in the valuation allowance for the net deferred income taxes.
Cash paid for income taxes was $1 million and $4 million, respectively, for the
first six months of 2000 and 1999.
SEASONALITY
The Company sells its products primarily through computer product distributors,
retailers and OEMs. The Company's Zip products are targeted primarily to the
retail consumer and enterprise markets and to personal computer OEMs. The
Company's Jaz products are targeted primarily to the business professional
market. The Company's ZipCD products are targeted to the retail consumer and
enterprise markets. The Company's Clik! products are targeted to the enterprise
market and to various consumer electronics device OEMs.
Management believes the markets for the Company's products are generally
seasonal, with a higher proportional share of total sales occurring in the
fourth quarter and sales slowdowns commonly occurring during the first quarter
and summer months. Accordingly, revenues and growth rates for any prior period
are not necessarily indicative of revenues or growth rates to be expected in any
future period.
LIQUIDITY AND CAPITAL RESOURCES
At June 25, 2000, the Company had cash, cash equivalents and temporary
investments of $354 million compared to $211 at December 31, 1999, an increase
of $143 million. At June 25, 2000, $152 million of cash, cash equivalents and
temporary investments was on deposit in foreign countries (primarily Western
Europe), compared to $32 million at December 31, 1999. Working capital of $277
million increased by $82 million when compared to $195 million at December 31,
1999, primarily due to increases in cash, cash equivalents and temporary
investments, partially offset by the classification of convertible subordinated
notes to current liabilities. The Company's ratio of current assets to current
liabilities of 1.8 to 1 increased slightly compared to 1.6 to 1 at December 31,
1999.
During the six months ended June 25, 2000, cash provided by operating activities
amounted to $154 million. The primary components were net income, non-cash
expense adjustments, reductions in accounts receivable, income taxes receivable
and inventory, partially offset by a decrease in accounts payable and other
current liabilities. This cash was used in part to purchase property, plant and
equipment of $11 million. The decrease in accounts receivable was due primarily
to the timing of sales and collections during the period and the decrease in
sales volume during the period. The decrease in inventory was due to overall
management of inventory levels. The decrease in accounts payable was due
primarily to timing of inventory receipts and related payments to vendors. The
decrease in other current liabilities was due to a combination of decreases in
accrued restructuring charges and purchase commitments that were partially
offset by increases in accrued payroll, accrued marketing and advertising, and
various other accrued liabilities. The decrease in income taxes receivable was
due primarily to the receipt of domestic tax refunds in the second quarter of
2000.
THE COMPANY CANCELLED ITS EXISTING $75 million Senior Secured Credit Facility
with Morgan Guaranty Trust Company of New York, Citibank, N.A. and a syndicate
of other lenders two months prior to the Credit Facility's expiration date of
July 14, 2000. There had been no borrowings under the Credit Facility in over
six quarters.
The current and long-term portions of capitalized lease obligations at June 25,
2000 were $4 million and $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 proceeds of these
notes were used for the cash purchase of Nomai. The Company used internally
generated funds to repay the principal and interest associated with the notes
upon their maturity on March 31, 1999.
The Company had $46 million of convertible subordinated notes outstanding at
June 25, 2000, which bear interest at 6.75% per year and mature on March 15,
2001. These notes have been classified as short-term at June 25, 2000 since they
mature in less than a year.
The Company believes that its balance of cash, cash equivalents and temporary
investments, together with cash flow from operations and future sources of
financing, will be sufficient to fund the Company's operations during the next
twelve months. However, cash flow from operations, investing activities and the
precise amount and timing of the Company's future financing needs, cannot be
determined at this time and will depend on a number of factors, including the
market demand for the Company's products, the availability of critical
components, the progress of the Company's product development efforts and the
success of the Company in managing its inventory, accounts receivable and
accounts payable.
OTHER MATTERS
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS
137 and SFAS 138, is effective for the Company's fiscal year beginning 2001.
SFAS 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires that the Company recognize
all derivative instruments as either assets or liabilities in the Condensed
Consolidated Balance Sheet and measure those instruments at fair value. The
Company does not expect the adoption of SFAS 133, as amended, to have a material
impact on the Company's results of operations, financial position or liquidity.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial Statements". SAB
101 provides guidance on the recognition, presentation and disclosure of revenue
in financial statements. In June of 2000, the Securities and Exchange Commission
issued SAB 101B which extended the implementation date to the Company's fourth
quarter of 2000. The Company is currently assessing the impact, if any, of SAB
101 on its financial statements.
In May 2000, the FASB's Emerging Issues Task Force ("EITF") issued EITF 00-14,
"Accounting for Certain Sales Incentives". EITF 00-14 provides specific guidance
on the accounting for and presentation of sales incentives offered by companies
to their customers. These incentives include discounts, coupons, rebates and
free products or services. The Company implemented the provisions of EITF 00-14
during the second quarter of 2000. The implementation did not have a material
impact on the Company's financial statements.
FACTORS AFFECTING FUTURE OPERATING RESULTS
The Company's future operating results will depend in large part on the success
of its Zip, Jaz, ZipCD and Clik! products in the market. Although the Company
believes there is market demand for removable data storage solutions for
personal computers and other devices, there can be no assurance that the Company
will be successful in establishing its products as the preferred solutions for
those market needs. The extent to which Zip, Jaz, ZipCD 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 rumored, announced or introduced
by other vendors; the emergence of any competing solutions as industry
standards; the success of the Company in meeting targeted availability dates for
new and enhanced products; the success of the Company in establishing and
maintaining OEM arrangements and meeting OEM quality, supply and other
requirements; the willingness of OEMs to promote computer and other products
containing the Company's drives; the ability of the Company to create demand for
Zip, Jaz, ZipCD and Clik!; the success of the Company's efforts to make
continued improvements to customer service and satisfaction; the public
perception of the Company and its products, including statements made by
industry analysts or consumers and adverse publicity resulting from such
statements or from litigation filed against the Company; and the overall market
demand for personal computers and other products with which the Company's
products can be used.
The Company's business strategy is substantially dependent on maximizing sales
of its proprietary Zip and Jaz disks, which generate significantly higher
margins than the related drives. If this strategy is not successful, either
because the Company does not establish a sufficiently large installed base of
Zip and Jaz drives, because the sales mix between disks and drives is below
levels anticipated by the Company, because another party succeeds in producing
or marketing disks that are compatible with any of the Company's drive products
without infringing the Company's proprietary rights or for any other reason, the
Company's sales would be adversely affected, and its results of operations would
be disproportionately adversely affected.
Sales of Zip products have accounted for a significant majority of the Company's
revenues since 1996. However, these sales may not be indicative of the long-term
demand for Zip products. Accordingly, historic sales levels should not be
assumed to be an indication of future sales levels. Sales of Zip drives to OEM
customers accounted for approximately 50% of total Zip drive shipments in the
first half of 2000. The level of future sales of Zip drives to OEM customers
will depend in great part on the Company's ability to further reduce the cost of
Zip drives and on the extent to which the incorporation of CD-RW or
DVD-Recordable drives into OEM products results in a reduction in the demand for
OEM products also incorporating a built-in Zip drive.
The Company anticipates continued sales decline in the future for the Jaz
product platform as a result of replacement products entering the market,
including products introduced by the Company, and changing customer
requirements. The Company anticipates introducing additional Jaz product
interfaces and enhancements to support the needs of its customers. In addition,
the Company continues to make limited investments to sustain and revitalize the
Jaz business. The process of managing Jaz and maximizing its profitability is
different than managing a growing product platform, and involves maintaining the
size of the product's infrastructure and monitoring vendor commitments and
inventory levels to prevent inventory write-offs and cancellation costs. There
can be no assurance that the Company will be successful in managing the Jaz
product platform and in maximizing its profitability in the future.
The Company's business strategy for ZipCD is different from its strategy for its
other products because the drive does not use proprietary media and thus has
lower overall margins. The Company purchases for resale from a third party
manufacturer. The CD-RW drive market is very competitive and includes a number
of established participants. Accordingly, there are additional risks that the
ZipCD product will not achieve significant market acceptance or otherwise be
successful.
The Company's Clik! products represent the Company's first products which are
targeted to portable consumer electronics manufacturers in addition to the
personal computer markets. The Company does not have prior experience in
consumer electronics channels; and, accordingly, there are additional risks that
the Clik! products will not achieve significant market presence or otherwise be
successful. The Company has introduced four different models of the Clik! drive
in addition to a Clik! OEM drive. Three of these models, the Clik! drive for
Digital Cameras, the Clik! Drive Plus and the Clik! Drive for Mobile Computers,
each of which began shipping in limited quantities in December 1998, were
marketed as add-on storage solutions to digital cameras that use various formats
of flash memory. The Company began shipping the fourth model, the Clik! PC Card
drive, in limited quantities in June 1999, and is currently marketing this
product to notebook and sub-notebook computer users. During the third quarter of
1999, the Company recorded a restructuring charge that included costs to refocus
the Clik! product platform on the newer Clik! PC Card and OEM drives, which
began shipping in the second half of 1999. Additionally, the Company took
charges in the fourth quarter of 1999 totaling $47 million relating to the Clik!
platform to reflect estimates of net realizable value of inventory and equipment
and accruals for related purchase commitments, primarily associated with the
Clik! PC Card platform. The Company took additional charges of $7 million during
the first quarter of 2000 to reflect a reduction in the estimated net realizable
value of inventory and equipment associated with the Clik! PC Card drive and
Clik! media. After these charges, net assets and commitments related to the
Clik! platform were approximately $7 million as of June 25, 2000. Although the
Company is making significant efforts to develop applications for the Clik!
platform, particularly in the digital/audio market, and believes the products
have potential in the enterprise and OEM markets, there is no assurance the
Company will not take additional charges associated with the Clik! platform in
the future. Market acceptance of Clik! products as a storage solution for
digital audio players, digital cameras and other electronic devices is dependent
upon obtaining a significant market presence and establishing OEM relationships
with manufacturers, who produce digital devices incorporating built-in Clik!
drives.
The Company has recently revised its software strategy. In addition to providing
operational product support for existing devices at no additional cost to the
customer, the Company plans to sell additional software which can also be used
with the Company's products or other products. The Company began selling
downloads of its Quick Sync 2 software from its website during the second
quarter of 2000. In addition, the Company is expanding its product offerings
into non-PC markets such as digital audio players, digital photo
storage/display, Internet-based storage and digital cameras. The Company does
not have prior experience with these types of products. Accordingly, there are
additional risks that these products will not achieve significant market
presence or otherwise be successful.
The Company has experienced and may in the future experience significant
fluctuations in its quarterly operating results. Moreover, because the Company's
expense levels (including budgeted selling, general and administrative and
research and development expenses) are based in part on expectations of future
sales levels, a shortfall in expected sales could result in a disproportionate
adverse effect on the Company's net income and cash flow.
Management of the Company's inventory levels is very complex. The Company's
customers frequently adjust their ordering patterns in response to various
factors including: perceptions of the Company's 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's business includes a significant volume of OEM sales. In an OEM
business, a high proportion of sales are concentrated among a small number of
customers. Although the Company believes its relationships with OEM customers
are generally good, a relatively small number of customers could 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 OEM 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 believes that in order to compete successfully against current and
future sources of competition, it will be necessary to further reduce the
manufacturing costs of its products, thus enabling the Company to sell its
products at lower prices. During the past several years, the Company has
implemented a number of programs, including Six Sigma quality initiatives, which
have resulted in substantial product and process quality improvements and
reduced costs. Through these and other programs, the Company is continuing to
focus on reducing the manufacturing costs of its products by: reducing the cost
of parts and components used in the Company's products through improved
inventory management and product design modifications and by taking advantage of
industry-wide reductions in costs; increasing manufacturing efficiencies; and
decreasing defect rates. This is particularly true for the Company's OEM
business, as OEM customers are particularly price sensitive. The Company's
ability to reduce manufacturing costs may be adversely affected if the lower
sales volumes recently reported by the Company result in less favorable pricing
for components purchased from third parties.
The Company has, and may again in the future, 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 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 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.
The factors described herein for Zip, Jaz, ZipCD and Clik! products are, or will
be, relevant to any other products currently sold by the Company or new products
introduced by the Company in the future. In addition, the Company faces
development, manufacturing, demand and market acceptance risks with regard to
recently introduced and future products. The Company's future operating results
will depend in part on its success in introducing enhanced and new products in a
timely and competitively effective manner. Future operating results will also
depend on the Company's ability to effectively manage obsolescence risks
associated with products that are phased out and its success in ramping to
volume production of new or enhanced products.
Future operating results also depend on intellectual property and antitrust
matters including the possibility that infringement claims asserted from time to
time against the Company could require the Company to pay royalties to a third
party in order to continue to market and distribute one or more of the Company's
current or future products and also includes the possibility that the Company
would be required to devote unplanned resources to developing modifications to
its products or marketing programs.
The Company has experienced difficulty in the past, and may experience
difficulty in the future, in obtaining a sufficient supply of many key
components on a timely and cost effective basis. At the present time, the
electronics industry is facing shortages on various memory devices and passive
components due to strong world-wide demand. Also, many components incorporated
or used in the manufacture of the Company's products are currently available
only from single or sole source suppliers or from a limited number of suppliers
and are purchased by the Company without guaranteed supply arrangements. In
particular, media used in Zip 250MB disks are currently obtained exclusively
from Fuji Photo Film, certain integrated circuits, including ASIC chips used in
Zip drives, are obtained exclusively from L.S.I. Logic Corporation and Texas
Instruments and HSAs used in Zip notebook are obtained exclusively from SAE
Magnetics. There can be no assurance that the Company will be able to obtain a
sufficient supply of components on a timely and cost effective basis. The
inability to obtain SUFFICIENT COMPONENTS AND EQUIPMENT to obtain or develop
alternative sources of supply at competitive prices and quality or to avoid
manufacturing delays could: prevent the Company from producing sufficient
quantities of its products to satisfy market demand (or, in the case of a
component purchased exclusively from one supplier, the Company could be
prevented from producing any quantity of the affected product(s) until such
component becomes available from an alternative source); delay product
shipments; increase the Company's material or manufacturing costs; cause an
imbalance in the inventory levels of certain components and cause the Company to
modify the design of its products to use a more readily available component,
which 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 purchase orders under which the Company buys many of its components
generally extend one to two quarters in the future or less based on the lead
times associated with the specific component. The quantities on the purchase
order are based on estimated sales requirements. In the case of new products or
products with declining sales, it can be difficult to estimate demand. Any
misestimate of demand could result in excess capacity and purchase commitments.
The Company has experienced increased difficulties in hiring and retaining
employees, due in part to the Company's financial performance and restructuring
actions. The Company's success depends in large part upon the services of a
number of key employees and the loss of the services of one or more of these key
employees could have a material adverse effect on the Company. Many members of
the Company's senior management team have been serving in their current
positions for only a short period of time, including Bruce R. Albertson, who
joined the Company as President and Chief Operating Officer in November 1999 and
assumed the role of President and Chief Executive Officer in January 2000. The
Company's success will depend in part on its ability to attract and retain
highly skilled personnel and on the success of the Company's senior management
team in learning to work effectively as a team.
During the second and third quarters of 1999, the Company announced plans to
consolidate manufacturing and other facilities; discontinue certain products and
development projects; organize along functional lines and to refocus the Clik!
product platform. These actions specifically included closing the Company's
facilities in Milpitas, California and San Diego, California and ceasing
manufacturing operations in Avranches, France. There can be no assurance that
the Company will close the facilities in the U.S. and cease manufacturing
operations in France without incurring significant legal or other costs that
have not been accrued for in the restructuring charges.
Significant portions of the Company's revenues are generated in Europe and Asia.
The Company's existing infrastructure outside of the United States is less
mature and developed than in the United States. Consequently, future sales and
operating income from these regions are less predictable than in the United
States. In addition, operating expenses may increase as those operations mature
and increase in size. The Company's international sales transactions are
generally denominated in U.S. dollars. Fluctuation in the value of foreign
currencies relative to the U.S. dollar that are not sufficiently hedged by
foreign customers could result in lower sales and have an adverse effect on
future operating results (see "Disclosures About Market Risk" below). In
addition, the Company is continuing to assess potential issues relating to the
adoption of the Euro.
The Company intends to expand its international operations into Latin America
during 2000 and 2001. This will require the Company to add at least some new
infrastructure in Latin America resulting in an increase in operating expenses
that will not necessarily be offset by an increase in revenue or gross margins.
In addition, the Latin America economy is not as mature as the economy in the
countries that the Company currently does business. This could result in an
increased exposure associated with the collectibility of customer accounts.
On April 19, 2000, the Company's shareholders approved an Employee Stock Option
Exchange Program (the "Exchange Program"), pursuant to which the Company has
granted approximately 1.1 million new stock options at an exercise price of
$3.59 in exchange for approximately 1.8 million previously outstanding stock
options which had exercise prices above $3.59. The new options issued under the
Exchange Program are subject to variable plan accounting in accordance with FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation". Under variable plan accounting, the Company is required to
recognize compensation expense in its statement of operations for any increase
in the market price of the Company's Common Stock above $4.00 (the market price
of July 1, 2000 which is the effective date of FASB Interpretation No. 44). This
compensation expense must be recorded on a quarterly basis until the option is
exercised, forfeited or expires unexercised. The impact of the new options
granted under the Exchange Program on the Company's financial statements will
depend on quarterly fluctuations in the Company's Common Stock price and the
dates of exercises, forfeitures or cancellations of the new options by
employees. Depending on these factors, the Company could be required to record
significant compensation expense during the next ten years. Moreover, because
the precise amount of the compensation expense will depend on the market price
of the common stock at the end of each quarterly period, the Company will not be
able to forecast in advance the amount of compensation expense that it will
incur in any future period.
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 fluctuating volumes of
production and an increasingly complex business, transportation issues, product
and component pricing, changes in analysts' earnings estimates, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE 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 primarily
uses borrowings comprised normally of fixed rate debt to finance its OPERATIONS.
THE COMPANY DID NOT HAVE ANY SIGNIFICANT DEBT OUTSTANDING AT JUNE 25, 2000,
EXCEPT FOR $46 million in convertible subordinated notes (fixed rate of 6.75%).
The Company has international operations resulting in receipts and payments in
currencies that differ from the U.S. dollar, which is the Company's functional
currency. 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 net assets
and liabilities that, when re-measured according to generally accepted
accounting principles, impact the consolidated statement of operations. All
forward contracts entered into by the Company are components of hedging programs
and are entered into for the sole purpose of hedging an existing or anticipated
currency exposure, not for speculation or trading purposes. The contracts are
primarily in European currencies, the Singapore dollar and the Japanese yen. The
contracts normally have maturities that do not exceed three months. The Company
has a substantial presence in Malaysia. In September 1998, the ruling party in
Malaysia fixed the Malaysian Ringgit to the U.S. dollar. The Company experienced
a loss related to the fixing of the currency. The Company has 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-evaluate its hedging
strategy for Ringgit exposure.
When hedging balance sheet exposure, all gains and losses on forward contracts
are recognized in other income and expense in the same period as the gains and
losses on re-measurement 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 June 25, 2000,
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 and interest rate markets,
availability of hedging instruments and the Company's ability to accurately
project net asset or liability positions. Actual gains and losses in the future
may differ materially from the Company's analysis depending on changes in the
timing and amount of interest rate and foreign exchange rate movements and the
Company's actual exposure and hedges.
<PAGE>
IOMEGA CORPORATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
A discussion of the Company's legal proceedings appears in Item 1 of this Form
10-Q under Note 8 of the Notes to Consolidated Financial Statements.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS:
The Company did not sell any equity securities during the second quarter of 2000
that were not registered under the Securities Act of 1933.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(A) EXHIBITS. The exhibits listed on the Exhibit Index filed as a part of
this Quarterly Report on Form 10-Q are incorporated herein by
reference.
(B) REPORTS ON FORM 8-K. 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/ BRUCE R. ALBERTSON
-------------------------
Dated: August 8, 2000 Bruce R. Albertson
Chief Executive Officer and President
/S/ PHILIP G. HUSBY
-------------------------
Dated: August 8, 2000 Philip G. Husby
Senior Vice President, Finance and
Chief Financial Officer
<PAGE>
EXHIBIT INDEX
The following exhibits are filed as part of this Quarterly Report on Form 10-Q:
EXHIBIT NO. DESCRIPTION
3. (i). 1 Restated Certificate of Incorporation of the Company, as amended.
27 Financial Data Schedule (only filed as part of electronic copy).
<PAGE>
