UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 26, 2000
COMMISSION FILE NUMBER 1-12333
[GRAPHIC OMITTED]
Iomega Corporation
(Exact name of registrant as specified in its charter)
Delaware 86-0385884
(State or other jurisdiction IRS employer identification number)
of incorporation or organization)
1821 West Iomega Way, Roy, UT 84067
(Address of principal executive offices)
(801) 332-1000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of March 26, 2000.
Common Stock, par value $.03 1/3 270,610,590
(Title of each class) (Number of shares)
<PAGE>
IOMEGA CORPORATION
TABLE OF CONTENTS
Page
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements
Condensed consolidated balance sheets at March 26, 2000
and December 31, 1999..................................... 3
Condensed consolidated statements of operations for the quarters
ended March 26, 2000 and March 28, 1999................... 5
Condensed consolidated statements of cash flows for the quarters
ended March 26, 2000 and March 28, 1999................... 6
Notes to condensed consolidated financial statements........... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 33
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 34
Item 2. Changes in Securities and Use of Proceeds...................... 37
Item 4. Submission of Matters to a Vote of Security Holders............ 37
Item 6. Exhibits and Reports on Form 8-K............................... 37
Signatures.............................................................. 38
Exhibit Index........................................................... 39
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 disks,
sales mix between disks and drives, the sales mix between OEM and aftermarket
channels and the sales mix between the Company's products; the expected
sufficiency of cash, cash equivalent and temporary investment balances, cash
flows from operations and available sources of financing; the impact of
Clik!(TM), Zip(R) 250MB, ZipCD(TM) and other new products introduced or expected
to be introduced during 1999 or 2000; 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 Item 1 of Part II. Any statements contained
herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects," "intends" and similar expressions
are intended to identify forward-looking statements, although not all
forward-looking statements contain these words. There are a number of important
factors that could cause actual events or the Company's actual results to differ
materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth under the captions
"Liquidity and Capital Resources," "Factors Affecting Future Operating Results"
and "Disclosures About Market Risk" included under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 2 of Part I
of this Quarterly Report on Form 10-Q, and those set forth in Item 1 of Part II
of this Quarterly Report on Form 10-Q. The factors discussed 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!,
Bernoulli, iomegadirect and the stylized "I" logo are either registered
trademarks or trademarks of Iomega Corporation in the United state and/or other
countries. Certain other product names, brand names and company name may be
trademarks or designations of their respective owners.
1
<PAGE>
IOMEGA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(In thousands)
March 26, December 31,
2000 1999
-------------------------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 190,927 $ 172,706
Temporary investments 82,502 38,209
Trade receivables, less allowance for
doubtful accounts of $14,430 and
$15,908, respectively 160,340 188,482
Inventories 84,588 94,626
Income taxes receivable 29,201 19,910
Other current assets 16,773 21,585
----------- -----------
Total current assets 564,331 535,518
----------- -----------
Property, plant and equipment, at cost 350,841 365,036
Less: Accumulated depreciation
and amortization (230,176) (227,336)
----------- -----------
Net property, plant and equipment 120,665 137,700
----------- -----------
Intangibles, net 29,871 31,743
----------- -----------
Other assets 2,597 2,848
----------- -----------
$ 717,464 $ 707,809
=========== ===========
3
The accompanying notes to condensed
consolidated financial statements are an integral part
of these statements.
<PAGE>
IOMEGA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands, except share data)
March 26, December 31,
2000 1999
----------- -----------
(Unaudited)
Current liabilities:
Accounts payable $ 111,020 $ 135,615
Other current liabilities (Note 1) 180,498 198,993
Current portion of capitalized
lease obligations 4,784 5,542
Convertible subordinated notes,
6.75%, due 2001 45,505 -
----------- -----------
Total current liabilities 341,807 340,150
----------- -----------
Capitalized lease obligations,
net of current portion 1,058 1,366
----------- -----------
Convertible subordinated notes,
6.75%, due 2001 - 45,505
----------- -----------
Commitments and contingencies (Note 7)
Stockholders' equity:
Preferred Stock, $0.01 par value;
authorized 4,350,000 shares;
none issued - -
Series A Junior Participating
Preferred Stock; authorized
400,000 shares; none issued - -
Series C Junior Participating
Preferred Stock; authorized
250,000 shares; none issued - -
Common Stock, $.03 1/3 par value;
authorized 400,000,000 shares;
issued 271,420,132 and 270,831,769
shares at March 26, 2000 and
December 31, 1999, respectively 9,047 9,027
Additional paid-in capital 295,592 293,627
Less: 809,542 Common Stock
treasury shares, at cost (6,088) (6,088)
Retained earnings 76,048 24,222
----------- -----------
Total stockholders' equity 374,599 320,788
----------- -----------
$ 717,464 $ 707,809
=========== ===========
The accompanying notes to condensed
consolidated financial statements are an integral part
of these statements.
<PAGE>
IOMEGA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For the Quarter Ended
-----------------------------
March 26, March 28,
2000 1999
----------- -----------
(Unaudited)
Sales $ 344,897 $ 386,212
Cost of sales 216,990 292,476
----------- -----------
Gross margin 127,907 93,736
----------- -----------
Operating expenses:
Selling, general and administrative 65,246 69,941
Research and development 11,130 20,713
----------- -----------
Total operating expenses 76,376 90,654
----------- -----------
Operating income 51,531 3,082
Interest and other income (expense), net 1,233 (2,205)
----------- -----------
Income before income taxes 52,764 877
Provision for income taxes (938) (308)
----------- -----------
Net income $ 51,826 $ 569
=========== ===========
Net income per common share:
Basic $ 0.19 $ 0.00
=========== ===========
Diluted $ 0.19 $ 0.00
=========== ===========
Weighted average common
shares outstanding (Note 1) 270,448 268,390
=========== ===========
Weighted average common
shares outstanding - assuming
dilution (Note 1) 281,235 273,087
=========== ===========
The accompanying notes to condensed
consolidated financial statements are an integral part
of these statements.
<PAGE>
IOMEGA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Quarter Ended
------------------------------
March 26, March 28,
2000 1999
----------- -----------
(Unaudited)
Cash Flows from Operating Activities:
Net income $ 51,826 $ 569
Non-Cash Revenue and Expense Adjustments:
Depreciation and amortization 23,739 22,271
Deferred income taxes - 5,030
Bad debts (1,478) 1,800
Tax benefit from dispositions
of employee stock 841 688
Other 1,035 804
----------- -----------
75,963 31,162
Changes in Assets and Liabilities:
Trade receivables 29,620 4,302
Inventories 10,038 7,114
Other current assets 4,812 (383)
Accounts payable (24,595) (16,776)
Other current liabilities (18,495) (12,163)
Income taxes (9,291) 2,150
----------- -----------
Net cash provided by operating activities 68,052 15,406
----------- -----------
Cash Flows from Investing Activities:
Purchase of property, plant and equipment (5,867) (8,881)
Purchase of temporary investments (74,852) -
Sale of temporary investments 30,559 -
Net decrease (increase) in other assets 251 (3,647)
----------- -----------
Net cash used in investing activities (49,909) (12,528)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from sale of Common Stock 1,144 2,681
Payments on capitalized lease obligations (1,066) (1,868)
----------- -----------
Net cash provided by financing activities 78 813
----------- -----------
Net Increase in Cash and Cash Equivalents 18,221 3,691
Cash and Cash Equivalents at Beginning of Period 172,706 90,273
----------- -----------
Cash and Cash Equivalents at End of Period $ 190,927 $ 93,964
=========== ===========
The accompanying notes to condensed
consolidated financial statements are an integral part
of these statements.
<PAGE>
IOMEGA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) SIGNIFICANT ACCOUNTING POLICIES
In the opinion of the Company's management, the accompanying unaudited,
condensed, consolidated financial statements reflect all adjustments
(consisting only of normal recurring adjustments) which are necessary
to present fairly the financial position of the Company as of March 26,
2000 and December 31, 1999, the results of operations for the quarter
ended March 26, 2000 and March 28, 1999 and cash flows for the quarter
ended March 26, 2000 and March 28, 1999.
The results of operations for the quarter ended March 26, 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 $19.4 million
and $29.8 million at March 26, 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
<PAGE>
anticipated, the Company establishes reserves against gross accounts
receivable for amounts estimated to be reimbursed to the qualifying
customers.
In addition, the Company records reserves at the time of shipment for
estimated volume rebates. These reserves for volume rebates and price
protection credits totaled $29.2 million and $37.8 million at March 26,
2000 and December 31, 1999, respectively, and are netted against
accounts receivable in the accompanying condensed consolidated balance
sheets.
Foreign Currency Translation - For purposes of consolidating
non-U.S. operations, the Company has determined the functional
currency for its non-U.S. operations to be the U.S. dollar.
Therefore, translation gains and losses are included in the
determination of income.
Cash 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 March 26, 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 March 26, 2000, the Company has $72.6
million of its temporary investments as available-for-sale securities
and the remaining $9.9 million as held-to-maturity. Due to the grade of
the investments, the adjusted cost basis and the market value of the
investments was not materially different at March 26, 2000 and no
comprehensive income or loss was recorded for the first 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:
<TABLE>
March 26, December 31,
2000 1999
------------------ ------------------
(In thousands)
<S> <C> <C>
Raw materials $ 23,309 $ 27,254
Work-in-process 4,803 7,958
Finished goods 56,476 59,414
----------- -----------
$ 84,588 $ 94,626
=========== ===========
</TABLE>
<PAGE>
Other Current Liabilities - Other current liabilities consist of the
following:
<TABLE>
March 26, December 31,
2000 1999
------------------ ------------------
(In thousands)
<S> <C> <C>
Accrued payroll, vacation
and bonus $ 15,819 $ 13,189
Deferred revenue 19,390 29,832
Accrued warranty 18,242 17,211
Accrued advertising 36,433 36,971
Accrued restructuring charges 12,455 17,843
Purchase commitments 14,463 19,734
Other accrued liabilities 63,696 64,213
----------- -----------
$ 180,498 $ 198,993
=========== ===========
</TABLE>
Reclassifications - Certain reclassifications were made to the prior
periods' unaudited, condensed, consolidated financial statements to
conform to the current period presentation.
Net Income Per Common Share - Basic net income per common share ("Basic
EPS") excludes dilution and is computed by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted net income per common share ("Diluted EPS") reflects the
potential dilution that could occur if stock options or other contracts
to issue common stock were exercised or converted into common stock.
Diluted EPS for the quarter ended March 26, 2000 was determined under
the assumption that the convertible subordinated notes were converted
on January 1, 2000. The computation of Diluted EPS does not assume
exercise or conversion of securities that would have an antidilutive
effect on net income per common share.
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>
Net Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
(In thousands, except per share data)
<S> <C> <C> <C>>
For the Quarter Ended:
March 26, 2000
Basic EPS $ 51,826 270,448 $ 0.19
Effect of options - 1,571
Effect of convertible subordinated notes 753 9,216
----------- -----------
Diluted EPS $ 52,579 281,235 $ 0.19
=========== ===========
March 28, 1999
Basic EPS $ 569 268,390 $ 0.00
Effect of options - 4,697
Effect of convertible subordinated notes - -
----------- -----------
Diluted EPS $ 569 273,087 $ 0.00
=========== ===========
</TABLE>
For the quarter ended March 28, 1999, convertible subordinated notes
were not included in the calculation of diluted EPS as their inclusion
would be antidilutive. For the quarters ended March 26, 2000 and March
28, 1999, there were outstanding options to purchase 9,045,814 and
6,314,873 shares, respectively, that had an exercise price greater than
the average market price of the common shares for the respective
quarters.
Recent Accounting Pronouncements - In June 1998, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes new
accounting and reporting standards for companies to report information
about derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as "derivatives")
and for hedging activities. In June 1999, the FASB issued Statement of
Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of
FASB Statement No. 133." This statement amended the effective date of
SFAS 133. SFAS 133 will now be effective for financial statements
issued for all fiscal quarters of fiscal years beginning after June 15,
2000. The Company does not expect SFAS 133 to have a material impact on
the Company's results of operations, financial position or liquidity.
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.
Implementation of SAB 101 is required in the second quarter of 2000.
All registrants are expected to apply the accounting and disclosure
requirements described in SAB 101. The Company is currently assessing
the impact, if any, of SAB 101 on its financial statements.
(2) INCOME TAXES
For the quarter ended March 26, 2000, the Company recorded an income
tax provision of $21.0 million on pre-tax income, partially offset by a
$20.1 million decrease in the valuation allowance for net deferred
income taxes. The significant components of the Company's deferred tax
assets and liabilities are as follows:
<TABLE>
March 26, 2000 December 31, 1999
--------------- -----------------
(In thousands)
<S> <C> <C>
Total deferred tax assets $ 108,610 $ 125,361
Total deferred tax liabilities (43,076) (37,347)
----------- -----------
Net deferred tax assets 65,534 88,014
Less: valuation allowance (65,534) (88,014)
----------- -----------
Total net deferred taxes $ - $ -
=========== ===========
</TABLE>
During the first quarter of 2000, the Company decreased its deferred
tax asset valuation allowance by approximately $20 million, to $66
million. The Company evaluates the realizability of its net deferred
tax assets on a quarterly basis. If the net deferred tax assets are
reduced in the future, if the Company is substantially profitable, or
if a portion or all of the valuation allowance is no longer deemed to
be necessary, reductions in the valuation allowance will reduce future
income tax provisions.
As of March 26, 2000, the Company had approximately $12.7 million of
deferred tax assets related to foreign net operating loss
carryforwards, which reflected the benefit of approximately $29.8
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 March 26, 2000, the Company had approximately $22.3 million of
deferred tax assets related to domestic net operating loss
carryforwards, which reflected the benefit of approximately $57.2
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 March 26, 2000, the Company had approximately $30.5
million of domestic deferred tax assets net of deferred liabilities,
which reflected the benefit of approximately $78.2 million in future
tax deductions.
Cash paid for income taxes was $0.9 million for the first three months
of 2000 and $1.1 million for the corresponding period in 1999.
U.S. taxes have not been provided for unremitted foreign earnings of
approximately $112 million, which are considered to be permanently
invested in non-U.S. operations. The residual U.S. tax liability, if
such amounts were remitted, would be approximately $43.6 million.
(3) DEBT
Notes Payable - On March 11, 1997, the Company entered into a $200
million Senior Secured Credit Facility with Morgan Guaranty Trust
Company of New York, Citibank, N.A. and a syndicate of other lenders.
During 1998 and 1999, the Company and the lenders agreed to several
amendments to and waivers under the Senior Secured Credit Facility, the
most recent of which was entered into on October 14, 1999, (the "Credit
Facility"). As a result of the most recent amendment, the Credit
Facility was reduced to $75 million. The Credit Facility expires on
July 14, 2000 and is secured by accounts receivable, domestic
inventory, domestic intellectual property, general intangibles,
equipment, personal property, investment property and a pledge of 65%
of the stock of certain of the Company's subsidiaries. Under the Credit
Facility, the Company may borrow at a base rate, which is the higher of
prime or the sum of the Federal funds rate plus 2.75%, or at LIBOR plus
3.25%. Borrowing availability under the Credit Facility is based on an
agreed upon advance rate on receivables and inventory not to exceed $75
million. Among other restrictions, the Credit Facility treats a change
in control (as defined) as an event of default and requires the
maintenance of minimum levels of consolidated tangible net worth,
earnings before interest, taxes, depreciation and amortization
("EBITDA") and certain other covenants. There were no borrowings on the
Company's Credit Facility during the first quarter of 2000. There were
no borrowings outstanding at March 26, 2000. The Company is currently
evaluating whether or not to replace the Credit Facility when it
expires in July.
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 $2.0 million and $2.3 million, respectively,
for the first quarters of 2000 and 1999, including interest on capital
leases. Included in interest expense for the first quarter of 2000 and
1999, was $0.5 million and $0.4 million, respectively, of amortization
of deferred charges associated with obtaining the debt.
(4) BUSINESS SEGMENT INFORMATION
The Company has four reportable segments based primarily on the nature
of the Company's customers and products: Zip, Jaz(R), 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! mobile drives, Clik! PC Card drives, Clik! OEM drives
and Clik! disks for use with portable digital products such as digital
cameras, handheld personal computers and notebook computers to
retailers, distributors, OEMs and resellers throughout the world. Clik!
products began shipping in limited quantities during the fourth quarter
of 1998. The Company's restructuring charge in the third quarter of
1999 included charges relating to refocusing the Clik! product platform
from the Clik! Mobile Drive to the newer Clik! PC Card and OEM drives.
The Company recorded other non-restructuring charges to reflect a
reduction in the estimated net realizable value of Clik! inventory and
equipment and accruals for purchasing commitments in connection with
Clik! PC Card drives and disks in the fourth quarter of 1999 and the
first quarter of 2000. The "Other" category includes products such as
Bernoulli(R), 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>
Reportable Operating Segment Information:
<TABLE>
For the Quarter Ended
----------------------------
March 26, March 28,
2000 1999
----------- -----------
(In millions)
<S> <C> <C>
Sales:
Zip $ 278 $ 302
Jaz 52 63
ZipCD 11 -
Clik! 2 5
Other 2 16
----------- -----------
Total sales $ 345 $ 386
=========== ===========
Product profit margin (loss):
Zip $ 88 $ 51
Jaz 12 (3)
ZipCD - -
Clik! (16) (13)
Other (2) (7)
----------- -----------
Total product profit margin 82 28
----------- -----------
Common:
General corporate expenses (30) (25)
Interest and other income
(expense), net 1 (2)
----------- -----------
Income before income taxes $ 53 $ 1
=========== ===========
</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. The majority of the fixed assets associated
with the discontinued products and projects are tooling items, which
are located outside of the United States. Due to various requirements
in these countries, it is taking longer than expected to dispose of the
assets. However, the Company still expects that the implementation of
the second quarter 1999 restructuring plan will be complete by the end
of June 2000.
Restructuring reserves are included in the Company's other current
liabilities, inventory and property, plant and equipment as of March
26, 2000. Utilization of the second quarter 1999 restructuring reserves
during the quarter ended March 26, 2000 is summarized below:
<TABLE>
Balance Utilized Balance
December 31, 1999 Cash Non-Cash March 26, 2000
----------------- ----------- ---------- ----------------
(In thousands)
<S> <C> <C> <C> <C>
Second Quarter 1999
Restructuring Actions:
Discontinued Products/Projects:
Fixed assets (a) $ 7,699 $ - $ - $ 7,699
Purchase commitments (b) 717 (1) - 716
Inventory (a) 756 - (224) 532
Severance and benefits (b) 1,594 (604) - 990
Other fixed asset charges (a) 3,096 - - 3,096
Lease terminations (b) 2,368 (520) - 1,848
France/Scotland Consolidation:
Contract cancellation (b)(c) 1,526 (112) - 1,414
Severance and benefits (b) 40 - - 40
Lease cancellations (a) 169 (12) - 157
Fixed assets (a) 217 - - 217
Other exit costs (a) 35 - - 35
----------- ----------- ----------- -----------
$ 18,217 $ (1,249) $ (224) $ 16,744
=========== =========== =========== ===========
Balance Sheet Breakout:
Inventory reserves $ 756 $ - $ (224) $ 532
Fixed asset reserves 10,674 - - 10,674
Liabilities 6,787 (1,249) - 5,538
----------- ----------- ----------- -----------
$ 18,217 $ (1,249) $ (224) $ 16,744
=========== =========== =========== ===========
<FN>
(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.
</FN>
</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 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.
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 substantially
complete by the end of June 2000, with the remainder being completed in
the third quarter of 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 will take longer to utilize. There were not any
indications of permanent impairment of the assets prior to the
restructuring actions.
<PAGE>
Restructuring reserves are included in the Company's other current
liabilities, inventory and property, plant and equipment as of March
26, 2000. Utilization of the second half 1999 restructuring reserves
during the quarter ended March 26, 2000 is summarized below:
<TABLE>
Balance Utilized Balance
December 31, 1999 Cash Non-Cash March 26, 2000
------------------ ------ ----------- ----------------
(In thousands)
<S> <C> <C> <C> <C>
Second Half 1999
Restructuring Actions:
Clik! Streamlining:
Fixed assets (a) $ 2,121 $ - $ (55) $ 2,066
Purchase commitments (b) 1,508 - - 1,508
Manufacturing Cessation:
Fixed assets (a) 2,845 - (380) 2,465
Other assets (a) 275 - - 275
Other commitments (b) 2,940 (231) - 2,709
Severance and benefits (b) 3,753 (2,007) - 1,746
Severance and benefits (b) 125 (100) - 25
----------- ----------- ----------- -----------
$ 13,567 $ (2,338) $ (435) $ 10,794
=========== =========== =========== ===========
Balance Sheet Breakout:
Fixed asset reserves (a) $ 4,966 $ - $ (435) $ 4,531
Other (a) 47 - - 47
Inventory reserves (a) 228 - - 228
Liabilities (b) 8,326 (2,338) - 5,988
----------- ----------- ----------- -----------
$ 13,567 $ (2,338) $ (435) $ 10,794
=========== =========== =========== ===========
<FN>
(a) Amounts represent primarily non-cash charges.
(b) Amounts represent primarily cash charges.
</FN>
</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.
(7) COMMITMENTS AND CONTINGENCIES
As previously disclosed in the Company's Annual Report on Form 10-K for
the year ended December 31, 1999, 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. The Court has not yet decided the motion. On April
25, 2000, the plaintiffs moved to further amend their complaint to add
an additional plaintiff who is a Delaware resident. The Company has
opposed that motion which has not yet been decided. 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.
(8) OTHER MATTERS
Significant Customers - During the quarter ended March 28, 1999, sales
to Ingram Micro, Inc. accounted for 14.3% of consolidated sales. No
other single customer accounted for more than 10% of the Company's
sales for the quarters ended March 26, 2000 or March 28, 1999.
Forward Exchange Contracts - The Company has commitments to sell and
purchase foreign currencies relating to forward exchange contracts in
order to hedge against future currency fluctuations.
At March 26, 2000, outstanding forward exchange sales (purchase)
contracts, which all mature in June 2000, were as follows:
<TABLE>
Contracted Spot
Currency Amount Forward Rate Rate
----------- ----------- -------------- ------
<S> <C> <C> <C>
Australian Dollar 160,000 .61 .61
European Euro 12,900,000 1.03 1.02
Japanese Yen (565,000,000) 105.35 106.99
Singapore Dollar 2,090,000 1.70 1.72
Swiss Franc (3,360,000) 1.66 1.62
</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 March 26, 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.
(9) SUBSEQUENT EVENT
In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation" which is effective
July 1, 2000. Interpretation 44 establishes accounting and reporting
standards for companies to report information about certain types of
stock compensation programs, particularly those that require variable
plan accounting.
On April 19, 2000, the Company's shareholders approved an Employee
Stock Option Exchange Program (the "Exchange Program"), pursuant to
which the Company is granting new stock options in exchange for
currently outstanding stock options which have an exercise price above
$3.59. Under Interpretation No. 44, new options issued under the
Exchange Program will be subject to variable plan accounting. 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 the repriced
exercise price. This compensation expense must be recorded on a
quarterly basis until the option is exercised, forfeited or expires
unexercised. Any subsequent decreases in the market value of the
Company's Common Stock would result in a reversal of compensation
expense previously recognized. Compensation expense can be reversed
only to the extent previously recognized for each option. For exchanged
options that are not vested, the increase or decrease in value, as the
case may be, is recorded as deferred compensation and amortized into
income over the new option's vesting period based on the ratio of the
number of periods outstanding over the vesting period. This calculation
requires that the beginning period in the ratio equal the original
option grant date, thereby decreasing the amount to be deferred into
later periods. The charges will be non-cash items.
The impact of the new options granted under the Exchange Program on the
Company's financial statements will depend on the number of options
exchanged, 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 period.
<PAGE>
IOMEGA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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! mobile drives, Clik!
PC Card drives, Clik! OEM drives and Clik! disks for use with portable digital
products such as digital cameras, handheld personal computers and notebook
computers to retailers, distributors, OEMs and resellers throughout the world.
Clik! products began shipping in limited quantities during the fourth quarter of
1998. The Company's restructuring charge in the third quarter of 1999 included
charges relating to refocusing the Clik! product platform from the Clik! Mobile
Drive to the newer Clik! PC Card and OEM drives. The Company recorded other
non-restructuring charges to reflect a reduction in the estimated net realizable
value of Clik! inventory and equipment and accruals for purchasing commitments
in connection with Clik! PC Card drives and disks in the fourth quarter of 1999
and the first quarter of 2000. The "Other" category includes products such as
Bernoulli, 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>
Reportable Operating Segment Information:
<TABLE>
For the Quarter Ended
----------------------------
March 26, March 28,
2000 1999
----------- -----------
(In millions)
<S> <C> <C>
Sales:
Zip $ 278 $ 302
Jaz 52 63
ZipCD 11 -
Clik! 2 5
Other 2 16
----------- -----------
Total sales $ 345 $ 386
=========== ===========
Product profit margin (loss):
Zip $ 88 $ 51
Jaz 12 (3)
ZipCD - -
Clik! (16) (13)
Other (2) (7)
----------- -----------
Total product profit margin 82 28
----------- -----------
Common:
General corporate expenses (30) (25)
Interest and other income
(expense), net 1 (2)
----------- -----------
Income before income taxes $ 53 $ 1
=========== ===========
</TABLE>
RESULTS OF OPERATIONS
The Company reported sales of $344.9 million and net income of $51.8 million, or
$0.19 per diluted share, for the first quarter of 2000, which included $20.1
million, or $.07 per diluted share, attributable to a decrease in the valuation
allowance for net deferred tax assets. This compares to sales of $386.2 million
and net income of $0.6 million, or $0.00 per diluted share, in the first quarter
of 1999.
SALES
Sales for the quarter ended March 26, 2000 decreased by $41.3 million, or 10.7%,
when compared to the corresponding period of 1999. This decrease was primarily a
result of reduced Zip drive and disk volumes, discontinued Ditto drive sales and
reduced Jaz drive volumes, offset in part by sales of recently introduced ZipCD
products. Total drive sales of $194.6 million decreased by 17.2% as compared to
the first quarter of 1999. Total drive unit shipments for the quarter ended
March 26, 2000 decreased by 14.5% as compared to the first quarter of 1999.
Total disk sales of $149.6 million decreased by 1.3% as compared to the first
quarter of 1999. Total disk unit shipments for the quarter ended March 26, 2000
decreased by 5.1% as compared to the first quarter of 1999.
Zip product sales in the first quarter of 2000 totaled $278.5 million,
representing a decrease of 7.7% from the first quarter of 1999. Sales of Zip
products represented 80.8% of total sales for the first quarter of 2000,
compared to 78.1% in the corresponding period of 1999. The Company's Zip drive
unit shipments decreased by 20.8% from the first quarter of 1999, while Zip disk
unit shipments decreased by 5.0%. The Company's Zip drive unit shipments
decreased primarily as a result of lower demand for Zip drives in the OEM
channel. Sales of Zip OEM drives (excluding licensee shipments) accounted for
approximately 37% of total Zip drive shipments in the first quarter of 2000,
compared to 48% in the first quarter of 1999.
Jaz product sales in the first quarter of 2000 totaled $51.8 million,
representing a decrease of 18.1% from the first quarter of 1999. Sales of Jaz
products represented 15.0% of total sales for the first quarter of 2000,
compared to 16.2% in the corresponding period of 1999. Jaz drive unit shipments
decreased by 36.4% as compared to the first quarter of 1999, while Jaz disk unit
shipments increased by 5.0%.
ZipCD product sales in the first quarter of 2000 totaled $10.8 million, or 3.1%
of total sales. The Company began shipping ZipCD products in limited quantities
in August 1999.
Clik! product sales in the first quarter of 2000 totaled $2.1 million,
representing a decrease of $3.0 million, or 59.7%, from the first quarter of
1999. Sales of Clik! products represented 0.6% of total sales in the first
quarter of 2000, compared to 1.3% in the corresponding period of 1999. Clik!
drive unit shipments decreased by 41.7% as compared to the first quarter of
1999, while Clik! disk shipments increased by 129.8%.
Geographically, sales in the Americas totaled $217.5 million, or 63.1% of total
sales, in the first quarter of 2000, as compared to $250 million, or 64.7% of
total sales, in the first quarter of 1999. This decrease was primarily due to
decreased Zip and Jaz sales, partially offset by ZipCD sales. Sales in Europe
totaled $95.0 million, or 27.5% of total sales, in the first quarter of 2000, as
compared to $103.3 million, or 26.7% of total sales, in the first quarter of
1999. This decrease was primarily due to decreased Zip sales, partially offset
by increased Jaz and ZipCD sales. Sales in Asia totaled $32.5 million, or 9.4%
of total sales, in the first quarter of 2000, as compared to $32.9 million, or
8.5% of total sales, in the first quarter of 1999.
GROSS MARGIN
The Company's overall gross margin was $127.9 million, or 37.1%, in the first
quarter of 2000, as compared to $93.7 million, or 24.3%, in the first quarter of
1999. This increase in gross margin was due primarily to increased Zip and Jaz
gross margins as a result of an increased mix of higher margin Zip 250MB drives
(most of which are sold as higher margin aftermarket products), Jaz disks and
lower manufacturing and operating costs in Zip and Jaz during the first quarter
of 2000.
Future gross margin percentage will be impacted by the sales mix between retail
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, and on the mix between disks and drives and the
mix between Zip, Jaz, ZipCD and Clik! products.
SEGMENT PRODUCT PROFIT MARGIN
Zip segment product profit margin of $87.9 million, or 31.6% of Zip sales,
increased by $36.7 million, or 71.7%, in the first quarter of 2000 when compared
to Zip segment product profit margin of $51.2 million, or 17.0% of Zip sales, in
the first quarter of 1999. This increase was primarily due to an increased mix
of higher margin Zip 250MB drives, a higher mix of aftermarket sales and
decreased Zip manufacturing and operating expenses. The first quarter
improvements were partially offset by a decrease in shipments of higher margin
Zip disks and lower overall volume shipments of drives and disks.
Jaz segment product profit margin of $12.4 million, or 24.0% of Jaz sales,
increased by $15.5 million in the first quarter of 2000 when compared to Jaz
segment product loss of $3.0 million in the first quarter of 1999. This increase
was primarily due to decreased manufacturing and operating costs and an increase
in Jaz disk shipments.
ZipCD segment product loss was $0.1 million for the first quarter of 2000. The
Company began shipping ZipCD products in limited quantities during August 1999.
Clik! segment product loss of $16.3 million increased by approximately $3.2
million in the first quarter of 2000 when compared to Clik! segment product loss
of $13.0 million in the first quarter of 1999. The Clik! segment product loss in
the first quarter of 2000 included a charge of $7.4 million to reflect a
reduction in the estimated net realizable value of inventory and equipment
associated with the Clik! PC Card drive and Clik! media. This charge was
partially offset by lower operating expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses of $65.2 million for the first
quarter of 2000 decreased by $4.7 million primarily due to decreased sales and
product management costs, when compared to the corresponding quarter of 1999.
However, selling, general and administrative expenses increased as a percentage
of sales to 18.9% for the first quarter of 2000, from 18.1% in the corresponding
quarter of 1999, primarily as a result of a decrease in sales during the first
quarter of 2000. Management expects selling, general and administrative
expenses, in absolute dollars, to increase from first quarter 2000 levels during
the remainder of 2000 due to planned additional advertising and promotional
expenses in the United States, Europe, Asia and Latin America.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses of $11.1 million for the first quarter of 2000
decreased by $9.6 million, or 46.3%, when compared to the first quarter of 1999,
and decreased as a percentage of sales to 3.2% in the first quarter of 2000,
from 5.4% in the first quarter 1999. The decrease in research and development
expenses for the first quarter of 2000 was due primarily to decreased spending
for development of Zip, Jaz and Clik! products, which was partially offset by
increased spending for ZipCD products and other new product development in the
first quarter of 2000. Management expects research and development expenses, in
absolute dollars, to increase from first quarter 2000 levels during the
remainder of 2000 as a result of planned increases in resources dedicated to new
product development and existing product enhancements.
INTEREST AND OTHER INCOME/EXPENSE
Interest income of $3.5 million in the first quarter of 2000 increased from $1.1
million in the first quarter of 1999. Higher average cash and investment
balances during the first quarter 2000 resulted in an increase in interest
income when compared to the corresponding quarter of 1999.
Interest expense of $1.4 million during the first quarter of 2000 decreased from
$2.8 million in the first quarter of 1999. 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 March 26, 2000, the Company recorded an income tax
provision of $21.0 million on pre-tax income, partially offset by a $20.1
million decrease in the valuation allowance for net deferred income taxes.
During the first quarter of 2000, the Company decreased its deferred tax asset
valuation allowance by approximately $20 million, to $66 million. The Company
evaluates the realizability of its net deferred tax assets on a quarterly basis.
If the net deferred tax assets are reduced in the future, if the Company is
substantially profitable, or if a portion or all of the valuation allowance is
no longer deemed to be necessary, reductions in the valuation allowance will
reduce future income tax provisions.
As of March 26, 2000, the Company had approximately $12.7 million of deferred
tax assets related to foreign net operating loss carryforwards, which reflected
the benefit of approximately $29.8 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 March 26, 2000, the Company had approximately $22.3 million of deferred
tax assets related to domestic net operating loss carryforwards, which reflected
the benefit of approximately $57.2 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 March 26, 2000, the Company had approximately $30.5 million
of domestic deferred tax assets net of deferred liabilities, which reflected the
benefit of approximately $78.2 million in future tax deductions.
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 quarter
are not necessarily indicative of revenues or growth rates to be expected in any
future quarter.
LIQUIDITY AND CAPITAL RESOURCES
At March 26, 2000, the Company had cash, cash equivalents and temporary
investments of $273.4 million compared to $210.9 at December 31, 1999, an
increase of $62.5 million. Working capital of $222.5 million increased by $27.1
million when compared to $195.4 million at December 31, 1999, primarily due to
increases in cash, cash equivalents and temporary investments and decreases in
accounts payable and other current liabilities, partially offset by decreases in
trade receivables and the classification of convertible subordinated notes to
current liabilities. The Company's ratio of current assets to current
liabilities of 1.7 to 1 increased slightly compared to 1.6 to 1 at December 31,
1999. During the quarter ended March 26, 2000, cash provided by operating
activities amounted to $68.1 million. The primary components were net income,
non-cash expense adjustments, reductions in accounts receivable and inventory,
partially offset by decreases in accounts payable and other current liabilities
and an increase in income taxes receivable. This cash was used in part to
purchase property, plant and equipment of $5.9 million and pay notes payable and
leases of $1.1 million.
The decrease in accounts receivable was due primarily to the timing of sales and
collections during the quarter and the decrease in sales volume during the
quarter. The decrease in inventory was due to the write-down of Clik! inventory
and improved management of foreign 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 deferred revenue, accrued restructuring charges and purchase
commitments that were partially offset by increases in accrued payroll and
various other accrued liabilities. The increase in income taxes receivable was
due primarily to refundable foreign withholdings on dividends.
On March 11, 1997, the Company entered into a $200 million Senior Secured Credit
Facility with Morgan Guaranty Trust Company of New York, Citibank, N.A. and a
syndicate of other lenders. During 1998 and 1999, the Company and the lenders
agreed to several amendments to and waivers under the Senior Secured Credit
Facility, the most recent of which was entered into on October 14, 1999, (the
"Credit Facility"). As a result of the most recent amendment, the Credit
Facility was reduced to $75 million and certain financial covenants were
amended. The Credit Facility expires on July 14, 2000 and is secured by accounts
receivable, domestic inventory, domestic intellectual property, general
intangibles, equipment, personal property, investment property and a pledge of
65% of the stock of certain of the Company's subsidiaries. Under the Credit
Facility, the Company may borrow at a base rate, which is the higher of prime or
the sum of the Federal funds rate plus 2.75%, or at LIBOR plus 3.25%. Borrowing
availability under the Credit Facility is based on an agreed upon advance rate
on receivables and inventory not to exceed $75 million. Among other
restrictions, the Credit Facility treats a change of control (as defined) as an
event of default and requires the maintenance of minimum levels of consolidated
tangible net worth, EBITDA and certain other covenants. There were no borrowings
on the Company's Credit Facility during the first quarter of 2000. There were no
borrowings outstanding at March 26, 2000. The Company is currently evaluating
whether or not to replace the Credit Facility when it expires in July.
The current and long-term portions of capitalized lease obligations at March 26,
2000 were $4.8 million and $1.1 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 $45.5 million of convertible subordinated notes outstanding at
March 26, 2000, which bear interest at 6.75% per year and mature on March 15,
2001. These notes have been classified as short-term at March 26, 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 current and future
sources of available 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 establishes new
accounting and reporting standards for companies to report information about
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as "derivatives") and for hedging
activities. In June 1999, the FASB issued Statement of Financial Accounting
Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities
- - Deferral of the Effective Date of FASB Statement No. 133." This statement
amended the effective date of SFAS 133. SFAS 133 will now be effective for
financial statements issued for all fiscal quarters of fiscal years beginning
after June 15, 2000. The Company does not expect SFAS 133 to have a material
impact on the Company's results of operations, financial position or liquidity.
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. Implementation of SAB 101 is required in the
second quarter of 2000. All registrants are expected to apply the accounting and
disclosure requirements described in SAB 101. The Company is currently assessing
the impact, if any, of SAB 101 on its 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 (existing, announced or
unannounced) introduced by other vendors, including, without limitation, the
LS-120 (or SuperDisk) (product co-developed by the consortium of Compaq
Computer, Imation, O.R. Technology and MKE), the HiFD (product co-developed by
Sony Corporation and Fuji Photo Film Co., Ltd.), the "it" drive (product in
development by Caleb Technology Corporation), the Orb (product developed by
Castlewood Systems, Inc.), the Pro-FD (product in development by Samsung
Electro-Mechanics Co., Ltd.), the Microdrive (product developed by IBM), the
Memory Stick (product developed by Sony Corporation), Compact Flash (product
developed by Sandisk), SmartMedia (product developed by Toshiba), CD-R, CD-RW
and DVD drives and media and announced products in development by Terastor
Corporation; the success of any third party in creating and marketing media,
compatible with the Company's proprietary media, and intended for use with the
Company's drive products; the success of the Company in meeting targeted
availability dates for new and enhanced products; the success of the Company in
establishing and maintaining OEM arrangements and meeting OEM quality, supply
and other requirements; the willingness of OEMs to promote computer and other
products containing the Company's drives; the ability of the Company to create
demand for Zip, Jaz, ZipCD and Clik!, including demand from leading personal
computer and other manufacturers; 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 in 1999 and in the first quarter of 2000 accounted for a
significant majority of the Company's revenues. However, these sales may not be
indicative of the long-term demand for Zip products. Accordingly, the sales
levels experienced by the Company in 1999 and the first quarter of 2000 should
not be assumed to be an indication of future sales levels. In addition, the
Company has experienced and may in the future experience significant
fluctuations in its quarterly operating results. Moreover, because the Company's
expense levels (including budgeted selling, general and administrative and
research and development expenses) are based in part on expectations of future
sales levels, a shortfall in expected sales could result in a disproportionate
adverse effect on the Company's net income and cash flow. In addition, the
Company's stock price, like other high technology companies' stock prices, could
be subject to changes in analysts' earning estimates, announcements of new
products or developments by the Company or its competitors, market conditions in
the information technology industry, as well as general economic conditions and
other factors external to the Company.
Sales of Zip drives to OEM customers accounted for approximately 37% of total
Zip drive shipments in the first quarter of 2000 and over 51% during the entire
year of 1999. 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 does not anticipate major sales growth 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 took actions in 1999 to better position the Jaz
product platform for future profitability, including the cancellation of a Jaz
development project and downsizing of Jaz facilities and workforce. The Company
anticipates introducing additional Jaz product interfaces and enhancements to
support the needs of its customers. In addition, the Company is making a small
investment 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 ZipCD drive represents the Company's first CD-RW product and its
initial entry into the optical storage market. Market acceptance of the ZipCD
product, which began shipping in limited quantities in August 1999, is not yet
known. In addition, the impact of ZipCD on the Company's other storage solutions
has not yet been determined and may have an adverse impact on future sales.
Moreover, the Company's business strategy for ZipCD is different from its
strategy for its other products because ZipCD does not include proprietary media
and thus has lower overall margins. Therefore, the success of ZipCD will depend
on margin contributions from the drive products which 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 digital camera and other 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.
The impact of the Clik! PC Card drive on the Company's other storage solutions
has not yet been determined and may have an adverse impact on future sales.
During the third quarter of 1999, the Company recorded a restructuring charge
that included costs to refocus the Clik! product platform on the newer Clik! PC
Card and OEM drives, which began shipping in the second half of 1999.
Additionally, the Company took charges in the fourth quarter of 1999 totaling
$47.3 million relating to the Clik! platform to reflect estimates of net
realizable value of inventory and equipment and accruals for related purchase
commitments. The Company took additional charges of $7.4 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 $10 million as of March 26, 2000. Although the
Company is making significant efforts to develop applications for the Clik!
platform 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 cameras and other electronic devices
is dependent upon obtaining a significant market presence and establishing OEM
relationships with digital camera manufacturers, who produce digital cameras
incorporating built-in Clik! drives, and other portable consumer electronic
manufacturers. To date, only one digital camera incorporating Clik! as a
built-in drive, which the Company refers to as an OEM drive, has been introduced
and begun shipping.
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 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. As new and
competing removable-media storage solutions are introduced, it is possible that
any such solution that achieves a significant market presence or establishes a
number of significant OEM relationships will emerge as an industry standard or
achieve a leading market position. If such is the case, the Company's products
may not be commercially successful.
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 supplier quality problems. Any product availability,
quality or reliability problems experienced by the Company, or claims filed
against the Company as a result of these problems, could have an adverse effect
on the Company's sales and net income, result in damage to the Company's
reputation in the marketplace, and 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 above 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 will
also depend on intellectual property and antitrust matters including the
possibility that infringement claims asserted from time to time against the
Company could require the Company to pay royalties to a third party in order to
continue to market and distribute one or more of the Company's current or future
products and also includes the possibility that the Company would be required to
devote unplanned resources to developing modifications to its products or
marketing programs.
The Company depends on independent parties for the supply of critical components
for its products. Many components incorporated or used in the manufacture of the
Company's products are currently available only from single or sole source
suppliers. In particular, media used in Zip 250MB disks and Clik! disks are
currently obtained exclusively from Fuji Photo Film, certain integrated circuits
used in Zip drives are obtained exclusively from L.S.I. Logic Corporation and
Texas Instruments, media used in Jaz disks is currently obtained exclusively
from HMT Technology, motors used in Jaz and Clik! drives are obtained
exclusively from Nidec Corporation, head stack assemblies (HSAs) used in Jaz
drives are obtained exclusively from Read Rite International and HSAs used in
Zip notebook and Clik! drives are obtained exclusively from SAE Magnetics. The
Company has experienced difficulty in the past, and may experience difficulty in
the future, in obtaining a sufficient supply of many key components on a timely
basis. The Company continues to develop relationships with qualified
manufacturers with the goal of securing high-volume manufacturing capabilities
and controlling the cost of current and future models of the Company's products;
however, there can be no assurance that the Company will be able to obtain a
sufficient supply of components on a timely and cost effective basis. Sales may
be adversely affected for all of these or similar reasons in the future.
The Company purchases a portion of its single, sole and limited source
components pursuant to purchase orders without guaranteed supply arrangements.
The inability to obtain sufficient components and equipment to obtain or develop
alternative sources of supply at competitive prices and quality or to avoid
manufacturing delays could prevent the Company from producing sufficient
quantities of its products to satisfy market demand (or, in the case of a
component purchased exclusively from one supplier, the Company could be
prevented from producing any quantity of the affected product(s) until such
component becomes available from an alternative source), delay product
shipments, increase the Company's material or manufacturing costs or cause an
imbalance in the inventory levels of certain components. For example, the
Company's Zip drive shipments, revenue and profitability were negatively
impacted by an ASIC chip storage during the second and third quarters of 1999.
The ASIC chip is supplied by a sole source supplier. Moreover, difficulties in
obtaining sufficient components may cause the Company to modify the design of
its products to use a more readily available component, and such design
modifications may result in product performance problems. Any or all of these
problems could in turn result in the loss of customers, provide an opportunity
for competing products to achieve market acceptance and otherwise adversely
affect the Company's business and financial results.
As mentioned above, the Company purchases the majority of its components on
purchase orders. These purchase orders 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 and therefore 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 on January 20, 2000;
Philip G. Husby, who joined the Company as Chief Financial Officer in August
1999; and John L. Conely, Sr., who was promoted to Executive Vice President,
Global Operations in June 1999. In addition, a number of senior management
positions, including Executive Vice President, Product Management and Global
Marketing; Executive Vice President, International Business Units; Executive
Vice President, Sales; Vice President, Global Human Resources; and General
Counsel, have only recently been filled. The Company's success will depend in
part on its ability to attract highly skilled personnel to fill vacancies in a
timely manner and on the success of the Company's senior management team in
learning to work effectively as a team. There can be no assurance that the
Company will be successful in attracting and/or retaining new employees.
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.
The Company has implemented Six Sigma quality initiatives intended to make
substantial product and process quality improvements and reduce costs. However,
there can be no assurance that the Company's quality initiatives will be
successful in providing substantial product and process improvements and in
reducing costs.
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).
The Company intends to expand its international operations into Latin America
during 2000. 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 January 1, 1999, eleven countries of the European Union established fixed
conversion rates between their existing currencies and adopted the Euro as their
new common legal currency. As of that date, the Euro has traded on currency
exchanges, with the legacy currencies remaining as legal tender in the
participating countries for a transition period between January 1, 1999 and
January 1, 2002. During the transition period, parties can elect to pay for
goods and services and transact business using either the Euro or a legacy
currency. Between January 1, 2002 and July 1, 2002, the participating countries
will introduce Euro bills and coins and withdraw all legacy currencies so that
they will no longer be available. The Euro conversion may affect cross-border
competition by creating cross-border price transparency. The Company is
assessing the competitiveness of its pricing/marketing strategy in a broader
European market. The Company is also assessing whether certain existing
contracts may require modification in addition to assessing its information
technology systems to allow for transactions to take place in both the legacy
currencies and the Euro and the eventual elimination of the legacy currencies.
The Company's currency risks and risk management for operations in participating
countries may be reduced as the legacy currencies are converted to the Euro. The
Company will continue to evaluate issues involving introduction of the Euro.
Based on the Company's assessment from current information, the Company does not
expect the Euro conversion to have a material adverse effect on the Company's
business or financial condition. There can be no assurance, however, that the
Euro conversion will not have a material adverse effect on the Company's
European sales or otherwise adversely affect the Company's business, results of
operations or financial condition.
On April 19, 2000, the Company's shareholders approved an Employee Stock Option
Exchange Program (the "Exchange Program"), pursuant to which the Company is
granting new stock options in exchange for currently outstanding stock options
which have an exercise price above $3.59. The new options issued under the
Exchange Program will be subject to variable plan accounting. 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 the repriced exercise price. 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 the
number of options exchanged, 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 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 increasing volumes of
production and an increasingly complex business, transportation issues, product
and component pricing, competition, technological changes and advances, adoption
of technology or communications standards affecting the Company's products,
intellectual property rights, litigation, general economic conditions, changes
or slowdowns in overall market demand for personal computer products.
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. If necessary, the
Company primarily uses borrowings comprised normally of variable rate debt to
finance its operations. The Company did not have any significant debt
outstanding at March 26, 2000 except for $45 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 functional currency of the Company. The
Company's functional currency is the U.S. dollar. The Company attempts to reduce
foreign currency exchange rate risks by utilizing financial instruments,
including derivative transactions pursuant to Company policies. The Company uses
forward contracts to hedge those 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 March 26,
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
A discussion of the Company's exposure to, and management of, market risk
appears in Item 2 of this Form 10-Q under the heading "Disclosures About Market
Risk".
<PAGE>
IOMEGA CORPORATION
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Except as set forth below or in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999, in management's opinion, there are no significant
legal proceedings, to which the Company or any of its subsidiaries is a party or
to which any of their property is subject. The Company is involved in other
lawsuits and claims generally incidental to its business.
As previously disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999, on May 27, 1998, Scott D. Ora filed a complaint against
the Company and other parties. The action, captioned Ora v. Iomega Corporation,
et al., was filed in Superior Court of the State of California for the County of
Los Angeles and alleged that the Company and certain of its former officers
violated certain federal and state securities laws and alleged that Kim B.
Edwards, former Chief Executive Officer and director of the Company, breached
his duties as a director of the Company. The Company successfully removed the
action to the United State 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 judgement in the Company's favor. The plaintiff has thirty
days from the entry of judgment in which to request an appeal of the Court's
decision. The Company intends to defend vigorously against this suit should
there be an appeal.
As previously disclosed in the Company's Annual Report on Form 10-K for the year
ended December 31, 1999, 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. The Court has not yet decided the motion. On April 25, 2000, the
plaintiffs moved to further amend their complaint to add an additional plaintiff
who is a Delaware resident. The Company has opposed that motion which has not
yet been decided. 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 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. 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
June 6, 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, 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 investments 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 February 22, 2000, the Company demanded indemnification
on this claim against Nomai from the principal shareholders of Nomai pursuant to
the Stock Purchase Agreement with the Company. The submission of this claim
against the principal shareholders increases the Company's claim against the
escrow account and individual shareholders from $11 million to approximately $19
million. At an April 18, 2000 hearing, the court declined to rule on the
bankruptcy trustee's demand for performance of the alleged commitments and took
the matter under advisement.
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.
<PAGE>
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS:
The Company did not sell any equity securities during the first quarter of 2000
that were not registered under the Securities Act of 1933.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
The Company's Annual Meeting of Stockholders was held on April 19, 2000. The
following proposals were adopted by the vote specified below:
<TABLE>
Proposal For Against/Withheld Abstain Broker Non-Votes
- ------------------------------ ------------ ------------------ ------------- ------------------
<S> <C> <C> <C> <C>
1. Election of Directors:
Robert P. Berkowitz 239,455,544 4,669,086 - -
John R. Myers 239,434,206 4,690,424 - -
2. Approval of the Employee
Stock Option Exchange Program 225,550,944 16,966,570 1,607,114 -
3. Ratification of Arthur Andersen LLP
as Independent Auditors 240,890,998 2,323,463 910,159 -
</TABLE>
In addition to the two directors listed above who were elected at the
meeting, the terms of the following directors continued after the meeting: Bruce
R. Albertson, Jonathan S. Huberman, David J. Dunn, James E. Sierk and John M.
Seidl.
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: May 9, 2000 Bruce R. Albertson
Chief Executive Officer and President
/s/ Philip G. Husby
--------------------------------------
Dated: May 9, 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
- ----------- -----------
27 Financial Data Schedule (only filed as part of electronic copy).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0000352789
<NAME> IOMEGA CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-26-2000
<CASH> 190,927
<SECURITIES> 82,502
<RECEIVABLES> 208,952
<ALLOWANCES> 48,612
<INVENTORY> 84,588
<CURRENT-ASSETS> 564,331
<PP&E> 350,841
<DEPRECIATION> 230,176
<TOTAL-ASSETS> 717,464
<CURRENT-LIABILITIES> 341,807
<BONDS> 0
0
0
<COMMON> 304,639
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 717,464
<SALES> 344,897
<TOTAL-REVENUES> 344,897
<CGS> 216,990
<TOTAL-COSTS> 293,366
<OTHER-EXPENSES> 824
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,447
<INCOME-PRETAX> 52,764
<INCOME-TAX> 938
<INCOME-CONTINUING> 51,826
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 51,826
<EPS-BASIC> 0.19
<EPS-DILUTED> 0.19
</TABLE>
