-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BBV+YbiwANnm9U6xrBRB5R/3THJLYtkNKkA9ikYn1NKWq2TQxFjXxkml+P3oJxpC gF3FAZZJSwAgxRbLhPC8hQ== /in/edgar/work/20000809/0000352789-00-000014/0000352789-00-000014.txt : 20000921 0000352789-00-000014.hdr.sgml : 20000921 ACCESSION NUMBER: 0000352789-00-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000625 FILED AS OF DATE: 20000809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IOMEGA CORP CENTRAL INDEX KEY: 0000352789 STANDARD INDUSTRIAL CLASSIFICATION: [3572 ] IRS NUMBER: 860385884 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12333 FILM NUMBER: 688844 BUSINESS ADDRESS: STREET 1: 1821 W IOMEGA WAY CITY: ROY STATE: UT ZIP: 84067 BUSINESS PHONE: 8017781000 MAIL ADDRESS: STREET 1: 1821 WEST IOMEGA WAY CITY: ROY STATE: UT ZIP: 84067 10-Q 1 0001.txt FORM 10-Q QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 25, 2000 COMMISSION FILE NUMBER 1-12333 Iomega Corporation (Exact name of registrant as specified in its charter) Delaware 86-0385884 (State or other jurisdiction (IRS employer identification number) of incorporation or organization) 1821 West Iomega Way, Roy, UT 84067 (Address of principal executive offices) (801) 332-1000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of June 25, 2000. Common Stock, par value $.03 1/3 270,664,536 (Title of each class) (Number of shares) IOMEGA CORPORATION TABLE OF CONTENTS PAGE PART I - FINANCIAL STATEMENTS Item 1. Financial Statements Condensed Consolidated Balance Sheets at June 25, 2000 and December 31, 1999..................................... 3 Condensed Consolidated Statements of Operations for the quarters ended June 25, 2000 and June 27, 1999..................... 5 Condensed Consolidated Statements of Operations for the six months ended June 25, 2000 and June 27, 1999...................... 6 Condensed Consolidated Statements of Cash Flows for the six months ended June 25, 2000 and June 27, 1999..................... 7 Notes to Condensed Consolidated Financial Statements........... 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 23 Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 40 PART II - OTHER INFORMATION Item 1. Legal Proceedings.............................................. 42 Item 2. Changes in Securities and Use of Proceeds...................... 42 Item 6. Exhibits and Reports on Form 8-K............................... 42 Signatures.............................................................. 43 Exhibit Index........................................................... 44 This Quarterly Report on Form 10-Q contains a number of forward-looking statements, including, without limitation, statements referring to: expected increases in selling, general and administrative expenses and in research and development expenses; the impact on gross margins of the sales volumes of Zip(R) and Jaz(R) disks, saLEs mix between disks and drives, the sales mix between Zip 100MB and Zip 250MB drives, the sales mix between OEM and aftermarket channels, the sales mix between the Company's products, future pricing actions and potential start-up costs of new products; the expected sufficiency of cash, cash equivalent and temporary investment balances, cash flows from operations and future sources of financing; the impact of new accounting pronouncements; the timing and impact of restructuring activities and other organizational changes; expected sales levels due to seasonal demand; anticipated hedging strategies; and, the possible effects of an adverse outcome in legal proceedings described in Note 8 of Part I. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "intends" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these words. There are a number of important factors that could cause actual events or the Company's actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth under the caption "Litigation" in Note 8 of Part I, under the captions "Liquidity and Capital Resources" and "Factors Affecting Future Operating Results" included under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I and "Quantitative Disclosures About Market Risk" in Item 3 of Part I of this Quarterly Report on Form 10-Q. The factors discussed herein do not reflect the potential future impact of any mergers, acquisitions or dispositions. The Company does not assume any obligation to update any forward-looking statements made herein. - ---------------------------------- Copyright (C) 2000 Iomega Corporation. Iomega, Zip, Jaz, ZipCD, Clik!, iomegadirect and the stylized "I" logo arE either registered trademarks or trademarks of Iomega Corporation in the United States and/or other countries. Certain other product names, brand names and company names may be trademarks or designations of their respective owners. IOMEGA CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (In thousands)
June 25, December 31, 2000 1999 ------------ ------------ (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 278,583 $ 172,706 Temporary investments 75,332 38,209 Trade receivables, less allowance for doubtful accounts of $10,353 and $15,908, respectively 168,716 188,482 Inventories 75,733 94,626 Income taxes receivable 7,459 19,910 Other current assets 16,834 21,585 ----------- ----------- TOTAL CURRENT ASSETS 622,657 535,518 ----------- ----------- PROPERTY, PLANT AND EQUIPMENT, at cost 315,065 365,036 LESS: Accumulated depreciation and amortization (206,183) (227,336) ----------- ----------- NET PROPERTY, PLANT AND EQUIPMENT 108,882 137,700 ----------- ----------- INTANGIBLES, NET 27,999 31,743 ----------- ----------- OTHER ASSETS 2,447 2,848 ----------- ----------- $ 761,985 $ 707,809 =========== ===========
The accompanying notes to condensed consolidated financial statements are an integral part of these balance sheets. IOMEGA CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) LIABILITIES AND STOCKHOLDERS' EQUITY (In thousands, except share data)
June 25, December 31, 2000 1999 ----------- ----------- (Unaudited) CURRENT LIABILITIES: Accounts payable $ 104,210 $ 135,615 Other current liabilities (Note 1) 191,977 198,993 Current portion of capitalized lease obligations 4,444 5,542 Convertible subordinated notes, 6.75% due 2001 45,505 - ----------- ---------- TOTAL CURRENT LIABILITIES 346,136 340,150 ----------- ---------- CAPITALIZED LEASE OBLIGATIONS, NET OF CURRENT PORTION 781 1,366 ----------- ---------- CONVERTIBLE SUBORDINATED NOTES, 6.75%, DUE 2001 - 45,505 ----------- ---------- COMMITMENTS AND CONTINGENCIES (NOTE 8) STOCKHOLDERS' EQUITY: Preferred Stock, $0.01 par value; authorized 4,600,000 shares; none issued - - Series A Junior Participating Preferred Stock; authorized 400,000 shares; none issued - - Common Stock, $.03 1/3 par value; authorized 400,000,000 shares; issued 271,474,078 and 270,831,769 shares at June 25, 2000 and December 31, 1999, respectively 9,048 9,027 Additional paid-in capital 295,690 293,627 Less: 809,542 Common Stock treasury shares, at cost (6,088) (6,088) RETAINED EARNINGS 116,418 24,222 ----------- ---------- TOTAL STOCKHOLDERS' EQUITY 415,068 320,788 ----------- ---------- $ 761,985 $ 707,809 =========== ==========
The accompanying notes to condensed consolidated financial statements are an integral part of these balance sheets. IOMEGA CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
FOR THE QUARTER ENDED --------------------- June 25, June 27, 2000 1999 ------------ ----------- (Unaudited) Sales $ 303,639 $ 348,781 Cost of sales 183,628 273,020 ----------- ----------- GROSS MARGIN 120,011 75,761 ----------- ----------- Operating expenses: Selling, general and administrative 69,254 82,828 Research and development 15,318 23,085 Restructuring charge (reversal) (2,497) 41,909 ----------- ----------- TOTAL OPERATING EXPENSES 82,075 147,822 ----------- ----------- Operating income (loss) 37,936 (72,061) Interest income 5,406 1,134 Interest expense (1,387) (1,479) OTHER INCOME (EXPENSE) (789) 17 ----------- ----------- Income (loss) before income taxes 41,166 (72,389) BENEFIT (PROVISION) FOR INCOME TAXES (796) 25,336 ----------- ----------- NET INCOME (LOSS) $ 40,370 $ (47,053) =========== =========== NET INCOME (LOSS) PER COMMON SHARE: Basic $ 0.15 $ (0.17) =========== =========== Diluted $ 0.15 $ (0.17) =========== =========== Weighted average common shares outstanding 270,638 269,115 =========== =========== Weighted average common shares outstanding - assuming dilution 281,351 269,115 =========== ===========
The accompanying notes to condensed consolidated financial statements are an integral part of these balance sheets. IOMEGA CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
FOR THE SIX MONTHS ENDED ------------------------ June 25, June 27, 2000 1999 ----------- ------------ (Unaudited) Sales $ 648,536 $ 734,993 Cost of sales 400,618 565,496 ----------- ----------- GROSS MARGIN 247,918 169,497 ----------- ----------- Operating expenses: Selling, general and administrative 134,500 152,769 Research and development 26,448 43,798 Restructuring charge (reversal) (2,497) 41,909 ----------- ----------- TOTAL OPERATING EXPENSES 158,451 238,476 ----------- ----------- Operating income (loss) 89,467 (68,979) Interest income 8,910 2,226 Interest expense (2,834) (4,268) Other expense (1,613) (491) ----------- ----------- Income (loss) before income taxes 93,930 (71,512) BENEFIT (PROVISION) FOR INCOME TAXES (1,734) 25,028 ----------- ----------- NET INCOME (LOSS) $ 92,196 $ (46,484) =========== =========== NET INCOME (LOSS) PER COMMON SHARE: Basic $ 0.34 $ (0.17) =========== =========== Diluted $ 0.33 $ (0.17) =========== =========== Weighted average common shares outstanding 270,543 268,753 =========== =========== Weighted average common shares outstanding - assuming dilution 281,293 268,753 =========== ===========
The accompanying notes to condensed consolidated financial statements are an integral part of these balance sheets. IOMEGA CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
FOR THE SIX MONTHS ENDED -------------------------- June 25, June 27, 2000 1999 ---------- ---------- (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 92,196 $ (46,484) Non-Cash Revenue and Expense Adjustments: Depreciation and amortization 39,381 46,142 Deferred income taxes - (13,037) Restructuring charge - 21,070 Bad debts (3,227) 3,761 Tax benefit from dispositions of employee stock 843 1,061 Other 4,419 972 ----------- ----------- 133,612 13,485 Changes in Assets and Liabilities: Trade receivables 22,993 43,902 Inventories 18,893 22,112 Other current assets 4,751 (2,923) Accounts payable (31,405) (36,880) Other current liabilities (7,016) 22,813 Income taxes 12,451 12,058 ----------- ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES 154,279 74,567 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (11,238) (25,688) Acquisition of SyQuest assets - (12,093) Purchase of temporary investments (103,701) - Sale of temporary investments 66,578 - NET DECREASE (INCREASE) IN OTHER ASSETS 401 (1,955) ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES (47,960) (39,736) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of Common Stock 1,241 3,706 Proceeds from issuance of notes payable - 3,532 Payments on notes payable and capitalized lease obligations (1,683) (43,061) ----------- ----------- NET CASH USED IN FINANCING ACTIVITIES (442) (35,823) ----------- ----------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 105,877 (992) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 172,706 90,273 ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 278,583 $ 89,281 =========== ===========
The accompanying notes to condensed consolidated financial statements are an integral part of these balance sheets. IOMEGA CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) SIGNIFICANT ACCOUNTING POLICIES In the opinion of the Company's management, the accompanying unaudited, condensed, consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are necessary to present fairly the financial position of the Company as of June 25, 2000 and December 31, 1999, the results of operations for the quarters and six months ended June 25, 2000 and June 27, 1999 and cash flows for the six months ended June 25, 2000 and June 27, 1999. The results of operations for the quarter and six months ended June 25, 2000 are not necessarily indicative of the results to be expected for the entire year or for any future period. These unaudited, condensed, consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in or incorporated into the Company's latest Annual Report on Form 10-K. PERVASIVENESS OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION - These unaudited, condensed, consolidated financial statements include the accounts of Iomega Corporation and its wholly-owned subsidiaries after elimination of all material intercompany accounts and transactions. REVENUE RECOGNITION - The Company's customers include original equipment manufacturers ("OEMs"), end users, retailers, distributors and value-added manufacturers. Some retail and distribution customer agreements have provisions that allow the customer to return product under certain conditions within specified time periods. Revenue, less reserves for returns, is generally recognized upon shipment to the customer. In addition to reserves for returns, the Company defers recognition of revenue on estimated excess inventory in the distribution and retail channels. For this purpose, excess inventory is the amount of inventory that exceeds the channels' 30-day requirements as estimated by management. The gross margin associated with deferral of revenue for returns and estimated excess channel inventory totaled $31.3 million and $29.8 million at June 25, 2000 and December 31, 1999, respectively, and is included in "Other current liabilities" in the accompanying condensed consolidated balance sheets. PRICE PROTECTION AND VOLUME REBATES - The Company has agreements with certain of its customers which, in the event of a price decrease, allow those customers (subject to certain limitations) credit equal to the difference between the price originally paid and the reduced price on units in the customers' inventories at the date of the price decrease. When a price decrease is anticipated, the Company establishes reserves against gross accounts receivable for amounts estimated to be reimbursed to the qualifying customers. In addition, the Company records reserves at the time of shipment for estimated volume and other channel rebates. These reserves for volume and other channel rebates and price protection credits totaled $29.0 million and $37.8 million at June 25, 2000 and December 31, 1999, respectively, and are netted against accounts receivable in the accompanying condensed consolidated balance sheets. During the second quarter of 2000, the Company reversed approximately $6 million of reserves associated with prior Zip drive and media rebate programs due to lower than estimated redemption rates. These programs ended on May 31, 2000. FOREIGN CURRENCY TRANSLATION - For purposes of consolidating non-U.S. operations, the Company has determined the functional currency for its non-U.S. operations to be the U.S. dollar. Therefore, translation gains and losses are included in the determination of income. CASH AND CASH EQUIVALENTS - For the purposes of the consolidated statements of cash flows, cash and cash equivalents include all marketable securities purchased with maturities of three or fewer months. Cash equivalents consist primarily of investments in money market mutual funds, commercial paper, auction rate, money market preferred stock investments, taxable and non-taxable municipal bonds and notes and are recorded at cost, which approximates fair value. TEMPORARY INVESTMENTS - Investments with maturities in excess of three months are classified as temporary investments. Temporary investments at June 25, 2000 and December 31, 1999 primarily consist of municipal notes, common bonds and paper, government securities, commercial paper and corporate notes, bonds and paper. The Company minimizes its credit risk associated with temporary investments by using investment grade, highly liquid securities. At June 25, 2000, the Company has classified all of its temporary investments as available-for-sale securities. Due to the grade of the investments, the adjusted cost basis and the market value of the investments was not materially different at June 25, 2000 and no comprehensive income or loss was recorded for the second quarter of 2000. At December 31, 1999 the Company classified $18.3 million of its temporary investments as available-for-sale securities and the remaining $19.9 million as held-to-maturity. Due to the timing of purchases (all available-for-sale securities were purchased after December 28, 1999) and the grade of the investments, no comprehensive income or loss was recorded in 1999. INVENTORIES - Inventories include direct materials, direct labor and manufacturing overhead costs and are recorded at the lower of cost (first-in, first-out) or market and consist of the following: June 25, December 31, 2000 1999
(In thousands) Raw materials $ 19,093 $ 27,254 Work-in-process 4,209 7,958 Finished goods 52,431 59,414 ------------ ------------ $ 75,733 $ 94,626 ============ ============
OTHER CURRENT LIABILITIES - Other current liabilities consist of the following:
June 25, December 31, 2000 1999 ----------- ------------ (In thousands) Accrued payroll, vacation and bonu $ 20,460 $ 13,189 Deferred revenue 31,287 29,832 Accrued warranty 17,923 17,211 Accrued advertising 43,979 36,971 Accrued restructuring charges 8,111 17,843 Purchase commitments 6,529 19,734 Other accrued liabilities 63,688 64,213 ----------- ----------- $ 191,977 $ 198,993 =========== ===========
EARNINGS PER COMMON SHARE - Basic earnings per common share ("Basic EPS") excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per common share ("Diluted EPS") reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock. Diluted EPS for the quarter and six months ended June 25, 2000 was determined under the assumption that the convertible subordinated notes were converted on March 27, 2000 and January 1, 2000, respectively. The computation of Diluted EPS does not assume exercise or conversion of securities that would have an antidilutive effect on net income (loss) per common share. Following is a reconciliation of the numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for all periods presented:
Net Income (Loss) Shares Per Share (Numerator) (Denominator) Amount -------------- --------------- ----------- (In thousands, except per share data) FOR THE QUARTER ENDED: JUNE 25, 2000 Basic EPS $ 40,370 270,638 $ 0.15 Effect of options - 1,497 - Effect of convertible subordinated notes 753 9,216 - ----------- ----------- ----------- DILUTED EPS $ 41,123 281,351 $ 0.15 =========== =========== =========== JUNE 27, 1999 Basic EPS $ (47,053) 269,115 $ (0.17) Effect of options - - - Effect of convertible subordinated notes - - - ----------- ----------- ---------- DILUTED EPS $ (47,053) 269,115 $ (0.17) =========== =========== ==========
For the quarter ended June 27, 1999, stock options and convertible subordinated notes were not included in the calculation of Diluted EPS as their inclusion would be antidilutive. For the quarters ended June 25, 2000 and June 27, 1999, there were outstanding options to purchase 9,205,564 and 4,444,199 shares, respectively, that had an exercise price greater than the average market price of the common shares for the respective quarters.
Net Income (Loss) Shares Per Share (Numerator) (Denominator) Amount -------------- --------------- ----------- (In thousands, except per share data) FOR THE SIX MONTHS ENDED: JUNE 25, 2000 Basic EPS $ 92,196 270,543 $ 0.34 Effect of options - 1,534 - Effect of convertible subordinated notes 1,505 9,216 (0.01) ----------- ----------- ----------- DILUTED EPS $ 93,701 281,293 $ 0.33 =========== =========== =========== JUNE 27, 1999 Basic EPS $ (46,484) 268,753 $ (0.17) Effect of options - - - Effect of convertible subordinated notes - - - ----------- ----------- ----------- DILUTED EPS $ (46,484) 268,753 $ (0.17) =========== =========== ===========
For the six months ended June 27, 1999, stock options and convertible subordinated notes were not included in the calculation of Diluted EPS as their inclusion would be antidilutive. For the six months ended June 25, 2000 and June 27, 1999, there were outstanding options to purchase 9,166,064 and 4,348,199 shares, respectively, that had an exercise price greater than the average market price of the common shares for the respective period. RECLASSIFICATIONS - Certain reclassifications were made to the prior periods' unaudited, condensed, consolidated financial statements to conform with the current period presentation. RECENT ACCOUNTING PRONOUNCEMENTS - In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS 137 and SFAS 138, is effective for the Company's fiscal year beginning 2001. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that the Company recognize all derivative instruments as either assets or liabilities in the condensed consolidated balance sheet and measure those instruments at fair value. The Company does not expect the adoption of SFAS 133, as amended, to have a material impact on the Company's results of operations, financial position or liquidity. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial Statements". SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. In June of 2000, the Securities and Exchange Commission issued SAB 101B which extended the implementation date to the Company's fourth quarter of 2000. The Company is currently assessing the impact, if any, of SAB 101 on its financial statements. In May 2000, the FASB's Emerging Issues Task Force ("EITF") issued EITF 00-14, "Accounting for Certain Sales Incentives". EITF 00-14 provides specific guidance on the accounting for and presentation of sales incentives offered by companies to their customers. These incentives include discounts, coupons, rebates and free products or services. The Company implemented the provisions of EITF 00-14 during the SECOND QUARTER OF 2000. The implementation did not have a material impact on the Company's financial statements. (2) INCOME TAXES For the quarter ended June 25, 2000, the Company recorded an income tax provision of $16.1 million on pre-tax income, substantially offset by a $15.3 million decrease in the valuation allowance for net deferred tax assets. The significant components of the Company's deferred taxes are as follows:
JUNE 25, 2000 DECEMBER 31, 1999 -------------- ----------------- (In thousands) Total deferred tax assets $ 99,314 $ 125,361 TOTAL DEFERRED TAX LIABILITIES (49,048) (37,347) ----------- ---------- Net deferred tax assets 50,266 88,014 LESS: VALUATION ALLOWANCE (50,266) (88,014) ----------- ---------- TOTAL NET DEFERRED TAXES $ - $ - =========== ===========
During the second quarter of 2000, the Company decreased its deferred tax asset valuation allowance by approximately $15 million, to $50 million due to a decrease in net deferred tax assets. The Company evaluates the realizablity of its net deferred tax assets on a quarterly basis. If the net deferred tax assets change in the future, if the Company's profitability changes, or if the valuation allowance requirements change, the valuation allowance may increase or decrease which will impact future income tax provisions. As of June 25, 2000, the Company had approximately $13.0 million of deferred tax assets related to foreign net operating loss carryforwards, which reflected a benefit of approximately $30.3 million in future tax deductions, for which the Company had established a valuation allowance. These carryforwards expire at various dates beginning in 2004. As of June 25, 2000, the Company had approximately $13.4 million of deferred tax assets related to domestic net operating loss carryforwards, which reflected a benefit of approximately $34.4 million in future tax deductions, for which the Company had established a valuation allowance. These carryforwards expire at various dates beginning in 2020. Additionally, as of June 25, 2000, the Company had approximately $23.9 million of domestic deferred tax assets, net of deferred liabilities, which reflected a benefit of approximately $61.3 million in future tax deductions. As of June 25, 2000, the Company had provided approximately $40 million in deferred tax liabilities on approximately $102 million of unremitted foreign earnings expected to be repatriated some time in the future. U.S. taxes have not been provided for additional unremitted foreign earnings of approximately $112 million, which are considered to be permanently invested in non-U.S. operations. The residual U.S. tax liabilities, if such amounts were remitted, would be approximately $44 million. Cash paid for taxes was $0.4 million and $3.1 million, respectively, for the quarters ended June 25, 2000 and June 27, 1999. For the six month period ended June 25, 2000, the Company recorded an income tax provision of $39.5 million on pre-tax income, substantially offset by a $37.8 million decrease in the valuation allowance for the net deferred income taxes. Cash paid for income taxes was $1.4 million and $4.2 million, respectively, for the first six months of 2000 and 1999. (3) DEBT NOTES PAYABLE - The Company cancelled its $75 million Senior Secured Credit Facility with Morgan Guaranty Trust Company of New York, Citibank, N.A. and a syndicate of other lenders two months prior to the Credit Facility's scheduled expiration date of July 14, 2000. There had been no borrowings under the Credit Facility in over six quarters. CAPITAL LEASES - The Company has entered into various agreements to obtain capital lease financing for the purchase of certain manufacturing equipment, software, office furniture and other equipment. The leases have terms ranging from 36 to 60 months and mature at various dates through April 2002. Principal and interest payments under the various agreements are payable monthly or quarterly. Interest rates are fixed and range from 7.1% to 10.2%. The leases are secured by the underlying leased equipment, software and furniture. Cash paid for interest was $0.7 and $2.6 million, respectively, for the quarters ended June 25, 2000 and June 27, 1999, including interest on capital leases. Included in interest expense for the second quarter of 2000 and 1999 was $0.4 million of amortization of deferred charges associated with obtaining the debt. All remaining deferred charges associated with the cancelled Credit Facility, which totaled $0.2 million, were expensed in the second quarter of 2000. For the first six months of 2000 and 1999, cash paid for interest was $2.7 million and $7.3 million, respectively, including interest on capital leases. Included in interest expense for the first six months of 2000 and 1999, was $0.9 million and $0.8 million, respectively, of amortization of deferred charges associated with obtaining the debt. All remaining deferred charges associated with the cancelled Credit Facility, which totaled $0.2 million, were expensed in the second quarter of 2000. (4) BUSINESS SEGMENT INFORMATION The Company has four reportable segments based primarily on the nature of the Company's customers and products: Zip, Jaz, ZipCD(TM) and Clik!(TM). The Zip segment involves the development, manufacTURE, distribution and sales of personal storage products and applications, including Zip disk and drive systems to retailers, distributors and OEMs throughout the world. The Jaz segment involves the development, manufacture, distribution and sales of professional storage products and applications, including Jaz disk and drive systems to distributors and retailers throughout the world. The Company's ZipCD segment involves the distribution and sales of CD-RW drives to retailers, distributors and resellers throughout the world and includes ZipCD disc and drive systems, which began shipping in limited quantities in August 1999. The Clik! segment involves the development, manufacture, distribution and sales of Clik! PC Card drives, Clik! OEM drives and Clik! disks for use with portable digital products such as digital cameras, audio players, handheld personal computers and notebook computers to retailers, distributors, OEMs and resellers throughout the world. The "Other" category includes products such as Ditto, floppy disks and other Nomai products and other miscellaneous items. The accounting policies of the segments are the same as those described in Note 1 "Significant Accounting Policies". Intersegment sales, eliminated in consolidation, are not material. The Company evaluates performance based on product profit margin for each segment. Product profit margin is defined as sales and other income directly related to a segment's operations, less both fixed and variable manufacturing costs, research and development expenses and selling, general and administrative expenses directly related to a segment's operations. When such costs and expenses exceed sales and other income, product profit margin is referred to as product loss. The expenses attributable to corporate activity are not allocated to the operating segments. The information in the following table is derived directly from the segments' internal financial information used for corporate management purposes.
REPORTABLE OPERATING SEGMENT INFORMATION: FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED June 25, June 27, June 25, June 27, 2000 1999 2000 1999 ------------ ----------- ----------- ------------ (In millions) (In millions) SALES: Zip $ 237 $ 274 $ 516 $ 576 Jaz 38 66 90 129 ZipCD 25 - 35 - Clik! 3 1 5 6 Other 1 8 3 24 ----------- ------------ ----------- ----------- TOTAL SALES $ 304 $ 349 $ 649 $ 735 =========== ============ =========== =========== PRODUCT PROFIT MARGIN (LOSS) BEFORE RESTRUCTURING CHARGE: Zip $ 69 $ 33 $ 158 $ 84 Jaz 12 (2) 24 (5) ZipCD 1 (2) 1 (3) Clik! (3) (17) (20) (30) Other (2) (10) (5) (16) ----------- ----------- ----------- ----------- TOTAL PRODUCT PROFIT MARGIN 77 2 158 30 ----------- ----------- ----------- ----------- PRODUCT PROFIT MARGIN (LOSS) AFTER RESTRUCTURING CHARGE: Zip $ 69 $ 33 $ 158 $ 84 Jaz 13 (32) 25 (35) ZipCD 1 (2) 1 (3) Clik! (2) (17) (19) (30) Other (2) (18) (5) (24) ----------- ----------- ----------- ----------- TOTAL PRODUCT PROFIT MARGIN (LOSS) 79 (36) 160 (8) ----------- ----------- ----------- ----------- COMMON (WITH RESTRUCTURING ALLOCATED TO PPM): Corporate restructuring charge - (4) - (4) General corporate expenses (41) (32) (71) (57) Interest and other income (expense), net 3 - 5 (3) ---------- ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES $ 41 $ (72) $ 94 $ (72) =========== =========== =========== ===========
(5) RESTRUCTURING CHARGES During the quarter ended June 27, 1999, the Company recorded a pre-tax restructuring charge of $41.9 MILLION AS A RESULT OF STEPS THE COMPANY WAS TAKING TO ORGANIZE ALONG FUNCTIONAL LINES (for example, manufacturing, sales, etc.) as opposed to product lines. These actions included the exit of facilities, headcount reductions, the discontinuance of certain products and development projects related to enhancements and accessories associated with the Jaz product platform and consolidation of the Company's magnetic technology expertise at its headquarters in Roy, Utah. These actions included closing the Company's facilities in Milpitas, California and San Diego, California. The restructuring charge was comprised of $20.2 million for fixed assets and inventory related to the discontinuance of certain products and development projects related to enhancements and accessories associated with the Jaz product platform; $9.7 million for workforce reduction costs; $4.3 million for excess leasehold improvements, furniture and fixtures formerly utilized in the Milpitas and San Diego facilities; $3.0 million for lease termination costs for facilities located in Milpitas and San Diego; $4.7 million for workforce reduction costs, contract cancellation and other exit costs to consolidate the Company's operations in France and Scotland. This restructuring charge consisted of cash and non-cash charges of approximately $18 million and $24 million, respectively. There were no indications of permanent impairment of the assets prior to the restructuring actions. In connection with the Company's second quarter 1999 restructuring actions, the Company terminated 466 regular and temporary employees, consisting primarily of operations and product development employees located in Milpitas, San Diego and Roy. The Company pays severance on a continuous basis as opposed to a lump sum payment. In addition, several of the employees were offered retention packages into the third and fourth quarters of 1999, and therefore, their severance pay did not begin until later in 1999. During the second quarter of 2000, the Company reversed $1.6 million of restructuring reserves associated with the discontinuance of a development project. The excess restructuring reserves were a result of the Company negotiating reductions in purchase commitments or cancellation charges on inventory and fixed assets and higher than expected proceeds received from equipment sales. Certain of the facilities in California have not yet been subleased or cancelled. The Company is continuing to make monthly payments for cash flow purposes. Certain of the contract cancellations in France are under dispute and therefore have not been settled. The Company anticipates completing these restructuring actions by the end of 2000. Restructuring reserves are included in the Company's other current liabilities, inventory and property, plant and equipment as of June 25, 2000. Utilization of the second quarter 1999 restructuring reserves during the quarter ended June 25, 2000 is summarized below: UTILIZED Balance --------------------------- Balance MARCH 26, 2000 CASH NON-CASH REVERSALS JUNE 25, 2000 -------------- ------------ -------- ----------- -------------- (In thousands) SECOND QUARTER 1999 RESTRUCTURING ACTIONS: Discontinued Products/Projects: Fixed assets (a) $ 7,699 $ - $ (6,017) $ (1,189) $ 493 Purchase commitments (b) 716 (24) - (400) 292 Inventory (a) 532 - (524) (8) - Severance and benefits (b) 990 (562) - - 428 Other fixed asset charges (a) 3,096 - (2,671) - 425 Lease terminations (b) 1,848 (341) - - 1,507 France/Scotland Consolidation: Contract cancellation (b)(c) 1,414 - - - 1,414 Severance and benefits (b) 40 - - - 40 Lease cancellations (a) 157 - - - 157 Fixed assets (a) 217 (82) - - 135 Other exit costs (A) 35 - - - 35 ----------- ----------- ----------- ----------- ----------- $ 16,744 $ (1,009) $ (9,212) $ (1,597) $ 4,926 =========== =========== =========== =========== =========== Balance Sheet Breakout: Inventory reserves $ 532 $ - $ (524) $ (8) $ - Fixed asset reserves 10,674 - (8,688) (1,189) 797 Liabilities 5,538 (1,009) - (400) 4,129 ----------- ---------- ---------- ----------- ----------- $ 16,744 $ (1,009) $ (9,212) $ (1,597) $ 4,926 ========= =========== ========== =========== =========== (a) Amounts represent primarily non-cash charges. (b) Amounts represent primarily cash charges. (c ) Amounts relate to commitments associated with the manufacturing of floppy drives.
During the third quarter ended September 26, 1999, the Company recorded a pre-tax restructuring charge of $20.5 million as a result of restructuring actions initiated to consolidate worldwide disk manufacturing and refocus the Clik! product platform on the newer Clik! PC Card and OEM drives. An additional charge of $5.4 million primarily for severance and benefits was taken in the fourth quarter of 1999 in connection with these actions. These restructuring charges included reserves of $10.2 million relating to certain assets and exit costs such as cancellation fees associated with the cessation of manufacturing in Avranches, France; $11.5 million of inventory and fixed asset reserves associated with the older Clik! products; and $2.7 million for write-offs of intangibles and other miscellaneous charges. These restructuring charges consisted of cash and non-cash charges of approximately $9 million and $17 million, respectively. There can be no assurance that the Company will cease manufacturing operations in France without incurring significant legal or other costs that have not been accrued for in the restructuring charge. In addition, the Company has been notified of a tax audit to be conducted in France. There can be no assurance that the Company will not incur claims or assessments from this audit that have not been accrued. During the second quarter of 2000, the Company reversed $0.9 million of restructuring charges associated with Clik! product streamlining as a result of the Company negotiating reductions in purchase commitments. In connection with the Company's 1999 second half restructuring actions, the Company had a workforce reduction of 123 regular and temporary employees, consisting primarily of operations employees in Avranches, France and product development employees in Longmont, Colorado. The Company anticipates that the implementation of the restructuring actions within the United States will be complete by the end of September 2000. However, the legal requirements in France relating to workforce reductions are very strict and the social plan approved for the workforce can take up to two years to fully administrate. Therefore, the restructuring reserves related to manufacturing cessation in France will take longer to utilize. Restructuring reserves are included in the Company's other current liabilities, inventory and property, plant and equipment as of June 25, 2000. Utilization of the second half 1999 restructuring reserves during the quarter ended June 25, 2000 is summarized below: UTILIZED Balance --------------------------- Balance MARCH 26, 2000 CASH NON-CASH REVERSALS JUNE 25, 2000 -------------- ------------ -------- ----------- -------------- (In thousands) SECOND HALF 1999 RESTRUCTURING ACTIONS: Clik! Streamlining: Fixed assets (a) $ 2,066 $ - $ (539) $ - $ 1,527 Purchase commitments (b) 1,508 - (12) (900) 596 Manufacturing Cessation: Fixed assets (a) 2,465 - (695) - 1,770 Other assets (a) 275 - - - 275 Other commitments (b) 2,709 (125) - - 2,584 Severance and benefits (b) 1,746 (944) - - 802 SEVERANCE AND BENEFITS (B) 25 (25) - - - ---------- ----------- ----------- ----------- ----------- $ 10,794 $ (1,094) $ (1,246) $ (900) $ 7,554 ========== =========== =========== =========== =========== Balance Sheet Breakout: Fixed asset reserves (a) $ 4,531 $ - $ (1,234) $ - $ 3,297 Other (a) 47 - - - 47 Inventory reserves (a) 228 - - - 228 LIABILITIES (B) 5,988 (1,094) (12) (900) 3,982 ----------- ----------- ----------- ----------- ----------- $ 10,794 $ (1,094) $ (1,246) $ (900) $ 7,554 =========== =========== =========== =========== ========== (a) Amounts represent primarily non-cash charges. (b) Amounts represent primarily cash charges.
(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) OTHER MATTERS SIGNIFICANT CUSTOMERS - DURING THE QUARTER ended June 25, 2000, sales to Ingram Micro, Inc. and Tech Data Corporation accounted for 20.6% and 12.1% of consolidated sales, respectively, compared to 14.3% and 10.4%, respectively, for the corresponding period of 1999. No other single customer accounted for more than 10% of the Company's sales for these periods. During the six months ended June 25, 2000, sales to Ingram Micro, Inc. accounted for 14.7% of consolidated sales compared to 12.6% for the corresponding period of 1999. No other single customer accounted for more than 10% of the Company's sales for these periods. FORWARD EXCHANGE CONTRACTS - The Company has commitments to sell and purchase foreign currencies relating to forward exchange contracts in order to hedge against future currency fluctuations. At June 25, 2000, outstanding forward exchange sales (purchase) contracts, which all mature in September 2000, were as follows:
Contracted Spot Currency Amount Forward rate Rate ---------------------- ------------- -------------- ------ European Euro 20,000,000 1.06 1.07 Japanese Yen (422,000,000) 102.78 105.02 Singapore Dollar 2,850,000 1.72 1.73 Swiss Franc (1,800,000) 1.63 1.66
The contracts are revalued at the month-end spot rate. Gains and losses on foreign currency contracts intended to be used to hedge operating requirements are reported currently in income. Gains and losses on foreign currency contracts intended to meet firm commitments are deferred and are recognized as part of the cost of the underlying transaction being hedged. At June 25, 2000, all of the Company's foreign currency contracts were being used to hedge operating requirements. The Company's theoretical risk in these transactions is the cost of replacing, at current market rates, these contracts in the event of default by the counter-party. (8) COMMITMENTS AND CONTINGENCIES LITIGATION As previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 1999 and the Company's Quarterly Report on Form 10-Q for the quarter ended March 26, 2000, on July 6, 1999, THE COMPANY INITIATED LITIGATION AGAINST CASTLEWOOD SYSTEMS, INC. ("CASTLEWOOD"), IOMEGA CORPORATION V. CASTLEWOOD SYSTEMS, INC., in the United States District Court in the District of Utah for infringing the Company's U.S. Patent No. 4,458,273 and U.S. Patent No. 5,854,719 and for infringing and diluting the Company's registered trademarks "Iomega", "Zip" and "Jaz". The complaint further alleged that Castlewood had engaged in federal unfair competition, common law unfair competition and common law unjust enrichment. The complaint requests monetary damages and injunctive relief enjoining Castlewood from further infringement. On August 18, 1999, Castlewood filed an answer and counterclaims, denying the Company's claims and requesting a declaratory judgment that the Company's patents are invalid. On September 9, 1999, the Company filed a reply to the counterclaims, denying that the patents are invalid. On September 17, 1999, the Company also initiated litigation against Castlewood in the Paris District Court based on claims of copyright and patent infringement. Additionally, on September 20, 1999, the Company initiated litigation against Motek, a French retailer of Castlewood's products, in the Paris District Court. On November 15, 1999, Castlewood filed an amended answer and counterclaims, adding several affirmative defenses. The Company filed a reply to this amended answer and counterclaims on January 5, 2000. The court has since denied a motion for a preliminary injunction with respect to the Company's patent claim, and granted a motion for a preliminary injunction with respect to the Company's trademark claims. On April 11, 2000, the Company also initiated litigation against Castlewood in the United States District Court for the District of Utah for infringement of the Company's U.S. Patent No. 6,049,444. The Company's complaint requests monetary damages and injunctive relief enjoining Castlewood from further infringement. Castlewood's response to the complaint is due on or before September 15, 2000. The Company continues to be committed to vigorously protecting and enforcing its intellectual property rights and to attacking unfair competition. As previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 1999 and the Company's Quarterly Report on Form 10-Q for the quarter ended March 26, 2000, on May 27, 1998, SCOTT D. ORA FILED A COMPLAINT AGAINST THE COMPANY AND OTHER PARTIES. THE ACTION, CAPTIONED ORA V. IOMEGA CORPORATION, ET AL., was filed in Superior Court of the State of California for the County of Los Angeles and alleged that the Company and certain of its former officers violated certain federal and state securities laws and alleged that Kim B. Edwards, former Chief Executive Officer and director of the Company, breached his duties as a director of the Company. The Company successfully removed the action to the United States District Court for the Central District of California. On February 9, 1999, the Court dismissed five of the complaints original seven causes of action. On August 18, 1999, the Court dismissed the remaining two causes of action, but gave Ora the opportunity to file an amended complaint with respect to those two counts. On November 1, 1999, Ora filed an amended complaint repleading the two causes of action dismissed on August 18, 1999 and bringing two new related conspiracy causes of action. The amended complaint seeks an unspecified amount of damages. On December 15, 1999, the Company and the individual defendants filed a motion to dismiss the amended complaint. On April 12, 2000, the Court dismissed the amended complaint in its entirety, entering judgment in the Company's favor. On May 7, 2000, the plaintiff filed a notice of appeal to the Ninth Circuit Court of Appeals. The plaintiff must file an opening appeal brief on August 29, 2000. The Company intends to defend vigorously against this appeal. As previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 1999 and the Company's Quarterly Report on Form 10-Q for the quarter ended March 26, 2000, on September 10, 1998, A PURPORTED CLASS ACTION LAWSUIT, RINALDI ET AL. V. IOMEGA CORPORATION, was filed against the Company in the Superior Court of Delaware, New Castle County. The suit alleges that a defect in the Company's Zip drives causes an abnormal clicking noise that may indicate damage to the Zip drive or disks. The plaintiffs sought relief pursuant to claims of breach of warranty, violation of the Delaware Consumer Fraud Act, and negligent design, manufacture and failure to warn. On September 3, 1999, the Court dismissed the claims of breach of warranty and violation of the Consumer Fraud Act, granting the plaintiffs the opportunity to amend the latter claim. On January 31, 2000, the plaintiffs filed an amended complaint, reasserting their claim under the Delaware Consumer Fraud Act and on February 28, 2000, the Company moved to dismiss this amended claim. With respect to this motion, on April 10, 2000, the Attorney General of the State of Delaware filed a brief in opposition, and, on July 27, 2000, by subpoena, also requested documents from the Company relating to its advertising in Delaware for the period January 1998 through December 1999. The Court has not yet decided the motion to dismiss, and the Company is in the process of responding to the Attorney General's subpoena. On April 25, 2000, the plaintiffs moved to further amend their complaint to add an additional plaintiff who is a Delaware resident, which amendment the Court allowed on May 23, 2000 over the Company's opposition. In connection with the same matter, on February 28, 2000, two of the plaintiffs served on the Company a "Notice of Claim" under Section 17.46(b) of the Texas Deceptive Trade Practices Act asserting allegations similar to those made in connection with the plaintiffs' Delaware Consumer Fraud Act claim (the "Texas Claim"). The Texas Claim purports to be on behalf of the two plaintiffs and a class of others similarly situated in the State of Texas, and demands relief of $150 for each Zip drive purchased by a class member, $100 for mental anguish damages to each class member and attorneys' fees and costs. Formal litigation in connection with the Texas Claim has not been commenced. The Company intends to vigorously defend against this suit and the Texas Claim. Although the Company does not expect this suit or the Texas Claim to have a material adverse effect on the Company's ongoing business, results of operations or financial condition, an adverse judgment or settlement could have a material adverse effect on the operating results reported by the Company for the period in which any such adverse judgment or settlement occurs. As previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 1999, ON JUNE 15, 1999, A PATENT INFRINGEMENT LAWSUIT, VALITEK, INC. V. IOMEGA CORPORATION, was filed against the Company in the United States District Court for the Eastern District of Pennsylvania. The suit alleges patent infringement. The complaint requests injunctive relief enjoining the Company from the alleged infringement and monetary damages. The Company intends to vigorously defend against this suit. As previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 1999, on December 29, 1999, the Company filed a request in Geneva, Switzerland for arbitration against Marc Frouin, Herve Frouin and Marine Frouin, the former principal shareholders of Nomai S.A. ("Nomai"), which is now a subsidiary of the Company. The arbitration request sought indemnification from the former shareholders for breaches of numerous representations and warranties under the Stock Purchase Agreement pursuant to which the Company acquired Nomai. On July 26, 2000, the Company entered into an agreement with the former shareholders settling any claims the Company had or may in the future have against the former shareholders. Under the settlement agreement, the Company will receive approximately CHF 6 million (approximately U.S. $3.6 million as of June 25, 2000), which represented substantially all of the amounts remaining in the escrow created at the time of the acquisition. This will be accounted for as a reduction of goodwill. As previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 1999, on February 18, 2000, Maitre Jean-Jacques Savenier, the Commissaire a l'execution du PLAn (bankruptcy trustee) filed a complaint against the Company's subsidiary, Nomai. Maitre Jean-Jacques Savenier claims that Nomai has not complied with investment and employment related commitments made by Nomai's former management before the Commercial Court in 1997. In 1997, Nomai acquired certain assets from RPS Media SA in bankruptcy, with the consent and under the supervision of the Commercial Court of Albi, pursuant to French bankruptcy law provisions. The action seeks a daily penalty against Nomai of FF 100,000 (approximately $15,000) until Nomai invests FF 48,000,000 (approximately $7.4 million) and hires 100 people. The Company intends to vigorously defend against the lawsuit. On May 18, 2000, Conseil & Technique, Soterem and IDCC (subcontractors under a research and development contract) filed a lawsuit before the Commercial Court of Toulouse, France against Nomai's former subsidiary Albi Media Manufacturing, SARL ("AMM"). Iomega's subsidiary Nomai is obligated to indemnify for and defend against the lawsuit pursuant to the agreement whereby Nomai divested its ownership of AMM to a new owner. Neither Iomega nor Nomai are parties to the lawsuit. The lawsuit alleges breach of contract and other claims relating to a research and development project among AMM and the plaintiffs. The lawsuit claims total damages of 67 million French francs. An initial procedural hearing was held in the case in June 2000, and the next hearing is scheduled for September 2000. It is the opinion of management, after discussions with legal counsel, that, except as discussed above, the ultimate dispositions of these lawsuits and claims will not have a material adverse effect on the Company's financial position or results of operations. STOCK OPTION EXCHANGE PROGRAM On April 19, 2000, the Company's shareholders approved an Employee Stock Option Exchange Program ("the Exchange Program"), pursuant to which the Company has granted approximately 1.1 million new stock options at an exercise price of $3.59 in exchange for approximately 1.8 million previously outstanding stock options which had exercise prices above $3.59. The new options issued under the Exchange Program are subject to variable plan accounting in accordance with FASB Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation". Under variable plan accounting, the Company is required to recognize compensation expense in its statement of operations for any increase in the market price of the Company's Common Stock above $4.00 (the market price of July 1, 2000 which is the effective date of FASB Interpretation No. 44). This compensation expense must be recorded on a quarterly basis until the option is exercised, forfeited or expires unexercised. The impact of the new options granted under the Exchange Program on the Company's financial statements will depend on quarterly fluctuations in the Company's Common Stock price and the dates of exercises, forfeitures or cancellations of the new options by employees. Depending on these factors, the Company could be required to record significant compensation expense during the next ten years. Moreover, because the precise amount of the compensation expense will depend on the market price of the Common Stock at the end of each quarterly period, the Company will not be able to forecast in advance the amount of compensation expense that it will incur in any future period. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: The Company's fiscal calendar was recently approved for fiscal 2001 which management believes better aligns the Company's fiscal quarters with its customer's fiscal quarters. The quarters for 2001 will end on the following dates compared to the corresponding dates for 2000: 2001 2000 ----- ------ Q1 April 1 March 26 Q2 July 1 June 25 Q3 Sept. 30 Sept. 24 Q4 Dec. 31 Dec. 31 Under the calendar for fiscal 2001, the first quarter of 2001 will have 5 more days than the first quarter of 2000 and the fourth quarter of 2001 will have 5 less days than the fourth quarter of 2000. The Company plans to continue its practice of releasing earnings on the third Thursday following quarter end. BUSINESS SEGMENT INFORMATION The Company has four reportable segments based primarily on the nature of the Company's customers and products: Zip, Jaz, ZipCD and Clik!. The Zip segment involves the development, manufacture, distribution and sales of personal storage products and applications, including Zip disk and drive systems to retailers, distributors and OEMs throughout the world. The Jaz segment involves the development, manufacture, distribution and sales of professional storage products and applications, including Jaz disk and drive systems to distributors and retailers throughout the world. The Company's ZipCD segment involves the distribution and sales of CD-RW drives to retailers, distributors and resellers throughout the world and includes ZipCD disc and drive systems, which began shipping in limited quantities in August 1999. The Clik! segment involves the development, manufacture, distribution and sales of Clik! PC Card drives, Clik! OEM drives and Clik! disks for use with portable digital products such as digital cameras, audio players, handheld personal computers and notebook computers to retailers, distributors, OEMs and resellers throughout the world. The "Other" category includes products such as Ditto, floppy disks and other Nomai products and other miscellaneous items. The accounting policies of the segments are the same as those described in Note 1 "Significant Accounting Policies". Intersegment sales, eliminated in consolidation, are not material. The Company evaluates performance based on product profit margin for each segment. Product profit margin is defined as sales and other income directly related to a segment's operations, less both fixed and variable manufacturing costs, research and development expenses and selling, general and administrative expenses directly related to a segment's operations. When such costs and expenses exceed sales and other income, product profit margin is referred to as product loss. The expenses attributable to corporate activity are not allocated to the operating segments. The information in the following table is derived directly from the segments' internal financial information used for corporate management purposes.
REPORTABLE OPERATING SEGMENT INFORMATION: FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED June 25, June 27, June 25, June 27, 2000 1999 2000 1999 ------------ ----------- ----------- ------------ (In millions) (In millions) SALES: Zip $ 237 $ 274 $ 516 $ 576 Jaz 38 66 90 129 ZipCD 25 - 35 - Clik! 3 1 5 6 Other 1 8 3 24 ----------- ------------ ----------- ----------- TOTAL SALES $ 304 $ 349 $ 649 $ 735 =========== ============ =========== =========== PRODUCT PROFIT MARGIN (LOSS) BEFORE RESTRUCTURING CHARGE: Zip $ 69 $ 33 $ 158 $ 84 Jaz 12 (2) 24 (5) ZipCD 1 (2) 1 (3) Clik! (3) (17) (20) (30) Other (2) (10) (5) (16) ----------- ----------- ----------- ----------- TOTAL PRODUCT PROFIT MARGIN 77 2 158 30 ----------- ----------- ----------- ----------- PRODUCT PROFIT MARGIN (LOSS) AFTER RESTRUCTURING CHARGE: Zip $ 69 $ 33 $ 158 $ 84 Jaz 13 (32) 25 (35) ZipCD 1 (2) 1 (3) Clik! (2) (17) (19) (30) Other (2) (18) (5) (24) ----------- ----------- ----------- ----------- TOTAL PRODUCT PROFIT MARGIN (LOSS) 79 (36) 160 (8) ----------- ----------- ----------- ----------- COMMON (WITH RESTRUCTURING ALLOCATED TO PPM): Corporate restructuring charge - (4) - (4) General corporate expenses (41) (32) (71) (57) Interest and other income (expense), net 3 - 5 (3) ---------- ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES $ 41 $ (72) $ 94 $ (72) =========== =========== =========== ===========
RESULTS OF OPERATIONS The Company reported sales of $304 million and net income of $40 million, or $0.15 per diluted share, in the second quarter of 2000, which included $15 million, or $0.05 per diluted share, attributable to a decrease in the Company's valuation allowance for net deferred tax assets, and also included $3 million, or $0.01 per diluted share, attributable to a reversal of restructuring reserves previously recorded. This compares to sales of $349 million and a net loss of $47 million, or ($0.17) per diluted share, in the second quarter of 1999, which included a pre-tax restructuring charge of $42 million, or ($0.10) per diluted share. For the first six months of 2000, the Company reported sales of $649 million and net income of $92 million, or $0.33 per diluted share, which included $35 million, or $0.13 per diluted share, attributable to a decrease in the Company's valuation allowance for net deferred tax assets, and also included $3 million, or $0.01 per diluted share, attributable to a reversal of restructuring reserves previously recorded. This compares to sales of $735 million and a net loss of $47 million, or ($0.17) per diluted share, for the first six months of 1999, which included a pre-tax restructuring charge of $42 million, or ($0.10) per diluted share. SALES Sales for the quarter ended June 25, 2000 of $304 million decreased by $45 million, or 13% when compared to $349 million in the corresponding period of 1999. This decrease was primarily a result of reduction in Zip and Jaz sales, offset in part by sales of ZipCD products. Zip product sales in the second quarter of 2000 totaled $237 million, representing a decrease of 14% when compared to sales of $274 million in the corresponding period of 1999. Sales of Zip products represented 78% of total sales for the second quarter of 2000, compared to 79% in the corresponding period of 1999. Zip drive sales of $128 million for the second quarter of 2000 decreased by $21 million, or 15%, when compared to $149 million in the corresponding period of 1999. Zip drive unit shipments decreased by 27% from the second quarter of 1999 to the second quarter of 2000. The decline in Zip drive revenue is primarily a result of lower volumes, price reductions and second quarter 2000 rebate programs, partially offset by a higher mix of Zip 250MB sales and a $3 million reversal of reserves for prior Zip drive rebate programs due to lower than estimated redemption rates. The prior Zip drive rebate programs ended on May 31, 2000. Zip disk sales of $109 million for the second quarter of 2000 decreased by $16 million, or 13%, when compared to $125 million in the corresponding period of 1999. Zip disk unit shipments decreased by 17% from the second quarter of 1999 to the second quarter of 2000. The decline in disk revenue was primarily a result of lower volumes and second quarter 2000 rebate programs, partially offset by a $3 million reversal of reserves relating to prior Zip disk rebate programs due to lower than estimated redemption rates. The prior Zip disk rebate programs ended on May 31, 2000. Jaz product sales in the second quarter of 2000 totaled $38 million, representing a decrease of 42% from the second quarter of 1999. Sales of Jaz products represented 13% of total sales for the second quarter of 2000, compared to 19% in the corresponding period of 1999. Jaz drive unit shipments decreased by 44% as compared to the second quarter of 1999, while Jaz disk unit shipments decreased by 40%. ZipCD product sales in the second quarter of 2000 totaled $25 million, or 8% of total sales. The Company began shipping ZipCD products in limited quantities in August 1999. Clik! product sales in the second quarter of 2000 totaled $3 million, representing an increase of $2 million from the second quarter of 1999. Sales of Clik! products represented 1% of total sales in the second quarter of 2000, compared to less than 1% in the corresponding period of 1999. Clik! drive unit shipments increased by 22,000 units as compared to the second quarter of 1999, while Clik! disk shipments increased by 50,000 units. Geographically, sales in the Americas totaled $195 million, or 64% of total sales, in the second quarter of 2000, as compared to $232 million, or 67% of total sales, in the second quarter of 1999. This decrease was primarily due to decreased Zip and Jaz sales, partially offset by ZipCD sales. Sales in Europe totaled $78 million, or 26% of total sales, in the second quarter of 2000, as compared to $81 million, or 23% of total sales, in the second quarter of 1999. Sales in Asia totaled $30 million, or 10% of total sales, in the second quarter of 2000, as compared to $35 million, or 10% of total sales, in the second quarter of 1999. This decrease was primarily due to decreased Zip and Jaz sales, partially offset by increased ZipCD sales. Sales for the six months ended June 25, 2000 of $649 million decreased by $86 million, or 12%, when compared to $735 million in the corresponding period of 1999. This decrease was primarily a result of reductions in Zip, Jaz and Ditto sales, offset in part by sales of ZipCD products. Zip product sales for the first six months of 2000 totaled $516 million, representing a decrease of 10% when compared to sales of $576 million in the corresponding period of 1999. Sales of Zip products represented 79% of total sales for the first six months of 2000, compared to 78% in the corresponding period of 1999. Zip drive sales of $288 million for the first six months of 2000 decreased by $44 million, or 13%, when compared to $332 million in the corresponding period of 1999. Zip drive unit shipments decreased by 20% from the first six months of 1999 to the corresponding period of 2000. The decline in Zip drive revenue was primarily a result of lower volumes, price reductions and rebate programs and pricing actions in the first six months of 2000, partially offset by a higher mix of Zip 250MB sales and a $3 million reversal of reserves relating to prior Zip drive rebate programs as discussed above. Zip disk sales of $226 million for the first six months of 2000 decreased by $17 million, or 7%, when compared to $243 million in the corresponding period of 1999. Zip disk unit shipments decreased by 17% from the first six months of 1999 to the first six months of 2000. The decline in disk revenue was primarily a result of lower volumes and first six months 2000 rebate programs, partially offset by a $3 million reversal of reserves relating to prior Zip disk rebate programs as discussed above and an increased mix of higher margin Zip 250MB disks. Jaz product sales in the first six months of 2000 totaled $90 million, representing a decrease of 30% from the corresponding period of 1999. Sales of Jaz products represented 14% of total sales for the first six months of 2000, compared to 18% in the corresponding period of 1999. Jaz drive unit shipments decreased by 40% as compared to the corresponding period of 1999, while Jaz disk unit shipments decreased by 19%. ZipCD product sales in the first six months of 2000 totaled $35 million, or 6% of total sales. The Company began shipping ZipCD products in limited quantities in August 1999. Clik! product sales in the first six months of 2000 totaled $5 million, representing a decrease of $1 million from the corresponding period of 1999 due to price reductions. Sales of Clik! products represented approximately 1% of total sales in the first six months of 2000 and 1999. Clik! drive unit shipments increased by 11,000 units as compared to the first six months of 1999, while Clik! disk shipments increased by 136,000 units. For the first six months of 2000, sales in the Americas were $413 million, or 64% of total sales in the first six months of 2000, as compared to $482 million, or 66% of total sales, for the first six months of 1999. Sales in Europe were $174 million, or 27% of total sales in the first six months of 2000, as compared to $185 million or 25% of total sales, for the first six months of 1999. Sales in Asia were $62 million, or 10% of total sales, in the first six months of 2000, as compared to $68 million, or 9% of total sales, in the first six months of 1999. GROSS MARGIN The Company's overall gross margin was $120 million, or 40%, in the second quarter of 2000, as compared to $76 million, or 22%, in the second quarter of 1999. This increase in gross margin for the second quarter of 2000 was due to increased gross margins for all product lines. The gross margin increases were attributable to an increased mix of higher margin Zip 250MB drives (most of which are sold as higher margin aftermarket products) and Jaz disks, lower manufacturing and operating costs in all product lines, the reversal of reserves relating to prior Zip rebate programs as discussed above and contributions from the ZipCD products. This increase was partially offset by product price reductions and second quarter 2000 rebate and pricing programs. The Company's overall gross margin for the first six months of 2000 was $248 million, or 38%, compared to $170 million, or 23%, for the corresponding period of 1999. The increase in gross margin for the first six months of 2000 was due to increased gross margins for all product lines. The gross margin increases were primarily attributable to an increased mix of higher margin Zip 250MB drives (most of which are sold as higher margin aftermarket products) and Jaz disks, lower manufacturing and operating costs in all product lines and the reversal of reserves relating to prior rebate programs as discussed above. This increase was partially offset by product price reductions and second quarter 2000 rebate and pricing programs. Future gross margin percentage will be impacted by the sales mix between aftermarket and OEM channels, as OEM sales generally provide lower gross margins than sales through other channels, and by the sales mix of Zip 100MB and Zip 250MB drives and disks. Gross margins for the remainder of 2000 will also depend on sales volumes of Zip and Jaz disks, which generate significantly higher gross margins than the corresponding drives, the mix between disks and drives and the mix between Zip, Jaz, ZipCD and Clik! products, any future pricing actions or promotions and potential start-up costs associated with new products. SEGMENT PRODUCT PROFIT MARGIN In the second quarter of 2000, Zip segment product profit margin of $70 million, or 29% of Zip sales, increased by $37 million, or 112%, when compared to Zip segment product profit margin of $33 million, or 12% of Zip sales, in the second quarter of 1999. This increase was primarily due to an increased mix of higher margin Zip 250MB drives, decreased Zip manufacturing and operating expenses, the reversal of reserves relating to prior rebate programs as discussed above and a higher mix of aftermarket sales. The second quarter improvements were partially offset by a decrease in shipments of higher margin Zip disks, lower overall volume shipments of drives, price reductions on Zip drives and rebate promotions on Zip products conducted in the second quarter to stimulate sales. Jaz segment product profit margin of $12 million, or 31% of Jaz sales, increased by $14 million in the second quarter of 2000 when compared to Jaz segment product loss of $2 million in the second quarter of 1999. This increase was primarily due to decreased manufacturing and operating costs as a result of the restructuring actions taken at the end of June 1999, partially offset by lower disk and drive volumes. ZipCD segment product profit margin was $1 million, or 3% of ZipCD sales for the second quarter of 2000. The Company began shipping ZipCD products in limited quantities during August 1999. Clik! segment product loss of $3 million decreased by approximately $14 million in the second quarter of 2000 when compared to Clik! segment product loss of $17 million in the second quarter of 1999. This improvement was primarily due to decreased manufacturing and operating costs. For the first six months of 2000, Zip product profit margin of $158 million, or 31% of Zip sales, increased by $74 million, or 87%, when compared to the corresponding period of 1999. The increase was primarily due to an increased mix of higher margin Zip 250MB drives, a higher mix of aftermarket sales, decreased Zip manufacturing and operating expenses and a reversal of reserves related to prior rebate programs as discussed above. The six month improvements were partially offset by price reductions and overall lower volume shipments of drives and disks. Jaz segment product profit margin of $23 million, or 27% of Jaz sales, increased by $30 million for the first six months of 2000 when compared to the corresponding period of 1999. The increase was attributable to lower overall operating expenses, partially offset by lower disk and drive volumes. ZipCD segment product profit margin was $1 million, or 2% of ZipCD sales for the first six months of 2000. The Company began shipping ZipCD products in limited quantities during August 1999. Clik! segment product loss of $20 million for the first six months of 2000 decreased by $10 million when compared to the corresponding period of 1999. This improvement was primarily due to lower manufacturing and operating expenses, partially offset by price reductions. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses of $69 million for the second quarter of 2000 decreased by $14 million, or 16%, when compared to the second quarter of 1999, and decreased slightly as a percentage of sales to 23% from 24% in the second quarter of 1999. The decrease was primarily attributable to the overall decrease in marketing and sales programs. Selling, general and administrative expenses of $135 million for the first six months of 2000 decreased by $18 million, or 12%, when compared to the first six months of 1999, and remained relatively constant as a percentage of sales with the corresponding period of 1999 at 21%. The decrease was primarily attributable to the overall decrease in marketing and sales programs. Management expects selling, general and administrative expenses, in absolute dollars, to increase from second quarter of 2000 levels during the remainder of 2000 due to planned additional advertising and promotional expenses in the United States, Europe, Asia and Latin America. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses of $15 million for the second quarter of 2000 decreased by $8 million, or 34%, when compared to the second quarter of 1999, and decreased as a percentage of sales to 5% from 7% in the second quarter of 1999. The decrease was attributable to decreased spending on Jaz, Zip and Clik! projects. Research and development expenses of $26 million for the six months ended June 25, 2000 decreased by $17 million, or 40%, when compared to the corresponding period of 1999. Research and development expenses decreased as a percentage of sales to 4% from 6% in the first six months of 1999. The decrease is attributable to decreased spending on Zip, Jaz and Clik! projects. Management expects research and development expenses, in absolute dollars, to increase from second quarter of 2000 levels during the remainder of 2000 as a result of planned increases in resources dedicated to new product development and existing product enhancements. RESTRUCTURING CHARGES During the quarter ended June 27, 1999, the Company recorded a pre-tax restructuring charge of $42 million as a RESULT OF STEPS THE COMPANY WAS TAKING TO ORGANIZE ALONG FUNCTIONAL LINES (for example, manufacturing, sales, etc.) as opposed to product lines. These actions included the exit of facilities, headcount reductions, the discontinuance of certain products and development projects related to enhancements and accessories associated with the Jaz product platform and consolidation of the Company's magnetic technology expertise at its headquarters in Roy, Utah. These actions included closing the Company's facilities in Milpitas, California and San Diego, California. The restructuring charge was comprised of $20 million for fixed assets and inventory related to the discontinuance of certain products and development projects related to enhancements and accessories associated with the Jaz product platform; $10 million for workforce reduction costs; $4 million for excess leasehold improvements, furniture and fixtures formerly utilized in the Milpitas and San Diego facilities; $3 million for lease termination costs for facilities located in Milpitas and San Diego; $5 million for workforce reduction costs, contract cancellation and other exit costs to consolidate the Company's operations in France and Scotland. This restructuring charge consisted of cash and non-cash charges of approximately $18 million and $24 million, respectively. There were no indications of permanent impairment of the assets prior to the restructuring actions. In connection with the Company's second quarter 1999 restructuring actions, the Company terminated 466 regular and temporary employees, consisting primarily of operations and product development employees located in Milpitas, San Diego and Roy. The Company pays severance on a continuous basis as opposed to a lump sum payment. In addition, several of the employees were offered retention packages into the third and fourth quarters of 1999, and therefore, their severance pay did not begin until later in 1999. During the second quarter of 2000, the Company reversed $2 million of restructuring reserves associated with the discontinuance of a development project. The excess restructuring reserves were a result of negotiating reductions in purchase commitments or cancellation charges on inventory and fixed assets and higher than expected proceeds received from equipment sales. Certain of the facilities in California have not yet been subleased or cancelled. The Company is continuing to make monthly payments for cash flow purposes. Certain of the contract cancellations in France are under dispute and therefore have not been settled. The Company anticipates completing these restructuring actions by the end of 2000. Restructuring reserves are included in the Company's other current liabilities, inventory and property, plant and equipment as of June 25, 2000. Utilization of the second quarter 1999 restructuring reserves during the quarter ended June 25, 2000 is summarized below: UTILIZED Balance --------------------------- Balance MARCH 26, 2000 CASH NON-CASH REVERSALS JUNE 25, 2000 -------------- ------------ -------- ----------- -------------- (In thousands) SECOND QUARTER 1999 RESTRUCTURING ACTIONS: Discontinued Products/Projects: Fixed assets (a) $ 7,699 $ - $ (6,017) $ (1,189) $ 493 Purchase commitments (b) 716 (24) - (400) 292 Inventory (a) 532 - (524) (8) - Severance and benefits (b) 990 (562) - - 428 Other fixed asset charges (a) 3,096 - (2,671) - 425 Lease terminations (b) 1,848 (341) - - 1,507 France/Scotland Consolidation: Contract cancellation (b)(c) 1,414 - - - 1,414 Severance and benefits (b) 40 - - - 40 Lease cancellations (a) 157 - - - 157 Fixed assets (a) 217 (82) - - 135 Other exit costs (A) 35 - - - 35 ----------- ----------- ----------- ----------- ----------- $ 16,744 $ (1,009) $ (9,212) $ (1,597) $ 4,926 =========== =========== =========== =========== =========== Balance Sheet Breakout: Inventory reserves $ 532 $ - $ (524) $ (8) $ - Fixed asset reserves 10,674 - (8,688) (1,189) 797 Liabilities 5,538 (1,009) - (400) 4,129 ----------- ---------- ---------- ----------- ----------- $ 16,744 $ (1,009) $ (9,212) $ (1,597) $ 4,926 ========= =========== ========== =========== =========== (a) Amounts represent primarily non-cash charges. (b) Amounts represent primarily cash charges. (c ) Amounts relate to commitments associated with the manufacturing of floppy drives.
During the third quarter ended September 26, 1999, the Company recorded a pre-tax restructuring charge of $21 million as a result of restructuring actions initiated to consolidate worldwide disk manufacturing and refocus the Clik! product platform on the newer Clik! PC Card and OEM drives. An additional charge of $5 million primarily for severance and benefits was taken in the fourth quarter of 1999 in connection with these actions. These restructuring charges included reserves of $10 million relating to certain assets and exit costs such as cancellation fees associated with the cessation of manufacturing in Avranches, France; $12 million of inventory and fixed asset reserves associated with the older Clik! products; and $3 million for write-offs of intangibles and other miscellaneous charges. These restructuring charges consisted of cash and non-cash charges of approximately $9 million and $17 million, respectively. There can be no assurance that the Company will cease manufacturing operations in France without incurring significant legal or other costs that have not been accrued for in the restructuring charge. In addition, the Company has been notified of a tax audit to be conducted in France. There can be no assurance that the Company will not incur claims or assessments from this audit that have not been accrued. During the second quarter of 2000, the Company reversed $1 million of restructuring reserves associated with Clik! product streamlining as a result of the Company negotiating reductions in purchase commitments. In connection with the Company's 1999 second half restructuring actions, the Company had a workforce reduction of 123 regular and temporary employees, consisting primarily of operations employees in Avranches, France and product development employees in Longmont, Colorado. The Company anticipates that the implementation of the restructuring actions within the United States will be complete by the end of September 2000. However, the legal requirements in France relating to workforce reductions are very strict and the social plan approved for the workforce can take up to two years to fully administrate. Therefore, the restructuring reserves related to manufacturing cessation in France will take longer to utilize. Restructuring reserves are included in the Company's other current liabilities, inventory and property, plant and equipment as of June 25, 2000. Utilization of the second half 1999 restructuring reserves during the quarter ended June 25, 2000 is summarized below: UTILIZED Balance --------------------------- Balance MARCH 26, 2000 CASH NON-CASH REVERSALS JUNE 25, 2000 -------------- ------------ -------- ----------- -------------- (In thousands) SECOND HALF 1999 RESTRUCTURING ACTIONS: Clik! Streamlining: Fixed assets (a) $ 2,066 $ - $ (539) $ - $ 1,527 Purchase commitments (b) 1,508 - (12) (900) 596 Manufacturing Cessation: Fixed assets (a) 2,465 - (695) - 1,770 Other assets (a) 275 - - - 275 Other commitments (b) 2,709 (125) - - 2,584 Severance and benefits (b) 1,746 (944) - - 802 SEVERANCE AND BENEFITS (B) 25 (25) - - - ---------- ----------- ----------- ----------- ----------- $ 10,794 $ (1,094) $ (1,246) $ (900) $ 7,554 ========== =========== =========== =========== =========== Balance Sheet Breakout: Fixed asset reserves (a) $ 4,531 $ - $ (1,234) $ - $ 3,297 Other (a) 47 - - - 47 Inventory reserves (a) 228 - - - 228 LIABILITIES (B) 5,988 (1,094) (12) (900) 3,982 ----------- ----------- ----------- ----------- ----------- $ 10,794 $ (1,094) $ (1,246) $ (900) $ 7,554 =========== =========== =========== =========== ========== (a) Amounts represent primarily non-cash charges. (b) Amounts represent primarily cash charges.
INTEREST AND OTHER INCOME/EXPENSE Interest income of $5 million and $9 million in the second quarter and first six months of 2000, respectively, INCREASED FROM $1 MILLION AND $2 million in the second quarter and first six months of 1999, respectively. Higher average cash and investment balances and higher interest rates during the second quarter of 2000 resulted in an increase in interest income when compared to the corresponding quarter of 1999. Interest expense of $1 million and $3 million during the second quarter and first six months of 2000, respectively, decreased from $2 million and $4 million in the second quarter and first six months of 1999, respectively. In July 1998, the Company entered into a debt agreement with Idanta Partners Ltd. and another entity affiliated with David J. Dunn, Chairman of the Company's Board of Directors, under which the Company borrowed $40 million pursuant to a series of three notes. The Company repaid the principal and interest associated with these notes upon their maturity on March 31, 1999. Also included in other income and expense were bank charges, miscellaneous royalty income, gains and losses on disposal of assets and foreign currency gains and losses. INCOME TAXES For the quarter ended June 25, 2000, the Company recorded an income tax provision of $16 million on pre-tax income, substantially offset by a $15 million decrease in the valuation allowance for net deferred tax assets. During the second quarter of 2000, the Company decreased its deferred tax asset valuation allowance by approximately $15 million, to $50 million due to a decrease in net deferred tax assets. The Company evaluates the realizablity of its net deferred tax assets on a quarterly basis. If the net deferred tax assets change in the future, if the Company's profitability changes, or if the valuation allowance requirements change, the valuation allowance may increase or decrease which will impact future income tax provisions. As of June 25, 2000, the Company had approximately $13 million of deferred tax assets related to foreign net operating loss carryforwards, which reflected a benefit of approximately $30 million in future tax deductions, for which the Company had established a valuation allowance. These carryforwards expire at various dates beginning in 2004. As of June 25, 2000, the Company had approximately $13 million of deferred tax assets related to domestic net operating loss carryforwards, which reflected a benefit of approximately $34 million in future tax deductions, for which the Company had established a valuation allowance. These carryforwards expire at various dates beginning in 2020. Additionally, as of June 25, 2000, the Company had approximately $24 million of domestic deferred tax assets, net of deferred liabilities, which reflected a benefit of approximately $61 million in future tax deductions. As of June 25, 2000, the Company had provided approximately $40 million in deferred tax liabilities on approximately $102 million of unremitted foreign earnings expected to be repatriated some time in the future. U. S. taxes have not been provided for additional unremitted foreign earnings of approximately $112 million, which are considered to be permanently invested in non-U.S. operations. The residual U.S. tax liabilities, if such amounts were remitted, would be approximately $44 million. Cash paid for taxes was less than $1 million and $3 million, respectively, for the quarters ended June 25, 2000 and June 27, 1999. For the six month period ended June 25, 2000, the Company recorded an income tax provision of $40 million on pre-tax income, substantially offset by a $38 million decrease in the valuation allowance for the net deferred income taxes. Cash paid for income taxes was $1 million and $4 million, respectively, for the first six months of 2000 and 1999. SEASONALITY The Company sells its products primarily through computer product distributors, retailers and OEMs. The Company's Zip products are targeted primarily to the retail consumer and enterprise markets and to personal computer OEMs. The Company's Jaz products are targeted primarily to the business professional market. The Company's ZipCD products are targeted to the retail consumer and enterprise markets. The Company's Clik! products are targeted to the enterprise market and to various consumer electronics device OEMs. Management believes the markets for the Company's products are generally seasonal, with a higher proportional share of total sales occurring in the fourth quarter and sales slowdowns commonly occurring during the first quarter and summer months. Accordingly, revenues and growth rates for any prior period are not necessarily indicative of revenues or growth rates to be expected in any future period. LIQUIDITY AND CAPITAL RESOURCES At June 25, 2000, the Company had cash, cash equivalents and temporary investments of $354 million compared to $211 at December 31, 1999, an increase of $143 million. At June 25, 2000, $152 million of cash, cash equivalents and temporary investments was on deposit in foreign countries (primarily Western Europe), compared to $32 million at December 31, 1999. Working capital of $277 million increased by $82 million when compared to $195 million at December 31, 1999, primarily due to increases in cash, cash equivalents and temporary investments, partially offset by the classification of convertible subordinated notes to current liabilities. The Company's ratio of current assets to current liabilities of 1.8 to 1 increased slightly compared to 1.6 to 1 at December 31, 1999. During the six months ended June 25, 2000, cash provided by operating activities amounted to $154 million. The primary components were net income, non-cash expense adjustments, reductions in accounts receivable, income taxes receivable and inventory, partially offset by a decrease in accounts payable and other current liabilities. This cash was used in part to purchase property, plant and equipment of $11 million. The decrease in accounts receivable was due primarily to the timing of sales and collections during the period and the decrease in sales volume during the period. The decrease in inventory was due to overall management of inventory levels. The decrease in accounts payable was due primarily to timing of inventory receipts and related payments to vendors. The decrease in other current liabilities was due to a combination of decreases in accrued restructuring charges and purchase commitments that were partially offset by increases in accrued payroll, accrued marketing and advertising, and various other accrued liabilities. The decrease in income taxes receivable was due primarily to the receipt of domestic tax refunds in the second quarter of 2000. THE COMPANY CANCELLED ITS EXISTING $75 million Senior Secured Credit Facility with Morgan Guaranty Trust Company of New York, Citibank, N.A. and a syndicate of other lenders two months prior to the Credit Facility's expiration date of July 14, 2000. There had been no borrowings under the Credit Facility in over six quarters. The current and long-term portions of capitalized lease obligations at June 25, 2000 were $4 million and $1 million, respectively. In July 1998, the Company borrowed a total of $40 million from Idanta Partners Ltd. and another entity affiliated with David J. Dunn, Chairman of the Company's Board of Directors, pursuant to a series of three senior subordinated notes. The proceeds of these notes were used for the cash purchase of Nomai. The Company used internally generated funds to repay the principal and interest associated with the notes upon their maturity on March 31, 1999. The Company had $46 million of convertible subordinated notes outstanding at June 25, 2000, which bear interest at 6.75% per year and mature on March 15, 2001. These notes have been classified as short-term at June 25, 2000 since they mature in less than a year. The Company believes that its balance of cash, cash equivalents and temporary investments, together with cash flow from operations and future sources of financing, will be sufficient to fund the Company's operations during the next twelve months. However, cash flow from operations, investing activities and the precise amount and timing of the Company's future financing needs, cannot be determined at this time and will depend on a number of factors, including the market demand for the Company's products, the availability of critical components, the progress of the Company's product development efforts and the success of the Company in managing its inventory, accounts receivable and accounts payable. OTHER MATTERS In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133, as amended by SFAS 137 and SFAS 138, is effective for the Company's fiscal year beginning 2001. SFAS 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that the Company recognize all derivative instruments as either assets or liabilities in the Condensed Consolidated Balance Sheet and measure those instruments at fair value. The Company does not expect the adoption of SFAS 133, as amended, to have a material impact on the Company's results of operations, financial position or liquidity. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 ("SAB 101") "Revenue Recognition in Financial Statements". SAB 101 provides guidance on the recognition, presentation and disclosure of revenue in financial statements. In June of 2000, the Securities and Exchange Commission issued SAB 101B which extended the implementation date to the Company's fourth quarter of 2000. The Company is currently assessing the impact, if any, of SAB 101 on its financial statements. In May 2000, the FASB's Emerging Issues Task Force ("EITF") issued EITF 00-14, "Accounting for Certain Sales Incentives". EITF 00-14 provides specific guidance on the accounting for and presentation of sales incentives offered by companies to their customers. These incentives include discounts, coupons, rebates and free products or services. The Company implemented the provisions of EITF 00-14 during the second quarter of 2000. The implementation did not have a material impact on the Company's financial statements. FACTORS AFFECTING FUTURE OPERATING RESULTS The Company's future operating results will depend in large part on the success of its Zip, Jaz, ZipCD and Clik! products in the market. Although the Company believes there is market demand for removable data storage solutions for personal computers and other devices, there can be no assurance that the Company will be successful in establishing its products as the preferred solutions for those market needs. The extent to which Zip, Jaz, ZipCD and Clik! achieve and maintain a significant market presence will depend upon a number of factors, including: the price, performance, quality and other characteristics of the Company's products and of competing solutions rumored, announced or introduced by other vendors; the emergence of any competing solutions as industry standards; the success of the Company in meeting targeted availability dates for new and enhanced products; the success of the Company in establishing and maintaining OEM arrangements and meeting OEM quality, supply and other requirements; the willingness of OEMs to promote computer and other products containing the Company's drives; the ability of the Company to create demand for Zip, Jaz, ZipCD and Clik!; the success of the Company's efforts to make continued improvements to customer service and satisfaction; the public perception of the Company and its products, including statements made by industry analysts or consumers and adverse publicity resulting from such statements or from litigation filed against the Company; and the overall market demand for personal computers and other products with which the Company's products can be used. The Company's business strategy is substantially dependent on maximizing sales of its proprietary Zip and Jaz disks, which generate significantly higher margins than the related drives. If this strategy is not successful, either because the Company does not establish a sufficiently large installed base of Zip and Jaz drives, because the sales mix between disks and drives is below levels anticipated by the Company, because another party succeeds in producing or marketing disks that are compatible with any of the Company's drive products without infringing the Company's proprietary rights or for any other reason, the Company's sales would be adversely affected, and its results of operations would be disproportionately adversely affected. Sales of Zip products have accounted for a significant majority of the Company's revenues since 1996. However, these sales may not be indicative of the long-term demand for Zip products. Accordingly, historic sales levels should not be assumed to be an indication of future sales levels. Sales of Zip drives to OEM customers accounted for approximately 50% of total Zip drive shipments in the first half of 2000. The level of future sales of Zip drives to OEM customers will depend in great part on the Company's ability to further reduce the cost of Zip drives and on the extent to which the incorporation of CD-RW or DVD-Recordable drives into OEM products results in a reduction in the demand for OEM products also incorporating a built-in Zip drive. The Company anticipates continued sales decline in the future for the Jaz product platform as a result of replacement products entering the market, including products introduced by the Company, and changing customer requirements. The Company anticipates introducing additional Jaz product interfaces and enhancements to support the needs of its customers. In addition, the Company continues to make limited investments to sustain and revitalize the Jaz business. The process of managing Jaz and maximizing its profitability is different than managing a growing product platform, and involves maintaining the size of the product's infrastructure and monitoring vendor commitments and inventory levels to prevent inventory write-offs and cancellation costs. There can be no assurance that the Company will be successful in managing the Jaz product platform and in maximizing its profitability in the future. The Company's business strategy for ZipCD is different from its strategy for its other products because the drive does not use proprietary media and thus has lower overall margins. The Company purchases for resale from a third party manufacturer. The CD-RW drive market is very competitive and includes a number of established participants. Accordingly, there are additional risks that the ZipCD product will not achieve significant market acceptance or otherwise be successful. The Company's Clik! products represent the Company's first products which are targeted to portable consumer electronics manufacturers in addition to the personal computer markets. The Company does not have prior experience in consumer electronics channels; and, accordingly, there are additional risks that the Clik! products will not achieve significant market presence or otherwise be successful. The Company has introduced four different models of the Clik! drive in addition to a Clik! OEM drive. Three of these models, the Clik! drive for Digital Cameras, the Clik! Drive Plus and the Clik! Drive for Mobile Computers, each of which began shipping in limited quantities in December 1998, were marketed as add-on storage solutions to digital cameras that use various formats of flash memory. The Company began shipping the fourth model, the Clik! PC Card drive, in limited quantities in June 1999, and is currently marketing this product to notebook and sub-notebook computer users. During the third quarter of 1999, the Company recorded a restructuring charge that included costs to refocus the Clik! product platform on the newer Clik! PC Card and OEM drives, which began shipping in the second half of 1999. Additionally, the Company took charges in the fourth quarter of 1999 totaling $47 million relating to the Clik! platform to reflect estimates of net realizable value of inventory and equipment and accruals for related purchase commitments, primarily associated with the Clik! PC Card platform. The Company took additional charges of $7 million during the first quarter of 2000 to reflect a reduction in the estimated net realizable value of inventory and equipment associated with the Clik! PC Card drive and Clik! media. After these charges, net assets and commitments related to the Clik! platform were approximately $7 million as of June 25, 2000. Although the Company is making significant efforts to develop applications for the Clik! platform, particularly in the digital/audio market, and believes the products have potential in the enterprise and OEM markets, there is no assurance the Company will not take additional charges associated with the Clik! platform in the future. Market acceptance of Clik! products as a storage solution for digital audio players, digital cameras and other electronic devices is dependent upon obtaining a significant market presence and establishing OEM relationships with manufacturers, who produce digital devices incorporating built-in Clik! drives. The Company has recently revised its software strategy. In addition to providing operational product support for existing devices at no additional cost to the customer, the Company plans to sell additional software which can also be used with the Company's products or other products. The Company began selling downloads of its Quick Sync 2 software from its website during the second quarter of 2000. In addition, the Company is expanding its product offerings into non-PC markets such as digital audio players, digital photo storage/display, Internet-based storage and digital cameras. The Company does not have prior experience with these types of products. Accordingly, there are additional risks that these products will not achieve significant market presence or otherwise be successful. The Company has experienced and may in the future experience significant fluctuations in its quarterly operating results. Moreover, because the Company's expense levels (including budgeted selling, general and administrative and research and development expenses) are based in part on expectations of future sales levels, a shortfall in expected sales could result in a disproportionate adverse effect on the Company's net income and cash flow. Management of the Company's inventory levels is very complex. The Company's customers frequently adjust their ordering patterns in response to various factors including: perceptions of the Company's ability to meet demand; the Company's and competitors' inventory supply in the retail and distribution channel; timing of new product introductions; seasonal fluctuations; Company and customer promotions; the consolidation of customer distribution centers; pricing considerations; and the attractiveness of the Company's products as compared with competing products. Customers may increase orders during times of shortages, cancel orders if the channel is filled with currently available products, or delay orders in anticipation of new products. Any excess supply could result in price reductions and inventory writedowns, which in turn could adversely affect the Company's results of operations. The Company's business includes a significant volume of OEM sales. In an OEM business, a high proportion of sales are concentrated among a small number of customers. Although the Company believes its relationships with OEM customers are generally good, a relatively small number of customers could represent a business risk that loss of one or more accounts could adversely affect the Company's financial condition or operating results. The Company's customers are generally not obligated to purchase any minimum volume and are generally able to terminate their relationship with the Company at will. If changes in purchase volume or customer relationships resulted in decreased OEM demand for the Company's drives, whether by loss of or delays in orders, the Company's financial condition or operating results could be adversely affected. The Company believes that in order to compete successfully against current and future sources of competition, it will be necessary to further reduce the manufacturing costs of its products, thus enabling the Company to sell its products at lower prices. During the past several years, the Company has implemented a number of programs, including Six Sigma quality initiatives, which have resulted in substantial product and process quality improvements and reduced costs. Through these and other programs, the Company is continuing to focus on reducing the manufacturing costs of its products by: reducing the cost of parts and components used in the Company's products through improved inventory management and product design modifications and by taking advantage of industry-wide reductions in costs; increasing manufacturing efficiencies; and decreasing defect rates. This is particularly true for the Company's OEM business, as OEM customers are particularly price sensitive. The Company's ability to reduce manufacturing costs may be adversely affected if the lower sales volumes recently reported by the Company result in less favorable pricing for components purchased from third parties. The Company has, and may again in the future, experience problems relating to the quality, reliability and/or availability of certain of its products. For example, the Company has recalled certain products and experienced manufacturing interruptions due to quality problems. Any product availability, quality or reliability problems experienced by the Company, or claims filed against the Company as a result of these problems, could have an adverse effect on the Company's sales and net income, result in damage to the Company's reputation in the marketplace, and subject the Company to damage claims from its customers. In addition, component problems, shortages, quality issues or other factors affecting the supply of the Company's products could provide an opportunity for competing products to increase their market share. The factors described herein for Zip, Jaz, ZipCD and Clik! products are, or will be, relevant to any other products currently sold by the Company or new products introduced by the Company in the future. In addition, the Company faces development, manufacturing, demand and market acceptance risks with regard to recently introduced and future products. The Company's future operating results will depend in part on its success in introducing enhanced and new products in a timely and competitively effective manner. Future operating results will also depend on the Company's ability to effectively manage obsolescence risks associated with products that are phased out and its success in ramping to volume production of new or enhanced products. Future operating results also depend on intellectual property and antitrust matters including the possibility that infringement claims asserted from time to time against the Company could require the Company to pay royalties to a third party in order to continue to market and distribute one or more of the Company's current or future products and also includes the possibility that the Company would be required to devote unplanned resources to developing modifications to its products or marketing programs. The Company has experienced difficulty in the past, and may experience difficulty in the future, in obtaining a sufficient supply of many key components on a timely and cost effective basis. At the present time, the electronics industry is facing shortages on various memory devices and passive components due to strong world-wide demand. Also, many components incorporated or used in the manufacture of the Company's products are currently available only from single or sole source suppliers or from a limited number of suppliers and are purchased by the Company without guaranteed supply arrangements. In particular, media used in Zip 250MB disks are currently obtained exclusively from Fuji Photo Film, certain integrated circuits, including ASIC chips used in Zip drives, are obtained exclusively from L.S.I. Logic Corporation and Texas Instruments and HSAs used in Zip notebook are obtained exclusively from SAE Magnetics. There can be no assurance that the Company will be able to obtain a sufficient supply of components on a timely and cost effective basis. The inability to obtain SUFFICIENT COMPONENTS AND EQUIPMENT to obtain or develop alternative sources of supply at competitive prices and quality or to avoid manufacturing delays could: prevent the Company from producing sufficient quantities of its products to satisfy market demand (or, in the case of a component purchased exclusively from one supplier, the Company could be prevented from producing any quantity of the affected product(s) until such component becomes available from an alternative source); delay product shipments; increase the Company's material or manufacturing costs; cause an imbalance in the inventory levels of certain components and cause the Company to modify the design of its products to use a more readily available component, which may result in product performance problems. Any or all of these problems could in turn result in the loss of customers, provide an opportunity for competing products to achieve market acceptance and otherwise adversely affect the Company's business and financial results. The purchase orders under which the Company buys many of its components generally extend one to two quarters in the future or less based on the lead times associated with the specific component. The quantities on the purchase order are based on estimated sales requirements. In the case of new products or products with declining sales, it can be difficult to estimate demand. Any misestimate of demand could result in excess capacity and purchase commitments. The Company has experienced increased difficulties in hiring and retaining employees, due in part to the Company's financial performance and restructuring actions. The Company's success depends in large part upon the services of a number of key employees and the loss of the services of one or more of these key employees could have a material adverse effect on the Company. Many members of the Company's senior management team have been serving in their current positions for only a short period of time, including Bruce R. Albertson, who joined the Company as President and Chief Operating Officer in November 1999 and assumed the role of President and Chief Executive Officer in January 2000. The Company's success will depend in part on its ability to attract and retain highly skilled personnel and on the success of the Company's senior management team in learning to work effectively as a team. During the second and third quarters of 1999, the Company announced plans to consolidate manufacturing and other facilities; discontinue certain products and development projects; organize along functional lines and to refocus the Clik! product platform. These actions specifically included closing the Company's facilities in Milpitas, California and San Diego, California and ceasing manufacturing operations in Avranches, France. There can be no assurance that the Company will close the facilities in the U.S. and cease manufacturing operations in France without incurring significant legal or other costs that have not been accrued for in the restructuring charges. Significant portions of the Company's revenues are generated in Europe and Asia. The Company's existing infrastructure outside of the United States is less mature and developed than in the United States. Consequently, future sales and operating income from these regions are less predictable than in the United States. In addition, operating expenses may increase as those operations mature and increase in size. The Company's international sales transactions are generally denominated in U.S. dollars. Fluctuation in the value of foreign currencies relative to the U.S. dollar that are not sufficiently hedged by foreign customers could result in lower sales and have an adverse effect on future operating results (see "Disclosures About Market Risk" below). In addition, the Company is continuing to assess potential issues relating to the adoption of the Euro. The Company intends to expand its international operations into Latin America during 2000 and 2001. This will require the Company to add at least some new infrastructure in Latin America resulting in an increase in operating expenses that will not necessarily be offset by an increase in revenue or gross margins. In addition, the Latin America economy is not as mature as the economy in the countries that the Company currently does business. This could result in an increased exposure associated with the collectibility of customer accounts. On April 19, 2000, the Company's shareholders approved an Employee Stock Option Exchange Program (the "Exchange Program"), pursuant to which the Company has granted approximately 1.1 million new stock options at an exercise price of $3.59 in exchange for approximately 1.8 million previously outstanding stock options which had exercise prices above $3.59. The new options issued under the Exchange Program are subject to variable plan accounting in accordance with FASB Interpretation No. 44 "Accounting for Certain Transactions Involving Stock Compensation". Under variable plan accounting, the Company is required to recognize compensation expense in its statement of operations for any increase in the market price of the Company's Common Stock above $4.00 (the market price of July 1, 2000 which is the effective date of FASB Interpretation No. 44). This compensation expense must be recorded on a quarterly basis until the option is exercised, forfeited or expires unexercised. The impact of the new options granted under the Exchange Program on the Company's financial statements will depend on quarterly fluctuations in the Company's Common Stock price and the dates of exercises, forfeitures or cancellations of the new options by employees. Depending on these factors, the Company could be required to record significant compensation expense during the next ten years. Moreover, because the precise amount of the compensation expense will depend on the market price of the common stock at the end of each quarterly period, the Company will not be able to forecast in advance the amount of compensation expense that it will incur in any future period. Factors other than those discussed above that could cause actual events or actual results to differ materially from those indicated by any forward-looking statements include the ability of management to manage fluctuating volumes of production and an increasingly complex business, transportation issues, product and component pricing, changes in analysts' earnings estimates, competition, technological changes and advances, adoption of technology or communications standards affecting the Company's products, intellectual property rights, litigation, general economic conditions, changes or slowdowns in overall market demand for personal computer products. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK: The Company is exposed to various interest rate and foreign currency exchange rate risks that arise in the normal course of business. The Company primarily uses borrowings comprised normally of fixed rate debt to finance its OPERATIONS. THE COMPANY DID NOT HAVE ANY SIGNIFICANT DEBT OUTSTANDING AT JUNE 25, 2000, EXCEPT FOR $46 million in convertible subordinated notes (fixed rate of 6.75%). The Company has international operations resulting in receipts and payments in currencies that differ from the U.S. dollar, which is the Company's functional currency. The Company attempts to reduce foreign currency exchange rate risks by utilizing financial instruments, including derivative transactions pursuant to Company policies. The Company uses forward contracts to hedge those net assets and liabilities that, when re-measured according to generally accepted accounting principles, impact the consolidated statement of operations. All forward contracts entered into by the Company are components of hedging programs and are entered into for the sole purpose of hedging an existing or anticipated currency exposure, not for speculation or trading purposes. The contracts are primarily in European currencies, the Singapore dollar and the Japanese yen. The contracts normally have maturities that do not exceed three months. The Company has a substantial presence in Malaysia. In September 1998, the ruling party in Malaysia fixed the Malaysian Ringgit to the U.S. dollar. The Company experienced a loss related to the fixing of the currency. The Company has material amounts of accounts payable denominated in Ringgit. Currently, the foreign currency markets are closed to hedging alternatives in Ringgit. When the foreign currency markets re-open for the Ringgit, the Company plans to re-evaluate its hedging strategy for Ringgit exposure. When hedging balance sheet exposure, all gains and losses on forward contracts are recognized in other income and expense in the same period as the gains and losses on re-measurement of the foreign currency denominated assets and liabilities occur. All gains and losses related to foreign exchange contracts are included in cash flows from operating activities in the consolidated statement of cash flows. The fair value of the Corporation's long-term debt and forward contracts are subject to change as a result of potential changes in market rates and prices. The Company has performed a sensitivity analysis assuming a hypothetical 10% adverse movement in foreign exchange rates and interest rates applied to the forward contracts and underlying exposures described above. As of June 25, 2000, the analysis indicated that such market movements would not have a material effect on the Company's consolidated financial position, results of operations or cash flows. Factors that could impact the effectiveness of the Company's hedging programs include volatility of the currency and interest rate markets, availability of hedging instruments and the Company's ability to accurately project net asset or liability positions. Actual gains and losses in the future may differ materially from the Company's analysis depending on changes in the timing and amount of interest rate and foreign exchange rate movements and the Company's actual exposure and hedges. IOMEGA CORPORATION PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS: A discussion of the Company's legal proceedings appears in Item 1 of this Form 10-Q under Note 8 of the Notes to Consolidated Financial Statements. ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS: The Company did not sell any equity securities during the second quarter of 2000 that were not registered under the Securities Act of 1933. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K: (A) EXHIBITS. The exhibits listed on the Exhibit Index filed as a part of this Quarterly Report on Form 10-Q are incorporated herein by reference. (B) REPORTS ON FORM 8-K. No reports on Form 8-K were filed during the quarter for which this report on Form 10-Q is filed. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. IOMEGA CORPORATION ------------------------- (Registrant) /S/ BRUCE R. ALBERTSON ------------------------- Dated: August 8, 2000 Bruce R. Albertson Chief Executive Officer and President /S/ PHILIP G. HUSBY ------------------------- Dated: August 8, 2000 Philip G. Husby Senior Vice President, Finance and Chief Financial Officer EXHIBIT INDEX The following exhibits are filed as part of this Quarterly Report on Form 10-Q: EXHIBIT NO. DESCRIPTION 3. (i). 1 Restated Certificate of Incorporation of the Company, as amended. 27 Financial Data Schedule (only filed as part of electronic copy). EX-3.(I).1 2 0002.txt RESTATED CERTIFICATE OF INCORPORATION RESTATED CERTIFICATE OF INCORPORATION OF IOMEGA CORPORATION PURSUANT TO SECTIONS 242 AND 245 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE IOMEGA CORPORATION (hereinafter called the "Corporation"), a corporation originally organized and incorporated under the name "Databyte Corporation" by the filing of a Certificate of Incorporation in the office of the Secretary of State of the State of Delaware on April 2, 1980, and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify that (a) at a meeting of the Board of Directors of the Corporation, the Board of Directors duly adopted a resolution pursuant to Sections 242 and 245 of the General Corporation Law of the State of Delaware proposing an amendment to and restatement of the Certificate of Incorporation of the Corporation and declaring said amendment and restatement to be advisable; (b) the stockholders of the Corporation duly approved said proposed amendment and restatement by written consent in accordance with Sections 228 and 242 of the General Corporation Law of the State of Delaware, and written notice of such consent has been given to all stockholders who have not consented in writing to said amendment and restatement; and (c) the capital of the Corporation will not be reduced under or by reason of this amendment and restatement. The resolution setting forth the amendment and restatement is as follows: RESOLVED: That the Restated Certificate of Incorporation of the Corporation shall read as follows: FIRST: The name of the Corporation is IOMEGA CORPORATION. SECOND: The registered office of the Corporation is to be located at No. 100 West Tenth Street, in the City of Wilmington, in the County of New Castle, in the State of Delaware. The name of its registered agent at such address is The Corporation Trust Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware. Without limiting in any manner the scope and generality of the foregoing, it is hereby provided that the Corporation shall have the following purposes, objects and powers: To purchase, manufacture, produce, assemble, receive, lease or in any manner acquire, hold, own, use, operate, install, maintain, service, repair, process, alter, improve, import, export, sell, lease, assign, transfer and generally to trade and deal in and with computers and computer systems, equipment, devices, apparatus, components, parts and supplies of every type and description, natural or manufactured articles or products, machinery, equipment, devices, systems, parts, supplies, apparatus, goods, wares, merchandise and personal property of every kind, nature or description, tangible or intangible, used or capable of being used for any purpose whatsoever; and to engage and participate in any mercantile, manufacturing or trading business of any kind or character. To improve, manage, develop, sell, assign, transfer, lease, mortgage, pledge or otherwise dispose of or turn to account or deal with all or any part of the property of the corporation and from time to time to vary any investment or employment of capital of the corporation. To borrow money, and to make and issue notes, bonds, debentures, obligations and evidences of indebtedness of all kinds, whether secured by mortgage, pledge or otherwise, without limit as to amount, and to secure the same by mortgage, pledge or otherwise; and generally to make and perform agreements and contracts of every kind and description, including contracts of guaranty and suretyship. To lend money for its corporate purposes, invest and reinvest its funds, and take, hold and deal with real and personal property as security for the payment of funds so loaned or invested. To the same extent as natural persons might or could do, to purchase or otherwise acquire, and to hold, own, maintain, work, develop, sell, lease, exchange, hire, convey, mortgage or otherwise dispose of and deal in lands and leaseholds, and any interest, estate and rights in real property, and any personal or mixed property, and any franchises, rights, licenses or privileges necessary, convenient or appropriate for any of the purposes herein expressed. To apply for, obtain, register, purchase, lease or otherwise to acquire and to hold, own, use, develop, operate and introduce and to sell, assign, grant licenses or territorial rights in respect to, or otherwise to turn to account or dispose of, any copyrights, trade marks, trade names, brands, labels, patent rights, letters patent of the United States or of any other country or government, inventions, improvements and processes, whether used in connection with or secured under letters patent or otherwise. To participate with others in any corporation, partnership, limited partnership, joint venture, or other association of any kind, or in any transaction, undertaking or arrangement which the participating corporation would have power to conduct by itself, whether or not such participation involves sharing or delegation of control with or to others; and to be an incorporator, promoter or manager of other corporations of any type or kind. To pay pensions and establish and carry out pension, profit sharing, stock option, stock purchase, restricted stock, stock bonus, retirement, benefit, incentive and commission plans, trusts and provisions for any or all of its directors, officers and employees, and for any or all of the directors, officers and employees of its subsidiaries; and to provide insurance for its benefit on the life of any of its directors, officers or employees, or on the life of any stockholder for the purpose of acquiring at his death shares of its stock owned by such stockholders. To acquire by purchase, subscription or otherwise, and to hold for investment or otherwise and to use, sell, assign, transfer, mortgage, pledge or otherwise deal with or dispose of stocks, bonds or any other obligations or securities of any corporation or corporations; to merge or consolidate with any corporation in such manner as may be permitted by law; to aid in any manner any corporation whose stocks, bonds or other obligations are held or in any manner guaranteed by this corporation, or in which this corporation is in any way interested; and to do any other acts or things for the preservation, protection, improvement or enhancement of the value of any such stock, bonds of other obligations; and while owner of any such stock, bonds or other obligations to exercise all the rights, powers and privileges of ownership thereof, and to exercise any and all voting powers thereon; and to guarantee the payment of dividends upon any stock, the principal or interest or both, of any bonds or other obligations, and the performance of any contracts. To do all and everything necessary, suitable and proper for the accomplishment of any of the purposes or the attainment of any of the objects or the furtherance of any of the powers hereinbefore set forth, either alone or in association with other corporations, firms or individuals, and to do every other act or acts, thing or things incidental or appurtenant to or growing out of or connected with the aforesaid business or powers or any part or parts thereof, provided the same be not inconsistent with the laws under which this corporation is organized. The business or purpose of the Corporation is from time to time to do any one or more of the acts and things hereinabove set forth, and it shall have power to conduct and carry on its said business, or any part thereof, and to have one or more offices, and to exercise any or all of its corporate powers and rights, in the State of Delaware, and in the various other states, territories, colonies and dependencies of the United States, in the District of Columbia, and in all or any foreign countries. The enumeration herein of the objects and purposes of the Corporation shall be construed as powers as well as objects and purposes and shall not be deemed to exclude by inference any powers, objects or purposes which the corporation is empowered to exercise, whether expressly by force of the laws of the State of Delaware now or hereafter in effect, or impliedly by the reasonable construction of the said laws. FOURTH: The total number of shares of stock which the Corporation shall have authority to issue is 30,000,000 shares of Common Stock, $.03 1/3 par value per share. FIFTH: The following provisions are inserted for the management of the business and for the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders: (1) The number of directors of the Corporation shall be such as from time to time shall be fixed by, or in the manner provided in the by-laws. Election of directors need not be by ballot unless the by-laws so provide. (2) The Board of Directors shall have power without the assent or vote of the stockholders to make, alter, amend, change, add to or repeal the by-laws of the Corporation; to fix and vary the amount to be reserved for any proper purpose; to authorize and cause to be executed mortgages and liens upon all or any part of the property of the Corporation; to determine the use and disposition of any surplus or net profits; and to fix the times for the declaration and payment of dividends. (3) In addition to the powers and authorities hereinbefore or by statute expressly conferred upon them, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation; subject, nevertheless, to the provisions of the statutes of Delaware, of this certificate, and to any by-laws from time to time made by the stockholders; provided, however, that no by-laws so made shall invalidate any prior act of the directors which would have been valid if such by-law had not been made. SIXTH: The Corporation shall, to the full extent permitted by Section 145 of the Delaware General Corporation Law, as amended from time to time, indemnify all directors and officers of the Corporation whom it may indemnify pursuant thereto. SEVENTH: Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof or on the application of any receiver or receivers appointed for this corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under the provisions of Section 279 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this corporation, as the case may be, and also on this corporation. EIGHTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation in the manner now or hereafter anner now or hereafter prescribed by law, and all rights and powers conferred herein on stockholders, directors, and officers are subject to this reserved power. IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be hereto affixed and this Certificate of Amendment and Restatement to be signed by its President and attested by its Secretary this 14th day of July, 1983. prescribed by law, and all rights and powers conferred herein on stockholders, directors, and officers are subject to this reserved power. IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be hereto affixed and this Certificate of Amendment and Restatement to be signed by its President and attested by its Secretary this 14th day of July, 1983. IOMEGA CORPORATION By: /s/ Gabriel P. Fusco --------------------------- President ATTEST: /s/ Paul P. Brountas ------------------------------ Secretary (CORPORATE SEAL) CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF IOMEGA CORPORATION IOMEGA CORPORATION (the "Corporation"), a corporation originally organized and incorporated under the name "Databyte Corporation" by the filing of a Certificate of Incorporation in the office of the Secretary of State of the State of Delaware on April 2, 1980, and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify as follows: 1. The Restated Certificate of Incorporation of the Corporation is hereby amended by deleting, in its entirety, Article FOURTH, and inserting in lieu thereof a new Article FOURTH, which shall read in its entirety as follows: "FOURTH. The total number of shares of capital stock of all classes which the Corporation shall have authority to issue is 35,000,000, consisting of 30,000,000 shares of Common Stock, $.03 1/3 par value per share, and 5,000,000 shares of Preferred Stock, $.01 par value per share. The following is a statement of the designations, powers, preferences and rights, and the relative, participating, optional or other special rights, and the qualifications, limitations and restrictions granted to or imposed upon the respective classes of shares of capital stock of the Corporation or the holders thereof: A. COMMON STOCK The voting and dividend rights, and the rights in the event of the liquidation of the Corporation, of the holders of Common Stock are subject to and qualified by such rights of the holders of any series of Preferred Stock as set forth herein or as the Board of Directors may designate upon the issuance of shares of any series of Preferred Stock. The holders of Common Stock are entitled to one vote for each share held at all meetings of stockholders. There shall be no cumulative voting. Dividends may be declared and paid on Common Stock from funds lawfully available therefor as and when determined by the Board of Directors and subject to any preferential dividend rights of any then outstanding shares of Preferred Stock. Upon the dissolution or liquidation of the Corporation, whether voluntary or involuntary, holders of Common Stock will be entitled to receive pro rata all net assets of the Corporation available for distribution after payment of creditors and payment of any preferential liquidation rights of any then outstanding shares of Preferred Stock. B. PREFERRED STOCK Preferred Stock may be issued from time to time in one or more series, each of such series to have such terms as stated or expressed herein and in the resolution or resolutions providing for the issuance of shares of such series adopted by the Board of Directors of the Corporation as hereinafter provided. Any shares of Preferred Stock which may be redeemed, purchased or acquired by the Corporation may be reissued except as otherwise provided by law. Different series of Preferred Stock shall not be construed to constitute different classes of shares for the purposes of voting by classes unless expressly provided. Authority is hereby expressly granted to the Board of Directors to issue from time to time shares of Preferred Stock in one or more series, and in connection with the creation of any such series, by resolution or resolutions providing for the issuance of the shares thereof, to determine and fix such voting powers, full or limited, or no voting powers, and such designation, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be stated and expressed in such resolutions, all to the full extent now or hereafter permitted by the General Corporation Law of Delaware. Without limiting the generality of the foregoing, the resolutions providing for the issuance of shares of any series of Preferred Stock may provide that such series shall be superior or rank equally or be junior to shares of any other series of Preferred Stock to the extent permitted by law. Unless otherwise expressly provided, no vote of the holders of shares of Preferred Stock or Common Stock shall be a prerequisite to the issuance of any shares of any series of Preferred Stock authorized by and complying with the conditions of the Restated Certificate of Incorporation." 2. The Restated Certificate of Incorporation of the Corporation is hereby amended by adding a new Article NINTH, which shall read in its entirety as follows: "NINTH: Except to the extent that the General Corporation Law of the State of Delaware prohibits the elimination of liability of directors for breaches of fiduciary duty, no director of the Corporation shall be liable for any breach of fiduciary duty. No amendment to or repeal of this provision shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment." 3. Pursuant to the requirements of Section 242 of the General Corporation Law of the State of Delaware, (i) the Board of Directors of the Corporation adopted resolutions setting forth the foregoing amendments to the Restated Certificate of Incorporation of the Corporation, declaring their advisability, and directing that they be presented to the stockholders of the Corporation for consideration, and (ii) the stockholders of the Corporation duly approved the foregoing amendments. ed by its Senior Vice President - Finance and Planning and attested by its Assistant Secretary, and its corporate seal to be affixed, this 20th day of May, 1987. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be signed by its Senior Vice President - Finance and Planning and attested by its Assistant Secretary, and its corporate seal to be affixed, this 20th day of May, 1987. IOMEGA CORPORATION By: /s/ E. Kevin Dahill --------------------------- E. Kevin Dahill Senior Vice President - Finance and Planning Attest: /s/ Gwenn Newbold ------------------------------- Gwenn Newbold Assistant Secretary (Corporate Seal) IOMEGA CORPORATION CERTIFICATE OF DESIGNATION OF SERIES A AND SERIES B CONVERTIBLE PREFERRED STOCK ------------------------------------------ Iomega Corporation, a Delaware corporation (the "Corporation"), pursuant to authority conferred on the Board of Directors of the Corporation by the Restated Certificate of Incorporation, as amended, of the Corporation and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, certifies that the Board of Directors of the Corporation, at a meeting thereof duly called and held on October 13, 1987, duly adopted the following resolutions providing for the establishment of two series of Preferred Stock of the Corporation, one to be designated "Series A Convertible Preferred Stock" and consisting of 1,200,000 shares and one to be designated "Series B Convertible Preferred Stock" and consisting of 250,000 shares, as follows: "RESOLVED: That, pursuant to the authority expressly granted and vested in the Board of Directors of the Company in accordance with the provisions of its Restated Certificate of Incorporation, there are hereby established (i) a series of Preferred Stock of the Company, consisting of 1,200,000 shares designated "Series A Convertible Preferred Stock" ("Series A Preferred Stock") and (ii) a series of Preferred Stock of the Company, consisting of 250,000 shares designated "Series B Convertible Preferred Stock" ("Series B Preferred Stock"); and subject to the limitations provided by law and by the Restated Certificate of Incorporation, the powers, designations, preferences and relative, participating, optional or other special rights of, and the qualifications, limitations or restrictions upon, the Series A Preferred Stock and Series B Preferred Stock shall be as follows: A. SERIES A CONVERTIBLE PREFERRED STOCK. One million two hundred thousand (1,200,000) shares of the authorized and unissued Preferred Stock of the Corporation are hereby designated "Series A Convertible Preferred Stock" (the "Series A Preferred Stock") with the following rights, preferences, powers, privileges and restrictions, qualifications and limitations. 1. DIVIDENDS. (a) The holders of record of shares of the Series A Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors of the Corporation, out of any funds legally available therefor, dividends at the rate of five percent (5%) per annum of the Series A Preference (as defined in Subsection 2(a) below) of such shares for the 1989 calendar year and at the rate of six percent (6%) per annum of the Series A Preference thereafter. Accrued dividends for each calendar year shall be paid annually on the March 31 (a "dividend payment date") following the end of such calendar year (commencing March 31, 1990) to holders of record of shares of Series A Preferred Stock on such record date (not more than 60 days prior to March 31) as is established by the Board of Directors for such dividend. Dividends at the applicable rates set forth above shall accrue daily and be cumulative from January 1, 1989. For purposes of the payment of dividends in cash, the amount of any dividends accrued on any shares of Series A Preferred Stock at any dividend payment date shall be deemed to be the amount of any unpaid dividends accumulated thereon to and including the last day of the preceding calendar year, whether or not earned or declared. Notwithstanding anything to the contrary herein, accrued dividends for any calendar year shall not be required to be paid unless the Corporation's after-tax net income (before any extraordinary benefits) for such year, as shown on the Company's audited consolidated financial statements, is equal to or greater than the sum of the aggregate amount of such accrued dividends. Any accrued dividends that are not paid shall be paid on the dividend payment date following the end of the first succeeding calendar year in which the Corporation's after-tax net income, before any extraordinary benefits (determined as set forth above), is sufficient to pay all of such accrued but unpaid dividends and the regular dividend on the Series A Preferred Stock for such year. (b) So long as shares of Series A Preferred Stock are outstanding, no cash dividends shall be paid or declared on the Common Stock of the Corporation or any security ranking junior to the Series A Preferred Stock as to the payment of dividends, unless all dividends on the Series A Preferred Stock for all past dividend payment dates shall have been paid and the full dividend payment for the dividend payment date next succeeding the payment date of such cash dividend shall have been paid or declared and set apart for payment. 2. LIQUIDATION, DISSOLUTION OR WINDING UP. (a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of Series A Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, after and subject to the payment in full of all amounts required to be distributed to the holders of any other class or series of stock of the Corporation ranking on liquidation prior and in preference to the Series A Preferred Stock (collectively referred to as "Senior Preferred Stock"), but before any payment shall be made to the holders of Common Stock or any other class or series of stock ranking on liquidation junior to the Series A Preferred Stock (such Common Stock and other stock being collectively referred to as "Junior Stock") by reason of their ownership thereof, an amount equal to $5.00 per share (the "Series A Preference"). The Series A Preferred Stock shall rank on a parity with the Series B Preferred Stock upon any liquidation, dissolution or winding up of the Corporation. If upon any such liquidation, dissolution or winding up of the Corporation the remaining assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Series A Preferred Stock the full amount to which they shall be entitled, the holders of shares of Series A Preferred Stock, Series B Preferred Stock and any other class or series of stock ranking on liquidation on a parity with the Series A Preferred Stock shall share ratably in any distribution of the remaining assets and funds of the Corporation in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. (b) After the payment of all preferential amounts required to be paid to the holders of Senior Preferred Stock, Series A Preferred Stock and any other class or series of stock of the Corporation ranking on liquidation on a parity with the Series A Preferred Stock, upon the liquidation, dissolution or winding up of the Corporation, the holders of shares of Junior Stock then outstanding shall be entitled to receive the remaining assets and funds of the Corporation available for distribution to its stockholders. (c) A consolidation or merger of the Corporation with or into another corporation or entity, or a sale of all or substantially all of the assets of the Corporation, shall not be regarded as a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 2. 3. VOTING. Except as otherwise required by law, holders of Series A Preferred Stock shall have no voting rights. 4. OPTIONAL CONVERSION. The holders of the Series A Preferred Stock shall have conversion rights as follows (the "Series A Conversion Rights"): (a) As used herein, the following items shall have the following respective meanings: (i) "CONVERSION DATE" shall have the meaning setforth in Subsection 4(d)(i). (ii) "MARKET VALUE" shall mean (A) if the Common Stock of the Corporation is listed on any national securities exchange or the NASDAQ National Market System, the reported last sale price of the Common Stock on such exchange or system, or, if the Common Stock shall not be so listed, (B) the average of the closing bid and asked prices for the Common Stock, as reported by NASDAQ, or (C) if there are no such closing bid and asked prices, the fair market value of the Common Stock as determined by the Board of Directors of the Corporation. (iii) "SERIES A MINIMUM CONVERSION PRICE" shall mean $15.00 per share, subject to adjustment pursuant to the provisions of this Section 4. (iv) "SERIES A CONVERSION PRICE" shall mean, as of the applicable Conversion Date, the greater of (A) the average of the Market Values of the Common Stock for the five consecutive Trading Days preceding (but not including) such Conversion Date, or (B) the then effective Series A Minimum Conversion Price. (v) "TRADING DAY" shall mean any day on which the New York Stock Exchange is generally open for trading. (b) RIGHT TO CONVERT. If (but only if) the Market Value of Common Stock of the Corporation shall have been equal to or greater than the Series A Minimum Conversion Price for at least 20 of the 30 Trading Days preceding the Conversion Date, holders of shares of Series A Preferred Stock may convert all or any of such shares, on such Conversion Date, into such number of fully paid and nonassessable shares of Common Stock as is determined by (i) multiplying the aggregate Series A Preferences of the shares so converted by 1.5, (ii) adding to such sum the aggregate amount of any accrued but unpaid dividends on such shares, excluding any such dividends declared for payment by the Board of Directors to holders of Series A Preferred Stock on a record date occurring prior to or on the Conversion Date, and (iii) dividing the sum so obtained by the Series A Conversion Price in effect on such Conversion Date. In the event of a notice of redemption of any shares of Series A Preferred Stock pursuant to Section 6 hereof, the Series A Conversion Rights of the shares designated for redemption shall terminate at the close of business on the fifth Trading Day preceding the date fixed for redemption. In the event of a liquidation, dissolution or winding up of the Corporation, the Series A Conversion Rights shall terminate at the close of business on the first Trading Day preceding the date fixed for the payment of any amounts distributable on liquidation to the holders of Series A Preferred Stock. (c) FRACTIONAL SHARES. No fractional shares of Common Stock shall be issued upon conversion of the Series A Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the then effective Series A Conversion Price. (d) MECHANICS OF CONVERSION. (i) In order for a holder of Series A Preferred Stock to convert shares of Series A Preferred Stock into shares of Common Stock, such holder shall surrender the certificate or certificates for such shares of Series A Preferred Stock, at the office of the transfer agent for the Series A Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer agent), together with written notice that such holder elects to convert all or any number of the shares of the Series A Preferred Stock represented by such certificate or certificates. Such notice shall state such holder's name or the names of the nominees in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. If required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by a written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or his or its attorney duly authorized in writing. The date of receipt of such certificates and notice by the transfer agent (or by the Corporation if the Corporation serves as its own transfer agent) shall be the Conversion Date, provided, however, that in the event that the shares tendered for conversion are not eligible for conversion on the date of receipt of such certificates and notice by the transfer agent (or by the Corporation if the Corporation serves as its own transfer agent), the transfer agent or Corporation shall promptly return such certificates to the registered holder. The Corporation shall, as soon as practicable after the Conversion Date, issue and deliver at such office to such holder of Series A Preferred Stock, or to his or its nominees, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled, together with cash in lieu of any fraction of a share. (ii) The Corporation shall at all times when the Series A Preferred Stock shall beoutstanding, reserve and keep available out of its authorized but unissued stock, for the purpose of effecting the conversion of the Series A Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Series A Preferred Stock. (iii) All shares of Series A Preferred Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares, including the rights, if any, to receive notices and to vote, shall immediately cease and terminate on the Conversion Date, except only the right of the holders thereof to receive (A) shares of Common Stock in exchange therefor pursuant to Subsection 4(b), (B) payments of accrued but unpaid dividends in accordance with Subsection 4(d)(iv) and (C) payments in lieu of any fractional shares pursuant to Subsection 4(c). Any shares of Series A Preferred Stock so converted shall be retired and cancelled and shall not be reissued, and the Corporation may from time to time take such appropriate action as may be necessary to reduce the authorized Series A Preferred Stock accordingly. (iv) In the case of any share of Series A Preferred Stock which is converted after any dividend record date and on or prior to the corresponding dividend payment date (except shares of Series A Preferred Stock called for redemption during such period as to which any accrued and unpaid dividends shall have been paid), the dividend payable on such dividend payment date shall be paid on such date notwithstanding such conversion and such dividend shall be paid to the person who is the holder of such shares of Series A Preferred Stock at the close of business on such dividend record date. (e) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If the Corporation shall at any time or from time to time after the date on which a share of Series A Preferred Stock was first issued (the "Series A Original Issue Date") effect a subdivision of the outstanding Common Stock, the Series A Minimum Conversion Price then in effect immediately before that subdivision shall be proportionately decreased. If the Corporation shall at any time or from time to time after the Series A Original Issue Date combine the outstanding shares of Common Stock, the Series A Minimum Conversion Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this paragraph shall become effective at the close of business on the date the subdivision or combination becomes effective. (f) ADJUSTMENT FOR DIVIDENDS AND DISTRIBUTIONS. In the event the Corporation at any time, or from time to time after the Series A Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Series A Minimum Conversion Price then in effect shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Series A Minimum Conversion Price then in effect by a fraction: (1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Series A Minimum Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Series A Minimum Conversion Price shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions. (g) ADJUSTMENT FOR MERGER OR REORGANIZATION, ETC. In case of any consolidation or merger of the Corporation with or into another corporation (other than a merger or consolidation in which the Corporation is the surviving corporation and which does not result in any reclassification of the outstanding shares of Common Stock) or the sale of all or substantially all of the assets of the Corporation to another corporation, entity or person, each share of Series A Preferred Stock shall thereafter be convertible into the kind and amount of shares of stock or other securities or assets to which a holder of the number of shares of Common Stock of the Corporation deliverable upon conversion of such Series A Preferred Stock would have been entitled upon such consolidation, merger or sale (assuming for this purpose the conversion of the Series A Preferred Stock into Common Stock pursuant to Subsection 4(b) at the then effective Series A Conversion Price). (h) CERTIFICATE AS TO ADJUSTMENTS. The Corporation shall, upon the written request at any time of any holder of Series A Preferred Stock, furnish or cause to be furnished to such holder a certificate setting forth (i) such adjustments and read- justments, (ii) the Series A Minimum Conversion Price then in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which then would be received upon the conversion of Series A Preferred Stock. 5. MANDATORY CONVERSION. (a) The Corporation may, at its option, require all, but not less than all, holders of shares of Series A Preferred Stock then outstanding to convert their shares of Series A Preferred Stock into shares of Common Stock, at the then effective Series A Conversion price and otherwise in accordance with the terms of Section 4, if the Market Value of the Common Stock has been equal to or greater than the Series A Minimum Conversion Price for at least 20 of the 30 Trading Days prior to notice of such required conversion by the Corporation. (b) All holders of record of shares of Series A Preferred Stock will be given at least 10 days' prior written notice of the date fixed and the place designated for mandatory conversion of shares of Series A Preferred Stock pursuant to this Section 5. Such notice will be sent by first class or registered mail, postage prepaid, to each record holder of Series A Preferred Stock at such holder's address last shown on the records of the transfer agent for the Series A Preferred Stock (or the records of the Corporation, if it serves as its own transfer agent). On or before the date fixed for conversion, each holder of shares of Series A Preferred Stock shall surrender his or its certificate or certificates for all such shares to the Corporation at the place designated in such notice, and shall thereafter receive certificates for the number of shares of Common Stock to which such holder is entitled pursuant to this Section 5. On the date fixed for conversion, all rights with respect to the Series A Preferred Stock so converted, including the rights, if any, to receive notices and vote, will terminate, except only the rights of the holders thereof, upon surrender of their certificate or certificates therefor, to receive (i) certificates for the number of shares of Common Stock into which such Series A Preferred Stock has been converted, (ii) payments of any accrued but unpaid dividends in accordance with Subsection 4(d)(iv) and (iii) payments in lieu of any fractional shares pursuant to Subsection 4(c). If so required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or by his or its attorney duly authorized in writing. As soon as practicable after the date of such mandatory conversion and the surrender of the certificate or certificates for Series A Preferred Stock, the Corporation shall cause to be issued and delivered to such holder, or on his or its written order, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof and cash as provided in Subsection 4(c) in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion. (c) All certificates evidencing shares of Series A Preferred Stock which are required to be surrendered for conversion in accordance with the provisions hereof shall, from and after the date such certificates are so required to be surrendered, be deemed to have been retired and cancelled and the shares of Series A Preferred Stock represented thereby converted into Common Stock for all purposes, notwithstanding the failure of the holder or holders thereof to surrender such certificates on or prior to such date. The Corporation may thereafter take such appropriate action as may be necessary to reduce the authorized Series A Preferred Stock accordingly. 6. MANDATORY REDEMPTION. (a) The Corporation will, subject to the conditions set forth in Subsection 6(b) below, on the date ten years after the Series A Original Issue Date (the "Series A Redemption Date"), redeem from each holder of shares of Series A Preferred Stock, at a price per share equal to the Series A Preference, plus an amount equal to all accrued but unpaid dividends thereon (the "Series A Redemption Price"), all of the shares of Series A Preferred Stock held by such holder on the Series A Redemption Date. (b) If the funds of the Corporation legally available for redemption of Series A Preferred Stock on the Series A Redemption Date are insufficient to redeem all of the shares of Series A Preferred Stock then outstanding, those funds which are legally available will be used to redeem the maximum possible number of such shares of Series A Preferred Stock ratably on the basis of the number of shares of Series A Preferred Stock which would be redeemed on such date if the funds of the Corporation legally available therefor had been sufficient to redeem all shares of Series A Preferred Stock. At any time thereafter when additional funds of the Corporation become legally available for the redemption of Series A Preferred Stock, such funds will be used, after the end of the next succeeding fiscal quarter (also referred to as a "Series A Redemption Date"), to redeem the balance of the shares, ratably on the basis set forth in the preceding sentence. (c) The Corporation shall provide notice of any redemption of Series A Preferred Stock pursuant to this Section 6 specifying the time and place of redemption and the Series A Redemption Price, by first class or registered mail, postage prepaid, to each holder of record of Series A Preferred Stock at the address for such holder last shown on the records of the transfer agent therefor (or the records of the Corporation, if it serves as its own transfer agent), not more than 60 nor less than 30 days prior to the date on which such redemption is to be made. If less than all Series A Preferred Stock owned by such holder is then to be redeemed, the notice will also specify the number of shares which are to be redeemed. Upon mailing any such notice of redemption, the Corporation will become obligated to redeem at the time of redemption specified therein all Series A Preferred Stock specified therein (other than such shares of Series A Preferred Stock as are duly converted pursuant to Section 4 or Section 5 prior to the close of business on the fifth Trading Day preceding the Series A Redemption Date). In case less than all Series A Preferred Stock represented by any certificate is redeemed in any redemption pursuant to this Section 6, a new certificate will be issued representing the unredeemed Series A Preferred Stock to the holder thereof. (d) No share of Series A Preferred Stock is entitled to any dividends declared after its Series A Redemption Date, and on such Series A Redemption Date all rights of the holder of such share as a stockholder of the Corporation by reason of the ownership of such share will cease, except the right to receive the Series A Redemption Price of such share, without interest, upon presentation and surrender of the certificate representing such share, and such share will not from and after such Series A Redemption Date be deemed to be outstanding. (e) Any Series A Preferred Stock redeemed pursuant to this Section 6 will be cancelled and will not under any circumstances be reissued, sold or transferred and the Corporation may from time to time take such appropriate action as may be necessary to reduce the authorized Series A Preferred Stock accordingly. B. SERIES B CONVERTIBLE PREFERRED STOCK. Two hundred fifty thousand (250,000) shares of the authorized and unissued Preferred Stock of the Corporation are hereby designated "Series B Convertible Preferred Stock" (the "Series B Preferred Stock") with the following rights, preferences, powers, privileges and restrictions, qualifications and limitations. 1. DIVIDENDS. (a) The holders of record of shares of the Series B Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors of the Corporation, out of any funds legally available therefor, dividends at the rate of five percent (5%) per annum of the Series B Preference (as defined in Subsection 2(a) below) of such shares for the 1989 calendar year and at the rate of six percent (6%) per annum of the Series B Preference thereafter. Accrued dividends for each calendar year shall be paid annually on the March 31 (a "dividend payment date") following the end of such calendar year (commencing March 31, 1990) to holders of record of shares of Series B Preferred Stock on such record date (not more than 60 days prior to March 31) as is established by the Board of Directors for such dividend. Dividends at the applicable rates set forth above shall accrue daily and be cumulative from January 1, 1989. The amount of any dividends accrued on any shares of Series B Preferred Stock at any dividend payment date shall be deemed to be the amount of any unpaid dividends accumulated thereon to and including the last day of the preceding calendar year, whether or not earned or declared. Notwithstanding anything to the contrary herein, accrued dividends for any calendar year shall not be required to be paid unless the Corporation's after-tax net income (before any extraordinary benefits) for such year, as shown on the Company's audited consolidated financial statements, is equal to or greater than the sum of the aggregate amount of such accrued dividends and the aggregate amount of all dividends required to be paid on the Series A Preferred Stock for such year. Any accrued dividends that are not paid shall be paid on the dividend payment date following the end of the first succeeding calendar year in which the Corporation's after-tax net income, before any extraordinary benefits (determined as set forth above), is sufficient to pay all of such accrued but unpaid dividends, the regular dividend on the Series B Preferred Stock for such year and all accrued but unpaid dividends required to be paid on such dividend payment date with respect to the Series A Preferred Stock. (b) So long as shares of Series B Preferred Stock are outstanding, no cash dividends shall be paid or declared on the Common Stock of the Corporation or any security ranking junior to the Series B Preferred Stock as to the payment of dividends, unless all dividends on the Series B Preferred Stock for all past dividend payment dates shall have been paid and the full dividend payment for the dividend payment date next succeeding the payment date of such cash dividend shall have been paid or declared and set apart for payment. 2. LIQUIDATION, DISSOLUTION OR WINDING UP. (a) In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of shares of Series B Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Corporation available for distribution to its stockholders, after and subject to the payment in full of all amounts required to be distributed to the holders of any other class or series of stock of the Corporation ranking on liquidation prior and in preference to the Series B Preferred Stock (collectively referred to as "Senior Preferred Common Stock"), but before any payment shall be made to the holders of Common Stock or any other class or series of stock ranking on liquidation junior to the Series B Preferred Stock (such Common Stock and other stock being collectively referred to as "Junior Stock") by reason of their ownership thereof, an amount equal to $5.00 per share (the "Series B Preference "). The Series B Preferred Stock shall rank on a parity with the Series A Preferred Stock upon any liquidation, dissolution or winding up of the Corporation. If upon any such liquidation, dissolution or winding up of the Corporation the remaining assets of the Corporation available for distribution to its stockholders shall be insufficient to pay the holders of shares of Series B Preferred Stock the full amount to which they shall be entitled, the holders of shares of Series B Preferred Stock, Series A Preferred Stock and any other class or series of stock ranking on liquidation on a parity with the Series B Preferred Stock shall share ratably in any distribution of the remaining assets and funds of the Corporation in proportion to the respective amounts which would otherwise be payable in respect of the shares held by them upon such distribution if all amounts payable on or with respect to such shares were paid in full. (b) After the payment of all preferential amounts required to be paid to the holders of Senior Preferred Stock, Series B Preferred Stock and any other class or series of stock of the Corporation ranking on liquidation on a parity with the Series B Preferred Stock, upon the liquidation, dissolution or winding up of the Corporation, the holders of shares of Junior Stock then outstanding shall be entitled to receive the remaining assets and funds of the Corporation available for distribution to its stockholders. (c) A consolidation or merger of the Corporation with or into another corporation or entity, or a sale of all or substantially all of the assets of the Corporation, shall not be regarded as a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 2. 3. VOTING. The Corporation shall not amend, alter or repeal the preferences, special rights or other powers of the Series B Preferred Stock so as to affect adversely the Series B Preferred Stock, or authorize any class or series of capital stock having a preference over the Series B Preferred Stock with respect to liquidation or redemption rights or dividends, without the written consent or affirmative vote of the holders of a majority of the then outstanding shares of Series B Preferred Stock, given in writing or by vote at a meeting, consenting or voting (as the case may be) separately as a class. Except as expressly set forth above or as otherwise required by law, holders of Series B Preferred Stock shall have no voting rights. 4. OPTIONAL CONVERSION. The holders of the Series B Preferred Stock shall have conversion rights as follows (the "Series B Conversion Rights"): (a) As used herein, the following items shall have the following respective meanings: (i) "CONVERSION DATE" shall have the meaning set forth in Subsection 4(d)(i). (ii) "MARKET VALUE" shall mean (A) if the Common Stock of the Corporation is listed on any national securities exchange or the NASDAQ National Market System, the reported last sale price of the Common Stock on such exchange or system, or (B) if the Common Stock shall not be so listed, the average of the closing bid and asked prices for the Common Stock, as reported by NASDAQ, or (C) if there are no such closing bid and asked prices, the fair market value of the Common Stock as determined by the Board of Directors of the Corporation. (iii) "SERIES B MINIMUM CONVERSION PRICE" shall mean $7.50 per share, subject to adjustment pursuant to the provisions of this Section 4. (iv) "SERIES B CONVERSION PRICE" shall mean, as of the applicable Conversion Date, the greater of (A) the average of the Market Values of the Common Stock for the five consecutive Trading Days preceeding (but not including) such Conversion Date, or (B) the then effective Series B Minimum Conversion Price. (v) "TRADING DAY" shall mean any day on which the New York Stock Exchange is generally open for trading. (b) RIGHT TO CONVERT. If (but only if) the Market Value of Common Stock of the Corporation shall have been equal to or greater than the Series B Minimum Conversion Price for at least 20 of the 30 Trading Days preceding the Conversion Date, holders of shares of Series B Preferred Stock may convert all or any of such shares, on such Conversion Date, into such number of fully paid and nonassessable shares of Common Stock as is determined by (i) multiplying the aggregate Series B Preferences of the shares so converted by 1.5, (ii) adding to such sum the aggregate amount of any accrued but unpaid dividends on such shares, excluding any such dividends declared for payment by the Board of Directors to holders of Series B Preferred Stock on a record date occurring prior to or on the Conversion Date, and (iii) dividing the sum so obtained by the Series B Conversion Price in effect on such Conversion Date. In the event of a notice of redemption of any shares of Series B Preferred Stock pursuant to Section 6 hereof, the Series B Conversion Rights of the shares designated for redemption shall terminate at the close of business on the fifth Trading Day preceding the date fixed for redemption. In the event of a liquidation, dissolution or winding up of the Corporation, the Series B Conversion Rights shall terminate at the close of business on the first Trading Day preceding the date fixed for the payment of any amounts distributable on liquidation to the holders of Series B Preferred Stock. (c) FRACTIONAL SHARES. No fractional shares of Common Stock shall be issued upon conversion of the Series B Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Corporation shall pay cash equal to such fraction multiplied by the then effective Series B Conversion Price. (d) MECHANICS OF CONVERSION. (i) In order for a holder of Series B Preferred Stock to convert shares of Series B Preferred Stock into shares of Common Stock, such holder shall surrender the certificate or certificates for such shares of Series B Preferred Stock, at the office of the transfer agent for the Series B Preferred Stock (or at the principal office of the Corporation if the Corporation serves as its own transfer agent), together with written notice that such holder elects to convert all or any number of the shares of the Series B Preferred Stock represented by such certificate or certificates. Such notice shall state such holder's name or the names of the nominees in which such holder wishes the certificate or certificates for shares of Common Stock to be issued. If required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by a written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or his or its attorney duly authorized in writing. The date of receipt of such certificates and notice by the transfer agent (or by the Corporation if the Corporation serves as its own transfer agent) shall be the Conversion Date, provided, however, that in the event that the shares tendered for conversion are not eligible for conversion on the date of receipt of such certificates and notice by the transfer agent (or by the Corporation if the Corporation serves as its own transfer agent), the transfer agent or Corporation shall promptly return such certificates to the registered holder. The Corporation shall, as soon as practicable after the Conversion Date, issue and deliver at such office to such holder of Series B Preferred Stock, or to his or its nominees, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled, together with cash in lieu of any fraction of a share. (ii) The Corporation shall at all times when the Series B Preferred Stock shall be outstanding, reserve and keep available out of its authorized but unissued stock, for the purpose of effecting the conversion of the Series B Preferred Stock, such number of its duly authorized shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding Series B Preferred Stock. (iii) All shares of Series B Preferred Stock which shall have been surrendered for conversion as herein provided shall no longer be deemed to be outstanding and all rights with respect to such shares, including the rights, if any, to receive notices and to vote, shall immediately cease and terminate on the Conversion Date, except only the right of the holders thereof to receive (A) shares of Common Stock in exchange therefor pursuant to Subsection 4(b), (B) payments of accrued but unpaid dividends in accordance with Subsection 4(d)(iv) and (C) payments in lieu of any fractional shares pursuant to Subsection 4(c). Any shares of Series B Preferred Stock so converted shall be retired and cancelled and shall not be reissued, and the Corporation may from time to time take such appropriate action as may be necessary to reduce the authorized Series B Preferred Stock accordingly. (iv) In the case of any share of Series B Preferred Stock which is converted after any dividend record date and on or prior to the corresponding dividend payment date (except shares of Series B Preferred Stock called for redemption during such period as to which any accrued and unpaid dividends shall have been paid), the dividend payable on such dividend payment date shall be paid on such date notwithstanding such conversion an such dividend shall be paid to the person who is the holder of such shares of Series B Preferred Stock at the close of business on such dividend record date. (e) ADJUSTMENT FOR STOCK SPLITS AND COMBINATIONS. If the Corporation shall at any time or from time to time after the date on which a share of Series B Preferred Stock was first issued (the "Series B Original Issue Date") effect a subdivision of the outstanding Common Stock, the Series B Minimum Conversion Price then in effect immediately before that subdivision shall be proportionately decreased. If the Corporation shall at any time or from time to time after the Series B Original Issue Date combine the outstanding shares of Common Stock, the Series B Minimum Conversion Price then in effect immediately before the combination shall be proportionately increased. Any adjustment under this paragraph shall become effective at the close of business on the date the subdivision or combination becomes effective. (f) ADJUSTMENT FOR DIVIDENDS AND DISTRIBUTIONS. In the event the Corporation at any time, or from time to time after the Series B Original Issue Date shall make or issue, or fix a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in additional shares of Common Stock, then and in each such event the Series B Minimum Conversion Price then in effect shall be decreased as of the time of such issuance or, in the event such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Series B Minimum Conversion Price then in effect by a fraction: (1) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (2) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Series B Minimum Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Series B Minimum Conversion Price shall be adjusted pursuant to this paragraph as of the time of actual payment of such dividends or distributions. (g) ADJUSTMENT FOR MERGER OR REORGANIZATION, ETC. In case of any consolidation or merger of the Corporation with or into another corporation (other than a merger or consolidation in which the Corporation is the surviving corporation and which does not result in any reclassification of the outstanding shares of Common Stock) or the sale of all or substantially all of the assets of the Corporation to another corporation, entity or person, each share of Series B Preferred Stock shall thereafter be convertible into the kind and amount of shares of stock or other securities or assets to which a holder of the number of shares of Common Stock of the Corporation deliverable upon conversion of such Series B Preferred Stock would have been entitled upon such consolidation, merger or sale (assuming for this purpose the conversion of the Series B Preferred Stock into Common Stock pursuant to Subsection 4(b) at the then effective Series B Conversion Price). (h) CERTIFICATE AS TO ADJUSTMENTS. The Corporation shall, upon the written request at any time of any holder of Series B Preferred Stock, furnish or cause to be furnished to such holder a certificate setting forth (i) such adjustments and readjustments, (ii) the Series B Minimum Conversion Price then in effect, and (iii) the number of shares of Common Stock and the amount, if any, of other property which then would be received upon the conversion of Series B Preferred Stock. 5. MANDATORY CONVERSION. (a) The Corporation may, at its option, require all, but not less than all, holders of shares of Series B Preferred Stock then outstanding to convert their shares of Series B Preferred Stock into shares of Common Stock, at the then effective Series B Conversion Price and otherwise in accordance with the terms of Section 4, if the Market Value of the Common Stock has been equal to or greater than the Series B Minimum Conversion Price for at least 20 of the 30 Trading Days prior to notice of such required conversion by the Corporation. (b) All holders of record of shares of Series B Preferred Stock will be given at least 10 days' prior written notice of the date fixed and the place designated for mandatory conversion of shares of Series B Preferred Stock pursuant to this Section 5. Such notice will be sent by first class or registered mail, postage prepaid, to each record holder of Series B Preferred Stock at such holder's address last shown on the records of the transfer agent for the Series B Preferred Stock (or the records of the Corporation, if it serves as its own transfer agent). On or before the date fixed for conversion, each holder of shares of Series B Preferred Stock shall surrender his or its certificate or certificates for all such shares to the Corporation at the place designated in such notice, and shall thereafter receive certificates for the number of shares of Common Stock to which such holder is entitled pursuant to this Section 5. On the date fixed for conversion, all rights with respect to the Series B Preferred Stock so converted, including the rights, if any, to receive notices and vote, will terminate, except only the rights of the holders thereof, upon surrender of their certificate or certificates therefor, to receive (i) certificates for the number of shares of Common Stock into which such Series B Preferred Stock has been converted, (ii) payments of any accrued but unpaid dividends in accordance with Subsection 4(d)(iv) and (iii) payments in lieu of any fractional shares pursuant to Subsection 4(c). If so required by the Corporation, certificates surrendered for conversion shall be endorsed or accompanied by written instrument or instruments of transfer, in form satisfactory to the Corporation, duly executed by the registered holder or by his or its attorney duly authorized in writing. As soon as practicable after the date of such mandatory conversion and the surrender of the certificate or certificates for Series B Preferred Stock, the Corporation shall cause to be issued and delivered to such holder, or on his or its written order, a certificate or certificates for the number of full shares of Common Stock issuable on such conversion in accordance with the provisions hereof and cash as provided in Subsection 4(c) in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion. (c) All certificates evidencing shares of Series B Preferred Stock which are required to be surrendered for conversion in accordance with the provisions hereof shall, from and after the date such certificates are so required to be surrendered, be deemed to have been retired and cancelled and the shares of Series B Preferred Stock represented thereby converted into Common Stock for all purposes, notwithstanding the failure of the holder or holders thereof to surrender such certificates on or prior to such date. The Corporation may thereafter take such appropriate action as may be necessary to reduce the authorized Series B Preferred Stock accordingly. 6. MANDATORY REDEMPTION. (a) The Corporation will, subject to the conditions set forth in Subsection 6(b) below, on the date ten years after the Series B Original Issue Date (the "Series B Redemption Date"), redeem from each holder of shares of Series B Preferred Stock, at a price per share equal to the Series B Preference, plus an amount equal to all accrued but unpaid dividends thereon (the "Series B Redemption Price"), all of the shares of Series B Preferred Stock held by such holder on the Series B Redemption Date. (b) If the funds of the Corporation legally available for redemption of Series B Preferred Stock on the Series B Redemption Date are insufficient to redeem all of the shares of Series B Preferred Stock then outstanding, those funds which are legally available will be used to redeem the maximum possible number of such shares of Series B Preferred Stock ratably on the basis of the number of shares of Series B Preferred Stock which would be redeemed on such date if the funds of the Corporation legally available therefor had been sufficient to redeem all shares of Series B Preferred Stock. At any time thereafter when additional funds of the Corporation become legally available for the redemp- tion of Series B Preferred Stock, such funds will be used, after the end of the next succeeding fiscal quarter (also referred to as a "Series B Redemption Date"), to redeem the balance of the shares, ratably on the basis set forth in the preceding sentence. (c) The Corporation shall provide notice of any redemption of Series B Preferred Stock pursuant to this Section 6 specifying the time and place of redemption and the Series B Redemption Price, by first class or registered mail, postage prepaid, to each holder of record of Series B Preferred Stock at the address for such holder last shown on the records of the transfer agent therefor (or the records of the Corporation, if it serves as its own transfer agent), not more than 60 nor less than 30 days prior to the date on which such redemption is to be made. If less than all Series B Preferred Stock owned by such holder is then to be redeemed, the notice will also specify the number of shares which are to be redeemed. Upon mailing any such notice of redemption, the Corporation will become obligated to redeem at the time of redemption specified therein all Series B Preferred Stock specified therein (other than such shares of Series B Preferred Stock as are duly converted pursuant to Section 4 or Section 5 prior to the close of business on the fifth Trading Day preceding the Series B Redemption Date). In case less than all Series B Preferred Stock represented by any certificate is redeemed in any redemption pursuant to this Section 6, a new certificate will be issued representing the unredeemed Series B Preferred Stock to the holder thereof. (d) No share of Series B Preferred Stock is entitled to any dividends declared after its Series B Redemption Date, and on such Series B Redemption Date all rights of the holder of such share as a stockholder of the Corporation by reason of the ownership of such share will cease, except the right to receive the Series B Redemption Price of such share, without interest, upon presentation and surrender of the certificate representing such share, and such share will not from and after such Series B Redemption Date be deemed to be outstanding. (e) Any Series B Preferred Stock redeemed pursuant to this Section 6 will be cancelled and will not under any circumstances be reissued, sold or transferred and the Corporation may from time to time take such appropriate action as may be necessary to reduce the authorized Series B Preferred Stock accordingly. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation to be duly executed by its Chief Executive Officer and attested by its Assistant Secretary, and its corporate seal to be affixed this 27th day of October, 1987. IOMEGA CORPORATION By: /s/ Michael J. Kucha --------------------------- Michael J. Kucha Chief Executive Officer Attest: /s/ Gwenn Newbold - ----------------------------- Gwenn Newbold Assistant Secretary [Corporate Seal] 7 CERTIFICATE OF DESIGNATIONS of SERIES C JUNIOR PARTICIPATING PREFERRED STOCK of IOMEGA CORPORATION ------------------------------ Iomega Corporation, a corporation organized and existing under the General Corporation Law of the State of Delaware (hereinafter called the "Corporation"), pursuant to the authority conferred on the Board of Directors of the Corporation by the Restated Certificate of Incorporation, as amended, and in accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, hereby certifies that the following resolution was adopted by the Board of Directors of the Corporation at a meeting duly called and held on July 28, 1989: RESOLVED, that pursuant to the authority expressly granted to and vested in the Board of Directors of this Corporation in accordance with the provisions of its Restated Certificate of Incorporation, as amended, there is hereby created a series of preferred stock, $.01 par value (the "Preferred Stock"), of the Corporation to be designated as "Series C Junior Participating Preferred Stock"; and, subject to the limitations provided by law and by the Restated Certificate of Incorporation, the powers, preferences and relative, participating, optional or other rights of, and the qualifications, limitations or restrictions upon, the Series C Junior Participating Preferred Stock shall be as follows: SERIES C JUNIOR PARTICIPATING PREFERRED STOCK: 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series C Junior Participating Preferred Stock" (the "Series C Preferred Stock") and the number of shares constituting the Series C Preferred Stock shall be 250,000. Such number of shares shall be increased or decreased by resolution of the Board of Directors of the Corporation (hereinafter, the "Board of Directors" or the "Board"); PROVIDED, that no decrease shall reduce the number of shares of Series C Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series C Preferred Stock. 2. DIVIDENDS AND DISTRIBUTIONS. (a) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series C Preferred Stock with respect to dividends, the holders of shares of Series C Preferred Stock, in preference to the holders of Common Stock, par value $.03 1/3 per share (the "Common Stock"), of the Corporation, and of any other security ranking junior to the Series C Preferred Stock as to the payment of dividends, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds of the Corporation legally available for the payment of dividends, quarterly dividends payable in cash on March 31, June 30, September 30 and December 31 in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series C Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (i) $1 or (ii) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series C Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series C Preferred Stock were entitled immediately prior to such event under clause (ii) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) The Corporation shall declare a dividend or distribution on the Series C Preferred Stock as provided in paragraph (a) of this Section 2 immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock) and the Corporation shall pay such dividend or distribution on the Series C Preferred Stock before the dividend or distribution declared on the Common Stock is paid or set apart; provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1 per share on the Series C Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (c) Dividends shall begin to accrue and be cumulative on outstanding shares of Series C Preferred Stock from the Quarterly Dividend Payment date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series C Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series C Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series C Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. 3. VOTING RIGHTS. The holders of shares of Series C Preferred Stock shall have the following voting rights: (a) Subject to the provision for adjustment hereinafter set forth, each share of Series C Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series C Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) Except as otherwise provided herein, in the Certificate of Incorporation or by law, the holders of shares of Series C Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (c) (i) If any time dividends on any Series C Preferred Stock shall be in arrears in an amount equal to six quarterly dividends thereon, the holders of the Series C Preferred Stock, voting as a separate series from all other series of Preferred Stock and classes of capital stock, shall be entitled to elect two members of the Board of Directors in addition to any Directors elected by any other series, class or classes of securities and the authorized number of Directors will automatically be increased by two. Promptly thereafter, the Board of Directors of this Corporation shall, as soon as may be practicable, call a special meeting of holders of Series C Preferred Stock for the purpose of electing such members of the Board of Directors. Said special meeting shall in any event be held within 45 days of the occurrence of such arrearage. (ii) During any period when the holders of Series C Preferred Stock, voting as a separate series, shall be entitled and shall have exercised their right to elect two Directors, then and during such time as such right continues (A) the then authorized number of Directors shall be increased by two, and the holders of Series C Preferred Stock, voting as a separate series, shall be entitled to elect the additional Director so provided for, and (B) each such additional Director shall not be a member of any existing class of the Board of Directors, but shall serve until the next annual meeting of stockholders for the election of Directors, or until his successor shall be elected and shall qualify, or until his right to hold such office terminates pursuant to the provisions of this paragraph (c). (iii) A Director elected pursuant to the terms hereof may be removed with or without cause by the holders of Series C Preferred Stock entitled to vote in an election of such Director. (iv) If, during any interval between annual meetings of stockholders for the election of Directors and while the holders of Series C Preferred Stock shall be entitled to elect two Directors, there is no such Director in office by reason of resignation, death or removal, then, promptly thereafter, the Board of Directors shall cause a special meeting of the holders of Series C Preferred Stock for the purpose of filling such vacancy and such vacancy shall be filled at such special meeting. Such special meeting shall in any event be held within 45 days of the occurrence of such vacancy. (v) At such time as the arrearage is fully cured, and all dividends accumulated and unpaid on any shares of Series C Preferred Stock outstanding are paid, and, in addition thereto, at least one regular dividend has been paid subsequent to curing such arrearage, the term of office of any Director elected pursuant to this paragraph (c), or his successor, shall automatically terminate, and the authorized number of Directors shall automatically decrease by two, the rights of the holders of the shares of the Series C Preferred Stock to vote as provided in this paragraph (c) shall cease, subject to renewal from time to time upon the same terms and conditions, and the holders of shares of the Series C Preferred Stock shall have only the limited voting rights elsewhere herein set forth. (d) Except as set forth herein, or as otherwise provided by law, holders of Series C Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. 4. CERTAIN RESTRICTIONS. (a) Whenever quarterly dividends or other dividends or distributions payable on the Series C Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series C Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series C Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series C Preferred Stock, except dividends paid ratably on the Series C Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series C Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series C Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration any shares of Series C Preferred Stock, or any shares of stock ranking on a parity with the Series C Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (a) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. 5. REACQUIRED SHARES. Any shares of Series C Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Certificate of Incorporation, or in any other Certificate of Designations creating a series of Preferred Stock or any similar stock or as otherwise required by law. 6. LIQUIDATION, DISSOLUTION OR WINDING UP. (a) Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (i) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series C Preferred Stock unless, prior thereto, the holders of shares of Series C Preferred Stock shall have received $100 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series C Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (ii) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series C Preferred Stock, except distributions made ratably on the Series C Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. (b) Neither the consolidation, merger or other business combination of the Corporation with or into any other corporation nor the sale, lease, exchange or conveyance of all or any part of the property, assets or business of the Corporation shall be deemed to be a liquidation, dissolution or winding up of the Corporation for purposes of this Section 6. (c) In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series C Preferred Stock were entitled immediately prior to such event under the proviso in clause (i) of paragraph (a) of this Section 6 shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 7. CONSOLIDATION, MERGER, ETC. Notwithstanding anything to the contrary contained herein, in case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series C Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series C Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 8. NO REDEMPTION. The shares of Series C Preferred Stock shall not be redeemable. 9. RANK. The Series C Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of the Preferred Stock issued either before or after the issuance of the Series C Preferred Stock, unless the terms of any such series shall provide otherwise. 10. AMENDMENT. The Certificate of Incorporation of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series C Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority of the then outstanding shares of Series C Preferred Stock, voting as a single class. 11. FRACTIONAL SHARES. Series C Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and have the benefit of all other rights of holders of Series C Preferred Stock. IN WITNESS WHEREOF, this Certificate of Designations is executed on behalf of the Corporation by its President and Chief Executive Officer and attested by its Secretary this 7th day of August, 1989. IOMEGA CORPORATION By: /s/ Fred Wenninger --------------------------- Name: Fred Wenninger Title: President and Chief Executive Officer Attest: /s/ Paul D. Slack - ------------------------- Paul D. Slack Title: Secretary CERTIFICATE OF AMENDMENT TO RESTATED CERTIFICATE OF INCORPORATION 0F IOMEGA CORPORATION IOMEGA CORPORATION (the "Corporation"), a corporation originally incorporated under the General Corporation law of the State of Delaware, under the name "Databyte Corporation," on April 2, 1980, does hereby certify as follows: 1. The Restated Certificate of Incorporation of the Corporation, as filed with the Delaware Secretary of State on July 18, 1983, as amended to date, is hereby further amended by the addition of a new Article TENTH and Article ELEVENTH, which shall read in their entirety as follows: TENTH: This Article is inserted for the management of the business and for the conduct of the affairs of the Corporation. SECTION 1. NUMBER OF DIRECTORS. The number of directors of the Corporation shall not be less than three. The exact number of directors within the limitations specified in the preceding sentence shall be fixed from time to time pursuant to a resolution adopted by the Board of Directors. SECTION 2. CLASSES OF DIRECTORS. The Board of Directors shall be and is divided into three classes: Class I, Class II and Class III. No one class shall have more than one director more than any other class. If a fraction is contained in the quotient arrived at by dividing the designated number of directors by three, then, if such fraction is one-third, the extra director shall be a member of Class III, and if such fraction is two-thirds, one of the extra directors shall be a member of Class III and one of the extra directors shall be a member of Class II, unless otherwise provided from time to time by resolution adopted by the Board of Directors. SECTION 3. ELECTION OF DIRECTORS. Elections of directors need not be by written ballot except as and to the extent provided in the By-laws of the Corporation. SECTION 4. TERMS OF OFFICE. Each director shall serve for a term ending on the date of the third annual meeting following the annual meeting at which such director was elected; PROVIDED that each initial director in Class I shall serve for a term ending on the date of the annual meeting next following the end of the Corporation's 1990 fiscal year; and each initial director in Class II shall serve for a term ending on the date of the annual meeting next following the end of the Corporation's 1991 fiscal year; and PROVIDED FURTHER, that the term of each director shall be subject to the election and qualification of his/her successor and to his/her earlier death, resignation or removal. SECTION 5. ALLOCATION OF DIRECTORS AMONG CLASSES IN THE EVENT OF INCREASES OR DECREASES IN THE NUMBER OF DIRECTORS. In the event of any increase or decrease in the authorized number of directors, (i) each director then serving as such shall nevertheless continue as a director of the class of which he/she is a member and (ii) the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of directors so as to ensure that no one class has more than one director more than any other class. To the extent possible, consistent with the foregoing rule, any newly created directorships shall be added to those classes whose terms of office are to expire at the latest dates following such allocation, and any newly eliminated directorships shall be subtracted from those classes whose terms of office are to expire at the earliest dates following such allocation, unless otherwise provided from time to time by resolution adopted by the Board of Directors. SECTION 6. QUORUM; ACTION AT MEETING. A majority of the directors at any time in office shall constitute a quorum for the transaction of business. In the event one or more of the directors shall be disqualified to vote at any meeting, then the required quorum shall be reduced by one for each such director so disqualified, provided that in no case shall less than one-third of the number of directors fixed pursuant to Section 1 above constitute a quorum. If at any meeting of the Board of Directors there shall be less than such a quorum, a majority of those present may adjourn the meeting from time to time. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors unless a greater number is required by law, by the By-laws of the Corporation or by this Certificate of Incorporation. SECTION 7. REMOVAL. Any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote at an election of directors; provided that, if and for so long as the Board of Directors is classified pursuant to Section 141(d) of the Delaware General Corporation Law, stockholders may effect such removal only for cause, unless this Certificate of Incorporation otherwise provides. SECTION 8. VACANCIES. Unless and until filled by the stockholders, any vacancy in the Board of Directors, however occurring, including a vacancy resulting from an enlargement of the Board, may be filled by a vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director. A director elected to filled a vacancy shall be elected to hold office until the next election of the class for which such director shall have chosen, subject to the election and qualification of his/her successor and to his/her earlier death, resignation or removal. SECTION 9. AMENDMENTS. Notwithstanding any other provisions of law, this Certificate of Incorporation or the By-laws of the Corporation, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least eighty percent (80%) of the votes which all of the stockholders would be entitled to cast at an annual election of directors or class of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article Tenth. ELEVENTH: Any action which is required to be taken or which may be taken at any annual or specified meeting of stockholders of the Corporation may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of all of the outstanding shares of stock that would be entitled to vote thereon at a meeting of stockholders. Notwithstanding any other provisions of law, this Certificates of Incorporation or the By-laws of the Corporation, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least eighty percent (80%) of the votes which all of the stockholders would be entitled to cast at an annual election of directors or class of directors shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article Eleventh. 2. The foregoing amendments to the Corporation's Restated Certificate of Incorporation were duly adopted by the Board of Directors and the stockholders of the Corporation in accordance with Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be executed and acknowledged as set forth below on this 24th day of April, 1990. IOMEGA CORPORATION By: /s/ Fred Wenninger -------------------------------- Fred Wenninger President and Chief Executive Officer Attest: /s/ Paul D. Slack -------------------------------- Paul D. Slack Senior Vice President Administration and Secretary CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF IOMEGA CORPORATION Pursuant to Section 242 of the General Corporation Law of the State of Delaware ------------------------------ IOMEGA CORPORATION (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify as follows: 1. The Restated Certificate of Incorporation of the Corporation, as filed with the Delaware Secretary of State on July 18, 1983, as amended to date, is hereby further amended by (i) deleting Article TENTH in its entirety and (ii) renumbering Article ELEVENTH as Article TENTH. 2. The foregoing amendment to the Corporation's Restated Certificate of Incorporation was duly adopted by the Board of Directors and the Stockholders of the Corporation in accordance with Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be affixed hereto and this Certificate of Amendment to be signed by its President and attested by its Secretary on this 20th day of April, 1993. IOMEGA CORPORATION By: /s/ Fred Wenninger -------------------------------- Fred Wenninger President and CEO Attest: /s/ Paul D. Slack -------------------------------- Paul D. Slack Senior Vice President Administration and Secretary [Corporate Seal] 2 IOMEGA CORPORATION CERTIFICATE OF DECREASE OF NUMBER OF SHARES OF PREFERRED STOCK DESIGNATED AS SERIES A CONVERTIBLE PREFERRED STOCK AND SERIES B CONVERTIBLE PREFERRED STOCK Iomega Corporation, a Delaware corporation (the "Corporation"), pursuant to authority conferred upon the Board of Directors of the Corporation by the Corporation's Restated Certificate of Incorporation, as amended (the "Certificate of Incorporation"), and in accordance with the provisions of Section 151(g) of the General Corporation Law of the State of Delaware (the "Delaware Law"), certifies that the Board of Directors of the Corporation, by unanimous written consent in accordance with Section 141(f) of the Delaware Law, duly adopted the following resolutions: "RESOLVED: That no shares of the Corporation's Series A Convertible Preferred Stock (the "Series A Preferred Stock") are outstanding and no shares of Series A Preferred Stock will be issued subject to the Certificate of Designation previously filed with respect to such series (the "Series A Certificate of Designation"); and that the proper officers of the Corporation be and hereby are authorized and directed in the name and on behalf of the Corporation to execute and file a certificate with the Secretary of State of the State of Delaware pursuant to Section 151(g) of the Delaware Law setting forth the text of this resolution, upon the filing and effectiveness of which all matters set forth in the Series A Certificate of Designation shall be deemed to have been eliminated from the Certificate of Incorporation and the 1,200,000 shares of Preferred Stock previously designated as Series A Preferred Stock shall resume their status as undesignated shares of Preferred Stock available for future issuance in accordance with the Certificate of Incorporation. RESOLVED: That no shares of the Corporation's Series B Convertible Preferred Stock (the "Series B Preferred Stock") are outstanding and no shares of Series B Preferred Stock will be issued subject to the Certificate of Designation previously filed with respect to such series (the "Series B Certificate of Designation"); and that the proper officers of the Corporation be and hereby are authorized and directed in the name and on behalf of the Corporation to execute and file a certificate with the Secretary of State of the State of Delaware pursuant to Section 151(g) of the Delaware Law setting forth the text of this resolution, upon the filing and effectiveness of which all matters are set forth in the Series B Certificate of Designation shall be deemed to have been eliminated from the Certificate of Incorporation and the 250,000 shares of Preferred Stock previously designated as Series B Preferred Stock shall resume their status as undesignated shares of Preferred Stock available for future issuance in accordance with the Certificate of Incorporation." IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be affixed hereto and this Certificate to be signed by its President this 14th day of December, 1995. IOMEGA CORPORATION By: /s/ Kim B. Edwards --------------------------- President 2 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF IOMEGA CORPORATION PURSUANT TO SECTION 242 OF THE GENERAL CORPORATION OF LAW OF THE STATE OF DELAWARE IOMEGA CORPORATION (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify as follows: 1. The Restated Certificate of Incorporation of the Corporation, as filed with the Delaware Secretary of State on July 18, 1983, as amended to date, is hereby further amended by deleting the first paragraph of Article FOURTH in its entirety and replacing it with the following paragraph: "FOURTH. The total number of shares of capital stock of all classes which the Corporation shall have authority to issue is 155,000,000 consisting of 150,000,000 shares of Common Stock, $.03 1/3 par value per share, and 5,000,000 shares of Preferred Stock, $.01 par value per share." 2. The foregoing amendment to the Corporation's Restated Certificate of Incorporation was duly adopted by the Board of Directors and the Stockholders of the Corporation in accordance with Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be affixed hereto and this Certificate of Amendment to be signed by its President on this 26th day of January, 1996. IOMEGA CORPORATION By: /s/ Kim B. Edwards ------------------------------- Kim B. Edwards President and CEO CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF IOMEGA CORPORATION Pursuant to Section 242 of the General Corporation Law of THE STATE OF DELAWARE Iomega Corporation (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify as follows: 1. The Corporation's Restated Certificate of Incorporation, as filed with the Delaware Secretary of State on July 18, 1993, as amended to date, is hereby further amended as follows by deleting the first paragraph of Article FOURTH in its entirety and replacing it with the following paragraph: "FOURTH. The total number of shares of capital stock of all classes which the Corporation shall have authority to issue is 405,000,000, consisting of 400,000,000 shares of Common Stock, $.03 1/3 par value per share, and 5,000,000 shares of Preferred Stock, $.01 par value per share." 2. The foregoing amendment to the Corporation's Restated Certificate of Incorporation was duly adopted by the Board of Directors and the stockholders of the Corporation in accordance with Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be signed by its President this 22nd day of April, 1997. IOMEGA CORPORATION BY: /S/ KIM B. EDWARDS Kim B. Edwards President and Chief Executive Officer 1 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF IOMEGA CORPORATION Pursuant to Section 242 of the General Corporation Law of THE STATE OF DELAWARE Iomega Corporation (the "Corporation"), a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, does hereby certify as follows: 1. The Corporation's Restated Certificate of Incorporation, as filed with the Delaware Secretary of State on July 18, 1983, as amended to date, is hereby further amended by inserting the following new Article ELEVENTH: "ELEVENTH: This Article is inserted for the management of the business and for the conduct of the affairs of the Corporation. SECTION 1. NUMBER OF DIRECTORS. The number of directors shall not be less than three. The exact number of directors within the limitations specified in the preceding sentence shall be fixed from time to time pursuant to a resolution adopted by the Board of Directors or as provided in the By-laws of the Corporation. SECTION 2. CLASSES OF DIRECTORS. The Board of Directors shall be and is divided into three classes: Class I, Class II and Class III. No one class shall have more than one director more than any other class. If a fraction is contained in the quotient arrived at by dividing the authorized number of directors by three, then, if such fraction is one-third, the extra director shall be a member of Class I, and if such fraction is two-thirds, one of the extra directors shall be a member of Class I and one of the extra directors shall be a member of Class II, unless otherwise provided from time to time by resolution adopted by the Board of Directors. SECTION 3. ELECTION OF DIRECTORS. Elections of directors need not be by written ballot except as and to the extent provided in the By-laws of the Corporation. SECTION 4. TERMS OF OFFICE. Each director shall serve for a term ending on the date of the third annual meeting following the annual meeting at which such director was elected; PROVIDED, that each initial director in Class I shall serve for a term expiring at the Corporation's annual meeting held in 1998; each initial director in Class II shall serve for a term expiring at the Corporation's annual meeting held in 1999; and each initial director in Class III shall serve for a term expiring at the Corporation's annual meeting held in 2000; PROVIDED, FURTHER, that the term of each director shall continue until the election and qualification of his successor and shall be subject to his earlier death, resignation or removal. SECTION 5. ALLOCATION OF DIRECTORS AMONG CLASSES IN THE EVENT OF INCREASES OR DECREASES IN THE NUMBER OF DIRECTORS. In the event of any increase or decrease in the authorized number of directors, (i) each director then serving as such shall nevertheless continue as a director of the class of which he is a member until the expiration of his current term, subject to his earlier death, resignation or removal, and (ii) the newly created or eliminated directorships resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of directors in accordance with the provisions of Section 2 above. To the extent possible, consistent with the provisions of Section 2 above, any newly created directorships shall be added to those classes whose terms of office are to expire at the latest dates following such allocation, and any newly eliminated directorships shall be subtracted from those classes whose terms of offices are to expire at the earliest dates following such allocation, unless otherwise provided from time to time by resolution adopted by the Board of Directors. SECTION 6. QUORUM; ACTION AT MEETING. A majority of the directors at any time in office shall constitute a quorum for the transaction of business. In the event one or more of the directors shall be disqualified to vote at any meeting, then the required quorum shall be reduced by one for each such director so disqualified, provided that in no case shall less than one-third of the number of directors fixed pursuant to Section 1 above constitute a quorum. In the absence of a quorum at any such meeting, a majority of the directors present may adjourn the meeting from time to time without further notice other than announcement at the meeting, until a quorum shall be present. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board of Directors unless a greater number is required by law, by the By-laws of the Corporation or by this Certificate of Incorporation. SECTION 7. REMOVAL. Directors of the Corporation may be removed only for cause by the affirmative vote of the holders of at least two-thirds of the shares of the capital stock of the Corporation issued and outstanding and entitled to vote. SECTION 8. VACANCIES. Unless and until filled by the stockholders, any vacancy in the Board of Directors, however occurring, including a vacancy resulting from an enlargement of the Board, may be filled by vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director. A director elected to fill a vacancy shall be elected to hold office until the next election of the class for which such director shall have been chosen, subject to the election and qualification of his successor and to his earlier death, resignation or removal. SECTION 9. AMENDMENTS TO ARTICLE. Notwithstanding any other provisions of law, this Certificate of Incorporation or the By-laws of the Corporation, and notwithstanding the fact that a lesser percentage may be specified by law, the affirmative vote of the holders of at least eighty percent (80%) of the shares of capital stock of the Corporation issued and outstanding and entitled to vote shall be required to amend or repeal, or to adopt any provision inconsistent with, this Article ELEVENTH." 2. The foregoing amendment to the Corporation's Restated Certificate of Incorporation was duly adopted by the Board of Directors and the stockholders of the Corporation in accordance with Section 242 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be signed by the undersigned this 6th day of June, 1997. IOMEGA CORPORATION BY: /S/ ROBERT J. SIMMONS Name: Robert J. Simmons Title: Treasurer CERTIFICATE OF DESIGNATIONS OF SERIES A JUNIOR PARTICIPATING PREFERRED STOCK OF IOMEGA CORPORATION ------------------------------ Iomega Corporation, a corporation organized and existing under the laws of the State of Delaware (hereinafter called the "Corporation"), hereby certifies that the following resolution was adopted by the Board of Directors of the corporation at a meeting duly called and held on July 29, 1999: RESOLVED: That pursuant to the authority granted to and vested in the Board of Directors of the Corporation (hereinafter called the "Board of Directors" or the "Board") in accordance with the provisions of the Certificate of Incorporation, as amended, the Board of Directors hereby creates a series of Preferred Stock, $.01 par value per share (the "Preferred Stock"), of the Corporation and hereby states the designation and number of shares, and fixes the relative rights, preferences and limitations thereof as follows: SERIES A JUNIOR PARTICIPATING PREFERRED STOCK: SECTION 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series A Junior Participating Preferred Stock" (the "Series A Preferred Stock") and the number of shares constituting the Series A Preferred Stock shall be four hundred thousand (400,000). Such number of shares may be increased or DECREASED BY RESOLUTION OF THE BOARD OF DIRECTORS PRIOR TO ISSUANCE; PROVIDED, that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares reserved for issuance upon the exercise of outstanding options, rights or warrants or upon the conversion of any outstanding securities issued by the Corporation convertible into Series A Preferred Stock. SECTION 2. DIVIDENDS AND DISTRIBUTIONS. (A) Subject to the rights of the holders of any shares of any series of Preferred Stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of Common Stock, par value $.03 1/3 per share (the "Common Stock"), of the Corporation, and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds of the Corporation legally available for the payment of dividends, quarterly dividends payable in cash on the last day of each fiscal quarter of the Corporation in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $10 or (b) subject to the provision for adjustment hereinafter set forth, 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions, other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. In the event the Corporation shall at any time declare or pay any dividend on the Series A Preferred Stock payable in shares of Series A Preferred Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Series A Preferred Stock (by reclassification or otherwise than by payment of a dividend in shares of Series A Preferred Stock) into a greater or lesser number of shares of Series A Preferred Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the first sentence of this Section 2(A) shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Series A Preferred Stock that were outstanding immediately prior to such event and the denominator of which is the number of shares of Series A Preferred Stock outstanding immediately after such event. (B) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (A) of this Section immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock) and the Corporation shall pay such dividend or distribution on the Series A Preferred Stock before the dividend or distribution declared on the Common Stock is paid or set apart; provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $10 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 60 days prior to the date fixed for the payment thereof. SECTION 3. VOTING RIGHTS. The holders of shares of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. In the event the Corporation shall at any time declare or pay any dividend on the Series A Preferred Stock payable in shares of Series A Preferred Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Series A Preferred Stock (by reclassification or otherwise than by payment of a dividend in shares of Series A Preferred Stock) into a greater or lesser number of shares of Series A Preferred Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Series A Preferred Stock that were outstanding immediately prior to such event and the denominator of which is the number of shares of Series A Preferred Stock outstanding immediately after such event. (B) Except as otherwise provided herein, in the Certificate of Incorporation or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock and any other capital stock of the Corporation having general voting rights shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C) (i) If at any time dividends on any Series A Preferred Stock shall be in arrears in an amount equal to six quarterly dividends thereon, the holders of the Series A Preferred Stock, voting as a separate series from all other series of Preferred Stock and classes of capital stock, shall be entitled to elect two members of the Board of Directors in addition to any Directors elected by any other series, class or classes of securities and the authorized number of Directors will automatically be increased by two. Promptly thereafter, the Board of Directors of the Corporation shall, as soon as may be practicable, call a special meeting of holders of Series A Preferred Stock for the purpose of electing such members of the Board of Directors. Such special meeting shall in any event be held within 45 days of the occurrence of such arrearage. (ii) During any period when the holders of Series A Preferred Stock, voting as a separate series, shall be entitled and shall have exercised their right to elect two Directors, then, and during such time as such right continues, (a) the then authorized number of Directors shall be increased by two, and the holders of Series A Preferred Stock, voting as a separate series, shall be entitled to elect the additional Directors so provided for, and (b) each such additional Director shall not be a member of any existing class of the Board of Directors, but shall serve until the next annual meeting of stockholders for the election of Directors, or until his successor shall be elected and shall qualify, or until his right to hold such office terminates pursuant to the provisions of this Section 3(C). (iii) A Director elected pursuant to the terms hereof may be removed with or without cause by the holders of Series A Preferred Stock entitled to vote in an election of such Director. (iv) If, during any interval between annual meetings of stockholders for the election of Directors and while the holders of Series A Preferred Stock shall be entitled to elect two Directors, there is no such Director in office by reason of resignation, death or removal, then, promptly thereafter, the Board of Directors shall call a special meeting of the holders of Series A Preferred Stock for the purpose of filling such vacancy and such vacancy shall be filled at such special meeting. Such special meeting shall in any event be held within 45 days of the occurrence of such vacancy. (v) At such time as the arrearage is fully cured, and all dividends accumulated and unpaid on any shares of Series A Preferred Stock outstanding are paid, and, in addition thereto, at least one regular dividend has been paid subsequent to curing such arrearage, the term of office of any Director elected pursuant to this Section 3(C), or his successor, shall automatically terminate, and the authorized number of Directors shall automatically decrease by two, the rights of the holders of the shares of the Series A Preferred Stock to vote as provided in this Section 3(C) shall cease, subject to renewal from time to time upon the same terms and conditions, and the holders of shares of the Series A Preferred Stock shall have only the limited voting rights elsewhere herein set forth. (D) Except as set forth herein, or as otherwise provided by law, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. SECTION 4. CERTAIN RESTRICTIONS. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (iv) redeem or purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of stock ranking on a parity with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. SECTION 5. REACQUIRED SHARES. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Certificate of Incorporation, or in any other Certificate of Designations creating a series of Preferred Stock or any similar stock or as otherwise required by law. SECTION 6. LIQUIDATION, DISSOLUTION OR WINDING UP. (A) Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $1000 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, provided that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 1,000 times the aggregate amount to be distributed per share to holders of shares of Common Stock, or (2) to the holders of shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. (B) Neither the consolidation, merger or other business combination of the Corporation with or into any other corporation nor the sale, lease, exchange or conveyance of all or any part of the property, assets or business of the Corporation shall be deemed to be a liquidation, dissolution or winding up of the Corporation for purposes of this Section 6. (C) In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of paragraph (A) of this Section 6 shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. In the event the Corporation shall at any time declare or pay any dividend on the Series A Preferred Stock payable in shares of Series A Preferred Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Series A Preferred Stock (by reclassification or otherwise than by payment of a dividend in shares of Series A Preferred Stock) into a greater or lesser number of shares of Series A Preferred Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of paragraph (A) of this Section 6 shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Series A Preferred Stock that were outstanding immediately prior to such event and the denominator of which is the number of shares of Series A Preferred Stock outstanding immediately after such event. SECTION 7. CONSOLIDATION, MERGER, ETC. Notwithstanding anything to the contrary contained herein, in case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each share of Series A Preferred Stock shall at the same time be similarly exchanged or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 1,000 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time declare or pay any dividend on the Common Stock payable in shares of Common Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise than by payment of a dividend in shares of Common Stock) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. In the event the Corporation shall at any time declare or pay any dividend on the Series A Preferred Stock payable in shares of Series A Preferred Stock, or effect a subdivision, combination or consolidation of the outstanding shares of Series A Preferred Stock (by reclassification or otherwise than by payment of a dividend in shares of Series A Preferred Stock) into a greater or lesser number of shares of Series A Preferred Stock, then in each such case the amount set forth in the first sentence of this Section 7 with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Series A Preferred Stock that were outstanding immediately prior to such event and the denominator of which is the number of shares of Series A Preferred Stock outstanding immediately after such event. SECTION 8. NO REDEMPTION. The shares of Series A Preferred Stock shall not be redeemable. SECTION 9. RANK. The Series A Preferred Stock shall rank, with respect to the payment of dividends and the distribution of assets, junior to all series of any other class of the Preferred Stock issued either before or after the issuance of the Series A Preferred Stock, unless the terms of any such series shall provide otherwise. SECTION 10. AMENDMENT. At such time as any shares of Series A Preferred Stock are outstanding, the Certificate of Incorporation, as amended, of the Corporation shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of at least two-thirds of the outstanding shares of Series A Preferred Stock, voting together as a single class. SECTION 11. FRACTIONAL SHARES. Series A Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and have the benefit of all other rights of holders of Series A Preferred Stock. IN WITNESS WHEREOF, this Certificate of Designations is executed on behalf of the Corporation by its Chief Executive Officer this 29th day of July, 1999. IOMEGA CORPORATION BY: /S/ JODIE K. GLORE NAME: JODIE K. GLORE TITLE: PRESIDENT AND CEO IOMEGA CORPORATION CERTIFICATE OF ELIMINATION OF SHARES OF PREFERRED STOCK DESIGNATED AS SERIES C JUNIOR PARTICIPATING PREFERRED STOCK Iomega Corporation, a Delaware corporation (the "Corporation"), pursuant to authority conferred upon the Board of Directors of the Corporation by the Corporation's Restated Certificate of Incorporation, as amended (the "Certificate of Incorporation"), and in accordance with the provisions of Section 151(g) of the General Corporation Law of the State of Delaware (the "Delaware Law"), certifies that the Board of Directors of the Corporation duly adopted the following resolution: "RESOLVED: That no shares of the Corporation's Series C Junior Participating Preferred Stock (the "Series --------- C Preferred Stock") are outstanding and no shares of Series C Preferred Stock will be issued subject to the Certificate of Designation previously filed with respect to such series (the "Series C Certificate of Designation"); and that the proper officers of the Corporation be and hereby are authorized and directed in the name and on behalf of the Corporation to execute and file a certificate with the Secretary of State of the State of Delaware pursuant to Section 151(g) of the Delaware Law setting forth the text of this resolution, upon the filing and effectiveness of which all matters set forth in the Series C Certificate of Designation shall be deemed to have been eliminated from the Certificate of Incorporation and the 250,000 shares of Preferred Stock previously designated as Series C Preferred Stock shall resume their status as undesignated shares of Preferred Stock available for future issuance in accordance with the Certificate of Incorporation." IN WITNESS WHEREOF, the Corporation has caused this Certificate to be signed by its President this 31st day of May, 2000. IOMEGA CORPORATION BY: /S/BRUCE R. ALBERTSON NAME: BRUCE R. ALBERTSON TITLE: PRESIDENT AND CHIEF EXECUTIVE OFFICER EX-27 3 0003.txt FINANCIAL DATA SCHEDULE
5 0000352789 IOMEGA CORPORATION 1,000 3-MOS 6-MOS DEC-31-2000 DEC-31-2000 MAR-27-2000 JAN-1-2000 JUN-25-2000 JUN-25-2000 278,583 278,583 75,332 75,332 219,376 219,376 50,660 50,660 75,733 75,733 622,657 622,657 315,065 315,065 206,183 206,183 761,985 761,985 346,136 346,136 0 0 0 0 0 0 304,738 304,738 0 0 761,985 761,985 303,639 648,536 303,639 648,536 183,628 400,618 265,703 559,069 789 1,613 0 0 1,387 2,834 41,166 93,930 796 1,734 40,370 92,196 0 0 0 0 0 0 40,370 92,196 0.15 0.34 0.15 0.33
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