-----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, D/gBR4IBrR0tOtoTZbml5qDCy0ST/pv3+LRHVu3T4IV5riR1LTdak73b4Fp50PCe eL1TEwngOAw/tTioqvGjgA== 0000912057-96-004051.txt : 19960308 0000912057-96-004051.hdr.sgml : 19960308 ACCESSION NUMBER: 0000912057-96-004051 CONFORMED SUBMISSION TYPE: S-3/A CONFIRMING COPY: PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19960307 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: IOMEGA CORP CENTRAL INDEX KEY: 0000352789 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER STORAGE DEVICES [3572] IRS NUMBER: 860385884 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-64995 FILM NUMBER: 00000000 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 S-3/A 1 S-3/A AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 7, 1996 REGISTRATION NO. 33-64995 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- AMENDMENT NO. 3 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ IOMEGA CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) -------------------------- DELAWARE 86-0385884 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NUMBER) INCORPORATION OR ORGANIZATION) -------------------------- 1821 WEST IOMEGA WAY, ROY, UTAH 84067 (801) 778-1000 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) -------------------------- LEONARD C. PURKIS SENIOR VICE PRESIDENT, FINANCE, AND CHIEF FINANCIAL OFFICER IOMEGA CORPORATION 1821 WEST IOMEGA WAY ROY, UTAH 84067 (801) 778-1000 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) -------------------------- COPIES TO: PATRICK J. RONDEAU, ESQ. BROOKS STOUGH, ESQ. JONATHAN WOLFMAN, ESQ. ROBERT G. SPECKER, ESQ. HALE AND DORR GUNDERSON DETTMER STOUGH 60 State Street VILLENEUVE FRANKLIN & HACHIGIAN, LLP Boston, Massachusetts 02109 600 Hansen Way (617) 526-6000 Palo Alto, California 94306 (415) 843-0500 -------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date hereof. -------------------------- If the only securities being registered on this form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. / / If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box, and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ------------------------------------------ If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box, and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / ------------------------------------------ If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. / / -------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION, DATED MARCH 7, 1996 PROSPECTUS $40,000,000 [LOGO] % CONVERTIBLE SUBORDINATED NOTES DUE 2001 The Notes are convertible into Common Stock of the Company at the option of the holder at any time after 60 days following the latest date of original issuance thereof and at or before maturity, unless previously redeemed or repurchased, at a conversion price of $ per share (equivalent to a conversion rate of approximately shares per $1,000 principal amount of Notes), subject to adjustment in certain events. See "Description of Notes--Conversion of Notes." The Notes have been approved for listing on the Nasdaq Stock Market under the symbol IOMGG. The Company's Common Stock is traded on the Nasdaq National Market under the symbol IOMG. On March 6, 1996, the last reported sale price of the Common Stock on the Nasdaq National Market was $17.75 per share. Interest on the Notes is payable on March 15 and September 15 in each year commencing on September 15, 1996. The Notes are redeemable at any time on or after March 15, 1999, in whole or in part, at the option of the Company, at declining redemption prices set forth herein, together with accrued interest. In the event of a Repurchase Event (as defined), each holder of Notes may require the Company to repurchase all or a portion of such holder's Notes at 100% of the principal amount thereof plus accrued and unpaid interest. See "Description of Notes--Optional Redemption by the Company" and "--Repurchase at Option of Holders Upon Repurchase Event." The Notes are unsecured and subordinated to all existing and future Senior Indebtedness (as defined on page 48) of the Company and are effectively subordinated to all existing and future indebtedness and other liabilities of subsidiaries of the Company. At January 28, 1996, (a) the Company had approximately $60.3 million of outstanding indebtedness that would have constituted Senior Indebtedness and (b) subsidiaries of the Company had approximately $18.8 million of outstanding indebtedness and other liabilities (excluding (i) intercompany liabilities, (ii) indebtedness included in Senior Indebtedness because it is guaranteed directly or indirectly by the Company and (iii) liabilities of a type not required to be reflected on the balance sheet of such subsidiaries in accordance with generally accepted accounting principles), as to which the Notes would have been effectively subordinated. The Indenture pursuant to which the Notes will be issued contains no limitations on the amount of additional indebtedness, including Senior Indebtedness, which the Company or any of its subsidiaries can create, incur, assume or guaranty. See "Description of Notes -- Subordination of Notes." ---------------- THE NOTES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS. ------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC (1) DISCOUNT (2) COMPANY (3) Per Note...................................... $ $ $ Total (4)..................................... $ $ $
(1) Plus accrued interest, if any, from March , 1996. (2) See "Underwriting" for indemnification arrangements with the Underwriter. (3) Before deducting estimated expenses of $650,000 payable by the Company. (4) The Company has granted to the Underwriter a 30-day option to purchase up to an additional $6,000,000 principal amount of Notes on the terms set forth above solely to cover over-allotments, if any. If all such Notes are purchased, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." ---------------- The Notes are offered by the Underwriter, subject to prior sale, receipt and acceptance by it and subject to the right of the Underwriter to reject any order in whole or in part and certain other conditions. It is expected that the Notes will be available for delivery on or about , 1996 at the office of the agent of Hambrecht & Quist LLC in New York, New York. HAMBRECHT & QUIST , 1996 [Picture of Company products] Iomega and Bernoulli are registered trademarks of the Company and Zip, Jaz, Ditto and the Iomega logo are trademarks of the Company. All other trademarks used are the property of their respective owners. IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OR THE COMMON STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. 2 PROSPECTUS SUMMARY THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS," APPEARING ELSEWHERE IN THIS PROSPECTUS. THE COMPANY Iomega Corporation designs, manufactures and markets innovative data storage solutions, based on removable-media technology, that help personal computer users "manage their stuff." The Company's data storage solutions include disk drives marketed under the tradenames Zip and Jaz and a family of tape drives marketed under the tradename Ditto. The Company's Zip and Jaz disk drives are designed to provide users with the benefits of high capacity and rapid access generally associated with hard disk drives and the benefits of media removability generally associated with floppy disk drives, including expandable storage capacity and data transportability, management and security. The Company's Ditto tape drives primarily address the market for backup data storage. Iomega's objective is to establish its Zip, Jaz and Ditto products as industry-standard data storage solutions for personal computer users and to capture an increasing share of the overall personal computer data storage market. The Company began shipping Zip drives in March 1995 and Jaz drives in limited quantities in December 1995. In recent years, advances in software, including memory-intensive graphical operating systems, integrated suites of word processing, spreadsheet and database applications, and multimedia applications, have dramatically increased the storage needs of personal computer users. In addition, data-intensive, multimedia files are increasingly being made available to personal computer users via on-line services and the Internet. Largely as a result of these trends, personal computer users increasingly need to expand the amount of their available primary storage, which is typically provided by a hard disk drive. Personal computer users are also increasingly seeking a reliable way to transport large files between computers (such as between a work and home computer), to organize and segregate files of different users of the same computer, to secure sensitive files from unauthorized viewing or modification, and to backup data. The Company believes that neither conventional hard disk drives nor floppy disk drives are capable of adequately addressing all of the information storage and management needs of personal computer users. The Company believes its recently-introduced Zip, Jaz and Ditto drives address emerging data storage needs and provide customers what they want at affordable price points. Designed as a mass-market product, the Zip drive is an affordable storage device for hard drive expansion, data transportability, management and security and data backup. The Zip drive uses 100-megabyte ("MB") disks to provide 70 times the capacity of traditional floppy disks. The external model of the Zip drive is generally sold by retailers for under $200 and the 100-MB disks are typically sold for under $15 per disk in ten-packs. The Jaz drive, which features 1-gigabyte ("GB") removable disks and performance specifications comparable to most current hard disk drives, is designed to address the high-performance needs of personal computer users in three areas: multimedia applications (audio, video and graphics), personal data management and hard drive upgrade. The external model of the Jaz drive is expected to be sold by retailers for approximately $599, while the internal version is expected to be sold by retailers for approximately $499. Each 1-GB Jaz disk is expected to sell for approximately $99 in five-packs. The Company's Ditto family of tape drives addresses the need of personal computer users for an easy-to-use, dependable backup solution. The Company offers internal and external Ditto tape drives based on leading industry standards ranging in capacity from 420 MBs to 3.2 GBs (using data compression). The Company believes that broadening the distribution of its products through strategic alliances with a variety of companies within the computer industry is a crucial element in the Company's objective of establishing its products as industry standards. The Company has OEM arrangements with personal computer manufacturers such as Micron Electronics and Power Computing for the incorporation of Zip, Jaz or Ditto drives into their computers, and is seeking to establish additional OEM relationships. The Company has also entered into private or co-branding arrangements with several companies, including Maxell, Seiko Epson, Fuji and Reveal Computer Products, which are selling private or co-branded versions of Zip drives and disks. In addition, the Company's products are sold by most of the leading retailers of computer products in the United States, including Best Buy, Circuit City, CompUSA, Computer City, Electronics Boutique and PC Warehouse. During 1994 and 1995, the Company's new management led the Company through a significant restructuring and repositioned the Company as a customer-driven vendor to the broad personal computer market. The Company's development and introduction of its new products over the last 18 months was facilitated by the experience in removable-media storage technology developed by the Company in connection with its Bernoulli disk drives, which were first introduced in 1982 and won numerous awards for design and performance. 3 THE OFFERING Securities Offered................ $40,000,000 aggregate principal amount of % Convertible Subordinated Notes due 2001 (the "Notes") ($46,000,000 if the Underwriter's over-allotment option is exercised in full). Interest.......................... Interest is payable semiannually on March 15 and September 15 of each year at % per annum commencing on September 15, 1996. See "Description of Notes--General." Maturity.......................... March 15, 2001. Conversion Rights................. The Notes are convertible into Common Stock of the Company at the option of the holder at any time after 60 days following the latest date of original issuance thereof and at or before maturity, unless previously redeemed or repurchased, at a conversion price of $ per share (equivalent to a conversion rate of approximately shares per $1,000 principal amount of Notes), subject to adjustment in certain events. See "Description of Notes--Conversion of Notes." Redemption at Option of Company... The Notes are redeemable at any time on or after March 15, 1999, in whole or in part, at the option of the Company, at declining redemption prices set forth herein, together with accrued interest, if any, to the redemption date. See "Description of Notes--Optional Redemption by the Company." Repurchase at Option of Holders Upon Repurchase Event............ In the event any Repurchase Event (as defined) occurs, each holder of Notes may require the Company to repurchase all or any part of such holder's Notes at 100% of the principal amount thereof plus accrued interest to the repurchase date. See "Description of Notes--Repurchase at Option of Holders Upon Repurchase Event." Subordination..................... The Notes are unsecured and subordinated to all existing and future Senior Indebtedness (as defined) and are effectively subordinated to all existing and future indebtedness and other liabilities of subsidiaries of the Company. At January 28, 1996, (a) the Company had approximately $60.3 million of outstanding indebtedness that would have constituted Senior Indebtedness and (b) subsidiaries of the Company had approximately $18.8 million of outstanding indebtedness and other liabilities (excluding (i) intercompany liabilities, (ii) indebtedness included in Senior Indebtedness because it is guaranteed directly or indirectly by the Company and (iii) liabilities of a type not required to be reflected on the balance sheet of such subsidiaries in accordance with generally accepted accounting principles), as to which the Notes would have been effectively subordinated. The Company intends to use a portion of the net proceeds of this offering to repay a portion of the amounts outstanding under its bank loan agreements, which constitute Senior Indebtedness (although it may subsequently borrow additional amounts under such loan agreements). See "Use of Proceeds." The Indenture contains no limitations on the incurrence of additional indebtedness or other obligations by the Company and its subsidiaries. See "Description of Notes--Subordination of Notes." Use of Proceeds................... Working capital needs and general corporate purposes, including the repayment of a portion of the amounts outstanding under the Company's bank loan agreements. See "Use of Proceeds." Trading Market.................... The Notes have been approved for listing on the Nasdaq Stock Market under the symbol IOMGG. The Company's Common Stock is traded on the Nasdaq National Market under the symbol IOMG.
4 SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ---------------------------------- 1993 1994 1995 ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA: Sales....................................................................... $ 147,123 $ 141,380 $ 326,225 Cost of sales............................................................... 92,585 92,453 235,838 Gross margin................................................................ 54,538 48,927 90,387 Restructuring costs (reversal).............................................. 14,131 (2,491) -- Operating income (loss)..................................................... (17,427) (882) 13,622 Net income (loss)........................................................... (14,525) (1,882) 8,503 Net income (loss) per common share (1)...................................... $ (0.27) $ (0.03) $ 0.14 Weighted average common shares outstanding (1).............................. 54,318 55,419 60,180 Ratio of earnings to fixed charges (2)...................................... - 1.0 6.0
DECEMBER 31, 1995 -------------------------- ACTUAL AS ADJUSTED(3) ---------- -------------- BALANCE SHEET DATA: Cash and cash equivalents........................................................... $ 1,023 $ 38,373 Working capital..................................................................... 12,623 49,973 Total assets........................................................................ 266,227 303,577 Stockholders' equity................................................................ 62,686 62,686
- ------------------------ (1) See Note 1 of Notes to Consolidated Financial Statements. (2) For purposes of determining the ratio of earnings to fixed charges, earnings consist of net income (loss) before provision for income taxes and cumulative effect of accounting change, plus fixed charges. Fixed charges consist of interest expense and the estimated interest component of rental expense. For 1993, earnings were insufficient to cover fixed charges by $16.7 million. (3) Adjusted to reflect the sale of the Notes offered hereby, after deducting the estimated underwriting discount and offering expenses. ------------------------ EXCEPT AS OTHERWISE NOTED, (I) ALL SHARE AND PER SHARE INFORMATION IN THIS PROSPECTUS HAS BEEN ADJUSTED TO GIVE EFFECT TO THE FIVE-FOR-FOUR STOCK SPLIT (EFFECTED AS A 25% STOCK DIVIDEND) THAT OCCURRED IN NOVEMBER 1994 AND THE THREE-FOR-ONE STOCK SPLIT (EFFECTED AS A 200% STOCK DIVIDEND) THAT OCCURRED IN JANUARY 1996 AND (II) THE INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITER'S OVER-ALLOTMENT OPTION. 5 RISK FACTORS THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY, IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, BEFORE PURCHASING THE NOTES OFFERED HEREBY. SHORTAGES OF CRITICAL COMPONENTS; ABSENCE OF SUPPLY CONTRACTS; DEPENDENCE ON SUPPLIERS. Many components incorporated in, or used in the manufacture of, the Company's products are currently only available from sole source suppliers. Moreover, the Company has experienced difficulty in the past, is currently experiencing difficulty and expects to continue to experience difficulty in the future, in obtaining a sufficient supply of many key components. For example, many of the integrated circuits used in the Company's Zip and Jaz drives are currently available only from sole source suppliers. The Company has been unable to obtain a sufficient supply of certain of these integrated circuits due to industry-wide shortages. In addition, the Company has been advised by certain sole source suppliers, including the manufacturers of critical integrated circuits for Zip and Jaz, that they do not anticipate being able to fully satisfy the Company's demand for components during 1996. These component shortages have limited the Company's ability to produce sufficient Zip drives to meet market demand and have limited the Company's ability to implement certain cost reduction and productivity improvement plans, and the Company expects that the shortage of components may limit production of Zip and Jaz products for the foreseeable future. The Company also experienced difficulty during 1995 in obtaining a sufficient supply of the servowriting equipment used in the manufacture of Zip disks. Such equipment shortages in 1995 limited the Company's production of Zip disks, and there can be no assurance that similar equipment shortages will not occur in the future. The Company purchases all of its sole and limited source components and equipment pursuant to purchase orders placed from time to time and has no guaranteed supply arrangements. The inability to obtain sufficient components and equipment, to obtain or develop alternative sources of supply at competitive prices and quality, or to avoid manufacturing delays could prevent the Company from producing sufficient quantities of its products to satisfy market demand, result in delays in product shipments, increase the Company's material or manufacturing costs or cause an imbalance in the inventory level of certain components. Moreover, difficulties in obtaining sufficient components may cause the Company to modify the design of its products to use a more readily available component, and such design modifications may result in product performance problems. Any or all of these problems could in turn result in the loss of customers, provide an opportunity for competing products to achieve market acceptance and otherwise adversely affect the Company's business and financial results. See "Business--Manufacturing." RECENT INTRODUCTION OF ZIP AND JAZ; UNCERTAINTY OF MARKET ACCEPTANCE. Zip products accounted for a substantial majority of the Company's sales in 1995 and the Company expects that sales of Zip and Jaz products will account for a substantial majority of the Company's sales in 1996. The Company's Zip products commenced commercial shipment in March 1995. Although sales of Zip products were the primary reason for the Company's revenue growth during 1995, such sales may be attributable in large part to the novelty of the product and the initial publicity surrounding the introduction of Zip, and may not be indicative of the long-term demand for the product. In an effort to improve performance and reduce costs, the Company continues to refine the product design for Zip, which could result in shipment delays or performance problems. As a result of the Zip drive's recent introduction and on-going supply shortages, it is difficult to accurately assess the ultimate market acceptance of Zip because of uncertainty concerning the size and characteristics of the market for Zip, the extent of the market demand for Zip and the competition that Zip will confront. Accordingly, investors should not assume that the sales growth experienced by the Company in 1995 is an indication of future sales. The Company began shipping Jaz drives and disks in limited quantities in December 1995. As is the case with Zip, the Company cannot yet accurately assess the market acceptance Jaz will achieve due to uncertainties regarding the market for Jaz and the competition it will confront. Moreover, the Company is continuing to refine the product design for Jaz, which has not yet begun to ship in volume, and there can be no assurance that the Company will not experience problems or delays as it begins to manufacture and ship Jaz products in volume. In addition, the Jaz drive incorporates hard disk technology that has not previously been used in any other removable-media cartridge drives with similar performance characteristics, and there can be no assurance that 6 Jaz will perform as the Company expects or attain the lifespan the Company anticipates. For the foregoing reasons, and because of differences in their price and target markets, investors should not assume that Jaz will receive the initial market acceptance that Zip has experienced. In addition, the market acceptance Zip and Jaz will achieve is difficult to assess because their product features are fundamentally different from the most popular data storage devices today (hard disk drives, floppy disk drives and CD-ROM drives). No new type of read/writable data storage device has achieved widespread market acceptance in recent years, and there can be no assurance that Zip and Jaz will achieve widespread market acceptance. Moreover, the two formats of removable-media storage which have gained widespread market acceptance to date--floppy disk drives and CD-ROM drives--are both used by software manufacturers as a means of software distribution. The Company's products are not intended for use in software distribution, and the Company does not expect that its products will be so used. The market acceptance of Zip and Jaz will also depend upon a number of other factors, including the ability of the Company to produce a sufficient supply of Zip and Jaz products (see "Risk Factors--Shortages of Critical Components; Absence of Supply Contracts; Dependence on Suppliers" and "--Reliance on Non-Binding Contract Manufacturing Relationships"), the price, performance and other characteristics of competing solutions introduced by other vendors and the timing of such product introductions (see "Risk Factors--Competition") and the success of the Company in establishing OEM arrangements for Zip and Jaz with leading personal computer manufacturers (see "Risk Factors-- Dependence on Non-Binding Strategic Marketing Alliances; Need to Establish Additional Alliances"). The failure of Zip or Jaz to achieve widespread commercial acceptance would have a material adverse effect on the Company's business. RISKS ASSOCIATED WITH GROWTH OF BUSINESS. The Company's business has grown significantly in the past year, with sales increasing from $38.5 million in the fourth quarter of 1994 to $148.8 million in the fourth quarter of 1995. Moreover, the Company has significantly restructured its business over the past two years, introducing the Zip drive in March 1995, the Jaz drive in December 1995 and several new Ditto products during 1995. Products introduced since January 1, 1995 now generate the substantial majority of the Company's sales. The growth and restructuring of the Company's business has placed significant demands on the systems and management of the Company. For example, throughout 1995, demand for the Company's products, particularly its Zip disk drives, exceeded the Company's manufacturing capacity. In addition, this business growth and restructuring have resulted in additional personnel needs and an increased level of responsibility for management personnel. To manage its growth effectively, the Company will be required to continue to expand and improve its internal operations and systems (including manufacturing, logistics, product development, management information systems and sales and marketing) and to expand and manage its employee base. The Company has recently added or expects to add several key managers, including a new Senior Vice President, Operations, and there can be no assurance as to the rate at which these managers will be effectively assimilated into the Company's business or operate effectively as a management team. The Company will also be required to effectively expand and manage the independent contractors which the Company intends to use to manufacture a majority of its products in the future. The Company's inability to manage growth effectively could have a material adverse effect on the Company's operating results. See "Selected Consolidated Financial Data," "Business--Employees" and "Management." DECLINE IN LIQUIDITY; FUTURE CAPITAL NEEDS. The Company had cash and cash equivalents of $1 million as of December 31, 1995 and $4.5 million as of January 28, 1996. During 1995, the Company used $27.0 million in operating activities and an additional $45.2 million in the purchase of equipment and leasehold improvements. Also during 1995, the Company experienced substantial increases in its accounts receivable and inventories. Increases in these working capital components have resulted in a significant decline in the Company's liquidity. The Company expects the proceeds of this offering, together with current sources of financing available to the Company, will be sufficient to fund the Company's operations through at least June 30, 1996. Thereafter, the Company expects to require additional funds to finance its operations. The precise amount and timing of the Company's funding needs cannot be determined at this time, and will depend upon a number of factors, including the market demand for the Company's products, the availability of critical components, the Company's strategic alliances for the manufacture of its products, the progress of the Company's product development efforts, the Company's inventory management, the Company's management of its cash and accounts 7 payable, and the Company's ability to refinance its bank debt, a significant portion of which matures in mid-1996. There can be no assurance that funds required by the Company in the future will be available on terms satisfactory to the Company. The inability to obtain needed funding on satisfactory terms may require the Company to reduce planned capital expenditures, to reduce planned levels of advertising and promotion, to scale back its manufacturing or other operations or to enter into financing arrangements on terms which it would not otherwise accept and would have a material adverse effect on the Company's business and financial results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." RECENT OPERATING LOSSES; QUARTERLY FLUCTUATIONS IN OPERATING RESULTS; RISK OF FAILURE TO SATISFY MARKET EXPECTATIONS. The Company incurred net losses in 1993 and 1994, as well as in the first two quarters of 1995. Although the Company was profitable for 1995 as a whole, there can be no assurance it will be able to remain profitable in the future. The Company has experienced and may experience in the future significant fluctuations in its quarterly operating results. Factors such as price reductions, the introduction and market acceptance of new products, product returns, the availability of critical components, the lower gross margins associated with the Company's newly introduced products, seasonality and the condition of retail markets could contribute to this variability. For example, as is common in the industry, it is likely that the Company will reduce the prices of certain of its products in the future. Moreover, the Company's expense levels are based in part on expectations of future sales levels, and a shortfall in expected sales could therefore result in a disproportionate decrease in the Company's net income. As a result of these and other factors, it is likely that in some future period the Company's operating results will be below the expectations of investors, which would be likely to result in a significant reduction in the market price of the Common Stock. In light of the Company's revenue growth in 1995 and the change in the nature of its business over the past year, the Company believes that period-to-period comparisons of its financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. The Company believes that its 1996 operating results are subject to a wide range of possible outcomes because they will be heavily dependent on recently introduced products and subject to a number of uncertainties. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company's recently introduced Ditto, Zip and Jaz products are targeted primarily to the retail consumer market. This market is generally seasonal, with a substantial portion of total sales typically occurring in the fourth quarter. In addition, some retailers have been experiencing sales decreases and certain analysts have predicted continued softening of this market. Accordingly, in light of the seasonal nature and general uncertainty of the consumer market, investors should not assume fourth quarter of 1995 revenues are necessarily indicative of the revenues to be expected in any future quarter. TECHNOLOGICAL CHANGE AND NEW PRODUCTS. The Company operates in an industry that is subject to both rapid technological change and rapid change in consumer demands. For example, over the last 10 years the typical hard disk drive included in a new personal computer has increased in capacity from approximately 40 MBs to over 1 GB, while the price of a hard disk drive has remained constant or even decreased. The Company's future success will depend in significant part on its ability to continually develop and introduce, in a timely manner, new removable-media disk drives and tape products with improved features, and to develop and manufacture those new products within a cost structure that enables the Company to sell such products at lower prices than those of comparable products today. There can be no assurance that the Company will be successful in developing, manufacturing and marketing new and enhanced products that meet both the performance and price demands of the data storage market. See "Business--Product Development." DEPENDENCE ON NON-BINDING STRATEGIC MARKETING ALLIANCES; NEED TO ESTABLISH ADDITIONAL ALLIANCES. The Company's business strategy depends in significant part on establishing successful strategic alliances with a variety of key companies within the computer industry. Among the types of alliances contemplated by the Company's business strategy are: OEM arrangements with personal computer manufacturers that will include Zip, Jaz and Ditto products as a standard feature or factory-installed option in their personal computers; reseller arrangements (including private and co-branding arrangements) with major vendors of computer products covering the resale of the Company's products by such companies; and licensing arrangements under which the Company grants certain computer manufacturers on a royalty-bearing basis the right to manufacture and sell 8 Zip, Jaz and Ditto drives or media. The Company is a party to several such strategic alliances, is currently in the process of negotiating additional strategic alliances, and expects to continue to establish strategic alliances of this nature in the future. Most of the strategic alliances to which the Company is now a party have been established only recently, and there can be no assurance that such relationships will produce the benefits anticipated by the Company. Moreover, the Company believes that establishing additional strategic alliances (especially OEM arrangements) is critical to the success of its business, and there can be no assurance that the Company will be successful in doing so. In addition, the Company's strategic alliances are generally not covered by binding contracts and may be subject to unilateral termination by the Company's strategic partners, and also may require the Company to share control over its manufacturing and marketing programs and technologies. See "Business--Company Strategy--Broadening Distribution Through Strategic Alliances," "Business--Marketing and Sales." RELIANCE ON NON-BINDING CONTRACT MANUFACTURING RELATIONSHIPS. The Company plans to use independent parties to manufacture for the Company, on a contract basis, a majority of the Company's products in the future. The Company currently has manufacturing relationships with Seiko Epson (Zip drives), MegaMedia Computer (Zip disks), Sequel (Jaz drives) and First Engineering Plastics (Ditto drives). There can be no assurance that the Company will be successful in maintaining such relationships or in establishing additional relationships in the future, or in managing such manufacturing relationships. The Company's manufacturing relationships are generally not covered by binding contracts and may be subject to unilateral termination by the Company's manufacturing partners. In addition, there can be no assurance that third-party manufacturers will be able to meet the Company's quantity or quality requirements for manufactured products. Moreover, the Company may grant certain of its third-party manufacturers, among others, the right to sell significant quantities of the Zip and Jaz drives they produce for their own account, thereby potentially reducing the supply of such drives to the Company and increasing competition. See "Business--Manufacturing." COMPETITION. The data storage industry is highly competitive. The Company believes that its Zip and Jaz products compete most directly with other removable-media data storage devices, such as magnetic cartridge disk drives offered by Syquest Technology, optical disk drives and "floptical" disk drives. Although the Company believes that its Zip and Jaz products offer price, performance or usability advantages over the other removable-media storage devices available today, the Company believes that the price, performance and usability levels of existing removable-media products will improve and that other companies will introduce new removable-media storage devices. Accordingly, the Company believes its Zip and Jaz products will face increasingly intense competition. In particular, a consortium comprised of Compaq Computer, 3M and MKE has announced the Floptical 120, a high-capacity floptical drive that is compatible with conventional floppy disks. In addition, both Mitsumi and Swan Instruments are expected to introduce high-capacity, removable-media disk drives in 1996 that would also directly compete with Zip and Jaz. In addition, to the extent that Zip and Jaz drives are used for incremental primary storage capacity, they also compete with conventional hard disk drives. Also, the leading suppliers of conventional hard disk drives could at any time determine to enter the removable-media storage market. As new and competing removable-media storage solutions are introduced, it is possible that any such solution that achieves a significant market presence or establishes a number of significant OEM relationships will emerge as an industry standard and achieve a dominant market position. If such is the case, there can be no assurance that the Company's products would achieve significant market acceptance, particularly given the Company's size and market position vis-a-vis other competitors. See "Risk Factors--Recent Introduction of Zip and Jaz; Uncertainty of Market Acceptance." The Company's Ditto products compete with tape drives from companies such as Conner Peripherals, Inc. and Colorado Memory Systems, a division of Hewlett-Packard Company, as well as vendors of other backup storage devices. The Company may also compete in both the removable disk drive and the tape market with licensees of the Company's products. Many of the Company's current and potential competitors have significantly greater financial, manufacturing and marketing resources than the Company. There can be no assurance that the Company will be able to compete successfully against current and future sources of competition or that the competitive pressures faced by the Company will not adversely affect the Company's operating results. See "Business--Competition." 9 DEPENDENCE ON PROPRIETARY TECHNOLOGY. The Company's success is heavily dependent upon the establishment and maintenance of proprietary technologies. The Company relies on a combination of patent, copyright and trade secret law to protect the technology in its Zip, Jaz and Ditto products. Although the Company has filed over 40 U.S. and foreign patent applications relating to its Zip and Jaz drives and disks, the majority of such applications were filed in late 1994 or 1995 and are at relatively early stages in the review process, no such patents have as yet been issued and there can be no assurance that they will issue in the future. For example, if some or all of the pending Zip and Jaz patents are not granted, the Company may not be able to legally prevent others from copying the technology incorporated in the Zip and Jaz drives and disks or from producing and selling compatible products which compete with the Company's products. If another party were to succeed in producing and selling Zip- or Jaz-compatible disks, the Company's sales would be materially adversely affected. Moreover, because the Company's Zip and Jaz disks have significantly higher gross margins than the Zip and Jaz drives, the Company's net income would be disproportionately affected by any such sales shortfall. In addition, there can be no assurance that the steps taken by the Company to protect its technology will be adequate to prevent misappropriation of its technology by third parties, or that third parties will not be able to independently develop similar technology. From time to time the Company receives notices alleging that the Company's products infringe third party proprietary rights. The Company, however, is not currently aware of any threatened or pending legal challenge to the technology which is incorporated in its products which it expects to have a material adverse effect on its business or financial results. Patent and similar litigation frequently is complex and expensive and its outcome can be difficult to predict. There can be no assurance that the Company will prevail in any proceedings that may be commenced against the Company. In addition, certain technology used in the Company's products is licensed from third parties, including the backup software included with the Company's Ditto products and certain patent rights relating to Zip. The Company is in the process of negotiating a definitive license agreement for the Ditto backup software and, although it has entered into a letter agreement regarding the Zip patent rights, is in the process of negotiating a more detailed license agreement for the Zip patent rights. The failure to execute definitive agreements or the termination of any such license arrangements could have a material adverse effect on the Company's business and financial results. See "Business--Proprietary Rights." INTERNATIONAL OPERATIONS. International sales generated a significant portion of the Company's sales in 1994 and 1995 and the Company expects international sales to continue to comprise a significant percentage of its total sales in the future. The international portion of the Company's business is subject to a number of inherent risks, including difficulties in building and managing foreign operations and foreign reseller networks, the differing product needs of foreign customers, fluctuations in the value of foreign currencies, import/export duties and quotas, and unexpected regulatory, economic or political changes in foreign markets. In addition, the Company relies on foreign companies for the supply of certain critical components and is increasingly relying on foreign companies for the manufacture of certain of its products, and these relationships may be subject to some of the same risks affecting its international sales. There can be no assurance that these factors will not adversely affect the Company's international sales or its overall financial performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--Marketing and Sales" and "--Manufacturing." The Company's international sales are predominantly denominated in foreign currencies. Accordingly, a decrease in the value of foreign currencies relative to the U.S. dollar could result in a significant decrease in U.S. dollar revenues received by the Company for its international sales. Due to the number of currencies involved in the Company's international sales and the volatility of foreign currency exchange rates, the Company cannot predict the effect of exchange rate fluctuations on future operating results. The Company enters into forward exchange contracts to sell foreign currencies as a means of hedging its currency translation exposure. In 1995, the Company recorded a net foreign currency loss of $1.2 million in connection with the remeasurement to market value of certain foreign currency contracts, which were purchased with the intent of hedging operating cash flows. The majority of the loss was incurred in the first quarter of 1995 as a result of the U.S. dollar weakening against European currencies hedged by forward currency contracts in place at that time. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 4 of Notes to Consolidated Financial Statements. 10 CERTAIN MARKETING AND SALES RISKS. As is common practice in its industry, the Company's arrangements with its customers generally allow customers, in the event of a price decrease, credit equal to the difference between the price originally paid and the new decreased price on units in the customers' inventories on the date of the price decrease. When a price decrease is anticipated, the Company establishes reserves for amounts estimated to be reimbursed to qualifying customers. There can be no assurance that these reserves will be sufficient or that any future returns or price protection charges will not have a material adverse effect on the Company's results of operations, particularly because future results will be heavily dependent on recently introduced products for which the Company has little or no operating history. In addition, customers generally have the right to return excess inventory within specified time periods. As a result, any build up of inventory in the Company's distribution channels that does not sell through to end users could result in product returns that have a material adverse effect on the Company's operating results and financial condition. The Company markets its products primarily through computer product distributors and retailers. Distribution channels for personal computers and accessories have been characterized by rapid change, including consolidation and financial difficulties of distributors. The loss or ineffectiveness of any of the Company's major distributors could have a material adverse effect on the Company's results of operations. In addition, since the Company grants credit to its customers, a substantial portion of outstanding accounts receivable are due from computer product distributors and certain large retailers. At December 31, 1995, the customers with the ten highest outstanding accounts receivable balances totaled $47.1 million or 43% of gross accounts receivable, with one customer accounting for $15.2 million, or 14% of gross accounts receivable. If any one or a group of these customers' receivable balances should be deemed uncollectible, it would have a material adverse effect on the Company's results of operations and financial condition. See "Business--Marketing and Sales--Marketing." SIGNIFICANT UNALLOCATED NET PROCEEDS. The Company has not yet quantified the amount of the net proceeds of this offering that will be used for the various purposes described under "Use of Proceeds." The exact uses of the net proceeds, and the amount allocated for each use, will be subject to the discretion of management. See "Use of Proceeds." DEPENDENCE ON KEY PERSONNEL. The Company's success will depend in large part upon the services of a number of key employees, including Kim B. Edwards, its President and Chief Executive Officer. The loss of the services of one or more of these key employees could have a material adverse effect on the Company. The Company's success will also depend in significant part upon its ability to attract and retain highly-skilled management and other personnel. Competition for such personnel in the computer industry is intense, and the Company has from time to time experienced difficulty in finding sufficient numbers of qualified professional and production personnel in the greater Salt Lake City area. There can be no assurance that the Company will be successful in attracting and retaining the quantity and quality of personnel that it needs. See "Business-- Employees" and "Management." MARKET VOLATILITY. There has been significant volatility in the market price of securities of technology-based companies similar in size to the Company. Factors such as announcements of new products by the Company or its competitors, variations in the Company's quarterly operating results, or general economic or stock market conditions unrelated to the Company's operating performance may have a significant impact on the market price of the Common Stock and the Notes. In addition, the Company believes that electronic bulletin board postings regarding the Company on America Online and other similar services, certain of which have in the past contained false information about Company developments, including quotes falsely attributed to executive officers of the Company, have in the past and may in the future contribute to volatility in the market price of the Common Stock and the Notes. Any information concerning the Company, including without limitation projections of future operating results, appearing in such on-line bulletin boards or otherwise emanating from a source other than the Company should not be relied upon as having been supplied or endorsed by the Company. See "Price Range of Common Stock and Dividend Policy." ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS AND SHAREHOLDER RIGHTS PLAN. The Company's Certificate of Incorporation and By-Laws contain provisions permitting the Board of Directors to issue Preferred Stock with rights senior to the Common Stock, limiting the right of stockholders to act by written consent and requiring that special meetings of stockholders be called only by the Board of Directors or the 11 President. In addition, the Company has a Shareholder Rights Plan that may make certain proposed acquisitions of the Company prohibitively expensive. These charter and By-Law provisions and the Shareholder Rights Plan could make it more difficult for a stockholder to effect certain actions and make it more difficult for a third party to acquire, or discourage a third party from attempting to acquire, control of the Company. As a result, they could limit the price that certain investors might be willing to pay in the future for shares of the Common Stock. See "Description of Capital Stock--Preferred Stock", "--Rights Plan" and "--Delaware Law and Certain Charter and By-Law Provisions." SUBORDINATION OF NOTES. The Notes will be unsecured and subordinated obligations of the Company and will be subordinated in right of payment in full of all Senior Indebtedness (as defined). The Notes will also be effectively subordinated to all indebtedness and other liabilities of the subsidiaries of the Company. At January 28, 1996, the Company had approximately $60.3 million of outstanding indebtedness that would have constituted Senior Indebtedness. In addition, at January 28, 1996, subsidiaries of the Company had outstanding an aggregate of approximately $18.8 million of indebtedness and other liabilities to which the Notes would have been effectively subordinated. The Indenture does not limit the amount of additional indebtedness, including Senior Indebtedness, which the Company or any of its subsidiaries can create, incur, assume or guaranty. The Company anticipates that from time to time it and its subsidiaries will incur additional indebtedness, including Senior Indebtedness. No payment on account or principal, premium, if any, or interest on, or redemption or repurchase of, the Notes may be made by the Company if there is a default in the payment of principal, premium, if any, or interest (including a default under any repurchase or redemption obligation) with respect to any Senior Indebtedness or if any other event of default with respect to any Senior Indebtedness permitting the holders thereof to accelerate the maturity thereof shall have occurred and shall not have been cured or waived. Upon any acceleration of the principal due on the Notes or payment or distribution of assets of the Company to creditors upon any dissolution, winding-up, liquidation or reorganization, all principal, premium, if any, and interest due on all Senior Indebtedness must be paid in full before the holders of the Notes are entitled to receive any payment. Moreover, the cash flow and consequent ability of the Company to service debt, including the Notes, is partially dependent upon the earnings from the Company's subsidiaries and the distribution of those earnings, or upon loans or other payments of funds, by those subsidiaries to the Company. The subsidiaries have no obligation to pay any amounts due pursuant to the Notes (which are obligations exclusively of the Company), and their payment of dividends or distributions and making of loans or other payments to the Company could be subject to statutory or contractual restrictions, could be contingent upon the subsidiaries' earnings and are subject to various business considerations. See "Description of Notes--Subordination of Notes." LIMITATION ON REPURCHASE OF NOTES. Upon the occurrence of a Repurchase Event (as defined), each holder of Notes may require the Company to repurchase all or a portion of such holder's Notes. If a Repurchase Event were to occur, there can be no assurance that the Company would have sufficient financial resources, or would be able to arrange financing, to pay the repurchase price for all Notes tendered by holders thereof. In addition, the occurrence of certain Repurchase Events would constitute an event of default under certain of the Company's current debt agreements, and the Company's repurchase of Notes as a result of the occurrence of a Repurchase Event may be prohibited or limited by, or create an event of default under, the terms of future agreements relating to borrowings of the Company, including agreements relating to Senior Indebtedness. In the event a Repurchase Event occurs at a time when the Company is prohibited from purchasing Notes, the Company could seek the consent of its lenders to the purchase of the Notes or could attempt to refinance the borrowings that contain such prohibition. If the Company does not obtain such a consent or repay such borrowings, the Company would remain prohibited from purchasing Notes. In such case, the Company's failure to purchase tendered Notes would constitute an Event of Default under the Indenture which would, in turn, constitute a further default under certain of the Company's existing debt agreements and may constitute a default under the terms of other indebtedness that the Company may incur from time to time. In such circumstances, the subordination provisions in the Indenture would prohibit payments to the holders of Notes. See "Description of Notes--Repurchase at Option of Holders Upon Repurchase Event." 12 THE COMPANY Iomega Corporation was incorporated in Delaware in 1980. The Company's principal executive offices are located at 1821 West Iomega Way, Roy, Utah 84067, and its telephone number is (801) 778-1000. As used in this Prospectus, the terms the "Company" and "Iomega" refer to Iomega Corporation and its wholly owned subsidiaries, unless the context otherwise requires. USE OF PROCEEDS The net proceeds to the Company from the sale of the Notes offered hereby are estimated to be approximately $37,350,000 (approximately $43,050,000 if the Underwriter's over-allotment option is exercised in full), after deducting the estimated underwriting discount and offering expenses. The Company intends to use the net proceeds primarily for working capital needs and general corporate purposes, including the repayment of a portion of the amounts outstanding under its bank loan agreements. In particular, the net proceeds may be used to expand manufacturing capacity, fund sales and marketing and research and development activities, purchase capital equipment, and finance increases in accounts receivable and inventory that may result from continued growth in the Company's business. The amounts actually expended by the Company for these purposes will vary significantly depending upon a number of factors, including the market demand for the Company's products, the availability of critical components, the Company's strategic alliances for the manufacture of its products, the progress of the Company's product development efforts and the Company's inventory management. The Company does not believe it can at this time accurately estimate the amounts to be used for each purpose. See "Risk Factors--Significant Unallocated Net Proceeds." Under its loan agreement with Wells Fargo Bank, N.A. ("Wells Fargo"), the Company has outstanding revolving loans, which bear interest at the bank's prime rate plus 1% and become due and payable on June 30, 1996, and term loans, which bear interest at the bank's prime rate plus 1.25% and become due and payable on June 30, 1996. As of January 28, 1996, borrowings under this loan agreement were $43.7 million, consisting of $40.2 million under the revolving credit facility and $3.5 million under the term loan facility. As of January 28, 1996, there was $10.7 million of borrowings outstanding under the loan agreement between a foreign subsidiary of the Company and a German commercial bank at interest rates ranging from 7.75% to 15.00%. The agreement expires on November 30, 1996. In January 1996, the Company entered into a $6 million revolving credit facility with First Security Bank of Utah, N.A., all of which was outstanding at January 28, 1996. The line matures on April 12, 1996 and bears interest at the bank's prime rate plus 2%. Amounts borrowed under these loan agreements have been used for working capital purposes and purchases of capital equipment. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" and Notes 5 and 13 of Notes to Consolidated Financial Statements for a further description of the Company's loan agreements. The Company may also use a portion of the net proceeds to make one or more acquisitions of businesses, products or technologies which enhance or broaden the Company's current product offerings. However, except as described below, the Company has no specific agreements or commitments and is not currently engaged in any negotiations for any such acquisition. The Company is currently engaged in negotiations for two technology acquisitions for a total purchase price (to be paid over two years) of less than $2,500,000, which the Company does not consider material to its business or financial condition. Pending the uses described above, the net proceeds will be invested in short-term, investment-grade, interest-bearing securities. 13 PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY The Company's Common Stock is traded on the Nasdaq National Market under the symbol IOMG. The following table sets forth for the periods indicated the high and low sales prices per share of the Common Stock as reported on the Nasdaq National Market.
HIGH LOW --------- --------- 1994 - ----------------------------------------------------------------------------------------------- First Quarter.................................................................................. $ 0.83 $ 0.60 Second Quarter................................................................................. $ 0.70 $ 0.53 Third Quarter.................................................................................. $ 1.07 $ 0.70 Fourth Quarter................................................................................. $ 1.50 $ 0.77 1995 - ----------------------------------------------------------------------------------------------- First Quarter.................................................................................. $ 2.61 $ 1.08 Second Quarter................................................................................. $ 8.71 $ 2.33 Third Quarter.................................................................................. $ 10.00 $ 6.79 Fourth Quarter................................................................................. $ 17.92 $ 5.50 1996 - ----------------------------------------------------------------------------------------------- First Quarter (through March 6, 1996).......................................................... $ 20.00 $ 11.42
The Company has never paid any cash dividends on its Common Stock and does not anticipate paying any cash dividends in the foreseeable future. The Company currently intends to retain future earnings to fund the development and growth of its business. The Company's loan agreements prohibit the payment of dividends without the prior written consent of the banks. 14 CAPITALIZATION The following table sets forth the capitalization of the Company as of December 31, 1995 and as adjusted to give effect to the sale by the Company of the Notes offered hereby, after deducting the estimated underwriting discount and offering expenses.
DECEMBER 31, 1995 ---------------------- ACTUAL AS ADJUSTED --------- ----------- (IN THOUSANDS) % Convertible Subordinated Notes due 2001................................................ $ -- $ 40,000 Stockholders' equity: Preferred Stock, $.01 par value; 4,750,000 shares authorized; no shares outstanding..................................................................... -- -- Series C Junior Participating Preferred Stock, $.01 par value; 250,000 shares authorized; no shares outstanding...................................................... -- -- Common Stock, $.03 1/3 par value; 150,000,000 shares authorized; 58,819,335 shares outstanding (1)................................................................. 1,960 1,960 Additional paid-in capital.............................................................. 51,473 51,473 Retained earnings....................................................................... 9,253 9,253 --------- ----------- Total stockholders' equity............................................................ 62,686 62,686 --------- ----------- Total capitalization.................................................................. $ 62,686 $ 102,686 --------- ----------- --------- -----------
- ------------------------ (1) Number of authorized shares gives effect to an amendment to the Certificate of Incorporation in January 1996 increasing the number of authorized shares of Common Stock from 30,000,000 to 150,000,000. Numbers of outstanding shares give effect to the 3-for-1 stock split (effected as a 200% stock dividend) in January 1996, and excludes (i) an aggregate of 6,206,977 shares of Common Stock reserved for issuance upon the exercise of stock options outstanding as of December 31, 1995 with a weighted average exercise price of $1.67 per share, and (ii) an aggregate of shares issuable upon conversion of the Notes. 15 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial data of the Company for and as of the years ended December 31, 1991, 1992, 1993, 1994 and 1995. These selected consolidated financial data have been derived from the Company's consolidated financial statements which have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports. These data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1991 1992 1993 1994 1995 --------- --------- --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Sales......................................................... $ 136,566 $ 139,174 $ 147,123 $ 141,380 $ 326,225 Cost of sales............................................... 68,404 74,090 92,585 92,453 235,838 --------- --------- --------- --------- --------- Gross margin.............................................. 68,162 65,084 54,538 48,927 90,387 Operating expenses: Selling, general and administrative......................... 34,323 37,572 38,862 36,862 57,189 Research and development.................................... 17,939 21,959 18,972 15,438 19,576 Restructuring costs (reversal).............................. -- -- 14,131 (2,491) -- --------- --------- --------- --------- --------- Total operating expenses.................................. 52,262 59,531 71,965 49,809 76,765 --------- --------- --------- --------- --------- Operating income (loss)....................................... 15,900 5,553 (17,427) (882) 13,622 Interest and other income (expense)........................... 1,661 592 771 908 (1,983) --------- --------- --------- --------- --------- Income (loss) before income taxes and cumulative effect of accounting change............................................ 17,561 6,145 (16,656) 26 11,639 Provision for income taxes (1)................................ (5,236) (1,474) (206) (1,908) (3,136) --------- --------- --------- --------- --------- Net income (loss) before cumulative effect of accounting change (1)................................................... 12,325 4,671 (16,862) (1,882) 8,503 Cumulative effect of accounting change (1).................... -- -- 2,337 -- -- --------- --------- --------- --------- --------- Net income (loss)............................................. $ 12,325 $ 4,671 $ (14,525) $ (1,882) $ 8,503 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Net income (loss) per common share (2)........................ $ 0.20 $ 0.08 $ (0.27) $ (0.03) $ 0.14 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average common shares outstanding (2)................ 61,767 60,795 54,318 55,419 60,180 Ratio of earnings to fixed charges (3)........................ 30.0 9.1 - 1.0 6.0 DECEMBER 31, ----------------------------------------------------- 1991 1992 1993 1994 1995 --------- --------- --------- --------- --------- (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and temporary investments.............. $ 31,611 $ 19,691 $ 18,804 $ 19,793 $ 1,023 Working capital............................................... 43,165 35,038 30,550 34,818 12,623 Total assets.................................................. 87,046 86,955 81,089 75,833 266,227 Stockholders' equity.......................................... 64,845 65,024 51,090 49,063 62,686
- ------------------------------ (1) See Note 3 of Notes to Consolidated Financial Statements. (2) See Note 1 of Notes to Consolidated Financial Statements. (3) For purposes of determining the ratio of earnings to fixed charges, earnings consist of net income (loss) before provision for income taxes and cumulative effect of accounting change, plus fixed charges. Fixed charges consist of interest expense and the estimated interest component of rental expense. For 1993, earnings were insufficient to cover fixed charges by $16.7 million. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW BACKGROUND The Company's business has undergone a significant transition over the past three years. During 1993, the Company recorded $14.1 million in restructuring costs relating to the write-off of certain assets and the establishment of accruals and reserves for future restructuring of the Company's business, including the disposal of a portion of the Company's research and development operations, workforce reductions and other consolidation of operations, and other restructuring actions necessary to make the Company more customer-driven. These restructuring reserves and accruals totaled approximately $11.5 million at December 31, 1993. 1994 was a year of transition for the Company as operations were restructured and redirected towards new development and marketing activities. On January 1, 1994, Mr. Edwards joined the Company as President and Chief Executive Officer. During the first quarter of 1994, the Company sold its thin-film head development operations and discontinued its Floptical development operations. During the third quarter of 1994, the Company sold certain assets of its Floptical development operations and also abandoned a Bernoulli-type product in the development stage. During the fourth quarter of 1994, the Company disposed of tooling and other manufacturing equipment which had become obsolete due to product design changes to make the Company's products more consumer friendly. The Company also reduced its workforce and paid out severance and outplacement costs in connection with two reductions in workforce, one of which occurred in January 1994 and the other in June 1994. These actions were included in the 1993 restructuring accruals and therefore had no impact on 1994 results of operations. In addition to restructuring and streamlining much of its historical business during 1994, the Company took several steps towards introducing the products that are currently generating most of the Company's revenues. In 1994, the Company began the consumer research and product development efforts that would lead to the introduction of its Zip disk drive, which was announced in October 1994. The Company also began the development work that would culminate in the Jaz drive. In addition, the Company successfully expanded and enhanced its family of tape drives in 1994, adopting the Ditto name for the first time and introducing the Ditto 420. The Company's efforts during 1994 began to yield results in 1995. The Zip drive began commercial shipment in March 1995. The Jaz drive began commercial shipment in limited quantities in December 1995. The Company continued to enhance its tape drive family in 1995, introducing the Ditto Easy 800 and the Ditto 3200. As a result of these new products, the Company's sales increased from $40.1 million in the first quarter of 1995 to $148.8 million in the fourth quarter of 1995. In 1994, Bernoulli products accounted for almost two-thirds of the Company's sales, with Ditto products accounting for most of the balance. In 1995, Zip was the Company's largest selling product line, with Bernoulli products accounting for only approximately 20% of the Company's sales. The Company expects that Zip and Jaz products will account for a substantial majority of its sales in 1996. The Company does not expect Bernoulli products to represent a significant portion of the Company's revenues or net income in the future. FUTURE OPERATING RESULTS Because the Company is relying on its Zip and Jaz products for the substantial majority of its sales in 1996, the Company's future operating results will depend in large part on the ability of those products to attain widespread market acceptance. Although the Company believes there is a market demand for new personal computer data storage solutions, there can be no assurance that the Company will be successful in establishing Zip and Jaz as accepted solutions for that market need. The extent to which Zip and Jaz achieve a significant market presence will depend upon a number of factors, including the price, performance and other characteristics of competing solutions introduced by other vendors, the timing of the introduction of such solutions, and the success of the Company in establishing OEM arrangements for Zip and Jaz with leading personal computer 17 manufacturers. In addition, the component shortages confronting the Company could continue to limit the Company's sales and provide an opportunity for competing products to achieve market acceptance. See "Risk Factors--Recent Introduction of Zip and Jaz; Uncertainty of Market Acceptance," "--Competition," "--Shortages of Critical Components; Absence of Supply Contracts; Dependence on Suppliers," "--Dependence on Non-Binding Strategic Marketing Alliances; Need to Establish Additional Alliances" and "--Reliance on Non-Binding Contract Manufacturing Relationships" and "Business--The Need for New Data Storage Solutions," "--Marketing and Sales," "--Manufacturing" and "--Competition." A number of elements of the Company's business strategy may also directly impact the Company's future operating results. Because the Company's marketing strategy is based in significant part on generating consumer awareness of and demand for its products, the Company plans to incur significantly increased marketing and advertising expenses in 1996. In addition, a critical element of the Company's distribution strategy is the establishment of OEM arrangements for Zip, Jaz and Ditto. OEM sales generally provide lower gross margins than sales to other channels. Moreover, reductions in the prices of the Company's Zip, Jaz and Ditto products, which the Company believes is likely at some point in the future, would likely have an adverse effect on gross margins for those products. The Company's business strategy is substantially dependent on maximizing sales of its proprietary Zip and Jaz disks, which generate significantly higher margins than its disk 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 another party succeeds in producing disks that are compatible with Zip and Jaz drives without infringing the Company's proprietary rights, or for any other reason, the Company's sales would be adversely affected, and its net income would be disproportionately adversely affected. See "Risk Factors--Dependence on Proprietary Technology." Although sales of Zip drives and disks were the primary reason for the Company's revenue growth during 1995, sales of such products may be attributable in large part to the novelty of such products and the initial publicity surrounding the introduction of Zip, and may not be indicative of the long-term demand for such products. Moreover, the retail market to which the Company's products are targeted is seasonal, with a substantial portion of total sales typically occurring in the fourth quarter, and may be subject to continued softening in 1996. Accordingly, investors should not assume that the sales growth experienced by the Company in 1995 is an indication of future sales. Moreover, in light of the Company's revenue growth in 1995 and the change in the nature of its business over the past year, the Company believes that period-to-period comparisons of its financial results are not necessarily meaningful. In addition, the Company has experienced and may experience significant fluctuations in its quarterly operating results. See "Risk Factor--Recent Operating Losses; Quarterly Fluctuations in Operating Results; Risk of Failure to Satisfy Market Expectations." The Company's European sales are predominantly denominated in foreign currencies. In addition, the Company purchases certain components in foreign currencies. The Company enters into forward exchange contracts to sell and purchase foreign currencies as a means of hedging its foreign operating cash flows. Fluctuations in the value of foreign currencies relative to the U.S. dollar would result in foreign currency gains and losses. See "Risk Factors--International Operations." 18 RESULTS OF OPERATIONS The following table sets forth certain financial data as a percentage of sales for the years ended December 31, 1993, 1994 and 1995:
PERCENTAGE OF SALES ------------------------------------- YEAR ENDED DECEMBER 31, ------------------------------------- 1993 1994 1995 ----------- ----------- ----------- Sales............................................................................ 100.0% 100.0% 100.0% Cost of sales.................................................................... 62.9 65.4 72.3 ----- ----- ----- Gross margin................................................................... 37.1 34.6 27.7 ----- ----- ----- Operating expenses: Selling, general and administrative............................................ 26.4 26.1 17.5 Research and development....................................................... 12.9 10.9 6.0 Restructuring costs (reversal)................................................. 9.6 (1.8) -- ----- ----- ----- Total operating expenses..................................................... 48.9 35.2 23.5 ----- ----- ----- Operating income (loss).......................................................... (11.8) (0.6) 4.2 Interest and other income (expense).............................................. 0.5 0.6 (0.6) ----- ----- ----- Income (loss) before income taxes and cumulative effect of accounting change..... (11.3) -- 3.6 Provision for income taxes....................................................... (0.2) (1.3) (1.0) ----- ----- ----- Net income (loss) before cumulative effect of accounting change.................. (11.5) (1.3) 2.6 Cumulative effect of accounting change........................................... 1.6 -- -- ----- ----- ----- Net income (loss)................................................................ (9.9)% (1.3)% 2.6% ----- ----- ----- ----- ----- -----
1995 AS COMPARED TO 1994 SALES. Sales increased by $185 million, or 131%, in 1995 when compared to 1994. The primary reason for the increased sales was the introduction of the new Zip product line, which began shipping at the end of the first quarter of 1995. Increased sales of Ditto products also contributed to the increased sales. In addition, the Company began shipping Jaz products in limited quantities in December 1995. These sales increases were partially offset by reduced sales of Bernoulli products. In 1995, sales of Zip and Jaz products accounted for $174.2 million, or 53%, of sales. Ditto products accounted for $86.5 million, or 27%, of sales in 1995 as compared to $42.1 million, or 30%, of sales in 1994. Bernoulli and other product sales totaled $65.5 million, or 20%, of sales in 1995 as compared to $99.3 million, or 70%, of 1994 sales. In the fourth quarter of 1995, sales of Zip and Jaz increased to 68% of sales, Ditto represented 22% of sales and Bernoulli and other products were 10% of sales. Sales to the U.S. market increased by $133.5 million, or 149%, in 1995 when compared to 1994. International sales, primarily to customers located in Europe, increased by $51.3 million, or 99%, in 1995 when compared to 1994. In total, sales outside of the United States represented 31.7% of sales in 1995 as compared to 36.7% in 1994. Management expects increased sales of Zip, Jaz and Ditto products in 1996, which it expects to be partially offset by significant declines in sales of Bernoulli products. However, the Company is experiencing component shortages which may continue to limit production and therefore sales. Accordingly, there can be no assurance that future sales will materialize as expected. GROSS MARGIN. The Company's gross margin percentage in 1995 was 27.7%, as compared to 34.6% in 1994. The decline in gross margin percentage was primarily attributable to a shift in sales mix away from higher margin Bernoulli products to lower margin Zip products. Start-up costs associated with the introduction of Zip and Jaz products also contributed to the decline in gross margin percentage. The Company's gross margin 19 percentage increased from 25.4% in the third quarter of 1995 to 30.6% in the fourth quarter of 1995, which is primarily attributable to an increase in sales of Zip disks, which have significantly higher margins than drives, as a percentage of total sales. Gross margins in 1996 will depend in large part on sales of Zip and Jaz disks, which generate significantly higher gross margin than the corresponding drives, and on the sales mix between disks and drives. Historically, the gross margin of Bernoulli products has generally been in excess of 40%; the gross margins of the Zip, Jaz and Ditto product lines during 1995 were significantly lower than that. Although the Company expects the gross margins of Zip and Jaz products to increase as production increases, it does not expect them to achieve the levels historically achieved by Bernoulli. In addition, gross margins will be affected by the level of sales through OEMs, the Company's ability to achieve planned cost reductions and by any future price reductions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased by 55% in 1995 as compared to 1994. As a percentage of sales, these expenses declined from 26.1% in 1994 to 17.5% in 1995. The decline in percentage is due to the increased sales volume in 1995. The actual selling, general and administrative expenses increased by $20.3 million in 1995 as compared to 1994. The increased expenses were primarily the result of advertising and promotion expenses incurred to launch new products, variable selling expenses, and increased salaries and wages resulting from increased headcount in all areas of sales, marketing and administration. Management expects selling, general and administrative expenses to increase further in 1996 in absolute dollars due to advertising and promotion expenses expected to be incurred to help create demand for Zip, Jaz and Ditto products, as well as increased variable selling expenses and increased fixed administrative expenses. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were 6.0% of sales in 1995, compared to 10.9% in 1994. The decline in percentages is due to the increased sales volumes in 1995. The actual research and development expenses increased by $4.1 million in 1995 compared to 1994. This increase was primarily the result of expenditures related to the development of the Zip, Ditto and Jaz products. Management expects continued increases in research and development expenses in 1996 in absolute dollars as the result of the continued growth in the resources needed for future product development and enhancement. OTHER. In 1995, the Company recorded a net foreign currency loss of $1.2 million. This loss was primarily a result of losses incurred in connection with the remeasurement of forward exchange contracts to market values. The majority of the loss was incurred in the first quarter of 1995 as the U.S. dollar weakened against foreign currencies (primarily European currencies) that were hedged by the forward contracts in place at March 31, 1995. In the first quarter of 1995, the Company bought more than its customary three months of forward exchange contracts with the intent of hedging operating cash flows through the remainder of the year and in anticipation of a strengthening dollar. However, the dollar continued to weaken against the currencies that were hedged, resulting in a $1.5 million charge to operations. The loss on the remeasurement of forward exchange contracts was partially offset by translation gains recorded in remeasurement of its foreign subsidiary's financial statements to the U.S. dollar. The Company recorded interest expense of $1.7 million in 1995 due to borrowings on short-term credit lines as well as capital leases. Interest income declined from $.9 million in 1994 to $.5 million in 1995 due to declining cash balances. Other income of $.4 million recorded in 1995 is primarily attributable to royalty payments received related to the Company's Ditto products. For 1995, the Company recorded a tax provision of $3.1 million representing an effective income tax rate of 27%. The Company expects the effective income tax rate to increase in the future to the statutory rate of 35% for federal income tax and approximately 5% for state income taxes. The timing of the rate increase will depend on future taxable income, the utilization of available tax credits, and changes in the valuation allowance associated with the deferred tax assets. 1994 AS COMPARED TO 1993 Sales decreased by 4% in 1994 when compared to 1993. Significant declines in sales of 5 1/4-inch 44- and 90-MB Bernoulli drive products were partially offset by increased sales of 5 1/4-inch 150- and 230-MB Bernoulli 20 drive products. Bernoulli drive sales dollars in total declined in 1994 as compared to 1993. Unit sales of Bernoulli drives were relatively flat in 1994 versus 1993, but price reductions resulted in lower sales dollars. Bernoulli disk sales also declined in 1994 as compared to 1993 in both dollars and units. These declines in Bernoulli sales were partially offset by increased sales of tape products. Tape drive unit sales doubled in 1994 as compared to 1993, while sales dollars increased at a slightly lower rate due to a lower average price on tape products in 1994. Sales of the Company's SyQuest-compatible removable hard disk cartridges (which have been discontinued) increased in 1994, which offset a decline in Floptical product sales. Sales to the U.S. market declined in 1994 when compared to 1993 as a result of decreasing sales of Bernoulli products, which were only partially offset by increases in tape product sales. International sales, including export sales, increased by approximately 25% and represented 37% of total consolidated sales in 1994 compared to 28% in 1993. Substantial increases in sales of tape products in Europe were the primary reason for the increased sales in the international channels. Cost of sales increased as a percentage of sales from 62.9% in 1993 to 65.4% in 1994. The decline in the gross margin percentage was partially due to a higher mix of tape products which have lower gross margins than the Bernoulli products. In addition, all product lines continued to experience competitive price pressures which resulted in lower selling prices in 1994 when compared to 1993. Partially offsetting these factors, both the Bernoulli and tape product lines benefitted from significant production cost reductions which were realized throughout 1994. Selling, general and administrative expenses decreased by $2.0 million and decreased slightly as a percentage of sales from 26.4% to 26.1%. Decreases in selling, general and administrative expenses resulted from restructuring actions which occurred in January and June of 1994, including the closing down of the Floptical product line, as well as streamlining operations in both the U.S. and Europe. Sales and marketing expenses were increased in the latter part of 1994 to introduce the Zip product line and to reposition the Company's marketing strategy worldwide. In addition, selling, general and administrative expenses increased in 1994 due to the payment of management bonuses. Research and development expenses decreased by $3.5 million and declined as a percentage of sales from 12.9% in 1993 to 10.9% in 1994. The major decline in research and development expenses resulted from the sale of the Company's thin film head development operation located in Fremont, California in the first quarter of 1994 and from closing its Floptical development laboratory located in Boulder, Colorado in the first quarter of 1994. Offsetting these decreases were increased development spending on the Company's tape product line and development costs for the Company's Zip product line. The Company's operating expenses were reduced in 1994 due to the reversal of restructuring reserves totaling $2.5 million. The Company had previously recorded restructuring reserves totaling $11.5 million at December 31, 1993. During 1993 and 1994, the Company effected most of the restructuring actions that had been planned, but due to changing conditions, it elected to change the scope and focus of other previously planned activities. As a result, the Company no longer required $2.5 million of the previously recorded reserves and reversed the unneeded reserves in the fourth quarter of 1994. The Company had no remaining restructuring reserves on its balance sheet at December 31, 1994. Interest income increased by $0.3 million in 1994 as compared to 1993 due to a slight increase in cash and temporary investments, as well as higher interest rates earned on available balances. Other income consisted primarily of royalties received, offset in part by losses incurred on the writedown of computer systems and foreign currency losses. In 1993, the Company increased its deferred tax assets as required by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). The deferred tax assets net value at December 31, 1993 was $5.0 million. The realizability of deferred tax assets was reevaluated throughout 1994 in light of changing business conditions and uncertainties regarding previously contemplated strategies. As a result, the Company recorded a tax provision of $3.3 million to increase the valuation allowance to cover the realizability of the deferred tax assets to its estimated realizable value as of December 31, 1994. In addition to this tax provision which was recorded in 1994, the Company recognized a tax benefit of $1.4 million in the third 21 quarter of 1994 as a result of a change in an estimate on the Company's 1993 tax return due to a change in the transfer price on products between the Company and its German subsidiary. The change in transfer price was a result of an independent economic study. The above items resulted in a tax provision for 1994 totaling $1.9 million. SELECTED QUARTERLY OPERATING RESULTS The following table sets forth certain unaudited quarterly results of operations of the Company for each quarter of 1995. In the opinion of management, these financial data have been prepared on the same basis as the audited consolidated financial statements of the Company and include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results of operations for these periods. These financial data should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included elsewhere in this Prospectus.
QUARTER ENDED ------------------------------------------------ APRIL 2, JULY 2, OCTOBER 1, DECEMBER 31, 1995 1995 1995 1995 --------- --------- ----------- ------------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Sales......................................................... $ 40,112 $ 52,594 $ 84,721 $ 148,798 Cost of sales................................................. 28,395 40,907 63,225 103,311 --------- --------- ----------- ------------- Gross margin................................................ 11,717 11,687 21,496 45,487 Operating expenses: Selling, general and administrative......................... 9,349 10,162 13,878 23,800 Research and development.................................... 4,126 3,976 4,691 6,783 --------- --------- ----------- ------------- Total operating expenses.................................... 13,475 14,138 18,569 30,583 --------- --------- ----------- ------------- Operating income (loss)....................................... (1,758) (2,451) 2,927 14,904 Interest and other income (expense)........................... (20) (55) (230) (1,678) --------- --------- ----------- ------------- Income (loss) before income taxes............................. (1,778) (2,506) 2,697 13,226 Provision for income taxes.................................... 280 559 (672) (3,303) --------- --------- ----------- ------------- Net income (loss)............................................. $ (1,498) $ (1,947) $ 2,025 $ 9,923 --------- --------- ----------- ------------- --------- --------- ----------- ------------- Net income (loss) per common share............................ $ (0.03) $ (0.03) $ 0.03 $ 0.16 --------- --------- ----------- ------------- --------- --------- ----------- ------------- Weighted average common shares outstanding.................... 56,301 57,018 63,618 63,780
Sales in the first quarter of 1995 consisted primarily of sales of Bernoulli and Ditto drives and media. Zip products, which began shipping late in the first quarter of 1995, accounted for an increasing portion of sales over each of the remaining three quarters of 1995. Sales of Zip products throughout 1995 were affected by component shortages which limited production. The Company began shipping Jaz drives in limited quantities during December 1995. The losses incurred in the first and second quarters of 1995 were predominantly a result of the start-up costs associated with the introduction of Zip, component shortages relating to Zip and anticipated declines in sales of Bernoulli products. Bernoulli products, which accounted for more than 60% of total sales in the fourth quarter of 1994, declined to less than 10% of total sales by the fourth quarter of 1995. In the fourth quarter of 1995, sales of Zip and Jaz accounted for 68% of sales, a large portion of which occurred in the final month of the quarter, and Ditto represented 22% of sales. Quarterly fluctuations in gross margin percentages were primarily related to the mix of products sold and start-up costs associated with the introduction of new products. Gross margins declined from 29% in the first quarter to 22% in the second quarter, primarily due to start-up costs associated with the introduction of Zip products and a decline in sales of higher margin Bernoulli products. Gross margins improved to 25% in the third quarter primarily due to the impact of increased sales of Zip products, which more than offset the decline in sales of higher margin Bernoulli products. In the fourth quarter, gross margins improved to 31%, which was primarily attributable to an increase in sales of Zip disks, which have significantly higher margins than drives, as 22 a percentage of total sales. The increase in margins in the third and fourth quarters, together with continued management of fixed costs, resulted in the Company's profitability in the second half of 1995 and for the total year. Although sales of Zip products were the primary reason for the Company's revenue growth during 1995, such sales may be attributable in large part to the novelty of the product and the initial publicity surrounding the introduction of Zip, and may not be indicative of the long-term demand for the product. Accordingly, investors should not assume that the sales growth experienced by the Company in 1995 is an indication of future sales. Moreover, in light of the Company's revenue growth in 1995 and the change in the nature of its business over the past year, the Company believes that period-to-period comparisons of its financial results are not necessarily meaningful. See "Risk Factors--Recent Introduction of Zip and Jaz; Uncertainty of Market Acceptance" and "-- Recent Operating Losses; Quarterly Fluctuations in Operating Results." LIQUIDITY AND CAPITAL RESOURCES At December 31, 1995, the Company had cash and cash equivalents of $1.0 million, working capital of $12.6 million and a ratio of current assets to current liabilities of 1.1 to 1. During 1995, the Company used $15.8 million in cash and cash equivalents consisting of $27.0 million used in operating activities, and $42.5 million in investing activities, offset by $53.7 million provided by financing activities. On July 5, 1995, the Company entered into a loan agreement with the Commercial Finance Division of Wells Fargo. The agreement permits revolving loans, term loans and letters of credit up to an aggregate outstanding principal amount equal to the lesser of $60 million or 80% of eligible accounts receivable, with a 10% overadvance provision through April 12, 1996. There is an aggregate sublimit of $10 million for letters of credit. The revolving credit line bears interest at the bank's prime rate plus 1%, and the Wells Fargo term loans bear interest at the bank's prime rate plus 1.25%. The agreement expires June 30, 1996. Certain covenants within the agreement require the Company to maintain minimum levels of working capital and net worth. Under the agreement with Wells Fargo, the Company may also secure financing of equipment purchases from third parties up to a maximum of $25 million, less term loans outstanding to Wells Fargo. In November 1995, a foreign subsidiary of the Company entered into an agreement with a German commercial bank for up to DM 50 million (approximately $35 million), which involves the sale of a portion of the foreign subsidiary's accounts receivable to the bank. In January 1996, the Company entered into a $6.0 million short-term revolving credit facility with First Security Bank of Utah. This facility matures on April 12, 1996 and contains covenants similar to those contained in the Wells Fargo loan agreement. In addition, the Company has entered into various agreements to provide capital lease financing and other term loans for the purchase of certain manufacturing equipment. The Company intends to refinance its loan with Wells Fargo upon its maturity. There can be no assurance, however, that the Company will be able to refinance such loan at acceptable terms. The Company's balance sheet at December 31, 1995 reflected current notes payable of $47.6 million, representing utilization of the revolving credit line with Wells Fargo of $33.2 million, term loans with Wells Fargo of $3.6 million, borrowings under the German loan agreement of $9.8 million and the short-term portion of other term loans of $1.0 million. In addition, the short-term and long-term portion of capital lease obligations totaled $0.8 million and $1.5 million, respectively, at December 31, 1995, and the long-term portion of notes payable totaled $2.6 million at December 31, 1995. The borrowings have been used to finance working capital needs, including increases in inventory and accounts receivable and capital expenditures related to production volume increases. Accounts receivable increased by $87.1 million at December 31, 1995 compared to December 31, 1994, due to increased sales, particularly in the last portion of the fourth quarter. Inventory increased by $81.4 million during 1995 due to build-ups in manufacturing capacity at both the Company's facilities and those of manufacturing partners. The Company's inventory is currently somewhat imbalanced, with more than sufficient quantities of certain goods and insufficient quantities of other goods, due in part to difficulties in obtaining certain components. The increases in receivables and inventory were partially offset by increases in accounts payable and accrued liabilities of $120.4 million. 23 Cash expenditures for fixed asset additions for 1995 totaled $45.2 million. These additions are primarily related to increased manufacturing capacity for Zip, Ditto and Jaz products. The Company expects capital expenditures in future quarters to continue to be significant as production capacity is added at the Company's current manufacturing facility, as well as tooling at vendor facilities and third-party manufacturing facilities. The Company expects that the proceeds of this offering, together with the current sources of financing available to the Company, will be sufficient to fund the Company's operations at least through June 30, 1996, including any planned expense increases or capital expenditures discussed above. Thereafter, the Company anticipates that it will require additional funds to finance its operations. The precise amount and timing of the Company's funding needs cannot be determined at this time, and will depend upon a number of factors, including the market demand for the Company's products, the availability of critical components, the Company's strategic alliances for the manufacture of its products, the progress of the Company's product development efforts and the Company's inventory management. The Company currently expects that it would seek to obtain such funds from additional borrowing arrangements and/or a public offering of debt or equity securities. There can be no assurance that funds required by the Company in the future will be available on terms satisfactory to the Company. See "Risk Factors--Decline in Liquidity; Future Capital Needs." RECENT ACCOUNTING PRONOUNCEMENT In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (SFAS No. 121). SFAS No. 121 is effective for financial statement periods beginning after December 31, 1995. Management does not expect that the adoption of SFAS No. 121 will have a material impact on the Company's financial position or results of operations. 24 BUSINESS The Company designs, manufactures and markets innovative data storage solutions, based on removable-media technology, that help personal computer users "manage their stuff." The Company's data storage solutions include disk drives marketed under the tradenames Zip and Jaz and a family of tape drives marketed under the tradename Ditto. The Company's Zip and Jaz disk drives are designed to provide users with the benefits of high capacity and rapid access generally associated with hard disk drives and the benefits of media removability generally associated with floppy disk drives, including expandable storage capacity and data transportability, management and security. The Company's Ditto tape drives primarily address the market for backup data storage. The Company began shipping Zip drives in March 1995 and Jaz drives in limited quantities in December 1995. Designed as a mass-market product, the Zip drive addresses the needs of personal computer users for an affordable storage device for hard drive expansion, data transportability, management and security and data backup. The drive uses 100-MB disks to provide 70 times the capacity of traditional floppy disks. See "Business--Products--Zip." The external model of the Zip drive is generally sold by retailers for under $200 and the 100-MB disks are typically sold for under $15 per disk in ten-packs. The Jaz drive also provides hard drive expansion, data transportability, management and security and data backup. However, the Jaz drive, which features 1-GB removable disks and offers data transfer rates comparable to those of most current hard disk drives, is targeted to address the high-performance needs of computer users storing, transporting and playing demanding multimedia applications, such as full-screen, full-motion video. The external model of the Jaz drive is expected to be sold by retailers for approximately $599, while the internal version is expected to be sold by retailers for approximately $499. Each 1-GB Jaz disk is expected to sell for approximately $99 in five-packs. The Company's Ditto family of tape drives addresses the need of personal computer users for an easy-to-use, dependable backup solution. The Company offers internal and external Ditto tape drives based on leading industry standards ranging in capacity from 420 MBs to 3.2 GBs (using data compression). INDUSTRY OVERVIEW The Company believes, based upon information in a 1995 report from International Data Corporation ("IDC"), that there are in excess of 150 million personal computers in use worldwide. Many of these personal computers (particularly those in the home) are used by more than one person. Moreover, many people make regular use of more than one personal computer; for example, an individual may use one computer in his or her office, another at home, and a laptop computer while traveling. Issues that each user of a personal computer must confront are how to store, transport, share, manage, secure and backup computer files and applications. The vast majority of personal computers in use today incorporate both a conventional hard disk drive (which is also known as a rigid disk drive or a "Winchester" disk drive) and a floppy disk drive for data storage. Hard disk drives use magnetic technology to store data on rigid rotating disks that are generally fixed permanently in the drive mechanism. Hard disk drives are characterized by their large storage capacities--capacities ranging from 540 MBs to 1.6 GBs are becoming increasingly common in new personal computers--and fast performance. Hard disk drives are the primary data storage device on most personal computers. Floppy disk drives, which are also based on magnetic technology, store data on thin plastic disks that are removable from the drive. Floppy disk drives are typically used for software distribution and transporting and sharing data. Most floppy disk drives in use today utilize 1.44-MB disks, which is not sufficient capacity to store many files and programs on a single disk. In addition to hard disk drives and floppy disk drives, a number of other data storage devices have come into use in recent years. In particular, a growing number of new personal computers incorporate a CD-ROM (compact disk-read only memory) drive. CD-ROM disks, which are read by the CD-ROM drive using optical technology, are capable of storing up to 650 MBs of data and are well-suited for distribution of information and software applications. However, CD-ROM drives are not capable of recording the user's data. A variety of other lesser-known removable storage technologies which are capable of reading and recording data are also available for use with personal computers, including disk drives systems using removable "hard" magnetic cartridge disks, which generally either employ similar technology to hard disk drives or the Company's proprietary Bernoulli technology; writable optical disk drives, which use various technologies to read and record data in a 25 digital format that can be read by laser light; "floptical" disk drives, which store data on a magnetic disk similar to a conventional floppy disk and use an optical pattern for servotracking; and flash memory cards, which store data on computer chips. The Company estimates, based on information from 1995 reports of IDC and Dataquest and its knowledge of the industry, that approximately 210 million data storage devices for personal computers, representing approximately $30 billion in revenue at the OEM level, were sold in 1995. Included in these sales figures are hard disk drives, floppy disk drives, CD-ROM drives, removable disk drives and tape drives. This market is principally comprised of conventional hard disk drives, which the Company estimates represented over 40% of unit sales and approximately two-thirds of dollar sales, and floppy disk drives, which the Company estimates represented approximately 40% of unit sales but less than 10% of dollar sales. THE NEED FOR NEW DATA STORAGE SOLUTIONS In recent years, advances in software, including memory-intensive graphical operating systems, integrated suites of word processing, spreadsheet and database applications, and multimedia applications, have dramatically increased the storage needs of personal computer users. For example, a popular CD version of Windows 95 (which includes certain pre-packaged software applications in addition to the Windows 95 operating system) includes 629 MBs of data, which is greater than the capacity of most hard drives in use today. In addition, data- intensive, multimedia files are increasingly being made available to personal computer users via on-line services and the Internet. For example, CD-quality sound generally requires 2 MBs of storage capacity per minute, using data compression software, and 9 MBs per minute without compression; and MPEG1 compressed DSS-satellite quality video generally requires approximately 8 MBs of storage capacity per minute, while broadcast-quality video requires 250 MBs per minute. Largely as a result of these trends, it has been estimated that the data storage needs of personal computer users are doubling every year. Accordingly, personal computer users increasingly need to expand the amount of their available primary storage. Personal computer users demand data storage solutions that do more than simply provide additional storage capacity. For example, personal computer users are increasingly seeking a reliable way to transport large files between computers, thus allowing them to work on the same files using different computers, and also enabling information to be provided to other computer users. In addition, with many personal computers (particularly home computers) being used by more than one person, many personal computer users are looking for an effective means of organizing and segregating the files of different users of the same computer. Personal computer users also need a reliable method of securing sensitive files from unauthorized viewing or modification. Finally, the increase in the data being used and stored on personal computers has heightened the need for a practical method of backing up this data. The Company believes that neither conventional hard disk drives nor floppy disk drives are capable of adequately addressing all of the information storage and management needs of personal computer users. A hard disk drive is an effective product for primary data storage. However, using an additional hard disk drive to provide additional storage capacity is an unattractive solution to many personal computer users because the installation of the additional hard drive (which generally involves selecting a compatible hard disk drive, opening the computer case, and internally connecting the hard disk drive to the appropriate controller card) may be difficult. More importantly, once the drive is installed, the amount of additional available space is limited to the size of the new hard disk drive. Furthermore, a new hard drive does not address the issues of data transportability, management and security. Removable-media storage devices, such as floppy disk drives, offer many of the advantages that hard disk drives do not, such as future expandability through the purchase of additional removable-media cartridges or disks; and data transportability, management and security, since the media storing the data can be removed from the drive, used in other computers and stored in a secure location. However, the Company believes that expanding storage capacity through conventional floppy disks, while inexpensive (floppy disks are generally sold by retailers at less than $1.00 per disk in multi-packs), is not an adequate solution because it is too slow and because each disk only stores up to 1.44 MBs of data, making it too small for many of today's personal computer 26 files and programs. Floppy disks are also not well-suited for backup purposes, since approximately 70 floppy disks would be required for each 100 MBs of data to be backed up and the user would have to be present during the backup procedure in order to insert and remove each floppy disk. Other types of removable-media data storage devices are now available for use with personal computers, including magnetic cartridge disk drives, optical disk drives, "floptical" disk drives and flash memory cards. However, these devices, while popular in certain niche markets, have not gained widespread market acceptance, in part because the Company believes that they have not been able to match the price/performance levels offered by hard disk drives and floppy disk drives. The following table sets forth certain of the principal advantages and disadvantages of various storage technologies currently available for users of personal computers:
TECHNOLOGY ADVANTAGES DISADVANTAGES - --------------------- ---------------------------------------------- ---------------------------------------------- Hard Disk Drives - Very fast average access time - Fixed capacity (generally 8 to 20 msec) and data - Disks storing data are not removable transfer rate (generally 2 to 6 or transportable MB/sec) - Less attractive aftermarket solution - Large storage capacity (generally due to difficulty of installation from 800MB to 4 GB) - Inexpensive cost per MB of storage - Proven technology/industry standard Floppy Disk Drives - Inexpensive drives and media - Capacity is limited to 1.44 MB - Disks are removable and per disk transportable - Slow average access time (165 msec) - Proven technology/industry standard and data transfer rate CD-ROM Drives - High capacity (650 MB) - Read-only; users cannot store data - Unlimited expansion - Very slow average access time - Disks are removable and (230 msec) transportable - Inexpensive drives and media - High durability - Emerging industry standard for multimedia applications Optical Drives - Media is inexpensive - Drives are expensive - Unlimited expansion - Several different formats exist, not - Disks are removable and all of which are compatible transportable - Some formats are not erasable - Some formats are capable of reading - Average access times for CD-ROM disks some formats are significantly slower than hard disk drives Floptical Drives - Capable of reading and writing to - Currently available in low capacities traditional floppy disks (although a 120MB Floptical has - Unlimited expansion been announced) - Disks are removable and transportable Tape Drives - High capacity for backup purposes - Not capable of random access - Tapes are removable and - Very slow average access time transportable - Inexpensive media - Very low cost per MB of storage Flash Cards - Fastest access time and data transfer - Very expensive rate - Removable and transportable
27 The Company believes, based on its consumer research, that the market for personal computer data storage solutions can be roughly divided into two market segments, based on the characteristics computer users demand of a data storage solution and the relative importance they place on the advantages and disadvantages listed above. The first, referred to by the Company as the "mass market", is characterized by computer users who are often uninterested in the detailed technical specifications of a data storage solution and who simply want a data storage solution to "manage their stuff." For these computer users, an affordable price is generally the most important criterion. The second, referred to by the Company as the "power user" or "high-performance market," is characterized by persons who use their personal computers for demanding applications and who are more focused on capacity, speed and other state-of-the-art performance features than on price. IOMEGA SOLUTIONS The Company believes its recently introduced Zip and Jaz disk drives address key information storage and management needs of today's personal computer users by providing affordable, easy-to-use storage solutions that combine the high capacity and rapid access of hard disk drives with the benefits of media removability generally associated with floppy disk drives. Specifically, the Company's products offer the following benefits to personal computer users. EXPANDABLE STORAGE CAPACITY. As personal computer users are increasingly forced to expand their primary storage capacity (generally provided by the hard disk drive incorporated in the computer), Zip and Jaz provide an easy and efficient way to do so. Both the Zip and the Jaz drive can be easily connected or installed and offer unlimited additional storage capacity, in increments of 100 MBs (in the case of Zip) and 1 GB (in the case of Jaz). MEDIA REMOVABILITY. Both Zip and Jaz store data on high-capacity removable disks, thus enabling computer users to: -take programs and files from an office computer and work with them on a home or laptop computer; -share programs and files with other personal computer users; -organize data by storing different files on different disks; -create a "separate personal computer" for each person using the computer (such as different family members)--each user can store all of his or her software and data on a single disk that can be removed from the computer and privately stored when that person is not using the computer; and -remove particularly sensitive or valuable information from the computer for storage in a different location, thus protecting it against viewing or modification by another user of the computer and against damage to the computer. DATA BACKUP. The Company's family of Ditto tape drives, as well as the Zip and the Jaz drive, offer a convenient and effective way for personal computer users to create backup copies of their programs and files. ATTRACTIVE PRICE, PERFORMANCE AND FEATURES. The Company believes that its Zip and Jaz drives provide a combination of price, performance and features that makes them attractive data storage solutions for their target markets. Zip offers data access times and transfer rates and storage capacity that greatly exceeds that offered by conventional floppy disk drives, along with the benefits of removable media, at a price that is attractive to mass-market customers. Jaz offers many performance features comparable to those of most other data storage devices (including conventional hard disk drives), at a lower price than other currently available comparably performing removable-media storage devices. COMPANY STRATEGY Iomega's objective is to establish its Zip, Jaz and Ditto products as industry-standard data storage solutions for personal computer users and to capture an increasing share of the overall personal computer data storage market. The Company's strategy to achieve this objective includes the following key elements: UNDERSTANDING AND PROVIDING WHAT CUSTOMERS WANT. Iomega's product strategy is based on identifying the product characteristics that personal computer users desire and developing and marketing products that 28 satisfy these demands. In developing and introducing the Zip and Jaz drives, the Company undertook a consumer research program to determine the performance and price characteristics of storage solutions demanded by personal computer users. For example, this program revealed to Iomega the need for both the mass-market Zip drive, which was cost-engineered by the Company to sell at a price level attractive to casual users and the small office/home office market, and the high-performance Jaz drive, which is primarily targeted at power users. DELIVERING INTEGRATED SOLUTIONS. The Company's products are designed to provide customers with a complete, easy-to-use solution to their data storage needs. The Company's drives are shipped with everything needed to install or connect the drive, including easy-to-use software which aids in set-up and enhances the drive's functionality, and generally also include a media cartridge for use in the drive. BROADENING DISTRIBUTION THROUGH STRATEGIC MARKETING ALLIANCES. The Company believes that broadening the distribution of its products through strategic alliances with a variety of companies within the computer industry is a critical element in establishing its products as industry standards. The Company has recently established OEM arrangements with personal computer manufacturers such as Micron Electronics (a mail-order manufacturer of IBM PC-compatible personal computers) and Power Computing (the first Macintosh clone manufacturer) for the incorporation of Zip, Jaz or Ditto drives into their computers, and is seeking to establish additional OEM relationships. The Company also has entered into private or co-branding arrangements with several companies, including Maxell, Seiko Epson, Fuji and Reveal Computer Products, who are selling private or co-branded versions of Zip drives and disks. In addition, the Company's products are sold by most of the leading retailers of computer products in the United States, including Best Buy, Circuit City, CompUSA, Computer City, Electronics Boutique and PC Warehouse. MAXIMIZING SALES OF REMOVABLE DISKS. The Company seeks to maximize sales of its proprietary disks because they generate significantly higher margins than its disk drives. The Company plans to accomplish this in part by increasing the installed base of the Company's removable-media disk drives, through such initiatives as OEM arrangements, licensing third-party manufacturers of drives on a royalty-bearing basis and increasing the Company's own output of drives both for sale by the Company and by others under private branding arrangements. Also, the multimedia demonstration software included with the Zip and Jaz drives informs users of the various applications for additional disks (such as security, personal workspaces, backup) and suggests the number of additional disks the user may need in response to questions the user answers as part of the interactive demonstration. CONTINUING TO ENHANCE PRODUCT FEATURES AND TECHNOLOGY. The Company plans to use its experience in Bernoulli, tape, magneto-optical, floptical and thin-film head technologies for the ongoing enhancement of existing products and the development of new products. During 1994 and 1995, the Company's product development efforts were primarily devoted to the development of its Zip and Jaz products, which began commercial shipment in March 1995 and December 1995, respectively. During 1996, the Company expects that its development efforts will be primarily focused on enhancing the features, developing higher capacity versions and reducing the production costs of its Zip, Jaz and Ditto products. LEVERAGING MANUFACTURING CAPABILITIES THROUGH PARTNERING. In addition to manufacturing or assembling a portion of each of the Company's products at its Roy, Utah manufacturing facility, the Company has established strategic relationships with various suppliers and manufacturers to increase the production capacity of its new products and to establish a second source of drive and disk production. The Company intends to continue to use third-party manufacturing as a means of increasing the availability and market penetration of the Company's drive products, to reduce costs of production, and to benefit from the expertise of experienced high-volume manufacturing companies. The Company plans to use third-party manufacturers to produce a majority of its products in the future. EXPANDING INTERNATIONAL SALES. The Company began offering its Zip products in Europe in August 1995 and its Jaz products in Europe, in limited quantities, in February 1996. The Company believes that it is the leading vendor of tape drives in Europe, and that its existing European distribution channel is well-suited to selling the Zip and Jaz removable-media drive products. During the third quarter of 1995, Maxell, Seiko Epson 29 and Fuji began selling co-branded versions of the Zip drive in Japan, and the Company plans to expand its presence in the Far East by opening a Singapore sales office in 1996. The Company expects international sales to increase as a result of its introduction of Zip and Jaz into international markets. PRODUCTS The Company offers products targeted at both the mass market and the high-performance market. The Zip drive and the Ditto 420 and Ditto Easy 800 tape drives were designed to achieve price levels which the Company determined are critical to mass-market consumers. The Jaz drive and Ditto 3200 tape drive, on the other hand, are principally targeted to more technically demanding, high-end customers, who the Company believes are less price sensitive than typical mass-market consumers. The following table lists the principal data storage devices currently being offered by the Company:
TYPICAL RETAIL PRODUCT (YEAR PRICE INTRODUCED)* MEDIA AND CAPACITY DRIVE/DISK** TECHNOLOGY - ------------------------- -------------------- ------------------ ---------------------------------- Zip (1995) 100-MB Zip Disks $199/$14.99 Drive: Winchester heads Disks: Advanced flexible media Jaz (1995) 1-GB Jaz Disks $599/$99.99 Drive: Thin-film heads 540-MB Jaz Disks Disks: Two rigid disk platters Ditto 420 (1994) Ditto Tape $99 Drive: Direct drive mechanism Ditto Easy 800 (1995) minicartridges $149 Media: Industry standard quarter Ditto Easy 3200 (1996) (420-MB, 800-MB, $299 inch cartridges 3200-MB)
- ------------------------ * Drives are available in internal and external versions. The indicated capacities for Ditto drives represent the maximum capacity using data compression. ** Indicates the typical price at which the external version of the drive and the highest capacity media for that drive is sold at retail. Prices for the internal version of a drive and for smaller capacity media are generally lower. The price for the Ditto 420 is the internal version price. Disk prices represent per unit purchase price in multi-packs. Media prices for tape are not presented because revenues from tape minicartridge sales are not material to the Company. ZIP The Company began shipping external Zip drives and 100-MB Zip disks in March 1995. Designed as an affordable mass-market product, the Zip drive addresses multiple needs of personal computer users: hard drive expansion, data transportability, management and security and data backup. The drive uses interchangeable 100-MB Zip disks to provide users of IBM-compatible and Apple Macintosh personal computers with 70 times the capacity of, and superior performance to, traditional floppy disks. Zip drives were designed with 100-MB disks based on the results of the Company's market research, which showed that 85% of the files stored on personal computers are 100 MBs or less. Zip drives use durable, high-capacity flexible media and Winchester-style nanoslide heads with a special airbearing surface combined with a linear voice coil motor. The Zip drive provides high capacity and rapid access and can be used for a number of data storage purposes. The SCSI version of the Zip drive, which offers faster performance than the parallel port version of the drive, features 29 millisecond average seek time and an average sustained data transfer rate of 1.00 MB per second. Software included with the Zip drive provides a total data storage solution by helping users organize and copy their data and offers software read/write protect, which further enables users to secure and protect their data. The external, portable version of the Zip drive weighs approximately one pound and is offered in a parallel port version for use with IBM PC-compatible computers and a SCSI version for use with Apple Macintosh computers or IBM PC-compatible computers which have a SCSI adapter board. The parallel port version features printer pass through to allow normal operation of a printer in the same port. The SCSI version has two connectors allowing it to be connected with other SCSI devices. The external Zip drive has a unique compact 30 design, including a royal blue color, a window allowing visibility of the label on the cartridge being used, rubber feet for positioning the drive flat or on its side, operation lights and a finger slot for easy cartridge insertion and removal. In September 1995, Power Computing, the first Macintosh clone manufacturer, began offering internal 5 1/4-inch Zip SCSI drives as a $159 option on its computers. The Company has also designed an internal version of the Zip drive which incorporates a conventional 3 1/2-inch floppy disk drive. In addition, the Company has developed an internal 3 1/2-inch IDE version of the Zip drive, which it expects will be available in the first quarter of 1996. During 1995, Zip received numerous awards from industry publications in select categories including: PC/ COMPUTING'S Most Valuable Product; PUBLISH magazine's 1995 Publish Impact Award; CADENCE magazine's Editor's Choice Award; the International Digital Imaging Association's "Best New Hardware" award; and, listing in COMPUTER LIFE magazine's "Best of Everything" list. The Zip drive carries a one-year warranty and Zip disks are sold with a limited lifetime warranty. JAZ The Company began shipping Jaz drives and 1-GB Jaz disks in limited quantities in December 1995. Jaz addresses the high-performance needs of personal computer users in three areas: multimedia applications (audio, video and graphics), personal data management, and hard drive upgrade. The Jaz drive offers data transfer rates comparable to those of most current hard disk drives, with an average sustained transfer rate of 5.4 MBs per second, 12 millisecond average seek time and 17.5 millisecond average access time. Jaz disks are currently available in a capacity of 1 GB, which the Company's market research indicated was a capacity that many high-performance computer users demand, and 540-MB Jaz disks are expected to be available in the first half of 1996. Using 1-GB disks, Jaz is capable of storing and playing up to two hours of MPEG1 compressed DSS satellite quality video, up to eight hours of CD-quality audio, more than 20,000 scanned documents for document imaging or up to four minutes of full-screen, full-motion broadcast-quality video. The Jaz drive will be available in an external SCSI version, which is expected to be sold by retailers for approximately $599, and is available in an internal SCSI version, which is expected to be sold by retailers for approximately $499. Each 1-GB and 540-MB Jaz cartridge is expected to sell for approximately $99 and $69, respectively, in five-packs. The Company expects an internal IDE version of the Jaz drive to be available beginning in the second half of 1996. The Jaz drive incorporates many innovative technological features including tri-pad, thin-film recording heads, dynamic head loading and drag and drop motorized cartridge ejection. Jaz disks feature a dual rigid platter cartridge and a proprietary disk capture system which secures the dual disk platters when not installed in a drive, eliminating rattle and reducing the possibility of losing valuable information. The drive operates with leading operating systems for personal computers and workstations, including Windows 95, Windows NT, Windows 3.x, Macintosh and OS/2. The external version of the drive, which weighs approximately two pounds, features design enhancements similar to those introduced with the external Zip drive, including a unique jade colored casing, a window to allow visibility of the label on the cartridge being used, operating lights and a finger slot for easy cartridge insertion and removal. Additional features include an auto-switching power supply to allow operation in different countries, auto-sensing SCSI termination and anti-gyro disk locking to increase durability. The Jaz drive carries a one-year warranty and Jaz disks are sold with a limited lifetime warranty. DITTO The Company's Ditto family of tape drives addresses the need of personal computer users for an easy-to-use, dependable backup solution. In response to the information learned from consumers regarding the characteristics demanded from backup storage devices, beginning in 1994 the Company redesigned its family of tape drives, which had first been introduced in 1992. The Company offers internal and external models based on leading industry standards ranging in capacity from 420 MBs to 3.2 GBs (using data compression). The tape drives are primarily designed to backup and protect against loss of data stored on hard disk drives in IBM PC- 31 compatible computers. Iomega's tape drives have a patented beltless design which the Company believes enhances reliability. The storage media used by Iomega's tape products is the industry-standard QIC-compatible minicartridge. In addition, the Ditto Easy 800 and Ditto Easy 3200 support new high-capacity Travan cartridge technology. The Ditto family of tape drives has achieved several industry firsts. In April 1992, the Iomega Tape 250 (later renamed the Ditto 250) became the industry's first commercially available QIC-standard, one-inch high tape drive and in March 1995 became the industry's first internal 250-MB tape drive to sell for under $100. In June 1995, the Ditto 420 became the industry's first internal 420-MB tape drive to sell for under $100. In October 1995, the Company introduced the Ditto Easy 800, which the Company believes was the industry's first external parallel port 800-MB tape drive to sell for under $150. The Ditto Easy 800 features an enhanced design similar to, and is stackable with, the Zip and Jaz drives. The Company's tape products are generally available in either internal or external models. The internal versions attach to the standard floppy drive interface in IBM PC-compatible computers, while the external versions attach to the parallel printer port on IBM PC-compatible computers and offer pass-through capability for a printer. The drives are shipped with backup software for both DOS and Windows. In connection with the introduction of the Ditto Easy 800 in October 1995, the Company also introduced new 1-Step software designed to permit the backup of an entire hard disk in a single step while the user continues working. The Ditto Easy 800 and the Ditto Easy 3200 carry a two-year warranty and the Ditto 420 carries a five-year warranty. Ditto media is sold with a two-year warranty. BERNOULLI These 5 1/4-inch half-height drives are removable-media storage devices based on the Company's proprietary Bernoulli technology. The Company's Bernoulli drives and the associated disks are sold both in the form of a complete storage subsystem for leading personal computers and workstations and in the form of components for integration into larger systems by OEMs or value-added resellers ("VARs"). The Bernoulli MultiDisk-TM- 150 drive began shipping in October 1992 and was Iomega's first drive to use multiple capacity disks - 35, 65, 105 and 150 MBs. The Company began shipping the Bernoulli 230 drive in September 1994. The Bernoulli drives are sold in internal and transportable versions. The Company is now focusing its development and marketing efforts on its Zip, Jaz and Ditto products, and does not expect Bernoulli products to represent a significant portion of the Company's revenues in the future. MARKETING AND SALES The Company believes that broadening the distribution of its products through strategic marketing alliances with a variety of key companies within the computer industry is a critical element in establishing its products as industry standards. The Company's initial marketing strategy for the introduction of its new products during 1995 was to generate consumer awareness of and demand for such products by focusing on aftermarket sales to existing users of personal computers through leading computer retail channels. As the next step in its strategy of promoting its products as new industry standards, the Company is increasingly focusing its efforts on establishing OEM relationships with leading personal computer manufacturers who will include the Company's products on a factory-installed basis to purchasers of new personal computers. RETAIL DISTRIBUTION Retail outlets for the Company's products include mail order catalogs, computer superstores, office supply superstores, consumer electronics superstores and specialty computer stores. The Company sells its products to 32 retail channels directly, as well as indirectly through distributors. The Company's products are sold at a retail level by most of the leading retailers of computer products in the United States. The following is a partial listing of the retail chains carrying the Company's products. Best Buy Electronics Boutique CDW Computer Center Elek-Tek Circuit City Fry's Electronics CompUSA MicroCenter Computer City NeoStar Creative Computer OfficeMax Egghead Software PC Warehouse
STRATEGIC MARKETING ALLIANCES In addition to sales through these retail channels, the Company has entered into a number of strategic marketing alliances with a variety of companies within the computer industry. These alliances include OEM arrangements providing for certain of the Company's products to be incorporated in new computer systems at the time of purchase. For example, Power Computing, the first Macintosh clone manufacturer, is offering Zip drives as an option in certain of its new computers, and Micron Electronics, a mail-order manufacturer of IBM PC-compatible personal computers, has announced plans to offer Zip, Ditto and Jaz drives as a factory-installable option in certain of its new computers. The Company's strategic alliances also include private-branding and co-branding arrangements with major vendors of computer products covering the resale of the Company's products by such companies. For example, the Company has entered into co-branding arrangements with Seiko Epson, Maxell and Fuji, which offer Zip drives in Japan in packages which feature Iomega's name in addition to the partner's name, and has entered into a private-branding arrangement with Reveal Computer Products, which sells Zip drives and disks under Reveal's tradename. INTERNATIONAL The Company sells its products outside of North America primarily through international distributors. The Company has increased its sales efforts in the European market in the past several years. Sales are accomplished primarily through offices located in Germany, Austria, Belgium, France, Ireland, Italy, Norway, Spain and the United Kingdom. The Company plans to open a Singapore office in 1996. The Company has been invoicing predominantly in foreign currencies since January 1992. MARKETING The Company's marketing group is responsible for positioning and promoting the Company's products. The Company participates in various industry tradeshows, including MacWorld and COMDEX, and seeks to generate coverage of its products in a wide variety of trade publications. Although the Company did not engage in significant direct consumer marketing in 1995 in light of the large number of favorable articles about the Company's products which appeared in newspapers and computer magazines and constraints on the Company's ability to further increase production levels, the Company expects marketing and advertising expenses to increase significantly as the Company seeks to expand market awareness of its products. As is common practice in the industry, the Company's arrangements with its customers generally allow customers, in the event of a price decrease, credit equal to the difference between the price originally paid and the new decreased price on units in the customers' inventories on the date of the price decrease. When a price decrease is anticipated, the Company establishes reserves for amounts estimated to be reimbursed to qualifying customers. In addition, customers generally have the right to return excess inventory within specified time periods. There can be no assurance that these reserves will be sufficient or that any future returns or price protection charges will not have a material adverse effect on the Company's results of operations. The Company markets its products primarily through computer product distributors and retailers. Accordingly, since the Company grants credit to its customers, a substantial portion of outstanding accounts receivable are due from computer product distributors and certain large retailers. At December 31, 1995, the customers with the ten highest outstanding accounts receivable balances totaled $47.1 million or 43% of gross accounts 33 receivable, with one customer accounting for $15.2 million, or 14% of gross accounts receivable. If any one or a group of these customers' receivable balances should be deemed uncollectible, it would have a material adverse effect on the Company's results of operations and financial condition. During the year ended December 31, 1994, sales to Ingram Micro D, Inc., a distributor, accounted for 11% of sales. No other single customer accounted for more than 10% of the Company's sales in 1994 or 1995. See "Risk Factors--Certain Marketing and Sales Risks" for a discussion of certain risks relating to the marketing and sales of the Company's products. MANUFACTURING The Company's products are manufactured both by the Company at its facilities in Roy, Utah and by independent parties manufacturing products for the Company on a contract basis. Manufacturing activity generally consists of assembling various components, subcomponents and prefabricated parts manufactured by the Company or outside vendors. The Company currently has third-party manufacturing relationships with Seiko Epson (Zip drives), MegaMedia Computer (Zip disks), Sequel (Jaz drives) and First Engineering Plastics (Ditto drives). Although the Company substantially increased its manufacturing capacity (through both internal expansion and arrangements with third-party manufacturers) during 1995, the Company was not able to produce enough Zip drives and Zip disks in 1995 to fill all orders for such products due to component supply constraints and normal manufacturing start-up issues. To minimize its manufacturing costs, to take maximum advantage of its available personnel and facilities and to benefit from the expertise of experienced high-volume manufacturing companies, the Company plans to use third-party manufacturers to produce a majority of its products in the future. There can be no assurance that the Company will be successful in establishing and managing such third-party manufacturing relationships, or that third-party manufacturers will be able to meet the Company's quantity or quality requirements for manufactured products. Moreover, the Company may grant certain of its third-party manufacturers, among others, the right to sell significant quantities of the Zip and Jaz drives they produce for their own account, thereby reducing the supply of such drives to the Company and increasing competition. See "Risk Factors--Reliance on Non-Binding Contract Manufacturing Relationships." Many components incorporated in, or used in the manufacture of, the Company's products are currently only available from sole source suppliers. Moreover, the Company has experienced difficulty in the past, is currently experiencing difficulty, and expects to continue to experience difficulty in the future, in obtaining a sufficient supply of many key components. For example, many of the integrated circuits used in the Company's Zip and Jaz drives are currently available only from sole source suppliers. The Company has been unable to obtain a sufficient supply of certain of these integrated circuits due to industry-wide shortages. In addition, the Company has been advised by certain sole source suppliers, including the manufacturers of critical integrated circuits for Zip and Jaz, that they do not anticipate being able to fully satisfy the Company's demand for components during 1996. These component shortages have limited the Company's ability to produce sufficient Zip drives to meet market demand and have limited the Company's ability to implement certain cost reduction and productivity improvement plans, and the Company expects that the shortage of components may limit production of Zip and Jaz products for the foreseeable future. The Company also experienced difficulty during 1995 in obtaining a sufficient supply of the servowriting equipment used in the manufacture of Zip disks. Such equipment shortages in 1995 limited the Company's production of Zip disks, and there can be no assurance that similar equipment shortages will not occur in the future. The Company purchases all of its sole and limited source components and equipment pursuant to purchase orders placed from time to time and has no guaranteed supply arrangements. The inability to obtain sufficient components and equipment, or to obtain or develop alternative sources of supply at competitive prices and quality or to avoid manufacturing delays, could prevent the Company from producing sufficient quantities of its products to satisfy market demand, result in delays in product shipments, increase the Company's material or manufacturing costs or cause an imbalance in the inventory level of certain components. Moreover, difficulties in obtaining sufficient components may cause the Company to modify the design of its products to use a more readily available component, and such design modifications may result in product performance problems. Any or all of these problems could in turn result in the loss of customers, provide an opportunity for competing 34 products to achieve market acceptance and otherwise adversely affect the Company's business and financial results. See "Risk Factors--Shortages of Critical Components; Absence of Supply Contracts; Dependence on Suppliers." The Company had a backlog as of January 28, 1996 of approximately $157 million, compared to a backlog at the end of January 1995 of approximately $5 million. Substantially all of the January 28, 1996 backlog was related to the Company's Zip and Jaz products, for which the Company has experienced component shortages. Based in part on the Company's current estimates regarding the expected availability of components (which estimates are based on information provided to the Company by its suppliers, the Company's current inventory of components, sales recorded since January 28, 1996 and the Company's experience in its business) and the Company's manufacturing capabilities, the Company believes that it will be able to fill all orders in the January 28, 1996 backlog during the first half of the current fiscal year, unless such orders are scheduled for delivery outside the first half of 1996 or first cancelled or rescheduled. However, there can be no assurance that the Company's current estimates regarding the expected availability of components will in fact turn out to be correct. See "Risk Factors -- Shortages of Critical Components; Absence of Supply Contracts; Dependence on Suppliers." In addition, the purchase agreements or purchase orders pursuant to which orders are made generally allow the customer to cancel orders without penalty, and the Company has experienced some cancellations or reschedulings of orders in backlog. Moreover, it is common in the industry during periods of product shortages for customers to engage in practices such as double ordering in order to increase a customer's allowance of available product. Accordingly, the Company's backlog as of any particular date should not be relied upon as an indication of the Company's actual sales for any future period. PRODUCT DEVELOPMENT An important element of the Company's business strategy is the ongoing enhancement of existing products and the development of new products. During 1994 and 1995, the Company's product development efforts were primarily devoted to the development of its Zip and Jaz products, which began commercial shipment in March 1995 and December 1995, respectively. During 1996 the Company expects that its development efforts will be primarily focused on enhancing the features, developing higher capacity versions and reducing the production costs of its existing Zip, Jaz and Ditto products. In particular, there are projects underway to develop higher capacity removable-media disk drives and tape products, to develop different system interfaces for the Company's removable-media disk drive products, such as IDE interface versions of Zip and Jaz, and to develop smaller subsystem versions of the Company's products, including a version of Zip which could be installed in laptop computers. During 1993, 1994 and 1995, the Company's research and development expenses were $18,972,000, $15,438,000 and $19,576,000, respectively (or 12.9%, 10.9% and 6.0%, respectively, of sales). The decline in research and development spending from 1993 to 1994 was the result of the Company's decision to discontinue certain research and development projects relating to floptical technology, digital audiotape technology, and thin-film head development. Research and development spending in 1995 was primarily related to efforts focused on the Company's Zip, Jaz and Ditto product lines. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company operates in an industry that is subject to both rapid technological change and rapid change in consumer demands. For example, over the last 10 years the typical hard disk drive included in a new personal computer has increased in capacity from approximately 40 MBs to over 1 GB while the price of a hard disk drive has remained constant or even decreased. The Company's future success will depend in significant part on its ability to continually develop and introduce, in a timely manner, new removable disk drives and tape products with improved features, and to develop and manufacture those new products within a cost structure that enables the Company to sell such products at lower prices than those of comparable products today. There can be no assurance that the Company will be successful in developing, manufacturing and marketing new and enhanced products that meet both the performance and price demands of the data storage market. COMPETITION The Company believes that its Zip and Jaz products compete most directly with other removable-media data storage devices, such as magnetic cartridge disk drives, optical disk drives and "floptical" disk drives. 35 Current suppliers of removable-media data storage devices include Syquest Technology (which offers magnetic disk drives with removable cartridges based on hard drive technology), Panasonic (which offers the Power Drive, a removable optical drive) and Sony (which offers the MD-DATA drive, a disk drive based on removable magneto-optical technology). Although the Company believes that its Zip and Jaz products offer price, performance or usability advantages over the other removable-media storage devices available today, the Company believes that the price, performance and usability of existing removable-media products will improve and that other companies will introduce new removable-media storage devices. Accordingly, the Company believes its Zip and Jaz products will face increasingly intense competition. In particular, a consortium comprised of Compaq Computer, 3M and MKE has announced the Floptical 120, a high-capacity floptical drive that is compatible with conventional floppy disks. In addition, both Mitsumi and Swan Instruments are expected to introduce high-capacity, removable-media disk drives in 1996 that would also directly compete with Zip and Jaz. As new and competing removable-media storage solutions are introduced, it is possible that any such solution that achieves a significant market presence or establishes a number of significant OEM relationships will emerge as an industry standard and achieve a dominant market position. If such is the case, there can be no assurance that the Company's products would achieve significant market acceptance, particularly given the Company's size and market position vis-a-vis other competitors. To the extent that Zip and Jaz drives are used for incremental primary storage capacity, they also compete with conventional hard disk drives, which are offered by companies such as Seagate Technology, Western Digital Corporation, Quantum Corporation, Conner Peripherals (which has announced its pending acquisition by Seagate Technology), Micropolis Corporation and Maxtor Corporation, as well as integrated computer manufacturers such as Hewlett-Packard, IBM, Fujitsu, Hitachi and Toshiba. In addition, the leading suppliers of conventional hard disk drives could at any time determine to enter the removable-media storage market. The Company believes that it is currently the only source of supply for the disks used in its disk drives. However, this situation may change either as a result of another party succeeding in producing disks that are compatible with Zip and Jaz drives without infringing the Company's proprietary rights, or as a result of licenses granted by the Company to other parties. The Company's tape drives compete in the market for backup data storage with other QIC and DC2000-type products (which includes QIC and Irwin), including parallel port interface products. DC2000-type products currently offer capacities up to 4 GBs with compression. The Company's two major competitors in the tape drive market are Conner Peripherals and Colorado Memory Systems, a division of Hewlett-Packard. Tape drives may in the future encounter increased competition from other forms of removable-media storage devices. The tapes used in the Company's tape drives are available from a number of sources and the Company is not the primary source of supply for these tapes. In the OEM market for both its disk drives and tape drives, the Company competes with the vendors mentioned above, as well as with the manufacturers of personal computers, who may elect to manufacture data storage devices themselves. The Company intends to license its products or technology to other computer manufacturers on a royalty-bearing basis in order to increase market use and acceptance of its products and help promote them as industry standards. Accordingly, the Company expects to compete in the future with licensees of the Company's products. The Company believes that most consumers distinguish among competitive data storage products on the basis of some or all of the following criteria: price (cost per unit and cost per megabyte of storage capacity), performance (speed and capacity), functionality (reliability, product size and removability), ease of installation and use, and security of data. Price is a particularly important factor with respect to the Company's mass-market products (the Zip drive and the Ditto 420 and Ditto Easy 800 tape drives). An additional competitive consideration, particularly in the OEM market, is the size (form factor) of the drive. Winchester drives are available in 5 1/4-inch, 3 1/2-inch, 2 1/2-inch and 1.8-inch form factors. The most common form factor for Winchester and floppy drives is 3 1/2-inches. The Company currently offers 3 1/2-inch Zip, Jaz and Ditto drives and 5 1/4-inch Bernoulli disk drives. 36 The data storage industry is highly competitive, and the Company expects that competition will substantially increase in the future. In addition, the data storage industry is characterized by rapid technological development. The Company competes with a number of companies that have greater financial, manufacturing and marketing resources than the Company. The introduction by a competitor of products with superior performance or substantially lower prices would adversely affect the Company's business. PROPRIETARY RIGHTS The Company relies on a combination of patent, copyright and trade secret laws to protect its technology. The Company has filed approximately 40 U.S. and foreign patent applications relating to its Zip and Jaz drives and disks, although there can be no assurance that such patents will issue. The Company holds over 50 U.S. and foreign patents, three of which relate to its Ditto products and the remainder of which relate to its Bernoulli products. Although the Company believes that a combination of patent rights (pursuant to a number of pending patent applications) and copyright protection should prevent another party from manufacturing and selling disks that work effectively with the Company's Zip and Jaz drives (except pursuant to a license from the Company), there can be no assurance that the steps taken by the Company to protect such technology will be successful. If another party were to succeed in producing and selling Zip- or Jaz-compatible disks, the Company's sales would be materially adversely affected. Moreover, because the Company's Zip and Jaz disks have significantly higher gross margins than the Zip and Jaz drives, the Company's net income would be disproportionately affected by any such sales shortfall. Due to the rapid technological change that characterizes the Company's industry, the Company believes that the success of its disk drives will also depend on the technical competence and creative skill of its personnel than on the legal protections afforded its existing drive technology. As is typical in the data storage industry, from time to time the Company has been, and may in the future be, notified that it may be infringing certain patents and other intellectual property rights of others. The Company, however, is not currently aware of any threatened or pending legal challenge to the technology which is incorporated in its products which it expects to have a material adverse effect on its business or financial results. The Company has in the past been engaged in several patent infringement lawsuits, both as plaintiff and defendant. There can be no assurance that future claims will not result in litigation. If infringement were established, the Company could be required to pay damages or be enjoined from selling the infringing product. In addition, there can be no assurances that the Company will be able to obtain any necessary licenses on satisfactory terms. See "Risk Factors--Dependence on Proprietary Technology." Certain technology used in the Company's products is licensed on a royalty-bearing basis from third parties, including the backup software included with the Company's Ditto products and certain patent rights relating to Zip. The Company is in the process of negotiating a definitive license agreement for the Ditto backup software and, although it has entered into a letter agreement regarding the Zip patent rights, is in the process of negotiating a more detailed license agreement for the Zip patent rights. The failure to execute definitive agreements or the termination of any such license arrangements could have a material adverse effect on the Company's business and financial results. EMPLOYEES As of December 31, 1995, the Company employed 1,667 persons (1,645 full-time and 22 part-time), including 143 in research and development, 1,209 in manufacturing, 139 in sales, marketing and service, 103 in general management and administration, and 73 in its European operations. The Company's business growth during 1995 has resulted in additional personnel needs and an increased level of responsibility for management personnel and the Company anticipates hiring a substantial number of new employees in the near future. There can be no assurance that the Company will be successful in hiring, integrating or retaining such personnel. PROPERTIES The Company currently leases an aggregate of approximately 210,000 square feet of space in seven buildings located in Roy, Utah, where its executive offices, manufacturing and distribution facilities, and primary research and development facilities are located. The leases for these buildings expire at various dates from 1998 to 2000 and provide for an aggregate base rent of approximately $1,100,000 for 1996. 37 The Company expects to lease an additional 70,000 square feet of space in the Roy area, which it estimates will cost an additional $765,000 in annual rent, by the end of 1996. Pending the availability of that space, the Company may rent additional space in the Roy area in 1996 on a temporary basis. The Company leases an 11,000 square foot facility in San Diego, California and a 10,000 square foot facility in San Jose, California, each for certain research and development activities. The Company may seek to increase its leased space in San Jose to approximately 50,000 square feet during 1996. The Company has also rented a 20,000 square foot facility in Freiburg, Germany for use as its European headquarters. In addition, the Company leases small sales offices, typically on a short-term basis, at 11 locations in the United States and in Canada, Austria, Belgium, France, Ireland, Italy, Spain and the United Kingdom. LEGAL PROCEEDINGS There are no legal proceedings, other than ordinary routine litigation incidental to its business, to which the Company or its subsidiaries is a party or of which any of their property is the subject. 38 MANAGEMENT The executive officers and directors of the Company are as follows:
NAME AGE POSITION - --------------------------------------- --------- ------------------------------------------------------------- Kim B. Edwards (1) 48 President, Chief Executive Officer and Director Leonard C. Purkis 47 Senior Vice President, Finance, and Chief Financial Officer Srini Nageshwar 53 Senior Vice President, Europe Anton J. Radman, Jr. 43 Senior Vice President, Strategic Business Development Leon J. Staciokas 68 Senior Vice President and Chief Internal Operating Officer M. Wayne Stewart 50 Senior Vice President, Operations Edward D. Briscoe 33 Vice President, Sales Reed M. Brown 42 Vice President, Manufacturing Timothy L. Hill 37 Vice President, Marketing Willard C. Kennedy 49 Vice President, Worldwide Logistics and Materials Donald R. Sterling 59 Vice President, Corporate Counsel and Secretary John G. Thompson 55 Vice President, Outsourcing David J. Dunn (1)(2) 65 Chairman of the Board of Directors Willem H.J. Andersen (3) 55 Director Robert P. Berkowitz (4) 60 Director Anthony L. Craig (1)(3) 50 Director Michael J. Kucha (1)(2)(4) 54 Director John R. Myers (1)(3) 59 Director John E. Nolan, Jr. (4) 68 Director The Honorable John E. Sheehan (3) 66 Director
- ------------------------ (1) Member of the Executive Committee (2) Member of the Nominating Committee (3) Member of the Compensation Committee (4) Member of the Audit Committee. Kim B. Edwards joined the Company as President and Chief Executive Officer on January 1, 1994. Mr. Edwards served as President and Chief Executive Officer of Gates Energy Products Inc., a manufacturer of rechargeable batteries and the successor of General Electric Battery Division, from March 1993 to December 1993. From January 1987 until March 1993, Mr. Edwards served in various other executive positions for Gates Energy Products Inc., including Vice President and General Manager of its Consumer Business Unit and Vice President of Marketing and Sales. Prior to that Mr. Edwards was employed for 18 years at General Electric Company in various marketing and sales positions. Leonard C. Purkis joined the Company as Senior Vice President, Finance and Chief Financial Officer in March 1995. Mr. Purkis also served as Treasurer of the Company from March 1995 until January 1996. Mr. Purkis joined Iomega following 12 years at General Electric Company, where his most recent assignment was as Senior Vice President of Finance at GE Capital Fleet Services. He also held positions in the Financial Services, Lighting and Plastics businesses, with assignments in Europe and the U.S. 39 Srini Nageshwar was promoted to Senior Vice President, Europe in April 1991. Mr. Nageshwar joined the Company in January 1991 as Vice President, Europe. Prior to joining the Company, Mr. Nageshwar was Executive Vice President for Marketing, Sales and Operations of OAZ Communications, a network fax server company, from February 1990 to December 1990. Prior to that, he was President and Chief Operating Officer of Cumulus Corp., a memory peripherals manufacturing company, from January 1989 to February 1990. Prior to that, Mr. Nageshwar spent 24 years in marketing and general management positions with Hewlett-Packard, a computer company, most recently as Value-Added Business Manager. Anton J. Radman, Jr., has been Senior Vice President, Strategic Business Development since April 1995. Mr. Radman joined the Company in April 1980 and his previous positions with the Company have included Senior Vice President, Sales and Marketing, Senior Vice President, Corporate Development, President of the Bernoulli Optical Systems Co. (BOSCO) subsidiary of the Company, Vice President, Research and Development, Vice President, OEM Products and Sales Manager, and Senior Vice President, Micro Bernoulli Division. Leon J. Staciokas has been Senior Vice President and Chief Internal Operating Officer since April 1993. Mr. Staciokas joined the Company in August 1987 as Senior Vice President - Operations. He served as acting Chief Executive Officer of the Company from October 1993 until January 1994. Mr. Staciokas plans to retire during 1996, although he may continue with the Company for some period of time in a consulting role. M. Wayne Stewart joined the Company as Senior Vice President, Operations in January 1996. Prior to that, Mr. Stewart was Vice President of Global Manufacturing Concepts and Engineering Services at Whirlpool Corporation, a consumer appliance company, from January 1995 to December 1995. From September 1970 to December 1994, Mr. Stewart was Manufacturing Manager for Hewlett-Packard. Edward D. Briscoe joined the Company as Vice President, Sales in January 1995. From May 1993 to January 1995, Mr. Briscoe was Director of Sales and Marketing for Apple Computer's Personal Interactive Electronics Division. Prior to that, Mr. Briscoe was Executive Assistant to the President of Apple USA. From July 1987 to April 1992, he held various sales management positions with Apple Computer, Inc. Previously, Mr. Briscoe was an Account Marketing Representative for IBM, Inc. from June 1984 to July 1987. Reed M. Brown joined the Company as Vice President, Manufacturing in February 1996. Prior to that, Mr. Brown was Director of Manufacturing at Quantum Corporation, a manufacturer of hard disk drives, from March 1994 to January 1996. From January 1979 to February 1994, Mr. Brown was Production Manager for Hewlett-Packard Company. Timothy L. Hill joined the Company as Vice President, Marketing in July 1994. Mr. Hill was Vice President, Marketing of Falcon Microsystems, a federal reseller and systems integrator, from August 1993 to July 1994. Prior to that, Mr. Hill was Director of Marketing and Sales for the Consumer Business Division of Gates Energy Products from January 1988 to August 1993. Prior to January 1988, Mr. Hill was Marketing Manager for the Consumer Camera Products Division of Polaroid Corporation, a producer of photography equipment and supplies. Willard C. Kennedy joined the Company as Vice President, Worldwide Logistics and Materials in November 1995. From January 1994 to November 1995, he was Senior Vice President and General Manager of the Digital Videocommunications Systems for Philips Consumer Electronics. He also held positions at Philips Consumer Electronics as Vice President of Logistics from October 1992 to January 1994 and Vice President of Purchasing from September 1990 to October 1992. Before joining Philips, Mr. Kennedy held a variety of management positions in manufacturing, purchasing and engineering over a period of 20 years with General Electric Company. Donald R. Sterling was promoted to Vice President, Corporate Counsel and Secretary in April 1994. Prior to that, he was Vice President for Legal Affairs and Secretary from August 1993 to March 1994. Mr. Sterling joined the Company in September 1988. 40 John G. Thompson has been Vice President, Outsourcing since January 1996. He was Vice President, Corporate Manufacturing from January 1993 to January 1996. Prior to that, Mr. Thompson was Vice President, Materials, Procurement and Engineering Services from March 1988 until January 1992. Mr. Thompson was Vice President/Controller of the Company from January 1988 until March 1988. David J. Dunn has been Chairman of the Board of Directors since 1980. Mr. Dunn has been Managing General Partner of Idanta Partners Ltd., a venture capital firm, since 1971. Willem H.J. Andersen has been a director of the Company since 1994. Mr. Andersen has been a private consultant since February 1995. From June 1992 until February 1995, he was Chief Executive Officer and a director of Comlinear Corporation, a semi-conductor manufacturer. From November 1986 until June 1992, he was Chief Executive Officer of Laser Magnetic Storage International Company, a designer and manufacturer of optical and tape mass-storage equipment. Mr. Andersen is a director of Analytical Survey, Inc. Robert P. Berkowitz has been a director of the Company since 1983. Mr. Berkowitz has been a private consultant since March 1992. From August 1991 until March 1992, he was President and Chief Executive Officer of CimTelligence Systems, a developer of process planning software for the manufacturing industry. Previously, he had been a private investor and a writer since August 1988. Anthony L. Craig has been a director of the Company since 1990. Mr. Craig has been President and Chief Executive Officer of Global Knowledge Network Incorporated, a worldwide provider of learning services for corporate information systems and technology, since February 1996. From October 1993 to January 1996, he was Vice President, Worldwide Sales Operations of Digital Equipment Corporation, a computer manufacturer. He was Senior Vice President, International of Oracle Corporation, a computer software company, from June 1992 until June 1993. From March 1992 until June 1992, he was a private investor. Previously, from June 1990 until February 1992, he was President and Chief Executive Officer of C3 Inc., a manufacturer of custom computing workstations. He is a director of Bell Industries, Inc. Michael J. Kucha has been a director of the Company since 1980. Mr. Kucha has been President and CEO of ERISS Corporation, an information services company, since January 1996. He has also been President of Melvin C. Dill Co., Inc., a manufacturer of industrial labels, since October 1990. He was a private investor from May 1989 until October 1990. He served as Chief Executive Officer of the Company from January 1987 until May 1989. John R. Myers has been a director of the Company since April 1994. Since July 1994, Mr. Myers has been Chairman of Garrett Aviation Services, a provider of modification and upgrade services for corporate jet aircraft. From December 1993 to July 1994, he was a private consultant. From June 1992 until October 1993, he was an executive officer of Thiokol Corporation, a manufacturer of rocket motors and specialty fastener devices, initially serving as Chief Operating Officer and later as Chief Executive Officer. From 1980 until 1992, he was President of Textron Lycoming, a producer of piston and turbine engines. He is a director of Curtiss-Wright Corporation. John E. Nolan, Jr. has been a director since 1993. Mr. Nolan has been a Partner at the law firm of Steptoe & Johnson since 1963. He is a director of Hooper Holmes, Inc. The Honorable John E. Sheehan has been a director of the Company since 1990. Mr. Sheehan, an entrepreneur since 1976, is a director and the principal stockholder of several of the privately owned enterprises which he founded. He is Chairman and Chief Executive Officer of Rhome Management Co., which provides oversight to his various corporate interests. He is also a member of the Board of Trustees for the Harvard Business School Alumni Association and Chairman of the Board of Trustees of the U.S. Naval Academy Alumni Association. Mr. Sheehan is a former member, Board of Governors of the Federal Reserve System. 41 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to the beneficial ownership of the Company's Common Stock as of January 31, 1996 by (i) each person or entity known to the Company to beneficially own 5% or more of the outstanding shares of Common Stock, (ii) each of the Company's directors and (iii) all directors and executive officers as a group.
NUMBER OF SHARES PERCENTAGE OF BENEFICIALLY OUTSTANDING OWNED (1) SHARES (2) -------------------- --------------- Idanta Partners Ltd. (3)..................................................... 7,989,678 13.6% 4660 La Jolla Village Drive Suite 775 San Diego, CA 92122 Willem H.J. Andersen (4)..................................................... 21,510 * Robert P. Berkowitz.......................................................... 0 -- Anthony L. Craig............................................................. 63,750 * David J. Dunn (5)............................................................ 8,331,414 14.1 Kim B. Edwards (6)........................................................... 735,525 1.2 Michael J. Kucha (7)......................................................... 37,758 * John R. Myers (8)............................................................ 21,750 * John E. Nolan, Jr. (9)....................................................... 67,500 * The Honorable John E. Sheehan (10)........................................... 306,000 * All current directors and executive officers as a group (20 persons) (11).......................................................... 11,736,798 19.2
- ------------------------ * Less than 1%. (1) The inclusion herein of any shares of Common Stock as beneficially owned does not constitute an admission of beneficial ownership of those shares. Unless otherwise indicated, each person listed above has sole investment and voting power with respect to the shares listed. In accordance with the rules of the Securities and Exchange Commission (the "SEC"), each person is deemed to beneficially own (i) any shares issuable upon the exercise of stock options held by such person that are currently exercisable or that become exercisable within 60 days after January 31, 1996 (and any reference in these footnotes to shares subject to stock options held by the stockholder in question refers only to such shares) and (ii) any shares issuable to such person under the Company's 1991 Stock Purchase Plan within 60 days after January 31, 1996 (and any reference in these footnotes to shares issuable to the stockholder in question under the 1991 Stock Purchase Plan refers to only such shares). (2) Number of shares deemed outstanding for purposes of calculating these percentages is comprised of the 58,923,372 shares outstanding as of January 31, 1996, plus any shares subject to stock options held by the person in question and any shares issuable to the person in question under the 1991 Stock Purchase Plan. (3) David J. Dunn, a director of the Company, Dev Purkayastha and Perse Failey are the general partners of Idanta Partners Ltd. and share voting and dispositive power with respect to such shares. (4) Includes 18,750 shares subject to a stock option held by Mr. Andersen. (5) Includes 7,989,678 shares held by Idanta Partners Ltd., of which Mr. Dunn is Managing General Partner, and 341,736 shares held by a family trust, of which Mr. Dunn is trustee. (6) Includes 496,875 shares subject to stock options held by Mr. Edwards. Also includes 3,000 shares held by Mr. Edwards' wife, as to which shares Mr. Edwards disclaims beneficial ownership. (7) Includes 7,500 shares held by Mr. Kucha as custodian for his children, as to which shares Mr. Kucha disclaims beneficial ownership. Also includes 258 shares held as co-trustee with his wife, as to which shares Mr. Kucha has shared voting and investment power, and 30,000 shares subject to stock options held by Mr. Kucha. (8) Includes 18,750 shares subject to a stock option held by Mr. Myers. (9) Includes 37,500 shares subject to a stock option held by Mr. Nolan. 42 (10) Includes 93,750 shares subject to a stock option held by Mr. Sheehan. Also includes 66,000 shares held by Mr. Sheehan's wife, as to which shares Mr. Sheehan disclaims beneficial ownership. (11) Includes 7,989,678 shares of Common Stock held by Idanta Partners Ltd. Also includes an aggregate of 2,280,030 shares subject to stock options and an aggregate of 1,191 shares issuable under the 1991 Stock Purchase Plan. DESCRIPTION OF NOTES The Notes are to be issued under an Indenture, to be dated as of March , 1996 (the "Indenture"), between the Company and State Street Bank and Trust Company, as Trustee (the "Trustee"), a copy of which is filed as an exhibit to the Registration Statement. The following summaries of certain provisions of the Notes and the Indenture, though accurate, do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all the provisions of the Indenture, including the definitions therein of certain terms. As used in this "Description of Notes," the "Company" refers to Iomega Corporation and does not include its subsidiaries. GENERAL The Notes will represent unsecured general obligations of the Company subordinate in right of payment to certain other obligations of the Company as described under "Subordination of Notes" and convertible into Common Stock as described under "Conversion of Notes." The Notes will be limited to $40,000,000 aggregate principal amount ($46,000,000 if the Underwriter's over-allotment option is exercised in full), will be issued only in denominations of $1,000 or any integral multiple thereof and will mature on March 15, 2001, unless earlier redeemed at the option of the Company or repurchased upon a Repurchase Event (as defined). The Notes will be issued only in fully registered form, without coupons. The Indenture does not contain any financial covenants or restrictions on the payment of dividends, the incurrence of Senior Indebtedness or issuance or repurchase of securities of the Company. The Indenture contains no covenants or other provisions to afford protection to holders of Notes in the event of a highly leveraged transaction or a change in control of the Company except to the extent described under "Repurchase at Option of Holders Upon Repurchase Event" below. The Notes will bear interest at the annual rate set forth on the front cover of this Prospectus from March , 1996, payable semiannually on March 15 and September 15 of each year, commencing on September 15, 1996, to the holders of record at the close of business on the preceding March 1 or September 1, as the case may be (other than with respect to a Note or portion thereof redeemed on a redemption date or repurchased in connection with a Repurchase Event after the record date and prior to (but excluding) the next succeeding interest payment date, in which case accrued interest shall be payable to the extent required as part of the redemption or repurchase price). Principal of, and premium, if any, and interest on the Notes will be payable at the offices or agencies of the Company in New York, New York, and the Notes may be presented for registration of transfer and exchange, conversion or redemption at the office of the Trustee in New York, New York. In addition, payment of interest may, at the option of the Company, be made by check mailed to the address of the registered holder of the Note, provided that a holder of Notes with an aggregate principal amount equal to or in excess of $5,000,000 will be paid by wire transfer in immediately available funds at the election of such holder. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. No service charge will be made for any registration of transfer or exchange, conversion or redemption of Notes, but the Company may require payment of a sum sufficient to cover any tax, assessment or other governmental charge that may be imposed in connection therewith (other than any tax solely in respect of the issue of Common Stock upon conversion). CONVERSION OF NOTES The holders of Notes will be entitled at any time after 60 days following the latest date of original issuance of the Notes through the close of business on the final maturity date of the Notes, subject to prior redemption or repurchase, to convert the principal amount of any Notes or portions thereof (in denominations of $1,000 or integral multiples thereof) into Common Stock of the Company, at the conversion price set forth on the cover 43 page of this Prospectus, subject to adjustment as described below. Except as described below, no adjustment will be made on conversion of any Notes for interest accrued thereon or for dividends on any shares of Common Stock issued upon conversion of such Notes. If any Notes not called for redemption are surrendered for conversion after a record date for the payment of interest and prior to the next succeeding interest payment date, such Notes must be accompanied by funds payable to the Company equal to the interest payable on such succeeding interest payment date on the principal amount being converted. The Company is not required to issue fractional shares of Common Stock upon conversion of Notes and, in lieu thereof, will pay a cash adjustment based upon the market price of Common Stock on the last business day prior to the date of conversion. In the case of Notes called for redemption, conversion rights will expire at the close of business on the second business day preceding the date fixed for redemption unless the Company defaults in payment of the redemption price. In the case of a Note in respect of which a holder is exercising its option to require repurchase upon a Repurchase Event, the conversion right will expire at the close of business on the repurchase date unless the Company defaults in payment of the repurchase price. The initial conversion price of $ per share of Common Stock is subject to adjustment (under formulae set forth in the Indenture) in certain events, including: (i) the issuance of Common Stock as a dividend or distribution on Common Stock of the Company; (ii) certain subdivisions and combinations of the Common Stock; (iii) the issuance to all holders of Common Stock of certain rights or warrants to purchase Common Stock at less than the Current Market Price (as defined) of the Common Stock; (iv) the distribution to all holders of Common Stock of shares of capital stock of the Company (other than Common Stock) or evidences of indebtedness of the Company or assets (including securities, but excluding those rights, warrants, dividends and distributions referred to above and dividends and distributions in connection with the liquidation, dissolution or winding up of the Company or paid in cash); (v) distributions consisting of cash, excluding any quarterly cash dividend on the Common Stock to the extent that the aggregate cash dividend per share of Common Stock in any quarter does not exceed the greater of (x) the amount per share of Common Stock of the next preceding quarterly cash dividend on the Common Stock to the extent that such preceding quarterly dividend did not require an adjustment of the conversion price pursuant to this clause (v) (as adjusted to reflect subdivisions or combinations of the Common Stock) and (y) 3.75% of the average of the daily Closing Prices (as defined) of the Common Stock for the ten consecutive Trading Days (as defined) immediately prior to the date of declaration of such dividend, and excluding any dividend or distribution in connection with the liquidation, dissolution or winding up of the Company; (vi) payment in respect of a tender or exchange offer made by the Company or any subsidiary of the Company for the Common Stock to the extent that the cash and the value of any other consideration included in such payment per share of Common Stock exceeds the Current Market Price per share of Common Stock on the Trading Day next succeeding the last date on which tenders or exchanges may be made pursuant to such tender or exchange offer; and (vii) payment in respect of a tender offer or exchange offer by a person other than the Company or any subsidiary of the Company in which, as of the closing date of the offer, the Board of Directors is not recommending rejection of the offer. If an adjustment is required to be made as set forth in clause (v) above as a result of a distribution that is a quarterly dividend, such adjustment would be based upon the amount by which such distribution exceeds the amount of the quarterly cash dividend permitted to be excluded pursuant to such clause (v). The adjustment referred to in clause (vii) above will only be made if the tender offer or exchange offer is for an amount which increases that person's ownership of Common Stock to more than 25% of the total shares of Common Stock outstanding and if the cash and value of any other consideration included in such payment per share of Common Stock exceeds the Current Market Price per share of Common Stock on the business day next succeeding the last date on which tenders or exchanges may be made pursuant to such tender or exchange offer. The adjustment referred to in clause (vii) above will not be made, however, if, as of the closing of the offer, the offering documents with respect to such offer disclose a plan or an intention to cause the Company to engage in a consolidation or merger of the Company or a sale of all or substantially all of the Company's assets. Upon conversion of the Notes, the holders will receive, in addition to the Common Stock issuable upon such conversion, an appropriate number of Common Stock purchase rights issuable under the Company's Rights Plan (as defined) and described under "Description of Capital Stock -- Rights Plan"), whether or not such rights have separated from the Common Stock at the time of conversion. In addition, the Indenture provides that if the Company implements a new stockholders' rights plan, such new plan must provide that upon 44 conversion of the Notes the holders will receive, in addition to the Common Stock issuable upon such conversion, the rights issuable under such plan (whether or not such rights have separated from the Common Stock at the time of conversion). In the case of (i) any reclassification or change of the Common Stock (other than one described in clause (ii) of the first sentence of the second preceeding paragraph) or (ii) a consolidation, merger or combination involving the Company or a sale or conveyance to another person of the property and assets of the Company as an entirety or substantially as an entirety, in each case as a result of which holders of Common Stock shall be entitled to receive stock, securities, or other property or assets (including cash) with respect to or in exchange for such Common Stock, the holders of the Notes then outstanding will be entitled thereafter to convert such Notes into the kind and amount of shares of stock, other securities or other property or assets (including cash) which they would have owned or been entitled to receive upon such reclassification, change, consolidation, merger, combination, sale or conveyance had such Notes been converted into Common Stock immediately prior to such reclassification, change, consolidation, merger, combination, sale or conveyance, assuming that a holder of Notes would not have exercised any rights of election as to the stock, other securities or other property or assets receivable in connection therewith. In the event of a taxable distribution to holders of Common Stock (or other transaction) which results in any adjustment of the conversion price, the holders of the Notes may, in certain circumstances, be deemed to have received a distribution subject to United States federal income tax as a dividend; in certain other circumstances, the absence of such an adjustment may result in a taxable dividend to the holders of Common Stock. The Company, from time to time and to the extent permitted by law, may reduce the conversion price by any amount for any period of at least 20 days, in which case the Company shall give at least 15 days notice of such reduction, if the Board of Directors has made a determination that such reduction would be in the best interests of the Company, which determination shall be conclusive. The Company may, at its option, make such reductions in the conversion price, in addition to those set forth above, as the Board of Directors deems advisable to avoid or diminish any income tax to holders of Common Stock resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for United States federal income tax purposes. No adjustment in the conversion price will be required unless such adjustment would require a change of at least 1% in the conversion price then in effect; provided that any adjustment that would otherwise be required to be made shall be carried forward and taken in account in any subsequent adjustment. Except as stated above, the conversion price will not be adjusted for the issuance of Common Stock or any securities convertible into or exchangeable for Common Stock or carrying the right to purchase any of the foregoing. OPTIONAL REDEMPTION BY THE COMPANY The Notes are not entitled to any sinking fund. At any time on or after March 15, 1999, the Notes will be redeemable at the Company's option on at least 30 and not more than 60 days' notice as a whole or, from time to time, in part at the following prices (expressed as percentages of the principal amount), together with accrued interest to, but excluding, the date fixed for redemption:
YEAR REDEMPTION PRICE - ----------------------------------------------------------------------- ---------------- 1999................................................................... % 2000...................................................................
If fewer than all the Notes are to be redeemed, the Trustee will select the Notes to be redeemed by lot or, in its discretion, on a pro rata basis with such adjustments up to $1,000 in order to maintain the minimum denominations of the Notes. If any Note is to be redeemed in part only, a new Note or Notes in principal amount equal to the unredeemed principal portion thereof will be issued. If a portion of a holder's Notes are selected for partial redemption and such holder converts a portion of such Notes, such converted portion shall be deemed (so far as may be) to be taken from the portion selected for redemption. 45 REPURCHASE AT OPTION OF HOLDERS UPON REPURCHASE EVENT The Indenture provides that if a Repurchase Event (as defined) occurs, each holder of Notes shall have the right to require the Company to repurchase all of such holder's Notes, or any portion of the principal amount thereof that is an integral multiple of $1,000, on the date (the "Repurchase Date") that is 30 days after the date of the Company Notice (as defined), at a price in cash equal to 100% of the principal amount thereof (the "Repurchase Price"), plus accrued and unpaid interest to, but excluding, the Repurchase Date (subject to the right of holders of record on the relevant record date to receive interest due on an interest payment date that is on the Repurchase Date). Within 30 days after the occurrence of a Repurchase Event, the Company or, at the Company's request, the Trustee is obligated to give all holders of record of the Notes a notice (the "Company Notice") of the occurrence of such Repurchase Event and of the repurchase right arising as a result thereof (unless the Company shall have theretofore called for redemption all of the outstanding Notes). The Company must also deliver a copy of the Company Notice to the Trustee. To exercise the repurchase right, a holder of Notes must deliver on or before the 30th day after the date of the Company Notice written notice of the holder's exercise of such right, together with the Notes with respect to which the right is being exercised, duly endorsed for transfer to the Company. A "Repurchase Event" shall be deemed to have occurred at such time as: (i) any Person (including any syndicate or group which would be deemed to be a "person" under Section 13(d)(3) of the Exchange Act), other than the Company, any subsidiary of the Company, or any employee benefit plan of the Company or any such subsidiary, is or becomes the beneficial owner, directly or indirectly, through a purchase or other acquisition transaction or series of transactions (other than a merger or consolidation involving the Company), of shares of capital stock of the Company entitling such Person to exercise in excess of 50% of the total voting power of all shares of capital stock of the Company entitled to vote generally in elections of directors; or (ii) there occurs any consolidation of the Company with, or merger of the Company into, any other Person, any merger of another Person into the Company or any sale or transfer of all or substantially all of the assets of the Company to another Person (other than (a) any such transaction pursuant to which the holders of the Common Stock immediately prior to such transaction have, directly or indirectly, shares of capital stock of the continuing or surviving corporation immediately after such transaction which entitle such holders to exercise in excess of 50% of the total voting power of all shares of capital stock of the continuing or surviving corporation entitled to vote generally in the election of directors and (b) any merger (1) which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock of the Company, or (2) which is effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Common Stock solely into shares of common stock); provided, however, that a Repurchase Event shall not be deemed to have occurred if either (a) the Closing Price per share of the Common Stock for any five Trading Days within the period of ten consecutive Trading Days ending immediately before the Repurchase Event shall equal or exceed 105% of the conversion price of the Notes in effect on each such trading day or (b) at least 90% of the consideration (excluding cash payments for fractional shares) in the transaction or transactions constituting the Repurchase Event consists of shares of common stock traded on a national securities exchange or quoted on the Nasdaq National Market (or which will be so traded or quoted when issued or exchanged in connection with such Repurchase Event) and as a result of such transaction or transactions the Notes become convertible solely into such common stock. The term "beneficial owner" shall be determined in accordance with Rule 13d-3 promulgated by the Commission under the Exchange Act. To the extent applicable, the Company will comply with the provisions of Rule 13e-4 or any other tender offer rules, and will file a Schedule 13E-4 or any other schedule required under such rules, in connection with any offer by the Company to repurchase Notes at the option of the holders thereof upon a Repurchase Event. The Repurchase Event feature of the Notes may in certain circumstances make more difficult or discourage a takeover of the Company and, thus, the removal of incumbent management. The repurchase right is not the 46 result of management's knowledge of any effort to accumulate Common Stock or to obtain control of the Company by means of a merger, tender offer, solicitation, or otherwise, or part of a plan by management to adopt a series of anti-takeover provisions. Instead, this right is the result of negotiations between the Company and the Underwriter. The foregoing provisions would not necessarily afford holders of the Notes protection in the event of a highly leveraged transaction, a change in control of the Company or other transactions involving the Company that may adversely affect holders of the Notes. The Company's ability to repurchase Notes upon the occurrence of a Repurchase Event is subject to limitations. If a Repurchase Event were to occur, there can be no assurance that the Company would have sufficient financial resources, or would be able to arrange financing, to pay the repurchase price for all Notes tendered by holders thereof. In addition, the occurrence of certain Repurchase Events would constitute an event of default under certain of the Company's current debt agreements, and the Company's repurchase of Notes as a result of the occurrence of a Repurchase Event may be prohibited or limited by, or create an event of default under, the terms of future agreements relating to borrowings of the Company, including agreements relating to Senior Indebtedness. In the event a Repurchase Event occurs at a time when the Company is prohibited from purchasing Notes, the Company could seek the consent of its lenders to the purchase of the Notes or could attempt to refinance the borrowings that contain such prohibition. If the Company does not obtain such a consent or repay such borrowings, the Company would remain prohibited from purchasing Notes. Any failure by the Company to repurchase the Notes when required following a Repurchase Event would result in an Event of Default under the Indenture whether or not such repurchase is permitted by the subordination provisions of the Indenture. Any such default may, in turn, cause a default under Senior Indebtedness of the Company. As a result, in each case, any repurchase of the Notes would, absent a waiver, be prohibited under the subordination provisions of the Indenture until the Senior Indebtedness is paid in full. See "Subordination of Notes" below and "Risk Factors -- Subordination." SUBORDINATION OF NOTES The indebtedness evidenced by the Notes is subordinated, to the extent provided in the Indenture, to the prior payment in full of all Senior Indebtedness (as defined on page 48). In addition, as described more fully below, the Notes are effectively subordinated to all existing and future indebtedness and other liabilities of subsidiaries of the Company. At January 28, 1996, (a) the Company had approximately $60.3 million of outstanding indebtedness that would have constituted Senior Indebtedness and (b) subsidiaries of the Company had approximately $18.8 million of outstanding indebtedness and other liabilities (excluding (i) intercompany liabilities, (ii) indebtedness included in Senior Indebtedness because it is guaranteed directly or indirectly by the Company and (iii) liabilities of a type not required to be reflected on the balance sheet of such subsidiaries in accordance with generally accepted accounting principles), as to which the Notes would have been effectively subordinated. Upon any payment by the Company or distribution of assets of the Company resulting from any dissolution, winding up, liquidation or reorganization, the payment of the principal of, or premium, if any, or interest on the Notes is subordinated, to the extent provided in the Indenture, in right of payment to the prior payment in full in cash of all Senior Indebtedness. In the event of any acceleration of the Notes because of an Event of Default (as defined), the holders of any Senior Indebtedness then outstanding would be entitled to payment in full in cash of all obligations in respect of such Senior Indebtedness before the holders of the Notes are entitled to receive any payment or distribution in respect thereof. The Indenture will require that the Company promptly notify holders of Senior Indebtedness if payment of the Notes is accelerated because of an Event of Default. The Company also may not make any payment upon or in respect of the Notes if (i) a default in the payment of the principal of, premium, if any, interest, rent or other obligations in respect of Senior Indebtedness occurs and is continuing beyond any applicable period of grace or (ii) any other default occurs and is continuing with respect to Designated Senior Indebtedness (as defined) that permits holders of the Designated Senior Indebtedness as to which such default relates to accelerate its maturity and the Trustee receives a notice of such default (a "Payment Blockage Notice") from the Company or other person permitted to give such notice under the Indenture. Payments on the Notes may and shall be resumed (a) in case of a payment default, upon the date on 47 which such default is cured or waived and (b) in case of a nonpayment default, the earlier of the date on which such nonpayment default is cured or waived or 179 days after the date on which the applicable Payment Blockage Notice is received if the maturity of such Designated Senior Indebtedness has not been accelerated, unless the Indenture otherwise prohibits the payment at the time of such payment. No new period of payment blockage may be commenced pursuant to a Payment Blockage Notice unless and until (i) 365 days have elapsed since the effectiveness of the immediately prior Payment Blockage Notice and (ii) all scheduled payments of principal of, premium, if any, and interest on the Notes that have become due have been paid in full in cash. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice. By reason of the subordination provisions described above, holders of Senior Indebtedness may, in the event of the Company's bankruptcy, dissolution or reorganization, receive more, ratably, and holders of the Notes may receive less, ratably, than the other creditors of the Company. Such subordination will not prevent the occurrence of any Event of Default under the Indenture. The term "Senior Indebtedness" means the principal of, premium, if any, interest (including all interest accruing subsequent to the commencement of any bankruptcy or similar proceeding, whether or not a claim for post-petition interest is allowable as a claim in any such proceeding) and rent payable on or in connection with, and all fees, costs, expenses and other amounts accrued or due on or in connection with, Indebtedness of the Company, whether outstanding on the date of the Indenture or thereafter created, incurred, assumed, guaranteed or in effect guaranteed by the Company (including all deferrals, renewals, extensions or refundings of, or amendments, modifications or supplements to the foregoing), unless in the case of any particular Indebtedness the instrument creating or evidencing the same or the assumption or guarantee thereof expressly provides that such Indebtedness shall not be senior in right of payment to the Notes or expressly provides that such Indebtedness is "pari passu" or "junior" to the Notes. Notwithstanding the foregoing, Senior Indebtedness shall not include any Indebtedness of the Company to any subsidiary of the Company, a majority of the voting stock of which is owned, directly or indirectly, by the Company. The term "Indebtedness" means, with respect to any Person, and without duplication, (a) all indebtedness, obligations and other liabilities (contingent or otherwise) of such Person for borrowed money (including obligations of the Company in respect of overdrafts, foreign exchange contracts, currency exchange agreements, interest rate protection agreements, and any loans or advances from banks, whether or not evidenced by notes or similar instruments) or evidenced by bonds, debentures, notes or similar instruments (whether or not the recourse of the lender is to the whole of the assets of such Person or to only a portion thereof) (other than any account payable or other accrued current liability or obligation incurred in the ordinary course of business in connection with the obtaining of materials or services), (b) all reimbursement obligations and other liabilities (contingent or otherwise) of such Person with respect to letters of credit, bank guarantees or bankers' acceptances, (c) all obligations and liabilities (contingent or otherwise) in respect of leases of such Person as lessee required, in conformity with generally accepted accounting principles, to be accounted for as capitalized lease obligations on the balance sheet of such Person, and all obligations and other liabilities (contingent or otherwise) under any lease or related document (including a purchase agreement) in connection with any lease of real property which provides that such Person is contractually obligated to purchase or cause a third party to purchase the leased property and thereby guarantee a minimum residual value of the leased property to the lessor and the obligations of such Person under such lease or related document to purchase or to cause a third party to purchase such leased property, (d) all obligations of such Person (contingent or otherwise) with respect to an interest rate or other swap, cap or collar agreement or other similar instrument or agreement or foreign currency hedge, exchange, purchase or similar instrument or agreement, (e) all direct or indirect guaranties or similar agreements by such Person in respect of, and obligations or liabilities (contingent or otherwise) of such Person to purchase or otherwise acquire or otherwise assure a creditor against loss in respect of, indebtedness, obligations or liabilities of another Person of the kind described in clauses (a) through (d), (f) any indebtedness or other obligations described in clauses (a) through (d) secured by any mortgage, pledge, lien or other encumbrance existing on property which is owned or held by such Person, regardless of whether the indebtedness or other obligation secured thereby shall have been assumed by such Person and, (g) any and all deferrals, renewals, extensions and refunding of, or amendments, modifications or supplements to, any indebtedness, obligation or liability of the kind described in clauses (a) through (f). The term "Designated Senior Indebtedness" means Indebtedness under the Company's existing 48 loan agreements with Wells Fargo and First Security Bank of Utah, and any other Senior Indebtedness if the instrument creating or evidencing the same or the assumption or guarantee thereof (or related agreements or documents to which the Company is a party) expressly provides that such Indebtedness shall be "Designated Senior Indebtedness" for purposes of the Indenture (provided that such instrument, agreement or other document may place limitations and conditions on the right of such Senior Indebtedness to exercise the rights of Designated Senior Indebtedness). The Notes are obligations exclusively of the Company. Since the operations of the Company are partially conducted through its subsidiaries, the cash flow and the consequent ability to service debt, including the Notes, of the Company are partially dependent upon the earnings of such subsidiaries and the distribution of those earnings, or upon loans or other payments of funds, by those subsidiaries to the Company. The subsidiaries are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the Notes or to make any funds available therefor, whether by dividends, distributions, loans or other payments. In addition, the payment of dividends or distributions and the making of loans and other payments to the Company by any such subsidiaries could be subject to statutory or contractual restrictions, could be contingent upon the earnings of those subsidiaries, and are subject to various business considerations. Any right of the Company to receive any assets of any of its subsidiaries upon their liquidation or reorganization (and the consequent right of the holders of the Notes to participate in those assets) will be effectively subordinated to the claims of that subsidiary's creditors (including trade creditors), except to the extent that the Company is itself recognized as a creditor of such subsidiary, in which case the claims of the Company would still be subordinate to any security interest in the assets of such subsidiary and any indebtedness of such subsidiary senior to that held by the Company. At January 28, 1996, the Company had approximately $60.3 million of outstanding indebtedness which would have constituted Senior Indebtedness and subsidiaries of the Company had approximately $18.8 million of outstanding indebtedness and other liabilities (excluding (i) intercompany liabilities, (ii) indebtedness included in Senior Indebtedness because it is guaranteed directly or indirectly by the Company and (iii) liabilities of a type not required to be reflected on the balance sheet of such subsidiaries in accordance with generally accepted accounting principles) to which the Notes would have been effectively subordinated. The Company intends to use a portion of the net proceeds of this offering to repay a portion of the outstanding amounts under its bank loan agreements, which constitute Senior Indebtedness (although it may subsequently borrow additional amounts under such loan agreements). See "Use of Proceeds". The Indenture contains no limitations on either (i) the amount of additional indebtedness, including Senior Indebtedness, which the Company may create, incur, assume or guarantee, or (ii) the amount of indebtedness and other liabilities which any subsidiary may create, incur, assume or guarantee. In the event that, notwithstanding the foregoing, the Trustee or any holder of Notes receives any payment or distribution of assets of the Company of any kind in contravention of any of the subordination provisions of the Indenture, whether in cash, property or securities, including, without limitation, by way of set-off or otherwise, in respect of the Notes before all Senior Indebtedness is paid in full, then such payment or distribution will be held by the recipient in trust for the benefit of and shall be paid over to the holders of Senior Indebtedness or their representative or representatives to the extent necessary to make payment in full of all Senior Indebtedness remaining unpaid, after giving effect to any concurrent payment or distribution, or provision therefor, to or for the holders of Senior Indebtedness. The Company is obligated to pay reasonable compensation to the Trustee and to indemnify the Trustee against any losses, liabilities or expenses incurred by it in connection with its duties relating to the Notes. The Trustee's claims for such payments will be senior to claims of holders of the Notes in respect of all funds collected or held by the Trustee. EVENTS OF DEFAULT AND REMEDIES An Event of Default is defined in the Indenture as being: default in payment of the principal of or premium, if any, on the Notes (including, without limitation, any redemption price or repurchase price payable with respect to any Note); default for 30 days in payment of any installment of interest on the Notes; default by the 49 Company for 60 days after notice in the observance or performance of any other covenants in the Indenture; failure of the Company or any subsidiary to make any payment at maturity in respect of Money Indebtedness (as defined) in an amount in excess of $25,000,000 and continuance of such failure for 30 days; default by the Company or any subsidiary with respect to any Money Indebtedness, which default results in the acceleration of Money Indebtedness in an amount in excess of $25,000,000 without such Money Indebtedness having been discharged or such acceleration having been cured, waived, rescinded or annulled within 30 days after notice as provided in the Indenture; or certain events involving bankruptcy, insolvency or reorganization of the Company. The Indenture provides that the Trustee may withhold notice to the holders of Notes of any default (except in payment of principal, premium, if any, or interest with respect to the Notes) if the Trustee in good faith determines it in the interest of the holders of the Notes to do so. The Indenture provides that if an Event of Default shall have occurred and be continuing, the Trustee or the holders of not less than 25% in principal amount of the Notes then outstanding may declare the principal of and accrued interest on the Notes to be due and payable immediately, but if the Company shall cure all defaults (except the nonpayment of principal of, premium, if any, and interest on any of the Notes which shall have become due by acceleration) and certain other conditions are met, with certain exceptions, such declaration may be canceled and past defaults may be waived by the holders of a majority of the principal amount of the Notes then outstanding. In the case of certain events of bankruptcy, insolvency or reorganization, the principal of and accrued interest on the Notes shall automatically become and be immediately due and payable. The holders of a majority in principal amount of the Notes then outstanding shall have the right to direct the time, method and place of conducting any proceedings for any remedy available to the Trustee, subject to certain limitations specified in the Indenture. MODIFICATIONS OF THE INDENTURE The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than a majority in principal amount of the Notes at the time outstanding, to modify the Indenture or any supplemental indenture or the rights of the holders of the Notes, except that no such modification shall (i) extend the fixed maturity of any Note, reduce the rate or extend the time for payment of interest thereon, reduce the principal amount thereof or premium, if any, thereon, reduce any amount payable upon redemption thereof, change the obligation of the Company to repurchase any Note upon the happening of a Repurchase Event in a manner adverse to holders of Notes, impair the right of a holder to institute suit for the payment thereof, change the currency in which the Notes are payable, impair the right to convert the Notes into Common Stock subject to the terms set forth in the Indenture or modify the provisions of the Indenture with respect to the subordination of the Notes in a manner adverse to the holders of the Notes in any material respect, without the consent of the holder of each Note so affected, or (ii) reduce the aforesaid percentage of Notes without the consent of the holders of all of the Notes then outstanding. SATISFACTION AND DISCHARGE The Company may discharge its obligations under the Indenture while Notes remain outstanding if (i) all outstanding Notes will become due and payable at their scheduled maturity within one year or (ii) all outstanding Notes are redeemed within one year, and, in either case, the Company has deposited with the Trustee an amount sufficient to pay and discharge all outstanding Notes on the date of their scheduled maturity or the scheduled date of redemption. GOVERNING LAW The Indenture and the Notes provide that they are to be governed in accordance with the laws of the Commonwealth of Massachusetts. THE TRUSTEE The Trustee under the Indenture has been appointed by the Company as the paying agent, conversion agent, registrar and custodian with regard to the Notes. The Trustee or its affiliates may from time to time in the future provide banking and other services to the Company in the ordinary course of their business. 50 The Indenture contains certain limitations on the rights of the Trustee, in the event it or any of its affiliates becomes a creditor of the Company, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee and its affiliates will be permitted to engage in other transactions with the Company; provided, however, that if the Trustee or any such affiliate acquires any conflicting interest (as defined), it must eliminate such conflict or resign. In case an Event of Default shall occur (and shall not be cured), the Trustee will be required to use the same degree of care and skill as a prudent person would use under the circumstances in the conduct of his own affairs. Subject to such provisions, the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any of the holders of Notes, unless they shall have offered to the Trustee reasonable security or indemnity. DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists 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. As of December 31, 1995, there were outstanding 58,819,335 shares of Common Stock held by 2,634 stockholders of record. Of the 5,000,000 authorized shares of Preferred Stock, 250,000 shares have been designated as Series C Junior Participating Preferred Stock (none of which are outstanding), and 4,750,000 shares remain available for designation by the Board of Directors in the future. The following summary of certain provisions of the Company's Common Stock, Preferred Stock, Certificate of Incorporation and By-laws is not intended to be complete and is qualified by reference to the provisions of applicable law and to the Company's Certificate of Incorporation and By-laws included as exhibits to the Registration Statement of which this Prospectus is a part. See "Available Information." COMMON STOCK Holders of Common Stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Accordingly, holders of a majority of the outstanding shares of Common Stock entitled to vote in any election of directors may elect all of the directors standing for election. Holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared by the Board of Directors out of funds legally available therefor, subject to any preferential dividend rights of the holders of any outstanding Preferred Stock. Upon the liquidation, dissolution or winding-up of the Company, holders of Common Stock are entitled to receive ratably the net assets of the Company available for distribution after the payment of all debts and other liabilities of the Company and subject to the prior rights of the holders of any outstanding Preferred Stock. Holders of Common Stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of Common Stock are, and the shares offered hereby will be, when issued and paid for, fully paid and nonassessable. The rights, preferences and privileges of holders of Common Stock are subject to, and may be adversely affected by, the rights of holders of any shares of Preferred Stock that the Company may issue in the future. PREFERRED STOCK The Board of Directors is authorized, subject to any limitations prescribed by law, without further stockholder approval, to issue from time to time up to 4,750,000 shares of Preferred Stock, in one or more series. Each such series of Preferred Stock shall have such number of shares, designations, preferences, voting powers, qualifications and special or relative rights or privileges as shall be determined by the Board of Directors, which may include, among others, dividend rights, voting rights, redemption and sinking fund provisions, liquidation preferences, conversion rights and preemptive rights. The stockholders of the Company have granted the Board of Directors authority to issue the Preferred Stock and to determine its rights and preferences in order to eliminate delays associated with a stockholder vote on specific issuances. The rights of the holders of Common Stock will be subject to the rights of holders of any Preferred Stock issued in the future. The issuance of Preferred Stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more 51 difficult for a third party to acquire, or of discouraging a third party from attempting to acquire, a majority of the outstanding voting stock of the Company. The Company has no present plans to issue any shares of Preferred Stock. RIGHTS PLAN In July 1989, the Company adopted a Shareholder Rights Plan and declared a dividend of four-fifteenths of one preferred stock purchase right (a "Right") for each outstanding share of Common Stock. Under certain conditions, each Right may be exercised to purchase one one-hundredth of a share of Series C Junior Participating Preferred Stock ("Series C Preference Stock") at an exercise price of $15. The Rights will be exercisable only if a person or group has acquired beneficial ownership of 20% or more of the Common Stock of the Company or announced a tender or exchange offer that would result in such a person or group owning 30% or more of the Common Stock. The Company generally will be entitled to redeem the Rights at $.01 per Right at any time until the tenth day following public announcement that a 20% stock position has been acquired and in certain other circumstances. If any person or group becomes a beneficial owner of 25% or more of the Common Stock (except pursuant to a tender or exchange offer for all shares at a fair price as determined by the outside members of the Board of Directors) or if a 20% stockholder consolidates or merges into or engages in certain self-dealing transactions with the Company, each Right not owned by a 20% stockholder will enable its holder to purchase such number of shares of Common Stock as is equal to the exercise price of the Right divided by one-half of the market price of the Common Stock on the date of the occurrence of the event. In addition, if the Company engages in a merger or other business combination with another person or group in which it is not the surviving corporation or in connection with which its Common Stock is changed or converted, or if the Company sells or transfers 50% or more of its assets or earning power to another person, each Right that has not previously been exercised will entitle its holder to purchase such number of shares of Common Stock of such other person as is equal to the exercise price of the Right divided by one-half of the market price of such Common Stock on the date of the occurrence of the event. Because of the nature of the Series C Preferred Stock's dividend, liquidation and voting rights, the value of four fifteen-hundredths of a share of Series C Preferred Stock purchasable upon exercise of the four-fifteenths of a Right associated with each share of Common Stock should approximate the value of one share of Common Stock. The Rights have certain anti-takeover effects. The Rights may cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Board of Directors of the Company, except pursuant to an offer conditioned on a substantial number of Rights being acquired. The Rights should not interfere with any merger or other business combination approved by the Board of Directors. DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS The Company is subject to the provisions of Section 203 of the General Corporation Law of Delaware. In general, Section 203 prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. The Company's Certificate of Incorporation and By-Laws provide that any action required or permitted to be taken by the stockholders of the Company may be taken only at a duly called annual or special meeting of stockholders or by a written consent signed by all holders of outstanding voting stock, and that special meetings of stockholders may be called only by the Board of Directors or the President of the Company. These provisions could have the effect of delaying until the next stockholders' meeting stockholder actions which are favored by the holders of a majority of the outstanding voting securities of the Company. These provisions may also discourage another person or entity from making a tender offer for the Common Stock, because such person or 52 entity, even if it acquired a majority of the outstanding voting securities of the Company, would be able to take action as a stockholder (such as electing new Directors or approving a merger) only at a duly called stockholders meeting, and not by written consent. The Company's Certificate of Incorporation contains certain provisions permitted under the General Corporation Law of Delaware relating to the liability of Directors. The provisions eliminate a Director's liability to stockholders for monetary damages for a breach of fiduciary duty, except in certain circumstances involving wrongful acts, such as the breach of a Director's duty of loyalty or acts or omissions which involve intentional misconduct or a knowing violation of law. The Company's Certificate of Incorporation also contains provisions obligating the Company to indemnify its Directors and officers to the fullest extent permitted by the General Corporation Law of Delaware. The Company believes that these provisions will assist the Company in attracting and retaining qualified individuals to serve as Directors. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is American Stock Transfer & Trust Company. UNDERWRITING Subject to the terms and conditions of the Underwriting Agreement, the Underwriter, Hambrecht & Quist LLC, has agreed to purchase all of the Notes from the Company. The Underwriting Agreement provides that the obligations of the Underwriter are subject to certain conditions precedent, including the absence of any material adverse change in the Company's business and the receipt of certain certificates, opinions and letters from the Company, its counsel and the Company's independent auditors. The nature of the Underwriter's obligation is such that it is committed to purchase all of the Notes offered hereby if any of such Notes are purchased. The Underwriter proposes to offer the Notes directly to the public at the public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per Note. The Underwriter may allow, and such dealers may reallow, a concession not in excess of $ per Note to certain other dealers. After the offering contemplated hereby, the offering price and other selling terms may be changed by the Underwriter. The Company has granted to the Underwriter an option, exercisable no later than 30 days after the date of this Prospectus, to purchase up to an additional $6,000,000 principal amount of Notes at the public offering price, less the underwriting discount, set forth on the cover page of this Prospectus. The Company will be obligated, pursuant to the option, to sell such Notes to the Underwriter to the extent the option is exercised. The Underwriter may exercise such option only to cover over-allotments made in connection with the sale of Notes offered hereby. The offering of the Notes is made for delivery when, as and if accepted by the Underwriter and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The Underwriter reserves the right to reject an order for the purchase of Notes in whole or in part. The Company has agreed to indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act of 1933, and to contribute to payments the Underwriter may be required to make in respect thereof. The executive officers and directors of the Company have agreed, with certain limited exceptions, that they will not, without the prior written consent of the Underwriter, offer, sell, or otherwise dispose of any shares of Common Stock or options to acquire shares of Common Stock owned by them during the 90-day period following the date of this Prospectus. The Company has agreed that it will not, without the prior written consent of the the Underwriter, offer, sell, grant any option to purchase or otherwise dispose of any shares of Common Stock during the 90-day period following the date of this Prospectus (except pursuant to employee and director stock plans). 53 LEGAL MATTERS The validity of the Notes offered hereby and the shares of Common Stock issuable upon conversion thereof will be passed upon for the Company by Hale and Dorr, Boston, Massachusetts. Partners of Hale and Dorr beneficially own 93,750 shares of Common Stock of the Company. Certain legal matters will be passed upon for the Underwriter by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, Palo Alto, California. EXPERTS The consolidated financial statements and schedule included or incorporated by reference in this Prospectus and elsewhere in the Registration Statement, to the extent and for the periods indicated in their reports, have been audited by Arthur Andersen LLP, independent public accountants, and are included herein in reliance upon the authority of said firm as experts in giving said reports. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the SEC. Such documents can be inspected and copied at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following Regional Offices of the SEC: Seven World Trade Center, 13th Floor, New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and copies of such material may be obtained from the SEC's Public Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Common Stock is quoted on the Nasdaq Stock Market. Reports and other information concerning the Company may be inspected at the office of Nasdaq Operations, 1735 K Street, N.W., Washington, D.C. 20006. The Company has filed with the SEC a Registration Statement on Form S-3 under the Securities Act of 1933 with respect to the Notes offered hereby and the Common Stock issuable upon conversion thereof. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company, the Notes and its Common Stock, reference is hereby made to such Registration Statement, exhibits and schedules. Statements contained in this Prospectus as to the contents of any contract or any other document are not necessarily complete, and in each instance reference is hereby made to the copy of such contract or document (if any) filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Registration Statement and the exhibits and schedules thereto may be examined without charge at the Public Reference Section of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549 and copies of such materials may be obtained from the SEC at prescribed rates. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by the Company with the SEC are incorporated herein by reference: (1) the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994; (2) the Company's Quarterly Reports on Form 10-Q for the quarters ended April 2, July 2 and October 1, 1995; (3) the Company's Current Report on Form 8-K dated February 1, 1996; (4) the Company's Form 10-C filed on February 6, 1996; and (5) the Company's Registration Statement on Form 8-A registering the Common Stock under Section 12(g) of the Exchange Act. All documents filed by the Company with the SEC pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to March 7, 1996 and prior to the termination of the offering of the Common Stock registered hereby shall be deemed to be incorporated by reference into this Prospectus and to be a part hereof from the date of filing such documents. Any statement contained in a document incorporated or deemed to be 54 incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is or is deemed to be incorporated by reference herein modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person to whom this Prospectus is delivered, upon written or oral request of such person, a copy of any or all of the foregoing documents incorporated by reference into this Prospectus (without exhibits to such documents other than exhibits specifically incorporated by reference into such documents). Requests for such copies should be directed to the Secretary of the Company, 1821 West Iomega Way, Roy, Utah 84067 (telephone: (801) 778-1000). 55 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants.............................................. F-2 Consolidated Balance Sheets as of December 31, 1994 and 1995.......................... F-3 Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and 1995................................................................................. F-5 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993, 1994 and 1995........................................................................ F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995................................................................................. F-9 Notes to Consolidated Financial Statements............................................ F-10
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Iomega Corporation: We have audited the accompanying consolidated balance sheets of Iomega Corporation (a Delaware corporation) and subsidiaries as of December 31, 1994 and 1995, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Iomega Corporation and subsidiaries as of December 31, 1994 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. As explained in Note 3 to the consolidated financial statements, effective January 1, 1993, the Company changed its method of accounting for income taxes. ARTHUR ANDERSEN LLP Salt Lake City, Utah January 26, 1996 F-2 IOMEGA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS
DECEMBER 31, --------------------- 1994 1995 --------- --------- Current assets: Cash and cash equivalents............................... $ 16,861 $ 1,023 Temporary investments................................... 2,932 -- Trade receivables, less allowance for doubtful accounts of $1,627 and $1,861, respectively..................... 18,892 105,955 Inventories............................................. 17,318 98,703 Deferred tax assets..................................... 477 2,778 Other current assets.................................... 4,077 3,673 --------- --------- Total current assets................................ 60,557 212,132 --------- --------- Equipment and leasehold improvements, at cost: Machinery and equipment................................. 45,585 67,812 Leasehold improvements.................................. 6,034 6,475 Furniture and fixtures.................................. 4,737 4,805 Equipment and construction in process................... 2,837 24,057 --------- --------- 59,193 103,149 Less: Accumulated depreciation and amortization......... (43,917) (49,779) --------- --------- 15,276 53,370 --------- --------- Deferred tax assets....................................... -- 520 --------- --------- Other assets.............................................. -- 205 --------- --------- $ 75,833 $ 266,227 --------- --------- --------- ---------
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. F-3 IOMEGA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA) LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31, -------------------- 1994 1995 -------- --------- Current liabilities: Notes payable............................................ $ -- $ 47,640 Accounts payable......................................... 7,228 94,782 Bank overdraft........................................... -- 11,833 Accrued payroll and bonus................................ 3,047 6,777 Deferred revenue......................................... 1,947 3,207 Accrued vacation......................................... 1,954 2,939 Accrued warranty......................................... 3,943 4,652 Other accrued liabilities................................ 7,620 21,756 Income taxes payable..................................... -- 5,141 Current portion of capitalized lease obligations......... -- 782 -------- --------- Total current liabilities............................ 25,739 199,509 -------- --------- Capitalized lease obligations, net of current portion...... -- 1,481 -------- --------- Notes payable, net of current portion...................... -- 2,551 -------- --------- Commitments and contingencies (Note 4) Redeemable Series A Convertible Preferred Stock; outstanding 258,816 shares................................ 1,031 -- -------- --------- Stockholders' equity: Preferred Stock, $0.01 par value; authorized 4,750,000 shares.................................................. -- -- Series C Junior Participating Preferred Stock; authorized 250,000 shares, none issued............................. -- -- Common Stock, $.03 1/3 par value; authorized 150,000,000 shares; issued 55,559,247 and 58,819,335 shares, respectively............................................ 1,852 1,960 Notes receivable from stockholders....................... (597) -- Additional paid-in capital............................... 47,023 51,473 Retained earnings........................................ 785 9,253 -------- --------- Total stockholders' equity........................... 49,063 62,686 -------- --------- -------- --------- $ 75,833 $ 266,227 -------- --------- -------- ---------
The accompanying notes to consolidated financial statements are an integral part of these balance sheets. F-4 IOMEGA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED DECEMBER 31, --------------------------------- 1993 1994 1995 --------- --------- --------- Sales.......................................... $ 147,123 $ 141,380 $ 326,225 Cost of sales.................................. 92,585 92,453 235,838 --------- --------- --------- Gross margin................................... 54,538 48,927 90,387 --------- --------- --------- Operating expenses: Selling, general and administrative.......... 38,862 36,862 57,189 Research and development..................... 18,972 15,438 19,576 Restructuring costs (reversal)............... 14,131 (2,491) -- --------- --------- --------- Total operating expenses................. 71,965 49,809 76,765 --------- --------- --------- Operating income (loss)........................ (17,427) (882) 13,622 Foreign currency gain (loss)................. 328 353 (1,243) Interest income.............................. 620 871 537 Interest expense............................. (70) (15) (1,652) Other income (expense)....................... (107) (301) 375 --------- --------- --------- Income (loss) before income taxes and cumulative effect of accounting change........ (16,656) 26 11,639 Provision for income taxes..................... (206) (1,908) (3,136) --------- --------- --------- Net income (loss) before cumulative effect of accounting change............................. (16,862) (1,882) 8,503 Cumulative effect of accounting change......... 2,337 -- -- --------- --------- --------- Net income (loss)............................ $ (14,525) $ (1,882) $ 8,503 --------- --------- --------- Net income (loss) per common share: Net income (loss) before cumulative effect of accounting change........................... $ (0.31) $ (0.03) $ 0.14 Cumulative effect of accounting change....... 0.04 -- -- --------- --------- --------- Net income (loss)............................ $ (0.27) $ (0.03) $ 0.14 --------- --------- --------- --------- --------- --------- Weighted average common chares outstanding..... 54,318 55,419 60,180
The accompanying notes to consolidated financial statements are an integral part of these statements. F-5 IOMEGA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
NOTES COMMON STOCK RECEIVABLE ADDITIONAL ------------------ FROM PAID-IN RETAINED TREASURY SHARES AMOUNT STOCKHOLDERS CAPITAL EARNINGS STOCK TOTAL ---------- ------ ------------ ---------- ----------- --------- -------- Balances at December 31, 1992................. 53,632,656 $1,788 $ -- $57,746 $ 17,347 $ (11,857) $ 65,024 Sale of shares to employees at an average price of $0.69 cash per share................ 570,888 19 -- 373 -- -- 392 Sale of shares to officer at an average price of $0.68 per share for a note receivable..... 882,000 29 (597) 568 -- -- -- Accretion of Series A Convertible Preferred Stock redemption premium..................... -- -- -- (51) -- -- (51) Dividends on Series A Convertible Preferred Stock........................................ -- -- -- -- (78) -- (78) Tax benefit from early dispositions of employee stock............................... -- -- -- 214 -- -- 214 Recognition of compensation from Employee Stock Purchase Plan.......................... -- -- -- 84 -- -- 84 Issuance of 34,563 treasury shares under Employee Stock Purchase Plan................. -- -- -- (30) -- 60 30 Net loss...................................... -- -- -- -- (14,525) -- (14,525) ---------- ------ ------ ---------- ----------- --------- -------- Balances at December 31, 1993................. 55,085,544 $1,836 $ (597) $58,904 $ 2,744 $ (11,797) $ 51,090
The accompanying notes to consolidated financial statements are an integral part of these statements. F-6 IOMEGA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA)
NOTES RECEIVABLE ADDITIONAL FROM PAID-IN RETAINED TREASURY SHARES AMOUNT STOCKHOLDERS CAPITAL EARNINGS STOCK TOTAL ---------- ------ ------------ ---------- ----------- --------- -------- Sale of shares to employees at an average price of $0.56 cash per share................ 473,703 16 -- 240 -- -- 256 Purchase of 390,000 shares at an average cost of $0.78 cash per share...................... -- -- -- -- -- (305) (305) Accretion of Series A Convertible Preferred Stock redemption premium..................... -- -- -- (55) -- -- (55) Dividends on Series A Convertible Preferred Stock........................................ -- -- -- -- (77) -- (77) Tax benefit from early dispositions of employee stock............................... -- -- -- 28 -- -- 28 Recognition of compensation from Employee Stock Purchase Plan.......................... -- -- -- 8 -- -- 8 Issuance of 15,171 treasury shares under Employee Stock Purchase Plan................. -- -- -- (17) -- 17 -- Five-for-four Common Stock split effected in the form of a 25% stock dividend............. -- -- -- (12,085) -- 12,085 -- Net loss...................................... -- -- -- -- (1,882) -- (1,882) ---------- ------ ------ ---------- ----------- --------- -------- Balances at December 31, 1994................. 55,559,247 $1,852 $ (597) $47,023 $ 785 $ -- $ 49,063
The accompanying notes to consolidated financial statements are an integral part of these statements. F-7 IOMEGA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED) (IN THOUSANDS, EXCEPT SHARE DATA)
NOTES RECEIVABLE ADDITIONAL FROM PAID-IN RETAINED TREASURY SHARES AMOUNT STOCKHOLDERS CAPITAL EARNINGS STOCK TOTAL ---------- ------ ------------ ---------- ----------- --------- -------- Sale of shares to employees at an average price of $0.83 cash per share................ 2,429,751 81 -- 1,945 -- -- 2,026 Sale of shares to an officer at an average price of $0.57 per share for a note receivable................................... 496,875 16 (283) 267 -- -- -- Accretion of Series A Convertible Preferred Stock redemption premium..................... -- -- -- (14) -- -- (14) Dividends on Series A Convertible Preferred Stock........................................ -- -- -- -- (35) -- (35) Tax benefit from early dispositions of employee stock............................... -- -- -- 860 -- -- 860 Recognition of compensation from Employee Stock Purchase Plan.......................... -- -- -- 185 -- -- 185 Conversion of Series A Convertible Preferred Stock to Common Stock........................ 318,600 11 -- 1,194 -- -- 1,205 Issuance of Common Shares under Employee Stock Purchase Plan................................ 14,862 -- -- 13 -- -- 13 Collection of notes receivable from stockholders................................. -- -- 880 -- -- -- 880 Net income.................................... -- -- -- -- 8,503 -- 8,503 ---------- ------ ------ ---------- ----------- --------- -------- Balances at December 31, 1995................. 58,819,335 $1,960 $ -- $51,473 $ 9,253 $ -- $ 62,686 ---------- ------ ------ ---------- ----------- --------- -------- ---------- ------ ------ ---------- ----------- --------- --------
The accompanying notes to consolidated financial statements are an integral part of these statements. F-8 IOMEGA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED DECEMBER 31, -------------------------------- 1993 1994 1995 --------- -------- --------- Increase (Decrease) in Cash and Cash Equivalents Cash Flows from Operating Activities: Net Income (Loss)........................... $ (14,525) $ (1,882) $ 8,503 Non-Cash Revenue and Expense Adjustments: Depreciation and amortization expense... 8,472 6,853 8,943 Cumulative effect of accounting change................................ (2,337) -- -- Deferred income tax provision (benefit)............................. -- 4,508 (2,821) Change in restructuring reserves........ 5,554 1,590 -- Other................................... (751) (314) 926 Changes in Assets and Liabilities: Trade receivables (net)................. (6,203) 2,793 (87,063) Inventories............................. 3,786 (3,747) (81,385) Income taxes payable.................... -- -- 6,823 Other current assets.................... (694) (1,135) (1,278) Accounts payable........................ 1,696 161 87,554 Accrued liabilities..................... 6,333 (3,516) 32,808 --------- -------- --------- Net cash provided from (used in) operating activities.............. 1,331 5,311 (26,990) --------- -------- --------- Cash Flows from Investing Activities: Purchase of equipment and leasehold improvements.............................. (6,567) (7,083) (45,232) Purchase of temporary investments........... -- (8,825) (2,090) Sale of temporary investments............... -- 5,893 5,022 Prepayment of royalties..................... (1,000) -- -- Proceeds from sale of property held for resale.................................... 4,461 -- -- Proceeds from sale of research and development assets........................ -- 2,792 -- Net (increase) decrease in other assets..... 343 (10) (205) --------- -------- --------- Net cash used in investing activities........................ (2,763) (7,233) (42,505) --------- -------- --------- Cash Flows from Financing Activities: Proceeds from sales of Common Stock......... 402 256 2,028 Proceeds from issuance of notes payable..... -- -- 259,667 Payments on notes payable and capitalized lease obligations......................... (11) -- (209,748) Tax benefit from early dispositions of employee stock............................ 214 28 860 Redemption of Preferred Stock............... (2) -- (30) Purchase of treasury stock.................. -- (305) -- Utilization of treasury stock for Stock Purchase Plan............................. 20 -- -- Payment of dividends on Preferred Stock..... (78) -- -- Proceeds from notes receivable from stockholders.............................. -- -- 880 --------- -------- --------- Net cash provided from (used in) financing activities.............. 545 (21) 53,657 --------- -------- --------- Net Change in Cash and Cash Equivalents......... (887) (1,943) (15,838) Cash and Cash Equivalents at Beginning of the Year............................................ 19,691 18,804 16,861 --------- -------- --------- Cash and Cash Equivalents at End of the Year.... $ 18,804 $ 16,861 $ 1,023 --------- -------- --------- --------- -------- --------- Supplemental Schedule of Non-Cash Investing and Financing Activities: Net receivable (payable) associated with revaluation of forward exchange contracts................................. $ 49 $ (111) $ (1,113) --------- -------- --------- --------- -------- --------- Sale of Common Stock for a Note............. $ 597 $ -- $ 283 --------- -------- --------- --------- -------- --------- Conversion of Series A Preferred Stock to Common Stock.............................. $ -- $ -- $ 1,205 --------- -------- --------- --------- -------- --------- Machinery and equipment financed under capitalized lease obligations............. $ -- $ -- $ 2,535 --------- -------- --------- --------- -------- ---------
The accompanying notes to consolidated financial statements are an integral part of these statements. F-9 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS The Company designs, manufactures and markets innovative data storage solutions, based on removable-media technology, that help personal computer users "manage their stuff." The Company's data storage solutions include disk drives marketed under the tradenames Zip and Jaz, a family of tape drives marketed under the tradename Ditto, and a line of removable drives marketed under the tradename Bernoulli. Retail outlets for the Company's products include mail order catalogs, computer superstores, office supply superstores and speciality computer stores. The Company sells its products to retail channels directly as well as indirectly through distributors. The Company's products are sold at the retail level by most of the leading retailers of computer products in the United States. In addition to sales through these retail channels, the Company has entered into a number of strategic marketing alliances with a variety of companies within the computer industry. These alliances include OEM arrangements providing for certain of the Company's products to be incorporated in new computer systems at the time of purchase. The Company's business has grown significantly in the past year, with sales increasing from $141.4 million in 1994 to $326.2 million in 1995. This business growth has resulted in substantial increases in accounts receivable and inventories. Increases in these working capital components have resulted in a significant decline in the Company's liquidity. The Company expects that proceeds from an anticipated note offering, together with current sources of financing available to the Company, will be sufficient to fund the Company's operations through at least June 30, 1996. Thereafter, the Company anticipates that it will require additional funds to finance its operations. SOURCES OF SUPPLY Many components incorporated in, or used in the manufacture of, the Company's products are currently only available from sole source suppliers. The Company purchases all of its sole source and limited source components and equipment pursuant to purchase orders placed from time to time and has no guaranteed supply arrangements. Supply shortages resulting from a change in suppliers could cause a delay in manufacturing and a possible loss of sales, which would have an adverse effect on operating results. MANUFACTURING RELATIONSHIPS The Company uses independent parties to manufacture for the Company, on a contract basis, a substantial portion of the Company's products. The Company's manufacturing relationships are generally not covered by binding contracts and may be subject to unilateral termination by the Company's manufacturing partners. Shortages resulting from a change in manufacturing partners could cause a delay in manufacturing and a possible loss of sales, which would have an adverse affect on operating results. PERVASIVENESS OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries after elimination of all material intercompany accounts and transactions. REVENUE RECOGNITION Revenue is recognized when units are shipped to customers. However, revenue recognition is deferred on shipments to customers with right of return privileges whose inventory is in excess of estimated normal customers' inventory requirements. The gross margin associated with deferral of sales in excess of estimated F-10 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (1) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) normal customers' inventory requirements totaled $1,494,000, $1,947,000 and $3,207,000 at December 31, 1993, 1994 and 1995, respectively, and is included in deferred revenue in the accompanying consolidated balance sheets. In addition, the Company records reserves at the time of shipment for estimated volume rebates and price protection credits to be issued to customers. These reserves totalled $169,000 and $1,633,000 at December 31, 1994 and 1995, respectively, and are netted against accounts receivable in the accompanying consolidated balance sheets. PRICE PROTECTION 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 for amounts estimated to be reimbursed to the qualifying customers. INVENTORIES Inventories include direct materials, direct labor, and manufacturing overhead costs and are recorded at the lower of cost (first-in, first-out) or market and consist of the following (in thousands):
DECEMBER 31, ---------------- 1994 1995 ------- ------- Raw materials........................................... $ 7,524 $89,030 Work-in-process......................................... 4,839 5,680 Finished goods.......................................... 4,955 3,993 ------- ------- $17,318 $98,703 ------- ------- ------- -------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS When property is retired or otherwise disposed of, the book value of the property is removed from the asset and related accumulated depreciation and amortization accounts, and the net gain or loss is included in the determination of net income. Depreciation is provided based on the straight-line method over the following estimated useful lives of the property. Machinery and equipment.................................... 2 - 5 years Leasehold improvements..................................... 5 years Furniture and fixtures..................................... 10 years
The Company has certain specialized manufacturing equipment used in its operations. PRODUCT DEVELOPMENT Product research and development costs are expensed as incurred. ADVERTISING The Company expenses the cost of advertising the first time the advertising takes place, except cooperative advertising with customers, which is accrued at the time of sale. For the years ended December 31, 1993, 1994 and 1995, advertising expenses totaled approximately $5,574,000, $6,348,000 and $10,612,000, respectively. BANK OVERDRAFT The bank overdraft represents those checks which have been disbursed to vendors but have not been presented to the bank for clearance. Upon presentment to the bank, the bank overdraft will be funded by the revolving line of credit, thereby reducing the availability under the line. (See Note 5.) F-11 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (1) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) WARRANTY COSTS A one-year limited warranty is generally provided on the Company's Zip and Jaz drives. Zip and Jaz disks carry a limited lifetime warranty. A two to five-year limited warranty is generally provided on Bernoulli disk drives and disk drive subsystems. A two to five-year limited warranty is generally provided on the tape drives and tape media. NET INCOME (LOSS) PER COMMON SHARE Net income (loss) per common share is based on the weighted average number of shares of Common Stock and dilutive common stock equivalent shares outstanding during the year. Common stock equivalent shares consist primarily of stock options and convertible preferred stock that have a dilutive effect when applying the treasury stock method. In periods where losses are recorded, common stock equivalents would decrease the loss per share and are therefore not added to weighted average shares outstanding. The outstanding shares and earnings per share have been restated for all periods presented to reflect the impact of the stock splits described in Note 2. FOREIGN CURRENCY TRANSLATION For purposes of consolidating foreign operations, the Company has determined the functional currency for its foreign operations is the U.S. dollar. Therefore, translation gains and losses are included in the determination of income. INCOME TAXES The Company recognizes a liability or asset for the deferred tax consequences of temporary differences between the tax bases of assets or liabilities and their reported amounts in the financial statements. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. General business tax credits are accounted for using the "liability" method, which reduces Federal income tax expense in the year in which these credits are generated. CASH EQUIVALENTS AND TEMPORARY INVESTMENTS For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with maturities of three or fewer months to be cash equivalents. Instruments with maturities in excess of three months are classified as temporary investments. At December 31, 1994, all temporary investments had maturities of less than six months. Cash equivalents and temporary investments primarily consist of certificates of deposit, investments in money market mutual funds, commercial paper and bankers' acceptances and are recorded at cost which approximates market. FAIR VALUE OF FINANCIAL INSTRUMENTS The book value of the Company's financial instruments approximates fair value. The estimated fair values have been determined using appropriate market information and valuation methodologies. RECLASSIFICATIONS Certain reclassifications have been made in prior periods' consolidated financial statements to conform to the current presentation. (2) STOCK SPLITS On October 27, 1994, the Company's Board of Directors declared a 5-for-4 stock split which was effected in the form of a 25% Common Stock dividend paid on November 23, 1994 to stockholders of record at the close of business on November 9, 1994. The Company paid cash in lieu of issuing fractional shares. The transaction has been accounted for as a stock split. Of the shares of Common Stock distributed by the Company in connection with the November 1994 stock split, approximately 9,051,000 were treasury shares and the remainder were F-12 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (2) STOCK SPLITS (CONTINUED) authorized but unissued shares. The cost of the treasury shares and authorized but unissued shares were recorded as a reduction in additional paid-in capital. All earnings per share and outstanding shares have been retroactively restated in the financial statements for all periods presented. In December 1995, the Board of Directors approved a 3-for-1 Common Stock split, to be effected in the form of a 200% Common Stock dividend, subject to stockholder approval of an increase in the authorized Common Stock to 150,000,000 shares at $.03 1/3 par value per share. On January 26, 1996, the stockholders approved the charter amendment to increase the authorized Common Stock. The stock dividend will be paid on or about January 31, 1996 to stockholders of record at the close of business on January 15, 1996. This stock split has been retroactively reflected in the accompanying consolidated financial statements. In connection with each stock split, proportional adjustments were made to outstanding stock options and other outstanding obligations of the Company to issue shares of Common Stock. (3) INCOME TAXES Income (loss) before income taxes and cumulative effect of accounting change consisted of the following:
December 31, 1993 1994 1995 --------- -------- -------- (IN THOUSANDS) U.S..................................... $ (7,338) $ 208 $ 10,761 Non-U.S................................. (9,318) (182) 878 --------- -------- -------- $ (16,656) $ 26 $ 11,639 --------- -------- -------- --------- -------- --------
The income tax provision consists of the following:
December 31, 1993 1994 1995 --------- -------- -------- (IN THOUSANDS) Current Income Taxes: Federal............................... $ (164) $ 1,217 $ (4,158) State................................. (22) 208 (805) Foreign............................... -- -- (156) --------- -------- -------- (186) 1,425 (5,119) --------- -------- -------- Deferred Taxes: Federal............................... 5,989 (6) 189 State................................. 1,497 -- 47 Change in Valuation Allowance......... (7,506) (3,327) 1,747 --------- -------- -------- (20) (3,333) 1,983 --------- -------- -------- Provision for Income Taxes.............. $ (206) $ (1,908) $ (3,136) --------- -------- -------- --------- -------- --------
Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). In accordance with the provisions of SFAS No. 109, the Company recognized the cumulative effect of this accounting change totaling $2.3 million in the consolidated statement of operations for the year ended December 31, 1993. F-13 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) INCOME TAXES (CONTINUED) Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax basis of assets and liabilities. They are measured by applying the enacted tax rates and laws in effect for the years in which such differences are expected to reverse. The significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
DECEMBER 31, DECEMBER 31, 1994 1995 ------------ ------------ Deferred tax assets: Accounts receivable reserves.............................. $ 482 $ 1,158 Inventory reserves........................................ 940 2,378 Fixed asset reserves...................................... 36 64 Accrued expense reserves.................................. 4,596 7,188 Unrealized foreign currency loss.......................... -- 438 Inventory unicap adjustment............................... 160 375 Foreign net operating loss carryover...................... 1,493 1,921 Tax credit carryover...................................... 5,365 1,273 Intercompany profit in inventory.......................... 86 84 Other..................................................... 45 30 ------------ ------------ Total deferred tax assets................................... 13,203 14,909 Valuation allowance......................................... (12,585) (11,341) ------------ ------------ Deferred tax asset net of valuation allowance............... 618 3,568 Deferred tax liabilities: Accelerated depreciation.................................. (141) (270) ------------ ------------ Net deferred tax assets..................................... $ 477 $ 3,298 ------------ ------------ ------------ ------------
Management believes that, based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of the deferred tax asset such that a valuation allowance has been recorded. Such factors include lack of cumulative operating profits in the previous three years, recent increases in expense levels to support the Company's growth, and the fact that the market in which the Company competes is intensely competitive and characterized by rapidly changing technology. Accordingly, the deferred tax assets have been reduced by a $11.3 million valuation allowance at December 31, 1995. This allowance has been established for the foreign net operating loss carryforward and temporary differences which are not expected to be realized through an income tax loss carryback to a prior period. Although the realization of the net deferred tax assets are not assured, management believes that it is more likely than not that all of the net deferred tax assets will be realized. The amount of the net deferred tax assets considered realizable, however, could be reduced in the near term based on changing conditions. F-14 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) INCOME TAXES (CONTINUED) The differences between the provision for income taxes at the U.S. statutory rate and the effective rate, are summarized as follows (in thousands):
December 31, 1993 1994 1995 -------- -------- -------- Benefit (provision) at U.S. statutory rate..................................... $ 5,663 $ (9) $ (3,957) Utilization of tax credits................ 947 4 -- Change in transfer price.................. -- 1,400 -- Non-Deductible items...................... 21 -- (95) State income taxes........................ 669 (22) (596) (Increase) decrease in deferred asset valuation allowance...................... (7,506) (3,327) 1,747 Foreign income taxes...................... -- -- (156) Other..................................... -- 46 (79) -------- -------- -------- Provision for income taxes................ $ (206) $ (1,908) $ (3,136) -------- -------- -------- -------- -------- --------
Cash paid for income taxes was $1,322,000 in 1993, $94,000 in 1994, and $71,000 in 1995. The Company received cash refunds of $2,247,000 in 1994 and $1,592,000 in 1995. For income tax purposes, the Company has approximately $5,056,000 in foreign net operating loss carryforwards and $1,273,000 of tax credit carryforwards. The tax credit carryforwards will begin expiring in 2008. (4) COMMITMENTS AND CONTINGENCIES LITIGATION The Company is involved in lawsuits and claims generally incidental to its business. It is the opinion of management, after discussions with legal counsel, that the ultimate dispositions of these lawsuits and claims will not have a material adverse effect on the Company's financial statements. LEASE COMMITMENTS The Company conducts its operations from leased facilities and leases certain equipment used in its operations. Aggregate lease commitments under non-cancelable operating leases in effect at December 31, 1995 are as follows (in thousands):
LEASE YEARS ENDING DECEMBER 31, COMMITMENTS ------------------------------------------------------------ ----------- 1996........................................................ $ 3,063 1997........................................................ 2,456 1998........................................................ 2,108 1999........................................................ 1,683 2000........................................................ 1,289 Thereafter.................................................. 97 ----------- $10,696 ----------- -----------
Total rent expense for the years ended December 31, 1993, 1994 and 1995 was approximately $2,336,000, $1,989,000 and $1,981,000, respectively. F-15 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) COMMITMENTS AND CONTINGENCIES (CONTINUED) The following is a schedule of future minimum lease payments under capital leases together with the present value of net minimum lease payments at December 31, 1995 (in thousands):
FUTURE MINIMUM YEARS ENDING DECEMBER 31, LEASE PAYMENTS -------------------------------------------------------- -------------- 1996.................................................... $ 973 1997.................................................... 973 1998.................................................... 640 ------ Total net minimum lease payments........................ 2,586 Less amount representing interest....................... (323) ------ Present value of net minimum lease payments............. 2,263 Less: current portion................................... (782) ------ $1,481 ------ ------
BONUS PLAN The Company has adopted a bonus plan that provides for bonus payments to officers and key employees. The payment of the 1995 bonuses was contingent upon the Company and the employees achieving certain objectives. At December 31, 1995, the Company has accrued $3,000,000 for management bonuses which will be paid in March 1996 or after the First Security Bank Loan Agreement is paid in full (see Note 13). At December 31, 1994, approximately $1,400,000 was accrued for management bonuses, the majority of which was paid in February and March of 1995. EXECUTIVE COMPENSATION AGREEMENT In 1995, the Company adopted a bonus plan for the Chief Executive Officer that provides for bonus payments of cash and up to 60,000 shares of stock, subject to a three year vesting, contingent upon the achievement of certain objectives. At December 31, 1995, the cash payment is fully accrued. In January 1996, the Compensation Committee approved the issuance of the full 60,000 shares of stock. The shares will be issued at a cost equal to par value. PROFIT SHARING PLAN In 1991, the Company adopted a profit sharing plan that provided for payments to all eligible employees of their share of a pool that equaled 6.0% of the Company's annual income before income taxes. In 1994, the plan was amended to 5.0% of the Company's annual income before income taxes. Employees must complete one year of continuous employment to be eligible. Employees receive a share of the profit sharing pool based upon their annual salary as a ratio to total annual salaries of all eligible employees. The Company has accrued approximately $600,000 for the 1995 profit sharing plan, which will be paid in January 1996. There were no profit sharing payments for fiscal 1993 and 1994. FOREIGN EXCHANGE CONTRACTS The Company has commitments to sell foreign currencies relating to forward exchange contracts in order to hedge against future currency fluctuations. In addition, the Company purchases components denominated in Yen and has purchased forward contracts to buy Yen. F-16 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) COMMITMENTS AND CONTINGENCIES (CONTINUED) The outstanding forward exchange sale and purchase contracts at December 31, 1995 are as follows. The contracts mature in January and February 1996.
CONTRACTED FORWARD AMOUNT CURRENCY RATE --------------- -------- --------------- French Franc........ 1,939,000 FRF 5.169 Spanish Peseta...... 64,524,000 ESP 134.45 Italian Lira........ 363,000,000 ITL 1692.0 Japanese Yen........ (1,109,678,923) YEN 100.60 - 101.0
Gains and losses on foreign currency contracts intended to be used to hedge operating requirements are reported currently in income. Gains and losses on foreign currency contracts intended to meet firm commitments are deferred and are recognized as part of the cost of the underlying transaction being hedged. At December 31, 1994 and 1995, all of the Company's foreign currency contracts are being used to hedge operating requirements. The Company's theoretical risk in these transactions is the cost of replacing, at current market rates, these contracts in the event of default by the counterparty. (5) NOTES PAYABLE LINE OF CREDIT On July 5, 1995, the Company entered into a loan agreement with the Commercial Finance Division of Wells Fargo Bank, N.A. The agreement permits revolving loans, term loans and letters of credit up to an aggregate outstanding principal amount equal to the lesser of $60 million or 80% of eligible accounts receivable, with a 10% overadvance provision through April 12, 1996. Amounts outstanding are collateralized by accounts receivable and equipment. The revolving credit line bears interest at the bank's prime rate plus 1% and the term loans bear interest at the bank's prime rate plus 1.25%. The Company has segregated $25 million of the revolving line into a 60 day LIBOR loan to achieve a lower interest rate. Total availability under the Wells Fargo agreement at December 31, 1995 was $56.1 million, of which $36.8 million (exclusive of bank overdrafts of $11.8 million) had been drawn. See Note 1. The agreement expires June 30, 1996. Among other restrictions, covenants within the agreement require the Company to maintain minimum levels of working capital and net worth. The weighted average outstanding balance was $23,327,000 during 1995. The maximum amount outstanding during 1995 was $38,184,000. The weighted average interest rate was 10.6% for the year ended December 31, 1995. Loss of Wells Fargo Bank as a lender would require the Company to find an alternative source of funding, which could have a material adverse affect on business and financial results. OTHER TERM NOTES During 1995, the Company has entered into term notes with financial institutions. The proceeds from these notes were used to purchase manufacturing equipment. The term notes have 36-month terms which mature at various dates from November 1998 to January 1999. Principal and interest payments are payable monthly. Interest rates are fixed and range from 8.89% to 9.11%. The notes are secured by the equipment purchased. The term notes require the Company to maintain minimum levels of working capital, net worth, and quarterly operating income. FINANCING OF EUROPEAN ACCOUNTS RECEIVABLE In November 1995, a foreign subsidiary of the Company entered into an agreement with a German commercial bank for up to DM 50 million (approximately $35 million) which involves the sale of a portion of the foreign subsidiary's accounts receivable to the bank. The agreement expires in November 1996. Such sales of receivables are limited to 90% of eligible accounts receivable subject to certain credit limits. The Company has retained the bad debt risk on the receivables up to DM 1 million per customer. The interest rate varies F-17 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (5) NOTES PAYABLE (CONTINUED) depending on the currency and ranges from 7.75% to 15% at December 31, 1995. The loan is denominated in several different European currencies and is dependent on the underlying receivable. The weighted average interest rate was 11% for the year ended December 31, 1995. During 1995, the Company received a total of $17,849,000 in proceeds under the arrangement. At December 31, 1995, $9.8 million was outstanding and is included in notes payable in the accompanying December 31, 1995 consolidated balance sheet. The following table summarizes the notes payable outstanding at December 31, 1995 (in thousands): LIBOR loan (8.875% fixed interest rate)............................... $ 25,000 Revolving credit line (9.5% interest rate at 12/31/95)........................... 8,241 Term loan (9.75% interest rate at 12/31/95).......................... 3,612 Other term notes............................................ 3,537 European agreement.......................................... 9,801 --------- 50,191 Less: Current portion....................................... (47,640) --------- $ 2,551 --------- ---------
Maturities of notes payable by year are as follows (in thousands):
YEARS ENDING DECEMBER 31, -------------------------------------------------------------- 1996.......................................................... $47,640 1997.......................................................... 1,119 1998.......................................................... 1,187 1999.......................................................... 245 ------- $50,191 ------- -------
Cash paid for interest was $970,000 in 1995, including interest on capital leases. There was no outstanding debt in 1993 and 1994. Included in interest expense for 1995 was $267,000 of amortization of deferred charges associated with obtaining the debt. (6) PREFERRED STOCK The Company has authorized the issuance of up to 5,000,000 shares of Preferred Stock, $.01 par value per share. The Company's Board of Directors has the authority, without further shareholder approval, to issue Preferred Stock in one or more series and to fix the rights and preferences thereof. As of December 31, 1995, 250,000 shares were designated as Series C Junior Participating Preferred Stock and the remaining 4,750,000 shares were undesignated. SERIES A CONVERTIBLE PREFERRED STOCK During 1987, in connection with the settlement of litigation, the Company designated 1,200,000 shares of Preferred Stock as Redeemable Series A Convertible Preferred Stock. These shares were issued in 1989. Effective June 16, 1995, the Company exercised its right to require the conversion of all outstanding Series A Stock into the Company's Common Stock pursuant to the original conversion terms. Upon conversion, 318,600 shares of Common Stock were issued to the Series A Stock shareholders. Any fractional shares were paid with cash in lieu of stock. Common shares issued on conversion of the Series A Stock shares were recorded at the net carrying value of the Series A Convertible Preferred Stock, plus accrued dividends. F-18 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (6) PREFERRED STOCK (CONTINUED) SERIES C JUNIOR PARTICIPATING PREFERRED STOCK In July 1989, the Company designated 250,000 shares of Preferred Stock as Series C Junior Participating Preferred Stock in connection with its Shareholder Rights Plan (see Note 7). Each share of Series C Junior Participating Preferred Stock (Series C Stock) will: (1) have a liquidation preference of $375 per share; (2) have rights to dividends, subject to the rights of any series of Preferred Stock ranking prior and superior to the Series C Stock, when and if declared by the Board of Directors; (3) not be redeemable; and (4) have voting rights which entitle the holder to 375 votes per share. (7) PREFERRED STOCK PURCHASE RIGHTS In July 1989, the Company adopted a Shareholder Rights Plan and declared a dividend of four-fifteenths of one preferred stock purchase right for each outstanding share of Common Stock. Under certain conditions, each right may be exercised to purchase one one-hundredth of a share of Series C Stock at an exercise price of $15. The rights will be exercisable only if a person or group has acquired beneficial ownership of 20% or more of the Common Stock or announced a tender or exchange offer that would result in such a person or group owning 30% or more of the Common Stock. The Company generally will be entitled to redeem the rights at $.01 per right at any time until the tenth day following public announcement that a 20% stock position has been acquired and in certain other circumstances. If any person or group becomes a beneficial owner of 25% or more of the Common Stock (except pursuant to a tender or exchange offer for all shares at a fair price as determined by the outside members of the Board of Directors) or if a 20% stockholder consolidates or merges into or engages in certain self-dealing transactions with the Company, each right not owned by a 20% stockholder will enable its holder to purchase such number of shares of Common Stock as is equal to the exercise price of the right divided by one-half of the current market price of the Common Stock on the date of the occurrence of the event. In addition, if the Company engages in a merger or other business combination with another person or group in which it is not the surviving corporation or in connection with which its Common Stock is changed or converted, or if the Company sells or transfers 50% or more of its assets or earning power to another person, each right that has not previously been exercised will entitle its holder to purchase such number of shares of Common Stock of such other person as is equal to the exercise price of the right divided by one-half of the current market price of such Common Stock on the date of the occurrence of the event. (8) STOCK OPTIONS STOCK OPTION PLANS The Company has a 1981 Stock Option Plan (the "1981 Option Plan") and a 1987 Stock Option Plan (the "1987 Option Plan"). The 1981 Option Plan has expired and no further options may be granted under this plan; however, outstanding options previously granted under this plan remain in effect. Both plans permit the granting of incentive and nonstatutory stock options. The plans cover an aggregate of 20,625,000 shares of Common Stock. The exercise price of options granted under the 1987 Option Plan may not be less than 100% of the fair market value of the Common Stock at the date of grant in the case of incentive stock options, and may not be less than 25% of the fair market value of the Common Stock at the date of grant in the case of nonstatutory stock options. Options under both plans must be exercised within ten years from the date of grant in the case of incentive stock options and within ten years and one month from the date of grant in the case of nonstatutory stock options, or sooner if so specified within the option agreement. At December 31, 1995, the Company had reserved an aggregate of 11,134,590 shares for issuance upon exercise of options granted or to be granted under these plans. F-19 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (8) STOCK OPTIONS (CONTINUED) The following table presents the aggregate options granted, forfeited, and exercised under the 1981 and 1987 Option Plans for the years ended December 31, 1993, 1994 and 1995 at their respective exercise price ranges. All options and option prices have been restated for the stock splits (see Note 2).
NUMBER OF OPTION PRICE OPTIONS PER SHARE ---------- --------------- Options outstanding at December 31, 1992... 8,934,153 $0.11 to $2.92 Granted.................................... 305,034 $0.70 to $1.90 Exercised.................................. (1,816,110) $0.11 to $1.00 Forfeited.................................. (373,908) $0.27 to $2.90 ---------- Options outstanding at December 31, 1993... 7,049,169 $0.27 to $2.92 Granted.................................... 2,204,625 $0.60 to $1.06 Exercised.................................. (474,141) $0.27 to $0.80 Forfeited.................................. (1,418,391) $0.41 to $2.92 ---------- Options outstanding at December 31, 1994... 7,361,262 $0.27 to $2.92 Granted.................................... 1,000,800 $1.13 to $14.21 Exercised.................................. (2,473,053) $0.27 to $2.92 Forfeited.................................. (57,032) $0.42 to $2.10 ---------- Options outstanding at December 31, 1995... 5,831,977 $0.27 to $14.21 ---------- ----------
Options to purchase 5,660,850, 4,886,061 and 4,754,094 shares were exercisable at December 31, 1993, 1994 and 1995, respectively. Options to purchase 5,302,613 shares were reserved for future grant at December 31, 1995. DIRECTOR STOCK OPTION PLANS The 1987 Director Stock Option Plan (the "Director Plan") covered 750,000 shares of Common Stock. The Director Plan provided for the grant to each non-employee director of the Company, on his initial election as a director, an option to purchase 93,750 shares of Common Stock. The exercise price per share of the option is equal to the fair market value of the Company's Common Stock on the date of grant of the option. Options become exercisable in five equal annual installments, commencing one year from the date of grant, provided the holder continues to serve as a director of the Company. Any option granted under the Director Plan must be exercised no later than ten years from the date of grant. All options granted under the Director Plan are nonstatutory options. In 1995 the Board adopted, and the stockholders approved, the 1995 Director Stock Option Plan. This Plan covers 600,000 shares of Common Stock and provides for the grant to each non-employee director of the Company, on his initial election as a director, an option to purchase 75,000 shares of Common Stock. F-20 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (8) STOCK OPTIONS (CONTINUED) The following table presents the aggregate options granted, forfeited and exercised under the Director Plans for the years ended December 31, 1993, 1994 and 1995, at their respective exercise price ranges. All options and option prices have been restated for the stock splits (see Note 2).
NUMBER OF OPTION PRICE OPTIONS PER SHARE --------- -------------- Options outstanding at December 31, 1992.... 412,500 $0.57 to $0.92 Granted..................................... 93,750 $1.17 Exercised................................... 0 Forfeited................................... 0 --------- Options outstanding at December 31, 1993.... 506,250 $0.57 to $1.17 Granted..................................... 187,500 $0.53 Exercised................................... (93,750) $0.57 Forfeited................................... 0 --------- Options outstanding at December 31, 1994.... 600,000 $0.53 to $1.17 Granted..................................... 0 Exercised................................... (225,000) $0.73 to $0.87 Forfeited................................... 0 --------- Options outstanding at December 31, 1995.... 375,000 $0.53 to $1.17 --------- ---------
Options to purchase 281,250, 300,000 and 300,000 shares were exercisable at December 31, 1993, 1994 and 1995, respectively. Options to purchase 600,000 shares were reserved for future grant at December 31, 1995. OTHER STOCK OPTIONS In December 1987, the Company granted to each of five of the six members of the Board of Directors an option to purchase 93,750 shares of Common Stock. The exercise price of these options was $0.40 per share in the case of four options, and $0.47 per share in the case of the other option. Each option is exercisable in increments of 18,750 shares per year beginning one year from the date of grant and must be exercised no later than ten years and one month from the date of grant. During 1995, options to purchase 243,750 shares were exercised at $0.40 and $0.47 per share. At December 31, 1994, options for the purchase of 243,750 shares were outstanding and exercisable at $0.40 and $0.47 per share. There were no options outstanding at December 31, 1995. (9) STOCK PURCHASE PLAN 1991 STOCK PURCHASE PLAN On January 25, 1991, the Company's Board of Directors approved an employee stock purchase plan for 1991, 1992, and 1993. Eligible employees were allowed to purchase Common Stock at market value on the date coincident with the distribution of the semiannual profit sharing payments. The employee will earn a premium equal to 25% of their original purchase on each of the first four anniversaries of purchase provided the employee is still employed by the Company and the shares are still held by the Company. A total of 4,500,000 shares were approved for the three-year plan with 750,000 shares plus the premium of 750,000 shares approved for each year. Employees participating in the profit sharing plan used up to 66 2/3% of their profit sharing payment to purchase stock. As of December 31, 1995, a total of 130,923 shares have been purchased pursuant to this plan and a total of 41,370 of premium shares have been issued under this plan. F-21 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (10) RETIREMENT PLAN The Iomega Retirement and Investment Savings (IRIS) Plan permits eligible employees to make tax deferred investments through payroll deductions. Each year the Company may contribute to the IRIS Plan at the discretion of the Board of Directors, based on the prior year's earnings of the Company. The IRIS Plan is subject to compliance with Section 401(k) of the Internal Revenue Code and the Employee Retirement Income Securities Act of 1974. Under the terms of the IRIS Plan, all employee contributions and certain employer contributions are immediately vested in full. Certain employer matching contributions become vested over five years. The Company contributed approximately $398,000 and $319,000 to the IRIS Plan for the years ended December 31, 1993 and 1994, respectively. The Company has accrued $671,000 for contribution to the IRIS Plan for the year ended December 31, 1995. (11) OPERATIONS BY GEOGRAPHIC REGION The Company has two primary geographic regions: domestic and European. Domestic operations include all U.S. and export operations, primarily Canada and Asia. Domestic export sales for the years ended December 31, 1993, 1994 and 1995 were $7,534,000, $6,133,000 and $18,160,000, respectively. European operations are comprised of a subsidiary in Germany and sales offices located in France, Belgium, the United Kingdom, Spain, Italy, Germany, Ireland and Austria. The sales offices are branches of U.S. subsidiaries. All European sales and substantially all identifiable assets and operating expenses are recorded on the books of the German subsidiary. Export sales from the European operation for the years ended December 31, 1993, 1994 and 1995 were approximately $23,868,000, $29,903,000 and $49,526,000, respectively, primarily to European countries other than Germany. Sales to European countries other than Germany are distributed relatively evenly across countries in which sales offices are located. The characteristics of sales to Germany and all other European countries are similar. The sales offices are compensated through commission agreements. Inventory is transferred from domestic operations to the German subsidiary at an arms-length price as determined by an independent economic study. Following is a summary of the Company's operations by geographic location. FOR THE YEAR ENDED DECEMBER 31, 1993:
DOMESTIC EUROPEAN INTERCOMPANY OPERATIONS OPERATIONS TRANSACTIONS CONSOLIDATED ---------- ---------- ------------ ------------ (IN THOUSANDS) Net Sales: Unaffiliated Customers........ $112,961 $ 34,162 $ -- $147,123 Affiliates........ 26,750 -- (26,750) -- Cost of Sales....... (89,984) (29,997) 27,396 (92,585) ---------- ---------- ------------ ------------ Gross Margin........ 49,727 4,165 646 54,538 ---------- ---------- ------------ ------------ Operating Expenses........... 58,454 13,511 -- 71,965 ---------- ---------- ------------ ------------ Net Income (Loss)... $ (4,147) $(11,024) $ 646 $(14,525) ---------- ---------- ------------ ------------ ---------- ---------- ------------ ------------ Identifiable Assets............. $ 68,004 $ 13,214 $ (129) $ 81,089 ---------- ---------- ------------ ------------ ---------- ---------- ------------ ------------ Capital Expenditures....... $ 4,920 $ 1,647 $ -- $ 6,567 ---------- ---------- ------------ ------------ ---------- ---------- ------------ ------------
F-22 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (11) OPERATIONS BY GEOGRAPHIC REGION (CONTINUED) FOR THE YEAR ENDED DECEMBER 31, 1994:
DOMESTIC EUROPEAN INTERCOMPANY OPERATIONS OPERATIONS TRANSACTIONS CONSOLIDATED ---------- ---------- ------------ ------------ (IN THOUSANDS) Net Sales: Unaffiliated Customers........ $ 95,554 $ 45,826 $ -- $141,380 Affiliates........ 26,393 -- (26,393) -- Cost of Sales....... (87,305) (31,522) 26,374 (92,453) ---------- ---------- ------------ ------------ Gross Margin........ 34,642 14,304 (19) 48,927 ---------- ---------- ------------ ------------ Operating Expenses........... 45,049 4,760 -- 49,809 ---------- ---------- ------------ ------------ Net Income (Loss)... $ (9,729) $ 7,866 $ (19) $ (1,882) ---------- ---------- ------------ ------------ ---------- ---------- ------------ ------------ Identifiable Assets............. $ 61,696 $ 14,228 $ (91) $ 75,833 ---------- ---------- ------------ ------------ ---------- ---------- ------------ ------------ Capital Expenditures....... $ 5,894 $ 1,189 $ -- $ 7,083 ---------- ---------- ------------ ------------ ---------- ---------- ------------ ------------
FOR THE YEAR ENDED DECEMBER 31, 1995:
DOMESTIC EUROPEAN INTERCOMPANY OPERATIONS OPERATIONS TRANSACTIONS CONSOLIDATED ---------- ---------- ------------ ------------ (IN THOUSANDS) Net Sales: Unaffiliated Customers........ $241,128 $ 85,097 $ -- $326,225 Affiliates........ 65,644 -- (65,644) -- Cost of Sales....... (229,134) (72,357) 65,653 (235,838) ---------- ---------- ------------ ------------ Gross Margin........ 77,638 12,740 9 90,387 ---------- ---------- ------------ ------------ Operating Expenses........... 66,072 10,693 -- 76,765 ---------- ---------- ------------ ------------ Net Income.......... $ 8,475 $ 19 $ 9 $ 8,503 ---------- ---------- ------------ ------------ ---------- ---------- ------------ ------------ Identifiable Assets............. $226,696 $ 39,473 $ 58 $266,227 ---------- ---------- ------------ ------------ ---------- ---------- ------------ ------------ Capital Expenditures....... $ 44,223 $ 1,009 $ -- $ 45,232 ---------- ---------- ------------ ------------ ---------- ---------- ------------ ------------
(12) OTHER MATTERS SIGNIFICANT CUSTOMERS During 1993, sales to Ingram Micro D, Inc. accounted for 14% of the Company's sales. During 1994, sales to Ingram Micro D, Inc. accounted for 11% of the Company's sales. In 1995, no single customer accounted for 10% or more of consolidated sales. CONCENTRATION OF CREDIT RISK The Company markets its products primarily through computer product distributors and retailers. Accordingly, as the Company grants credit to its customers, a substantial portion of outstanding accounts receivable are due from computer product distributors and certain large retailers. At December 31, 1994, the customers with the ten highest outstanding accounts receivable balances totaled $7.1 million or 34% of the gross accounts receivable. At December 31, 1994, the outstanding accounts receivable balance from one customer was $3.1 million or 15% of gross accounts receivable. At December 31, 1995, the customers with the ten highest F-23 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (12) OTHER MATTERS (CONTINUED) outstanding accounts receivable balances totaled $47.1 million or 43% of gross accounts receivable. At December 31, 1995, the outstanding accounts receivable balance from one customer was $15.2 million or 14% of gross accounts receivable. If any one or a group of these customers' receivable balances should be deemed uncollectible, it would have a material adverse effect on the Company's results of operations and financial condition. PURCHASES FROM RELATED PARTIES The Company purchased inventory items totaling $372,000, $398,000 and $1,130,000 for the years ended December 31, 1993, 1994 and 1995, respectively, from a vendor having a common director with the Company. NOTES RECEIVABLE FROM RELATED PARTIES In September 1993, the Company loaned an executive officer approximately $679,000 as part of the officer's severance package; a portion of the loan was used by the executive to exercise stock options. This amount of the loan is included in notes receivable from shareholders in the accompanying consolidated balance sheet at December 31, 1994. The Company received a note from the officer which bore interest at an annual rate of 4.5% and was payable in two equal annual installments of $340,000 which were due on or before January 1995 and January 1996. The note was with full recourse and was collateralized by the stock purchased. The loan was paid in full with accrued interest during the first quarter of 1995. In January 1995, the Company loaned another executive officer approximately $283,000 as part of the officer's severance package. A portion of the loan was used by the executive to exercise stock options. The Company received a note from the officer which bore interest at an annual rate of 7.75% and was payable in full on or before January 1996. The note was with full recourse and was collateralized by the stock purchased. The loan was paid in full with accrued interest during the second quarter of 1995. (13) SUBSEQUENT EVENTS REVOLVING CREDIT FACILITY In January 1996, the Company entered into a $6 million revolving credit facility with First Security Bank of Utah, N.A. The line matures on April 12, 1996 and bears interest at prime plus 2%. Interest is payable monthly and principal is due at maturity. The facility is secured by accounts receivable and inventory subject to a priority lien by Wells Fargo Bank, N.A. In addition, the agreement prohibits the payment of certain bonuses until the facility expires or is paid in full. F-24 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. -------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary............................. 3 Risk Factors................................... 6 The Company.................................... 13 Use of Proceeds................................ 13 Price Range of Common Stock and Dividend Policy........................................ 14 Capitalization................................. 15 Selected Consolidated Financial Data........... 16 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 17 Business....................................... 25 Management..................................... 39 Principal Stockholders......................... 42 Description of Notes........................... 43 Description of Capital Stock................... 51 Underwriting................................... 53 Legal Matters.................................. 54 Experts........................................ 54 Available Information.......................... 54 Incorporation of Certain Documents by Reference..................................... 54 Index to Consolidated Financial Statements..... F-1
$40,000,000 [LOGO] % CONVERTIBLE SUBORDINATED NOTES DUE 2001 -------------- PROSPECTUS -------------- HAMBRECHT & QUIST , 1996 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION The following table sets forth the various expenses in connection with the sale and distribution of the securities being registered, other than the underwriting discounts and commissions. All amounts shown are estimates except for the Securities and Exchange Commission registration fee and the NASD filing fee. SEC Registration Fee.............................................................. $ 34,048 NASD Filing Fee................................................................... 10,374 Nasdaq Listing Fee................................................................ 17,500 Blue Sky Fees and Expenses........................................................ 15,000 Accounting Fees and Expenses...................................................... 100,000 Legal Fees and Expenses........................................................... 300,000 Printing, Engraving and Mailing Expenses.......................................... 125,000 Miscellaneous..................................................................... 48,078 --------- Total............................................................................. $ 650,000 --------- ---------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS Under Article Sixth of the Company's Restated Certificate of Incorporation and Article Fifth of the Company's By-Laws, each person who is a director or officer of the Company shall be indemnified by the Company to the full extent permitted by Section 145 of the General Corporation Law of Delaware ("Section 145"). Section 145 provides a detailed statutory framework covering indemnification of directors and officers of liabilities and expenses arising out of legal proceedings brought against them by reason of their status or service as directors or officers. This section provides that a director or officer of a corporation (i) shall be indemnified by the corporation for all expenses of such legal proceedings when he is successful on the merits, (ii) may be indemnified by the corporation for the expenses, judgments, fines and amounts paid in settlement of such proceedings (other than a derivative suit), even if he is not successful on the merits, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation (and, in the case of a criminal proceeding, had no reasonable cause to believe his conduct was unlawful), and (iii) may be indemnified by the corporation for expenses of a derivative suit (a suit by a shareholder alleging a breach by a director or officer of a duty owed to the corporation), even if he is not successful on the merits, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation. No indemnification may be made under clause (iii) above, however, if the director or officer is adjudged liable for negligence or misconduct in the performance of his duties to the corporation, unless a court determines that, despite such adjudication and in view of all of the circumstances, he is entitled to indemnification. The indemnification described in clauses (ii) and (iii) above may be made only upon a determination that indemnification is proper because the applicable standard of conduct has been met. Such a determination may be made by a majority of a quorum of disinterested directors, independent legal counsel or the stockholders. The board of directors may authorize advancing litigation expenses to a director or officer upon receipt of an undertaking by such director or officer to repay such expenses if it is ultimately determined that he is not entitled to be indemnified for them. The Company has entered into indemnification agreements with each of its directors which supplement or clarify the statutory indemnity provisions of Section 145 in the following respects: (i) the presumption that the director or officer met the applicable standard of conduct is established, (ii) the advancement of litigation expenses is provided upon request if the director or officer agrees to repay them if it is ultimately determined that he is not entitled to indemnification for them, (iii) indemnity is explicitly provided for settlements of derivative actions, (iv) the director or officer is permitted to petition a court to determine whether his actions met the standard required, and (v) partial indemnification is permitted in the event that the director or officer is not entitled to full indemnification. II-1 As permitted by Section 145, the Company has purchased a general liability insurance policy which covers certain liabilities of directors and officers of the Company arising out of claims based on acts or omissions in their capacity as directors or officers and for which they are not indemnified by the Company. Under the Underwriting Agreement filed as Exhibit 1 hereto, the Underwriter is obligated, under certain circumstances, to indemnify directors and officers of the Company against certain liabilities, including liabilities under the Securities Act of 1933 (the "Securities Act"). ITEM 16. EXHIBITS
EXHIBIT NO. DESCRIPTION - --------- ------------------------------------------------------------------------------------------------------- 1 Form of Underwriting Agreement 4.1* Certificate of Incorporation 4.2** By-laws 4.3*** Rights Agreement between the Company and The First National Bank of Boston, as Rights Agent, dated July 28, 1989 4.4 Form of Indenture 5* Opinion of Hale and Dorr 12* Statement re Computation of Ratios of Earnings to Fixed Charges 23.1* Consent of Hale and Dorr (included in Exhibit 5) 23.2 Consent of Arthur Andersen LLP 24* Powers of Attorney 25* Statement on Form T-1 of Eligibility and Qualification of Trustee 27* Financial Data Schedule 99* Schedule of Valuation and Qualifying Accounts (including report of Arthur Andersen LLP)
- ------------------------ * Previously filed ** Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended July 4, 1993. *** Incorporated by reference from the Company's Current Report on Form 8-K dated July 28, 1989. ITEM 17. UNDERTAKINGS The Company hereby undertakes that, for purposes of determining any liability under the Securities Act, each filing of the Company's annual report pursuant to Section 13(a) or 15(d) of the Exchange Act (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in this Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein and the offering of such securities at the time shall be deemed to be the initial bona fide offering thereof. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Corporation pursuant to the indemnification provisions described herein, or otherwise, the Company has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For purposes of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-2 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe it meets all of the requirements for filing on Form S-3 and has duly caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Roy and State of Utah on the 7th day of March, 1996. IOMEGA CORPORATION By: /s/ LEONARD C. PURKIS -------------------------------------- Leonard C. Purkis Senior Vice President, Finance, and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment has been signed below by the following persons in the capacities indicated below on the 7th day of March, 1996.
SIGNATURE TITLE - ------------------------------------------------------ --------------------------------------------------------- * ------------------------------------------- Chief Executive Officer and Director (principal executive Kim B. Edwards officer) /s/ LEONARD C. PURKIS ------------------------------------------- Senior Vice President, Finance, and Chief Financial Leonard C. Purkis Officer (principal financial and accounting officer) * ------------------------------------------- Chairman of the Board of Directors David J. Dunn * ------------------------------------------- Director Willem H.J. Andersen * ------------------------------------------- Director Robert P. Berkowitz * ------------------------------------------- Director Anthony L. Craig * ------------------------------------------- Director Michael J. Kucha * ------------------------------------------- Director John R. Myers * ------------------------------------------- Director John E. Nolan, Jr.
II-3 * ------------------------------------------- Director The Honorable John E. Sheehan *By: /s/ LEONARD C. PURKIS -------------------------------------- Leonard C. Purkis Attorney-in-fact
II-4 EX-1 2 EXHIBIT 1 $40,000,000(1) IOMEGA CORPORATION % Convertible Subordinated Notes due 2001 UNDERWRITING AGREEMENT ---------------------- _____________, 1996 HAMBRECHT & QUIST LLC Hambrecht & Quist LLC One Bush Street San Francisco, CA 94104 Ladies and Gentlemen: Iomega Corporation, a Delaware corporation (herein called the "Company"), proposes to issue and sell to you, as the underwriter (herein called the "Underwriter"), an aggregate of $40,000,000 principal amount of its __% Convertible Subordinated Notes (herein called the "Underwritten Notes"), to be issued pursuant to the Indenture dated as of March __, 1996 (herein called the "Indenture") between the Company and State Street Bank and Trust Company, as the trustee (herein called the "Trustee"). The Company proposes to grant to the Underwriter an option to purchase up to an additional $6,000,000 principal amount of its __% Convertible Subordinated Notes (herein called the "Option Notes;" with the Underwritten Notes, herein collectively called the "Notes") as provided in Section 3(b) of this Underwriting Agreement (herein called the "Agreement"). The Underwritten Notes and Option Notes will be convertible, on the terms and subject to the conditions set forth in the Indenture and the Notes, into shares of Common Stock, $0.03 1/3 par value, of the Company (the "Common Stock"). The shares of Common Stock issuable upon conversion of the Notes are referred to herein as the "Conversion Shares." The Notes are more fully described in the Indenture and the Registration Statement and the Prospectus hereinafter mentioned. The Company hereby confirms the agreements made with respect to the purchase of the Notes by the Underwriter. - -------------------- (1) Plus a 30-day option to purchase from the Company up to an additional $6,000,000 principal amount of Notes to cover over-allotments, if any. 1. REGISTRATION STATEMENT. The Company has filed with the Securities and Exchange Commission (herein called the "Commission") a registration statement on Form S-3 (No. 33-64995), including the related preliminary prospectus, for the registration under the Securities Act of 1933, as amended (herein called the "Securities Act"), of the Notes and Conversion Shares. Copies of such registration statement and of each amendment thereto, if any, including the related preliminary prospectus (meeting the requirements of Rule 430A of the rules and regulations of the Commission) heretofore filed by the Company with the Commission have been delivered to you. The term Registration Statement as used in this Agreement shall mean such registration statement, including all documents incorporated by reference therein and all exhibits and financial statements and all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, in the form in which it became effective, and any registration statement filed pursuant to Rule 462(b) of the rules and regulations of the Commission with respect to the Notes (herein called a 462(b) registration statement), and in the event of any amendment thereto after the effective date of such registration statement (herein called the "Effective Date"), shall also mean (from and after the effectiveness of such amendment) such registration statement as so amended (including any Rule 462(b) registration statement). The term "Prospectus" as used in this Agreement shall mean the prospectus, including the documents incorporated by reference therein, relating to the Notes first filed with the Commission pursuant to Rule 424(b) and Rule 430A (or, if no such filing is required, as included in the Registration Statement) and, in the event of any supplement or amendment to such prospectus after the Effective Date, shall also mean (from and after the filing with the Commission of such supplement or the effectiveness of such amendment) such prospectus as so supplemented or amended. The term "Preliminary Prospectus" as used in this Agreement shall mean each preliminary prospectus, including the documents incorporated by reference therein, included in such registration statement prior to the time it becomes effective. The Registration Statement has been declared effective under the Securities Act, and no post-effective amendment to the Registration Statement has been filed as of the date of this Agreement. The Company has caused to be delivered to you copies of each Preliminary Prospectus and has consented to the use of such copies for the purposes permitted by the Securities Act. 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. (a) The Company hereby represents and warrants as follows: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, has full corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus and as being conducted, and is duly qualified as a foreign corporation and in good standing in all jurisdictions in which the character of the property owned or leased or the nature of the business transacted by it makes qualification 2 necessary (except where the failure to be so qualified would not have a material adverse effect on the business, properties, condition (financial or otherwise) or results of operations or prospects of the Company and its subsidiaries taken as whole (a "Material Adverse Effect")). (ii) The Company owns all of the shares of capital stock of each subsidiary of the Company, and each of the Company's subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has full corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement and the Prospectus and as being conducted, and is duly qualified as a foreign corporation and in good standing in all jurisdictions in which the character of the property owned or leased or the nature of the business transacted by it makes qualification necessary except where the failure to be so qualified would not have a Material Adverse Effect. (iii) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any materially adverse change in the business, properties, financial condition or results of operations or prospects of the Company and its subsidiaries, taken as a whole, whether or not arising from transactions in the ordinary course of business, other than as set forth in the Registration Statement and the Prospectus, and since such dates, except in the ordinary course of business, neither the Company nor any of its subsidiaries has entered into any material transaction not referred to in the Registration Statement and the Prospectus. (iv) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus relating to the proposed offering of the Notes nor instituted or, to the best knowledge of the Company, after due inquiry, threatened instituting proceedings for that purpose. The Registration Statement and the Prospectus comply, and on the Closing Date (as hereinafter defined) and any later date on which Option Notes are to be purchased, the Prospectus will comply, in all material respects, with the provisions of the Securities Act, the Securities Exchange Act of 1934, as amended (herein called the "Exchange Act"), and the Trust Indenture Act of 1939, as amended (herein called the "Trust Indenture Act") and the rules and regulations of the Commission thereunder. The Company has taken such actions as are necessary to qualify the Indenture under the Trust Indenture Act, and the rules and regulations of the Commission thereunder. On the Effective Date, the Registration Statement (including the information incorporated by reference therein) did not contain any untrue statement of a material fact and did not omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; and, on the Effective Date the Prospectus (including the information incorporated by reference therein) did not and, on the Closing Date and any later date on which Option Notes are to be purchased, will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; PROVIDED, HOWEVER, that none of the representations and warranties in this subparagraph (iv) shall apply to statements in, or omissions from, the Registration Statement or the Prospectus made in reliance upon and in conformity with information herein or otherwise furnished in writing to the 3 Company by or on behalf of the Underwriter for use in the Registration Statement or the Prospectus. (v) The outstanding shares of Common Stock have been duly authorized and validly issued and are fully paid and nonassessable. (vi) The Notes to be issued and sold by the Company have been duly authorized by the Company and, when executed, authenticated, issued and delivered in accordance with this Agreement and the Indenture, will be duly and validly executed, authenticated, issued and delivered and will constitute valid and binding obligations of the Company enforceable in accordance with their terms, except as the enforceability thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally, or by general equitable principles, and will be entitled to the benefits of the Indenture. No further approval or authority of the stockholders or the Board of Directors of the Company will be required for the issuance and sale of the Notes as contemplated herein. (vii) All of the Conversion Shares have been duly authorized and duly reserved for issuance upon such conversion and, when issued upon conversion of the Notes pursuant to the terms of the Indenture and the Notes, will be validly issued and outstanding, fully paid and nonassessable with no personal liability attached to the ownership thereof. None of the Conversion Shares, when delivered, will be subject to any lien, claim, encumbrance, restriction upon voting or transfer, preemptive right or any other claim of any third party, except such as are described in the Prospectus. (viii) The Notes and the capital stock of the Company conform in all material respects to the statements concerning them in the Registration Statement, and the form of certificate for the Notes conforms in all material respects to the Indenture. (ix) Prior to the Closing Date, the Notes to be issued and sold by the Company and the Conversion Shares will be authorized for listing on the Nasdaq Small-Cap Market (herein called the "NSCM") upon official notice of issuance. The Company shall use commercially reasonable efforts to cause the Conversion Shares to be authorized for listing on the Nasdaq National Market (the "NNM") prior to their initial issuance. (x) Except as specifically disclosed in the Registration Statement, and except for options to purchase not more than an aggregate of _________ shares of Common Stock granted to the Company's employees, directors or consultants in the ordinary course of business subsequent to the date as of which stock option data is presented in the Registration Statement, the Company does not have outstanding any options to purchase, or any preemptive rights, or other rights to subscribe or to purchase or rights of co-sale, any securities or obligations convertible into, or any contracts or commitments to issue or sell or register for sale, shares of its capital stock or any such options, rights, convertible securities or obligations. 4 (xi) The audited consolidated financial statements of the Company, together with related notes and schedules as set forth in the Registration Statement ("Financial Statements"), present fairly the financial position and the results of operations of the Company and its subsidiaries, taken as a whole, at the indicated dates and for the indicated periods. The Financial Statements have been prepared in accordance with generally accepted accounting principles, consistently applied through the period involved, and all adjustments necessary for a fair presentation of results for such periods have been made. The selected and summary financial data and the tables set forth under "Results of Operations" and "Selected Quarterly Operating Results" in the Management's Discussion and Analysis of Financial Condition and Results of Operations section, included in the Registration Statement, present fairly the information shown therein and have been compiled on a basis consistent with the audited financial statements presented in the Registration Statement. (xii) Neither the Company nor any of its subsidiaries is in violation or default under any provision of its charter documents or bylaws, as currently in effect, or any indenture, license, mortgage, lease, franchise, permit, deed of trust or other agreement or instrument to which such corporation is a party or by which such corporation or any of its properties is bound or may be affected, except where such violation or default would not have a Material Adverse Effect. (xiii) The Company has full legal right, power and authority to enter into this Agreement, the Indenture and the Notes and perform the transactions contemplated hereby and thereby. This Agreement and the Indenture have been duly authorized by the Company and this Agreement has been duly executed and delivered by the Company and is, and the Indenture, when duly executed and delivered by the officers of the Company (assuming due execution and delivery by the Trustee) will be valid and binding agreements on the part of the Company, enforceable in accordance with their respective terms, except as rights to indemnity and contribution hereunder may be limited by applicable law and except as the enforcement hereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting creditors' rights generally, or by general equitable principles. The Indenture will be duly qualified under, and conform to the requirements of, the Trust Indenture Act. The execution and performance of this Agreement, the Indenture and the Notes and the consummation of the transactions herein and therein contemplated do not and will not: (A) conflict with, or result in a breach of, or violation of, any of the terms or provisions of, or constitute, either by itself or upon notice or the passage of time or both, a default under, any indenture, license, mortgage, lease, franchise, permit, deed of trust or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which any such corporation or any of its properties is bound or may be affected, except where such breach, violation or default would not have a Material Adverse Effect, (B) violate any of the provisions of the charter documents or bylaws of any such corporation, except where such violation would not have a Material Adverse Effect, or (C) violate any material order, judgment, statute, rule or regulation applicable to any such corporation or of any regulatory, administrative or governmental body or agency having jurisdiction over any such corporation or any of its properties, except where such violation would not have a Material Adverse Effect. 5 (xiv) Except as disclosed in the Prospectus, there is not any pending or, to the Company's knowledge, threatened action, suit, claim or proceeding against the Company or any of its subsidiaries or any of their respective officers or any of their properties, assets or rights before any court or governmental agency or body or otherwise which (A) might have a Material Adverse Effect, or (B) might prevent consummation of the transactions contemplated hereby or (C) is required to be disclosed in the Registration Statement; and there are no contracts or documents of the Company or any of its subsidiaries that are required to be described in the Prospectus or to be filed as exhibits to the Registration Statement which have not been fairly and accurately described in all material respects in the Prospectus and filed as exhibits to the Registration Statement. The contracts so described in the Prospectus are in full force and effect on the date hereof; and neither the Company nor any of its subsidiaries nor, to the Company's knowledge any other party, is in breach of or default under any of such contracts. (xv) Except as disclosed in the Prospectus, the Company owns or possesses adequate rights to use all patents, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names and copyrights described or referred to in the Prospectus as owned or used by it or which are necessary for the conduct of its businesses as described in the Prospectus; the Company has not received any notice of, and the Company has no knowledge of, any infringement of or conflict with asserted rights of others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, might reasonably have a Material Adverse Effect. (xvi) The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Notes. 3. PURCHASE OF THE NOTES BY THE UNDERWRITER. (a) On the basis of the representations and warranties and subject to the terms and conditions herein set forth, the Company agrees to issue and sell the Underwritten Notes to the Underwriter and the Underwriter agrees to purchase from the Company the Underwritten Notes at the purchase price of ___% of the principal amount thereof plus accrued interest, if any, from March ___, 1996 to the date of payment and delivery. (b) On the basis of the representations, warranties and covenants herein contained, and subject to the terms and conditions herein set forth, the Company grants an option to the Underwriter to purchase up to $6,000,000 principal amount of Option Notes from the Company at the purchase price of ___% of the principal amount thereof plus accrued interest, if any, from March ___, 1996 to the date of payment and delivery. Said option may be exercised only to cover over-allotments in the sale of the Underwritten Notes by the Underwriter and may be exercised in whole or in part at any time (but not more than once) on or before the thirtieth day after the date of this Agreement upon written or telegraphic notice by you to the Company setting forth the aggregate principal amount of the Option Notes as to which the Underwriter is 6 exercising the option. Delivery of certificates for the Option Notes and payment therefor shall be made as provided in Section 5 hereof. 4. OFFERING BY UNDERWRITER. (a) The terms of the public offering by the Underwriter of the Notes to be purchased by it shall be as set forth in the Prospectus. The Underwriter may from time to time change the public offering price after the closing of the public offering and increase or decrease the concessions and discounts to dealers as it may determine. (b) The information set forth in the last paragraph on the front cover page and under "Underwriting" in the Registration Statement, any Preliminary Prospectus and the Prospectus relating to the Notes filed by the Company (insofar as such information relates to the Underwriter or the terms and conditions upon which it will sell the Notes) constitutes the only information furnished by the Underwriter to the Company for inclusion in the Registration Statement, any Preliminary Prospectus, and the Prospectus, and you represent and warrant to the Company that the statements made therein are correct. 5. DELIVERY OF AND PAYMENT FOR THE NOTES. (a) Delivery of certificates for the Underwritten Notes and the Option Notes (if the option granted by Section 3(b) hereof shall have been exercised not later than 7:00 A.M., California time, on the date two business days preceding the Closing Date), and payment therefor, shall be made at the office of ______________________________________, at 7:00 A.M., California time, on the fourth business day after the date of this Agreement, or at such time on such other day, not later than seven full business days after such fourth business day, as shall be agreed upon in writing by the Company and you. The date and hour of such delivery and payment (which may be postponed as provided in Section 3(b) hereof) are herein called the Closing Date. (b) If the option granted by Section 3(b) hereof shall be exercised after 7:00 A.M., California time, on the date two business days preceding the Closing Date, delivery of certificates for the Option Notes, and payment therefor, shall be made at the office of ______________________________________________________, at 7:00 A.M., California time, on the third business day after the exercise of such option. (c) Payment for the Notes purchased from the Company shall be made to the Company or its order by one or more certified or official bank check or checks in next day funds (and the Company agrees not to deposit any such check in the bank on which drawn until the day following the date of its delivery to the Company). Such payment shall be made upon delivery of certificates for the Notes to you for the respective accounts of the several Underwriter against receipt therefor signed by you. Certificates for the Notes to be delivered to you shall be registered in such name or names and shall be in such denominations as you may request at least two business days before the Closing Date, in the case of Underwritten Notes, and at least two 7 business days prior to the purchase thereof, in the case of the Option Notes. Such certificates will be made available to the Underwriter for inspection, checking and packaging at the offices of Lewco Securities Corporation, 2 Broadway, New York, New York, 10004 not less than one full business day prior to the Closing Date or, in the case of the Option Notes, by 3:00 p.m., New York time, on the business day preceding the date of purchase. 6. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees as follows: (a) The Company will (i) prepare and timely file with the Commission under Rule 424(b) a Prospectus containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A and (ii) not file any amendment to the Registration Statement or supplement to the Prospectus of which you shall not previously have been advised and furnished with a copy or to which you shall have reasonably objected in writing or which is not in compliance with the Securities Act or the rules and regulations of the Commission. (b) The Company will promptly notify the Representatives in the event of (i) the request by the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, (ii) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement, (iii) the institution or notice of intended institution of any action or proceeding for that purpose, (iv) the receipt by the Company of any notification with respect to the suspension of the qualification of the Notes for sale in any jurisdiction, or (v) the receipt by it of notice of the initiation or threatening of any proceeding for such purpose. The Company will make every reasonable effort to prevent the issuance of such a stop order and, if such an order shall at any time be issued, to obtain the withdrawal thereof at the earliest possible moment. (c) The Company will (i) on or before the Closing Date, deliver to you a signed copy of the Registration Statement as originally filed and of each amendment thereto filed prior to the time the Registration Statement becomes effective and, promptly upon the filing thereof, a signed copy of each post- effective amendment, if any, to the Registration Statement (together with, in each case, all exhibits thereto unless previously furnished to you), (ii) as promptly as possible deliver to you, at such office or offices as you may designate, as many copies of the Prospectus as you may reasonably request, and (iii) thereafter from time to time during the period in which a prospectus is required by law to be delivered by the Underwriter or dealer, likewise send to you as many additional copies of the Prospectus and as many copies of any supplement to the Prospectus and of any amended Prospectus, filed by the Company with the Commission, as you may reasonably request for the purposes contemplated by the Securities Act. (d) If at any time during the period in which a prospectus is required by law to be delivered by the Underwriter or dealer any event relating to or affecting the Company, or of which the Company shall be advised in writing by you, shall occur as a result of which it is 8 necessary, in the opinion of counsel for the Company or of counsel for the Underwriter, to supplement or amend the Prospectus in order to make the Prospectus not misleading in the light of the circumstances existing at the time it is delivered to a purchaser of the Notes, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended Prospectus so that the Prospectus as so supplemented or amended will not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time such Prospectus is delivered to such purchaser, not misleading. If, after the public offering of the Notes by the Underwriter and during such period, the Underwriter shall propose to vary the terms of offering thereof by reason of changes in general market conditions or otherwise, you will advise the Company in writing of the proposed variation, and, if in the opinion either of counsel for the Company or of counsel for the Underwriter such proposed variation requires that the Prospectus be supplemented or amended, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended Prospectus setting forth such variation. The Company authorizes the Underwriter and all dealers to whom any of the Notes may be sold by the Underwriter to use the Prospectus, as from time to time amended or supplemented, in connection with the sale of the Notes in accordance with the applicable provisions of the Securities Act and the applicable rules and regulations thereunder for such period. (e) Prior to the filing thereof with the Commission, the Company will submit to you, for your information, a copy of any post-effective amendment to the Registration Statement and any supplement to the Prospectus or any amended Prospectus proposed to be filed. (f) The Company will cooperate, when and as requested by you, in the qualification of the Notes for offer and sale under the securities or blue sky laws of such jurisdictions as you may designate and, during the period in which a prospectus is required by law to be delivered by the Underwriter or dealer, in keeping such qualifications in good standing under said securities or blue sky laws; PROVIDED, HOWEVER, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation in any jurisdiction in which it is not so qualified. The Company will from time to time, prepare and file such statements, reports, and other documents as are or may be required to continue such qualifications in effect for so long a period as you may reasonably request for distribution of the Notes. (g) During a period of five years commencing with the date hereof, the Company will furnish to you copies of all periodic and special reports furnished to stockholders of the Company and of all information, documents and reports filed with Commission. (h) Not later than the 45th day following the end of the fiscal quarter first occurring after the first anniversary of the Effective Date, the Company will make generally available to its security holders an earnings statement in accordance with Section 11(a) of the Securities Act and Rule 158 thereunder. (i) The Company agrees to pay all costs and expenses incident to the performance of its obligations under this Agreement and the Indenture, including all costs and expenses incident 9 to (i) the preparation, printing and filing with the Commission and the National Association of Securities Dealers, Inc. ("NASD") of the Registration Statement, any Preliminary Prospectus, the Prospectus and the Form T-1 filed in connection with the Notes (the "Form T-1"), (ii) the furnishing to the Underwriter of copies of any Preliminary Prospectus and of the several documents required by paragraph (c) of this Section 6 to be so furnished, (iii) the printing of this Agreement and related documents delivered to the Underwriter, (iv) the preparation, printing and filing of all supplements and amendments to the Prospectus referred to in paragraph (d) of this Section 6 and the T-1, (v) the furnishing to you of the reports and information referred to in paragraph (g) of this Section 6 and (vi) the printing and issuance of the Indenture and the note certificates, including the transfer agent's fees. (j) The Company agrees to reimburse you, for the account of the several Underwriter, for blue sky fees and related disbursements and costs of a legal investment survey (including counsel fees and disbursements and cost of printing memoranda for the Underwriter) paid by or for the account of the Underwriter or its counsel in qualifying the Notes under state securities or blue sky laws, in conducting a legal investment survey and in the review of the offering by the NASD. (k) The Company hereby agrees that, without the prior written consent of the Underwriter, it will not, during the period ending ninety (90) days after the date of the final Prospectus for the public offering, (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, or (2) enter into any swap or similar agreement that transfers, in whole or in part, the economic risk of ownership of Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise; PROVIDED, HOWEVER, that the foregoing provisions of this paragraph (k) shall not apply to (a) the Notes to be sold to the Underwriter pursuant to this Agreement, and (b) shares of Common Stock issued under the stock option and stock purchase plans of the Company (the "Stock Plans"), including Common Stock issued upon the exercise of options granted under the Stock Plans, all as described through incorporation by reference in the Preliminary Prospectus and (c) shares of Common Stock issued on conversion of the Notes. For purposes of this paragraph (k), a sale, offer, or other disposition shall be deemed to include any sale to an institution which can, following such sale, sell Common Stock to the public in reliance on Rule 144A. (l) The Company is familiar with the Investment Company Act of 1940, as amended, and has in the past conducted its affairs, and will in the future conduct its affairs, in such a manner to ensure that the Company was not and will not be an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, and the rules and regulations thereunder. 10 7. INDEMNIFICATION AND CONTRIBUTION. (a) Subject to the provisions of paragraph (f) of this Section 7, the Company agrees to indemnify and hold harmless each Underwriter and each person (including each partner or officer thereof) who controls the Underwriter within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act, the Trust Indenture Act, or the common law or otherwise, and the Company agrees to reimburse the Underwriter and controlling person for any legal or other expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(b) registration statement) or any post-effective amendment thereto (including any Rule 462(b) registration statement), or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; PROVIDED, HOWEVER, that (A) the indemnity agreements of the Company contained in this paragraph (a) shall not apply to any such losses, claims, damages, liabilities or expenses if such statement or omission was made in reliance upon and in conformity with information furnished as herein stated or otherwise furnished in writing to the Company by or on behalf of the Underwriter expressly for use in any Preliminary Prospectus or the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto, and (B) the indemnity agreement contained in this paragraph (a) with respect to any Preliminary Prospectus shall not inure to the benefit of the Underwriter from whom the person asserting any such losses, claims, damages, liabilities or expenses purchased the Notes which is the subject thereof (or to the benefit of any person controlling the Underwriter) if at or prior to the written confirmation of the sale of such Notes a copy of the Prospectus (or the Prospectus as amended or supplemented) was not sent or delivered to such person (excluding the documents incorporated therein by reference) and the untrue statement or omission of a material fact contained in such Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented) unless the failure is the result of noncompliance by the Company with this Agreement. The indemnity agreements of the Company contained in this paragraph (a) and the representations and warranties of the Company contained in Section 2 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Notes. 11 (b) The Underwriter agrees to indemnify and hold harmless the Company, each of its officers who signs the Registration Statement on his own behalf or pursuant to a power of attorney, each of its directors and each person (including each partner or officer thereof) who controls the Company within the meaning of Section 15 of the Securities Act from and against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject under the Securities Act, the Exchange Act, the Trust Indenture Act, or the common law or otherwise and to reimburse each of them for any legal or other expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(b) registration statement) or any post-effective amendment thereto (including any Rule 462(b) registration statement) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) any untrue statement or alleged untrue statement of a material fact contained in any Preliminary Prospectus or the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, if such statement or omission was made in reliance upon and in conformity with information furnished as herein stated or otherwise furnished in writing to the Company by or on behalf of the Underwriter expressly for use in the Registration Statement or in any Preliminary Prospectus or the Prospectus or any such amendment thereof or supplement thereto. The indemnity agreement of the Underwriter contained in this paragraph (b) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery of and payment for the Notes. (c) Each party indemnified under the provisions of paragraphs (a) and (b) of this Section 7 agrees that, upon the service of a summons or other initial legal process upon it in any action or suit instituted against it or upon its receipt of written notification of the commencement of any investigation or inquiry of, or proceeding against, it in respect of which indemnity may be sought on account of any indemnity agreement contained in such paragraphs, it will promptly give written notice (herein called the Notice) of such service or notification to the party or parties from whom indemnification may be sought hereunder. No indemnification provided for in such paragraphs shall be available to any party who shall fail so to give the Notice if the party to whom such Notice was not given was unaware of the action, suit, investigation, inquiry or proceeding to which the Notice would have related and was prejudiced by the failure to give the Notice, but the omission so to notify such indemnifying party or parties of any such service or notification shall not relieve such indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of such indemnity agreement. Any indemnifying party shall be entitled at its own expense to participate in the defense of any action, suit or proceeding against, or investigation or inquiry of, an 12 indemnified party. Any indemnifying party shall be entitled, if it so elects within a reasonable time after receipt of the Notice by giving written notice (herein called the Notice of Defense) to the indemnified party, to assume (alone or in conjunction with any other indemnifying party or parties) the entire defense of such action, suit, investigation, inquiry or proceeding, in which event such defense shall be conducted, at the expense of the indemnifying party or parties, by counsel chosen by such indemnifying party or parties and reasonably satisfactory to the indemnified party or parties; PROVIDED, HOWEVER, that (i) if the indemnified party or parties reasonably determine that there may be a conflict between the positions of the indemnifying party or parties and of the indemnified party or parties in conducting the defense of such action, suit, investigation, inquiry or proceeding or that there may be legal defenses available to such indemnified party or parties different from or in addition to those available to the indemnifying party or parties, then one counsel for the indemnified party or parties shall be entitled to conduct the defense of the indemnified party or parties to the extent reasonably determined by such counsel to be necessary to protect the interests of the indemnified party or parties and (ii) in any event, the indemnified party or parties shall be entitled to have counsel chosen by such indemnified party or parties participate in, but not conduct, the defense. If, within a reasonable time after receipt of the Notice, an indemnifying party gives a Notice of Defense and the counsel chosen by the indemnifying party or parties is reasonably satisfactory to the indemnified party or parties, the indemnifying party or parties will not be liable under paragraphs (a) through (c) of this Section 7 for any legal or other expenses subsequently incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding, except that (A) the indemnifying party or parties shall bear the legal and other expenses incurred in connection with the conduct of the defense as referred to in clause (i) of the proviso to the preceding sentence and (B) the indemnifying party or parties shall bear such other expenses as it or they have authorized to be incurred by the indemnified party or parties. If, within a reasonable time after receipt of the Notice, no Notice of Defense has been given, the indemnifying party or parties shall be responsible for any legal or other expenses incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding. (d) If the indemnification provided for in this Section 7 is unavailable or insufficient to hold harmless an indemnified party under paragraph (a) or (b) of this Section 7, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in paragraph (a) or (b) of this Section 7 (i) in such proportion as is appropriate to reflect the relative benefits received by each indemnifying party from the offering of the Notes or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each indemnifying party in connection with the statements or omissions that resulted in such losses, claims, damages or liabilities, or actions in respect thereof, as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriter on the other shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Notes received by the Company and the total underwriting discount received by the Underwriter, as set forth in the table on the cover page of the Prospectus, bear to the aggregate public offering price 13 of the Notes. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by each indemnifying party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties agree that it would not be just and equitable if contributions pursuant to this paragraph (d) were to be determined by pro rata allocation or by any other method of allocation which does not take into account the equitable considerations referred to in the first sentence of this paragraph (d). The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities, or actions in respect thereof, referred to in the first sentence of this paragraph (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating, preparing to defend or defending against any action or claim which is the subject of this paragraph (d). Notwithstanding the provisions of this paragraph (d), the Underwriter shall not be required to contribute any amount in excess of the underwriting discount applicable to the Notes purchased by the Underwriter. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Each party entitled to contribution agrees that upon the service of a summons or other initial legal process upon it in any action instituted against it in respect of which contribution may be sought, it will promptly give written notice of such service to the party or parties from whom contribution may be sought, but the omission so to notify such party or parties of any such service shall not relieve the party from whom contribution may be sought from any obligation it may have hereunder or otherwise (except as specifically provided in paragraph (c) of this Section 7). (e) The Company will not, without the prior written consent of the Underwriter, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not the Underwriter or any person who controls the Underwriter within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding) unless such settlement, compromise or consent includes an unconditional release of the Underwriter and each controlling person from all liability arising out of such claim, action, suit or proceeding. 8. TERMINATION. This Agreement may be terminated by you at any time prior to the Closing Date by giving written notice to the Company if after the date of this Agreement trading in the Common Stock shall have been suspended, or if there shall have occurred (i) the engagement in hostilities or an escalation of major hostilities by the United States or the declaration of war or a national emergency by the United States on or after the date hereof, (ii) any outbreak of major hostilities involving the United States, or a national or international calamity or emergency if the effect of such outbreak, calamity or emergency would, in the Underwriter's reasonable judgment, make the offering or delivery of the Notes impracticable, 14 (iii) suspension of trading in securities generally or a material adverse decline in value of securities generally on the New York Stock Exchange, the American Stock Exchange, the NASD Automated Quotation System ("Nasdaq") or the NNM, or limitations on prices (other than limitations on hours or numbers of days of trading) for securities on either such exchange or system, (iv) the occurrence of any change in the business or properties of the Company which in the Underwriter's reasonable opinion materially and adversely impairs the investment quality of the Notes, or (v) declaration of a banking moratorium by either federal or New York State authorities. If this Agreement shall be terminated pursuant to this Section 8, there shall be no liability of the Company to the Underwriter and no liability of the Underwriter to the Company; PROVIDED, HOWEVER, that in the event of any such termination the Company agrees to indemnify and hold harmless the Underwriter from all costs or expenses incident to the performance of the obligations of the Company under this Agreement, including all costs and expenses referred to in paragraphs (i) and (j) of Section 6 hereof. 9. CONDITIONS OF UNDERWRITER'S OBLIGATIONS. The obligations of the Underwriter to purchase and pay for the Notes shall be subject to the performance by the Company of its obligations to be performed hereunder at or prior to the Closing Date or any later date on which Option Notes are to be purchased, as the case may be, and to the following further conditions: (a) The Registration Statement shall have become effective; and no stop order suspending the effectiveness thereof shall have been issued and no proceedings therefor shall be pending or threatened by the Commission. The Indenture shall have been qualified under the Trust Indenture Act. (b) The legality and sufficiency of the sale of the Notes hereunder, the validity and form of the certificates representing the Notes, and all corporate proceedings and other legal matters incident to the foregoing and the authorization, form and validity of this Agreement, the Indenture, the Registration Statement and the Prospectus (except as to the financial statements contained therein) and the Form T-1, shall have been approved at or prior to the Closing Date by Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP, counsel for the Underwriter ("GDSVF&H"). (c) You shall have received from Hale and Dorr, counsel for the Company, and from Woodcock Washburn Kurtz Mackiewicz & Norris, patent counsel for the Company, opinions, addressed to the Underwriter and dated the Closing Date, covering the matters set forth in Annex A and Annex B hereto, respectively, and if Option Notes are purchased at any date after the Closing Date, additional opinions from each such counsel addressed to the Underwriter and dated 15 such later date, confirming that the statements expressed as of the Closing Date in such opinions remain valid as of such later date. (d) You shall be satisfied that (i) as of the Effective Date, the statements made in the Registration Statement and the Prospectus were true and correct and neither the Registration Statement nor the Prospectus omitted to state any material fact required to be stated therein or necessary in order to make the statements therein, respectively, not misleading, (ii) since the Effective Date, no event has occurred which was required by law to have been set forth in a supplement or amendment to the Prospectus which has not been set forth in such a supplement or amendment, (iii) since the respective dates as of which information is given in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the business, properties, financial condition, results of operations or prospects of the Company, whether or not arising from transactions in the ordinary course of business, and, since such dates, except in the ordinary course of business, the Company has not entered into any material transaction not referred to in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, (iv) the Company does not have any material contingent obligations which are not disclosed in the Registration Statement and the Prospectus, (v) there are not any pending or known threatened legal proceedings to which the Company is a party or of which property of the Company is the subject which are material and which are not disclosed in the Registration Statement and the Prospectus, (vi) there are not any franchises, contracts, leases or other documents which are required to be filed as exhibits to the Registration Statement which have not been filed as required, (vii) the representations and warranties of the Company herein are true and correct in all material respects as of the Closing Date or any later date on which Option Notes are to be purchased, as the case may be, and (viii) there has not been any material change in the market for securities in general or in political, financial or economic conditions from those reasonably foreseeable as to render it impracticable, in your reasonable judgment, to make a public offering of the Notes or a material adverse change in market levels for securities in general (or those of companies in particular) or financial or economic conditions which render it inadvisable to proceed. (e) You shall have received on the Closing Date and on any later date on which Option Notes are purchased a certificate, dated the Closing Date or such later date, as the case may be, and signed by the President and the Chief Financial Officer of the Company, on behalf of the Company, stating that the respective signers of said certificate have carefully examined the Registration Statement in the form in which it originally became effective and the Prospectus contained therein and any supplements or amendments thereto, and that the statements included in clauses (i) through (vii) of paragraph (d) of this Section 9 are true and correct. (f) You shall have received from Arthur Andersen LLP, a letter or letters, addressed to the Underwriter and dated the Closing Date and any later date on which Option Notes are purchased, confirming that they are independent public accountants with respect to the Company within the meaning of the Securities Act and the applicable published rules and regulations 16 thereunder and based upon the procedures described in their letter delivered to you concurrently with the execution of this Agreement (herein called the Original Letter), but carried out to a date not more than five (5) business days prior to the Closing Date or such later date on which Option Notes are purchased (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the Closing Date or such later date, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described in the Original Letter since the date of the Original Letter or to reflect the availability of more recent financial statements, data or information. The letters shall not disclose any change, or any development involving a prospective change, in or affecting the business or properties of the Company which, in your reasonable judgment, makes it impractical or inadvisable to proceed with the public offering of the Notes or the purchase of the Option Notes as contemplated by the Prospectus. (g) You shall have received from Arthur Andersen LLP a letter stating that their review of the Company's system of internal accounting controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's financial statements as at December 31, 1995, did not disclose any weakness in internal controls that they considered to be material weaknesses. (h) You shall have been furnished evidence in usual written or telegraphic form from the appropriate authorities of the several jurisdictions, or other evidence satisfactory to you, of the qualification referred to in paragraph (f) of Section 6 hereof. (i) On or prior to the Closing Date, you shall have received from all directors, and executive officers of the Company and Idanta Partners Ltd. agreements in a form reasonably satisfactory to the Underwriter that such stockholders will not, without the prior written consent of Hambrecht & Quist LLC, during the period ending ninety (90) days after the date of the final Prospectus for the public offering, (1) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any shares of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock, or (2) enter into any swap or similar agreement that transfers, in whole or in part, the economic risk of ownership of the Common Stock, whether any such transaction described in clause (1) or (2) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise, and whether any such transaction relates to Common Stock then owned or thereafter acquired by such holder. (j) Prior to the Closing Date, the Notes to be issued and sold by the Company and the Conversion Shares will be authorized for listing on the NSCM upon official notice of issuance. 17 All the agreements, opinions, certificates and letters mentioned above or elsewhere in this Agreement shall be deemed to be in compliance with the provisions hereof only if GDSVF&H, counsel for the Underwriter, shall be reasonably satisfied that they comply in form and scope. In case any of the conditions specified in this Section 9 shall not be fulfilled, this Agreement may be terminated by you by giving notice to the Company. Any such termination shall be without liability of the Company to the Underwriter and without liability of the Underwriter to the Company; PROVIDED, HOWEVER, that (i) in the event of such termination, the Company agrees to indemnify and hold harmless the Underwriter from all costs or expenses incident to the performance of the obligations of the Company under this Agreement, including all costs and expenses referred to in paragraphs (i) and (j) of Section 6 hereof, and (ii) if this Agreement is terminated by you because of any refusal, inability or failure on the part of the Company to perform any agreement herein, to fulfill any of the conditions herein, or to comply with any provision hereof other than by reason of a default by any of the Underwriter, the Company will reimburse the Underwriter upon demand for all out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with transactions contemplated hereby. 10. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other obligations under Section 7 of this Agreement, the Company hereby agrees to reimburse on a quarterly basis the Underwriter for all reasonable legal and other expenses incurred in connection with investigating or defending any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the obligations under this Section 10 and the possibility that such payments might later be held to be improper; PROVIDED, HOWEVER, that (i) to the extent any such payment is ultimately held to be improper, the persons receiving such payments shall promptly refund them, (ii) such persons shall provide to the Company, upon request, reasonable assurances of their ability to effect any refund, when and if due and (iii) such persons shall not be entitled to reimbursement under this Section 10 if there shall have been a judicial determination or agreement among the Company and such persons that they are not entitled to payment of their reasonable legal expenses and other expenses pursuant to Section 7 of this Agreement. 11. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure to the benefit of the Company and the Underwriter and, with respect to the provisions of Section 7 hereof, the several parties (in addition to the Company and the Underwriter) indemnified under the provisions of said Section 7, and their respective personal representatives, successors and assigns. Nothing in this Agreement is intended or shall be construed to give to any other person, firm or corporation any legal or equitable remedy or claim under or in respect of this Agreement 18 or any provision herein contained. The term "successors and assigns" as herein used shall not include any purchaser, as such purchaser, of any of the Notes from the Underwriter. 12. NOTICES. Except as otherwise provided herein, all communications hereunder shall be in writing and, if to the Underwriter, shall be mailed, copied or delivered to Hambrecht & Quist LLC, One Bush Street, San Francisco, California 94104, Attention: Andrew Kahn (with a copy to the General Counsel); and if to the Company, shall be mailed, telegraphed or delivered to it at its office, Attention: Kim B. Edwards or Leonard C. Purkis (with a copy to Hale and Dorr, Attention: Patrick Rondeau, Esq.). All notices given by telegraph shall be promptly confirmed by letter. 13. MISCELLANEOUS. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations, warranties and covenants in this Agreement shall remain in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter or controlling person thereof, or by or on behalf of the Company or its respective directors or officers, and (c) delivery and payment for the Notes under this Agreement; PROVIDED, HOWEVER, that if this Agreement is terminated prior to the Closing Date, the provisions of paragraph (k) of Section 6 hereof shall be of no further force or effect. The engagement letter dated February 9, 1996 between the Company and the Underwriter with respect to the transaction contemplated by this Agreement is hereby terminated and of no further force or effect. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF CALIFORNIA. 19 Please sign and return to the Company the enclosed duplicates of this letter, whereupon this letter will become a binding agreement between the Company and the Underwriter in accordance with its terms. Very truly yours, IOMEGA CORPORATION By: _____________________________________________ Kim B. Edwards President and Chief Executive Officer The foregoing Agreement is hereby confirmed and accepted as of the date first above written. HAMBRECHT & QUIST LLC By: ____________________________________ Managing Director 20 ANNEX A Matters to be Covered in the Opinion of Hale and Dorr Counsel for the Company (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware, is duly qualified as a foreign corporation and in good standing in ______________, ______________, ______________, and is so qualified and in good standing in each jurisdiction in which, to its knowledge, the ownership or leasing of property requires such qualification (except where the failure to be so qualified would not have a material adverse effect on the business, properties, condition (financial or otherwise) or results of operations or prospects of the Company and its subsidiaries taken as whole (a "Material Adverse Effect")), and has full corporate power and authority to own or lease its properties and conduct its business as described in the Registration Statement; (ii) The Company owns beneficially and of record all of the shares of capital stock of each subsidiary of the Company, and each subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation; (iii) The authorized capital stock of the Company consists of 5,000,000 shares of Preferred Stock, $.01 par value, none of which are issued and outstanding, and 150,000,000 shares of Common Stock, $.03 1/3 par value, of which there are issued and outstanding of record __________ shares; proper corporate proceedings have been taken validly to authorize such authorized capital stock; all of the outstanding shares of such capital stock have been duly and validly issued and are fully paid and nonassessable; all of the Conversion Shares have been duly authorized and duly reserved for issuance upon conversion of the Notes and, when issued and delivered upon conversion of the Notes pursuant to the terms of the Indenture, will be validly issued and outstanding, fully paid and nonassessable; no preemptive rights or rights of refusal exist with respect to the Notes or Conversion Shares, or the issue and sale thereof, pursuant to the Restated Certificate of Incorporation or Bylaws of the Company; and, to the knowledge of such counsel, there are no contractual preemptive rights, rights of first refusal or rights of co-sale which exist with respect to the issue and sale of the Notes or Conversion Shares that have not been waived. Except as disclosed in the Registration Statement and except for options to purchase not more than an aggregate of _________ shares of Common Stock granted to the Company's employees, directors or consultants subsequent to the date as of which stock option data is presented in the Registration Statement, to the knowledge of such counsel, the Company does not have outstanding any options to purchase, or any other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell shares of its capital stock or any such options, rights, convertible securities or obligations; 21 (iv) The Registration Statement has become effective under the Securities Act and, to the best of such counsel's knowledge after due inquiry, no stop order suspending the effectiveness of the Registration Statement or suspending or preventing the use of the Prospectus is in effect and no proceedings for that purpose have been instituted or are pending or threatened by the Commission. The Indenture has been qualified under the Trust Indenture Act; (v) The Registration Statement at the Effective Date and the Prospectus and each amendment and supplement thereto (except as to the financial statements and schedules and other financial data contained therein, as to which such counsel need express no opinion) comply as to form in all material respects with the requirements of the Securities Act, the Exchange Act, the Trust Indenture Act, as applicable, and with the rules and regulations of the Commission thereunder; (vi) The information required to be set forth in the Registration Statement in answer to Items 9 and 10 (insofar as Item 10 relates to such counsel) of Form S-3 is accurately and adequately set forth therein in all material respects or no response is required with respect to such Items; the statements (1) in the Prospectus under the captions "Business -- Legal Proceedings," and "Incorporation of Certain Documents by Reference" and (2) in the Registration Statement in Items 14 and 15, in each case insofar as such statements constitute summaries of legal matters, documents or proceedings referred to therein, fairly and correctly present the information called for with respect to such legal matters, documents and proceedings in all material aspects; and, to the best of such counsel's knowledge, the description of the Company's stock option plans and the options granted and which may be granted thereunder set forth or incorporated by reference in the Prospectus accurately and fairly presents the information required to be shown with respect to said plans and options to the extent required by the Securities Act and the rules and regulations of the Commission thereunder; (vii) To counsel's knowledge, there are no franchises, contracts, leases, documents or legal proceedings, pending or threatened, which in the opinion of such counsel are of a character required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement, which are not described and filed as required; such franchises, contracts, leases, documents and legal proceedings as are summarized in the Registration Statement or the Prospectus fairly and correctly present the information disclosed with respect thereto in all material aspects; (viii) The Underwriting Agreement has been duly authorized, executed and delivered by the Company; (ix) The Notes have been duly authorized and, when duly executed, authenticated and issued in accordance with the Indenture and delivered by the Company and paid for in accordance the terms thereof will constitute valid and legally binding obligations of the Company entitled to the benefits provided by the Indenture, subject, as to enforcement, to bankruptcy, insolvency, fraudulent transfer, moratorium, reorganization and similar laws of 22 general applicability relating to or affecting creditors' rights and to general equity principles; the form of certificate of the Notes conforms in all material respects to the terms of the Indenture and the holders of the Notes will not be subject to personal liability for acts or obligations of the Company by reason of being such holders. (x) The Indenture has been duly authorized, executed and delivered by the Company and constitutes a valid and legally binding instrument, enforceable against the Company in accordance with its terms, subject, as to enforcement to bankruptcy, insolvency, fraudulent transfer, moratorium, reorganization and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles; and the Indenture has been duly qualified under the Trust Indenture Act; (xi) The statements in the Prospectus under the captions "Prospectus Summary-The Offering", "Description of Notes" and "Description of Capital Stock", insofar as such statements purport to summarize certain provisions of documents or agreements specifically referred to therein or matters of law, are correct in all material respects; (xii) Except as described in the Prospectus with respect to the repurchase of the Notes upon the occurrence of a Repurchase Event (as defined in the Indenture), the issue and sale by the Company of the Notes as contemplated by this Agreement and the compliance by the Company with all of the provisions of the Notes, the Indenture and this Agreement and the consummations of the transactions herein and therein contemplated will not conflict with, or result in a breach of, the Restated Certificate of Incorporation or Bylaws of the Company or any material agreement or instrument known to such counsel to which the Company is a party or by which the Company or its assets are bound or any applicable law or regulation, or so far as is known to such counsel, any order, writ, injunction or decree, of any jurisdiction, court or governmental instrumentality; (xiii) To the best of such counsel's knowledge, all holders of securities of the Company having rights to the registration of shares of Common Stock, or other securities, because of the filing of the Registration Statement by the Company have waived such rights or such rights have expired by reason of lapse of time following notification of the Company's intent to file the Registration Statement; (xiv) No consent, approval, authorization or order of any court or governmental agency or body is required for the consummation of the transactions contemplated in the Underwriting Agreement, except such as have been obtained under the Securities Act and the Trust Indenture Act and such as may be required under state securities or blue sky laws in connection with the purchase and distribution of the Notes by the Underwriter. (xv) The Company is not an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in The Investment Company Act of 1940, as amended; and 23 Counsel rendering the foregoing opinion may rely as to questions of law not involving the laws of the United States or of the State of Delaware, upon opinions of local counsel satisfactory in form and scope to counsel for the Underwriter. Copies of any opinions so relied upon shall be delivered to the Representatives and to counsel for the Underwriter and the foregoing opinion shall also state that counsel knows of no reason the Underwriter are not entitled to rely upon the opinions of such local counsel. In addition to the matters set forth above, counsel rendering the foregoing opinion shall also include a statement to the effect that nothing has come to the attention of such counsel that leads them to believe that the Registration Statement (except as to the financial statements and schedules and other financial and statistical data contained or incorporated by reference therein, as to which such counsel need not express any opinion or belief) at the Effective Date contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus (except as to the financial statements and schedules and other financial and statistical data contained or incorporated by reference therein, as to which such counsel need not express any opinion or belief) as of its date or at the Closing Date (or any later date on which Option Notes are purchased), contained or contains any untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances as under which they were made, not misleading. 24 ANNEX B Matters to be Covered in the Opinion of Woodcock Washburn Kurtz Mackiewicz & Norris Patent Counsel for the Company Such counsel are familiar with the technology used by the Company in its business and the manner of its use thereof and have read the Registration Statement and the Prospectus, including particularly the portions of the Registration Statement and the Prospectus referring to patents, trade secrets, or other proprietary information or materials and: (i) The statements in the Registration Statement and the Prospectus under the captions "Risk Factors--Dependence on Proprietary Technology" and "Business--Proprietary Rights," to the best of such counsel's knowledge and belief, are accurate and complete statements or summaries of the matters therein set forth and nothing has come to such counsel's attention that causes such counsel to believe that the above-described portions of the Registration Statement and the Prospectus contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading; (ii) To the best of such counsel's knowledge and except as referred to in the Prospectus under the captions and disclosures referred to in paragraph (i) above, there are no legal or governmental proceedings pending relating to patent rights that could materially affect the Company's business and, to the best of such counsel's knowledge, no such proceedings are threatened or contemplated by governmental authorities or others; (iv) To the best of such counsel's knowledge, the Company is not infringing or otherwise violating any patents, trade secrets, trademarks, service marks or other proprietary information or materials of others, which in the judgment of such counsel could affect materially the use by the Company of any of the Company's patents, trade secrets, trademarks, service marks or other proprietary information or materials, and to the best of such counsel's knowledge there are no infringements of any of the Company's patents, trade secrets, trademarks, service marks or other proprietary information or materials by others which in the judgment of such counsel could affect materially the Company's business; and (v) To the best of such counsel's knowledge, the Company owns or possesses sufficient licenses or other rights to use all patents, trade secrets, or other proprietary information or materials necessary to conduct the business now being or proposed to be conducted by the Company as described in the Prospectus. 25 EX-4.4 3 EXHIBIT 4.4 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- IOMEGA CORPORATION AND STATE STREET BANK AND TRUST COMPANY Trustee INDENTURE Dated as of March __, 1996 ___% Convertible Subordinated Notes due 2001 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS PAGE ---- ARTICLE I DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 Section 1.1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 2 AFFILIATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 BOARD OF DIRECTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 BUSINESS DAY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 CLOSING PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 COMMISSION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 COMMON STOCK. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 CONVERSION PRICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 CORPORATE TRUST OFFICE. . . . . . . . . . . . . . . . . . . . . . . . . . 3 CREDIT AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 DEFAULTED INTEREST. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 DESIGNATED SENIOR INDEBTEDNESS. . . . . . . . . . . . . . . . . . . . . . 3 EXCHANGE ACT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 EVENT OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 INDEBTEDNESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 INDENTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 MONEY INDEBTEDNESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 NEW RIGHTS PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 NOTE or NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 NOTEHOLDER or HOLDER. . . . . . . . . . . . . . . . . . . . . . . . . . . 5 NOTE REGISTER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 OFFICERS' CERTIFICATE . . . . . . . . . . . . . . . . . . . . . . . . . . 5 OPINION OF COUNSEL. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 OUTSTANDING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 PAYMENT BLOCKAGE NOTICE . . . . . . . . . . . . . . . . . . . . . . . . . 5 PERSON. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 PREDECESSOR NOTE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 i REPURCHASE EVENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 REPURCHASE PRICE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 RESPONSIBLE OFFICER . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 RIGHTS PLAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SECURITIES ACT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SENIOR INDEBTEDNESS . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 SUBSIDIARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 TRADING DAY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 TRIGGER EVENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 TRUST INDENTURE ACT . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 UNDERWRITER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE II ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF NOTES. 7 Section 2.1 DESIGNATION, AMOUNT AND ISSUE OF NOTES. . . . . . . . . . . . . 7 Section 2.2 FORM OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . 8 Section 2.3 DATE AND DENOMINATION OF NOTES; PAYMENTS OF INTEREST. . . . . . 8 Section 2.4 EXECUTION OF NOTES. . . . . . . . . . . . . . . . . . . . . . .10 Section 2.5 EXCHANGE AND REGISTRATION OF TRANSFER OF NOTES. . . . . . . . .10 Section 2.6 MUTILATED, DESTROYED, LOST OR STOLEN NOTES. . . . . . . . . . .11 Section 2.7 TEMPORARY NOTES . . . . . . . . . . . . . . . . . . . . . . . .12 Section 2.8 CANCELLATION OF NOTES PAID, ETC.. . . . . . . . . . . . . . . .12 ARTICLE III REDEMPTION OF NOTES . . . . . . . . . . . . . . . . . . . . . . .13 Section 3.1 REDEMPTION PRICES . . . . . . . . . . . . . . . . . . . . . . .13 Section 3.2 NOTICE OF REDEMPTION: SELECTION OF NOTES. . . . . . . . . . . .13 Section 3.3 PAYMENT OF NOTES CALLED FOR REDEMPTION. . . . . . . . . . . . .14 Section 3.4 CONVERSION ARRANGEMENT ON CALL FOR REDEMPTION . . . . . . . . .15 ARTICLE IV SUBORDINATION OF NOTES . . . . . . . . . . . . . . . . . . . . . .16 Section 4.1 AGREEMENT OF SUBORDINATION. . . . . . . . . . . . . . . . . . .16 Section 4.2 PAYMENTS TO NOTEHOLDERS . . . . . . . . . . . . . . . . . . . .16 ii Section 4.3 SUBROGATION OF NOTES. . . . . . . . . . . . . . . . . . . . . .19 Section 4.4 AUTHORIZATION TO EFFECT SUBORDINATION . . . . . . . . . . . . .20 Section 4.5 NOTICE TO TRUSTEE . . . . . . . . . . . . . . . . . . . . . . .20 Section 4.6 TRUSTEE'S RELATION TO SENIOR INDEBTEDNESS . . . . . . . . . . .21 Section 4.7 NO IMPAIRMENT OF SUBORDINATION. . . . . . . . . . . . . . . . .21 Section 4.8 CERTAIN CONVERSIONS DEEMED PAYMENT. . . . . . . . . . . . . . .21 Section 4.9 ARTICLE APPLICABLE TO PAYING AGENTS . . . . . . . . . . . . . .22 Section 4.10 SENIOR INDEBTEDNESS ENTITLED TO RELY. . . . . . . . . . . . . .22 ARTICLE V PARTICULAR COVENANTS OF THE COMPANY . . . . . . . . . . . . . . . .22 Section 5.1 PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST. . . . . . . . . . .22 Section 5.2 MAINTENANCE OF OFFICE OR AGENCY . . . . . . . . . . . . . . . .22 Section 5.3 APPOINTMENTS TO FILL VACANCIES IN TRUSTEE'S OFFICE. . . . . . .23 Section 5.4 PROVISIONS AS TO PAYING AGENT . . . . . . . . . . . . . . . . .23 Section 5.5 CORPORATE EXISTENCE . . . . . . . . . . . . . . . . . . . . . .24 Section 5.6 STAY, EXTENSION AND USURY LAWS. . . . . . . . . . . . . . . . .24 Section 5.7 COMPLIANCE CERTIFICATE. . . . . . . . . . . . . . . . . . . . .24 ARTICLE VI NOTEHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE. . .25 Section 6.1 NOTEHOLDERS' LISTS. . . . . . . . . . . . . . . . . . . . . . .25 Section 6.2 PRESERVATION AND DISCLOSURE OF LISTS. . . . . . . . . . . . . .25 Section 6.3 REPORTS BY TRUSTEE. . . . . . . . . . . . . . . . . . . . . . .25 Section 6.4 REPORTS BY COMPANY. . . . . . . . . . . . . . . . . . . . . . .26 ARTICLE VII REMEDIES OF THE TRUSTEE AND NOTEHOLDERS ON AN EVENT OF DEFAULT. .26 Section 7.1 EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . .26 Section 7.2 PAYMENTS OF NOTES ON DEFAULT: SUIT THEREFOR . . . . . . . . . .28 Section 7.3 APPLICATION OF MONIES COLLECTED BY TRUSTEE. . . . . . . . . . .30 Section 7.4 PROCEEDINGS BY NOTEHOLDER . . . . . . . . . . . . . . . . . . .31 Section 7.5 PROCEEDINGS BY TRUSTEE. . . . . . . . . . . . . . . . . . . . .31 Section 7.6 REMEDIES CUMULATIVE AND CONTINUING. . . . . . . . . . . . . . .32 Section 7.7 DIRECTION OF PROCEEDINGS AND WAIVER OF DEFAULTS BY MAJORITY OF NOTEHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32 iii Section 7.8 NOTICE OF DEFAULTS. . . . . . . . . . . . . . . . . . . . . . .32 Section 7.9 UNDERTAKING TO PAY COSTS. . . . . . . . . . . . . . . . . . . .33 ARTICLE VIII CONCERNING THE TRUSTEE . . . . . . . . . . . . . . . . . . . . .33 Section 8.1 DUTIES AND RESPONSIBILITIES OF TRUSTEE. . . . . . . . . . . . .33 Section 8.2 RELIANCE ON DOCUMENTS, OPINIONS. ETC. . . . . . . . . . . . . .34 Section 8.3 NO RESPONSIBILITY FOR RECITALS, ETC.. . . . . . . . . . . . . .35 Section 8.4 TRUSTEE, PAYING AGENTS, CONVERSION AGENTS OR REGISTRAR MAY OWN NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35 Section 8.5 MONIES TO BE HELD IN TRUST. . . . . . . . . . . . . . . . . . .36 Section 8.6 COMPENSATION AND EXPENSES OF TRUSTEE. . . . . . . . . . . . . .36 Section 8.7 OFFICERS' CERTIFICATE AS EVIDENCE . . . . . . . . . . . . . . .37 Section 8.8 CONFLICTING INTERESTS OF TRUSTEE. . . . . . . . . . . . . . . .37 Section 8.9 ELIGIBILITY OF TRUSTEE. . . . . . . . . . . . . . . . . . . . .37 Section 8.10 RESIGNATION OR REMOVAL OF TRUSTEE . . . . . . . . . . . . . . .37 Section 8.11 ACCEPTANCE BY SUCCESSOR TRUSTEE . . . . . . . . . . . . . . . .38 Section 8.12 SUCCESSION BY MERGER, ETC.. . . . . . . . . . . . . . . . . . .39 Section 8.13 LIMITATION ON RIGHTS OF TRUSTEE AS CREDITOR . . . . . . . . . .39 ARTICLE IX CONCERNING THE NOTEHOLDERS . . . . . . . . . . . . . . . . . . . .40 Section 9.1 ACTION BY NOTEHOLDERS . . . . . . . . . . . . . . . . . . . . .40 Section 9.2 PROOF OF EXECUTION BY NOTEHOLDERS . . . . . . . . . . . . . . .40 Section 9.3 WHO ARE DEEMED ABSOLUTE OWNERS. . . . . . . . . . . . . . . . .40 Section 9.4 COMPANY-OWNED NOTES DISREGARDED . . . . . . . . . . . . . . . .41 Section 9.5 REVOCATION OF CONSENTS: FUTURE HOLDERS BOUND. . . . . . . . . .41 ARTICLE X NOTEHOLDERS' MEETINGS . . . . . . . . . . . . . . . . . . . . . . .42 Section 10.1 PURPOSE OF MEETINGS. . . . . . . . . . . . . . . . . . . . . .42 Section 10.2 CALL OF MEETINGS BY TRUSTEE. . . . . . . . . . . . . . . . . .42 Section 10.3 CALL OF MEETINGS BY COMPANY OR NOTEHOLDERS . . . . . . . . . .42 Section 10.4 QUALIFICATIONS FOR VOTING. . . . . . . . . . . . . . . . . . .43 Section 10.5 REGULATIONS. . . . . . . . . . . . . . . . . . . . . . . . . .43 Section 10.6 VOTING . . . . . . . . . . . . . . . . . . . . . . . . . . . .43 Section 10.7 NO DELAY OF RIGHTS BY MEETING. . . . . . . . . . . . . . . . .44 iv ARTICLE XI SUPPLEMENTAL INDENTURES. . . . . . . . . . . . . . . . . . . . . .44 Section 11.1 SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF NOTEHOLDERS . . . .44 Section 11.2 SUPPLEMENTAL INDENTURES WITH CONSENT OF NOTEHOLDERS. . . . . .45 Section 11.3 EFFECT OF SUPPLEMENTAL INDENTURE . . . . . . . . . . . . . . .46 Section 11.4 NOTATION ON NOTES. . . . . . . . . . . . . . . . . . . . . . .46 Section 11.5 EVIDENCE OF COMPLIANCE OF SUPPLEMENTAL INDENTURE TO BE FURNISHED TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . .47 ARTICLE XII CONSOLIDATED, MERGER, SALE, CONVEYANCE AND LEASE. . . . . . . . .47 Section 12.1 COMPANY MAY CONSOLIDATE ETC. ON CERTAIN TERMS. . . . . . . . .47 Section 12.2 SUCCESSOR CORPORATION TO BE SUBSTITUTED. . . . . . . . . . . .47 Section 12.3 OPINION OF COUNSEL TO BE GIVEN TRUSTEE . . . . . . . . . . . .48 ARTICLE XIII SATISFACTION AND DISCHARGE OF INDENTURE. . . . . . . . . . . . .48 Section 13.1 DISCHARGE OF INDENTURE . . . . . . . . . . . . . . . . . . . .48 Section 13.2 DEPOSITED MONIES TO BE HELD IN TRUST BY TRUSTEE. . . . . . . .49 Section 13.3 PAYING AGENT TO REPAY MONIES HELD. . . . . . . . . . . . . . .49 Section 13.4 RETURN OF UNCLAIMED MONIES . . . . . . . . . . . . . . . . . .49 Section 13.5 REINSTATEMENT. . . . . . . . . . . . . . . . . . . . . . . . .49 ARTICLE XIV IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS .50 Section 14.1 INDENTURE AND NOTES SOLELY CORPORATE OBLIGATIONS . . . . . . .50 ARTICLE XV CONVERSION OF NOTES. . . . . . . . . . . . . . . . . . . . . . . .50 Section 15.1 RIGHT TO CONVERT . . . . . . . . . . . . . . . . . . . . . . .50 Section 15.2 EXERCISE OF CONVERSION PRIVILEGE; ISSUANCE OF COMMON STOCK ON CONVERSION; NO ADJUSTMENT FOR INTEREST OR DIVIDENDS. . . . . . . . . .50 Section 15.3 CASH PAYMENTS IN LIEU OF FRACTIONAL SHARES . . . . . . . . . .52 Section 15.4 CONVERSION PRICE . . . . . . . . . . . . . . . . . . . . . . .52 Section 15.5 ADJUSTMENT OF CONVERSION PRICE . . . . . . . . . . . . . . . .52 Section 15.6 EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE. . .62 Section 15.7 TAXES ON SHARES ISSUED . . . . . . . . . . . . . . . . . . . .63 Section 15.8 RESERVATION OF SHARES; SHARES TO BE FULLY PAID; COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS; LISTING OF COMMON STOCK . . . . . . . . .63 Section 15.9 RESPONSIBILITY OF TRUSTEE. . . . . . . . . . . . . . . . . . .63 v Section 15.10 NOTICE TO HOLDERS PRIOR TO CERTAIN ACTIONS . . . . . . . . . .64 ARTICLE XVI REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON REPURCHASE EVENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65 Section 16.1 RIGHT TO REQUIRE REPURCHASE. . . . . . . . . . . . . . . . . .65 Section 16.2 NOTICES; METHOD OF EXERCISING REPURCHASE RIGHT, ETC. . . . . .65 Section 16.3 CERTAIN DEFINITIONS. . . . . . . . . . . . . . . . . . . . . .67 Section 16.4 REPURCHASE EVENT . . . . . . . . . . . . . . . . . . . . . . .67 ARTICLE XVII MISCELLANEOUS PROVISIONS . . . . . . . . . . . . . . . . . . . .68 Section 17.1 PROVISIONS BINDING ON COMPANY'S SUCCESSORS . . . . . . . . . .68 Section 17.2 OFFICIAL ACTS BY SUCCESSOR CORPORATION . . . . . . . . . . . .68 Section 17.3 ADDRESSES FOR NOTICES, ETC.. . . . . . . . . . . . . . . . . .68 Section 17.4 GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . . .69 Section 17.5 EVIDENCE OF COMPLIANCE WITH CONDITIONS PRECEDENT; CERTIFICATES TO TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . .69 Section 17.6 LEGAL HOLIDAYS . . . . . . . . . . . . . . . . . . . . . . . .69 Section 17.7 TRUST INDENTURE ACT. . . . . . . . . . . . . . . . . . . . . .69 Section 17.8 NO SECURITY INTEREST CREATED . . . . . . . . . . . . . . . . .69 Section 17.9 BENEFITS OF INDENTURE. . . . . . . . . . . . . . . . . . . . .70 Section 17.10 TABLE OF CONTENTS, HEADINGS, ETC.. . . . . . . . . . . . . . .70 Section 17.11 AUTHENTICATING AGENT . . . . . . . . . . . . . . . . . . . . .70 Section 17.12 EXECUTION IN COUNTERPARTS . . . . . . . . . . . . . . . . . .71 vi CROSS REFERENCE TABLE(1)
Trust Indenture Indenture Act Section Section - --------------- ---------- Section 310(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . .8.9 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . .8.9 (a)(3) . . . . . . . . . . . . . . . . . . . . . . . . .N/A(2) (a)(4) . . . . . . . . . . . . . . . . . . . . . . . . .N/A (a)(5) . . . . . . . . . . . . . . . . . . . . . . . . .8.9 (b) . . . . . . . . . . . . . . . . . . . . . . . . .8.8 Section 311(a) . . . . . . . . . . . . . . . . . . . . . . . . .8.13 (b) . . . . . . . . . . . . . . . . . . . . . . . . .8.13 (c) . . . . . . . . . . . . . . . . . . . . . . . . .N/A Section 312(a) . . . . . . . . . . . . . . . . . . . . . . . . .6.1; 6.2(a) (b) . . . . . . . . . . . . . . . . . . . . . . . . .6.2(b) (c) . . . . . . . . . . . . . . . . . . . . . . . . .6.2(c) Section 313(a) . . . . . . . . . . . . . . . . . . . . . . . . .6.3(a) (b) . . . . . . . . . . . . . . . . . . . . . . . . .6.3(a) (c) . . . . . . . . . . . . . . . . . . . . . . . . .6.3(a) (d) . . . . . . . . . . . . . . . . . . . . . . . . .6.3(b) Section 314(a) . . . . . . . . . . . . . . . . . . . . . . . . .6.4 (b) . . . . . . . . . . . . . . . . . . . . . . . . .N/A (c)(1) . . . . . . . . . . . . . . . . . . . . . . . . .17.5 (c)(2) . . . . . . . . . . . . . . . . . . . . . . . . .17.5 (c)(3) . . . . . . . . . . . . . . . . . . . . . . . . .17.5 (d) . . . . . . . . . . . . . . . . . . . . . . . . .N/A (e) . . . . . . . . . . . . . . . . . . . . . . . . .17.5 Section 315(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . .8.1(a)(1) (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . .8.1(a)(2) (b) . . . . . . . . . . . . . . . . . . . . . . . . .7.8 (c) . . . . . . . . . . . . . . . . . . . . . . . . .8.1 (d) . . . . . . . . . . . . . . . . . . . . . . . . .8.1 (d)(1) . . . . . . . . . . . . . . . . . . . . . . . . .8.1(a)(1,2) (d)(2) . . . . . . . . . . . . . . . . . . . . . . . . .8.1(b) (d)(3) . . . . . . . . . . . . . . . . . . . . . . . . .8.1(c) (e) . . . . . . . . . . . . . . . . . . . . . . . . .7.9 Section 316(a) . . . . . . . . . . . . . . . . . . . . . . . . .7.7 (a)(1)(A). . . . . . . . . . . . . . . . . . . . . . . .7.7 (a)(1)(B). . . . . . . . . . . . . . . . . . . . . . . .7.7 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . .N/A (b) . . . . . . . . . . . . . . . . . . . . . . . . .7.4
Trust Indenture Indenture Act Section Section - --------------- ---------- Section 317(a)(1) . . . . . . . . . . . . . . . . . . . . . . . . .7.1; 7.2 (a)(2) . . . . . . . . . . . . . . . . . . . . . . . . .7.2 (b) . . . . . . . . . . . . . . . . . . . . . . . . .5.4(a)(1,2) Section 318(a) . . . . . . . . . . . . . . . . . . . . . . . . .17.7
- --------------------------- Note: (1) This Cross Reference Table shall not, for any purpose, be deemed to be a part of the Indenture. (2) N/A means Not Applicable (ii) INDENTURE dated as of March __, 1996, between Iomega Corporation, a Delaware corporation (hereinafter sometimes called the "Company", as more fully set forth in Section 1.1), and State Street Bank and Trust Company, a Massachusetts trust company duly organized and existing under the laws of the Commonwealth of Massachusetts, as trustee hereunder (hereinafter sometimes called the "Trustee", as more fully set forth in Section 1.1). W I T N E S S E T H: WHEREAS, for its lawful corporate purposes, the Company has duly authorized the issue of its ___% Convertible Subordinated Notes due 2001 (hereinafter sometimes called the "Notes"), in an aggregate principal amount not to exceed $46,000,000 and, to provide the terms and conditions upon which the Notes are to be authenticated, issued and delivered, the Company has duly authorized the execution and delivery of this Indenture; and WHEREAS, the Notes, the certificate of authentication to be borne by the Notes, a form of assignment, a form of option to elect repurchase upon a Repurchase Event, a form of conversion notice and a certificate of transfer to be borne by the Notes are to be substantially in the forms hereinafter provided for; and WHEREAS, all acts and things necessary to make the Notes, when executed by the Company and authenticated and delivered by the Trustee or a duly authorized authenticating agent, as in this Indenture provided, the valid, binding and legal obligations of the Company, and to constitute these presents a valid agreement according to its terms, have been done and performed, and the execution of this Indenture and the issue hereunder of the Notes have in all respects been duly authorized. NOW, THEREFORE, THIS INDENTURE WITNESSETH: That in order to declare the terms and conditions upon which the Notes are, and are to be, authenticated, issued and delivered, and in consideration of the premises and of the purchase and acceptance of the Notes by the holders thereof, the Company covenants and agrees with the Trustee for the equal and proportionate benefit of the respective holders from time to time of the Notes (except as otherwise provided below), as follows: ARTICLE I DEFINITIONS Section 1.1 DEFINITIONS. The terms defined in this Section 1.1 (except as herein otherwise expressly provided or unless the context otherwise requires) for all purposes of this Indenture and of any indenture supplemental hereto shall have the respective meanings specified in this Section 1.1. All other terms used in this Indenture that are defined in the Trust Indenture Act or which are by reference therein defined in the Securities Act (except as herein otherwise expressly provided or unless the context otherwise requires) shall have the meanings assigned to such terms in said Trust Indenture Act and in said Securities Act as in force at the date of the execution of this Indenture. The words "herein," "hereof," "hereunder," and words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other Subdivision. The terms defined in this Article include the plural as well as the singular. AFFILIATE: The term "Affiliate" of any specified Person shall mean any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control," when used with respect to any specified Person means the power to direct or cause the direction of the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. BOARD OF DIRECTORS: The term "Board of Directors" shall mean the Board of Directors of the Company or a committee of such Board duly authorized to act for it hereunder. BUSINESS DAY: The term "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which the banking institutions in The City of New York or the city in which the Corporate Trust Office is located are authorized or obligated by law or executive order to close or be closed. CLOSING PRICE: The term "Closing Price" shall have the meaning specified in Section 15.5(g)(1). COMMISSION: The term "Commission" shall mean the Securities and Exchange Commission. COMMON STOCK: The term "Common Stock" shall mean any stock of any class of the Company which has no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company and which is not subject to redemption by the Company. Subject to the provisions of Section 15.6, however, shares issuable on conversion of Notes shall include only shares of the class designated as common stock of the Company at the date of this Indenture or shares of any class or classes resulting from any reclassification or reclassifications thereof and which have no preference in respect of dividends or of amounts payable in the event of any voluntary or involuntary 2 liquidation, dissolution or winding up of the Company and which are not subject to redemption by the Company; PROVIDED that if at any time there shall be more than one such resulting class, the shares of each such class then so issuable shall be substantially in the proportion which the total number of shares of such class resulting from all such reclassifications bears to the total number of shares of all such classes resulting from all such reclassifications. COMPANY: The term "Company" shall mean Iomega Corporation, a Delaware corporation, and subject to the provisions of Article XII, shall include its successors and assigns. CONVERSION PRICE: The term "Conversion Price" shall have the meaning specified in Section 15.4. CORPORATE TRUST OFFICE: The term "Corporate Trust Office" or other similar term, shall mean the office of the Trustee at which at any particular time its corporate trust business shall be principally administered, which office is, at the date as of which this Indenture is dated, located at Two International Place, 4th Floor, Boston, Massachusetts 02110, Attention: Corporate Trust Division (Iomega Corporation, ___% Convertible Subordinated Notes due 2001). CREDIT AGREEMENTS: The term "Credit Agreements" means that certain Loan Agreement, dated July 5, 1995, between the Company, as borrower, and Wells Fargo Bank, N.A., as lender, as amended, amended and restated, supplemented or otherwise modified from time to time, and that certain Revolving Loan Agreement dated January 12, 1996 between the Company, as lender, and First Security Bank of Utah, N.A., as lender, as amended, amended and restated, supplemented or otherwise modified from time to time. DEFAULT: The term "default" shall mean any event that is, or after notice or passage of time, or both, would be, an Event of Default. DEFAULTED INTEREST: The term "Defaulted Interest" shall have the meaning specified in Section 2.3. DESIGNATED SENIOR INDEBTEDNESS: The term "Designated Senior Indebtedness" means all amounts payable under the Credit Agreements and any other Senior Indebtedness if the instrument creating or evidencing the same or the assumption or guarantee thereof (or related agreements or documents to which the Company is a party) expressly provides that such Indebtedness shall be "Designated Senior Indebtedness" for purposes of this Indenture (provided that such instrument, agreement or other document may place limitations and conditions on the right of such Senior Indebtedness to exercise the rights of Designated Senior Indebtedness). EXCHANGE ACT: The term "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, as in effect from time to time. EVENT OF DEFAULT: The term "Event of Default" shall mean any event specified in Section 7.1(a), (b), (c), (d), (e) or (f). 3 INDEBTEDNESS: The term "Indebtedness" means, with respect to any Person, and without duplication, (a) all indebtedness, obligations and other liabilities (contingent or otherwise) of such Person for borrowed money (including obligations of the Company in respect of overdrafts, foreign exchange contracts, currency exchange agreements, interest rate protection agreements, and any loans or advances from banks, whether or not evidenced by notes or similar instruments) or evidenced by bonds, debentures, notes or similar instruments (whether or not the recourse of the lender is to the whole of the assets of such Person or to only a portion thereof) (other than any account payable or other accrued current liability or obligation incurred in the ordinary course of business in connection with the obtaining of materials or services), (b) all reimbursement obligations and other liabilities (contingent or otherwise) of such Person with respect to letters of credit, bank guarantees or bankers' acceptances, (c) all obligations and liabilities (contingent or otherwise) in respect of leases of such Person as lessee required, in conformity with generally accepted accounting principles, to be accounted for as capitalized lease obligations on the balance sheet of such Person, and all obligations and other liabilities (contingent or otherwise) under any lease or related document (including a purchase agreement) in connection with any lease of real property which provides that such Person is contractually obligated to purchase or cause a third party to purchase the leased property and thereby guarantee a minimum residual value of the leased property to the lessor and the obligations of such Person under such lease or related document to purchase or to cause a third party to purchase such leased property, (d) all obligations of such Person (contingent or otherwise) with respect to an interest rate or other swap, cap or collar agreement or other similar instrument or agreement or foreign currency hedge, exchange, purchase or similar instrument or agreement, (e) all direct or indirect guaranties or similar agreements by such Person in respect of, and obligations or liabilities (contingent or otherwise) of such Person to purchase or otherwise acquire or otherwise assure a creditor against loss in respect of, indebtedness, obligations or liabilities of another Person of the kind described in clauses (a) through (d), (f) any indebtedness or other obligations described in clauses (a) through (d) secured by any mortgage, pledge, lien or other encumbrance existing on property which is owned or held by such Person, regardless of whether the indebtedness or other obligation secured thereby shall have been assumed by such Person and (g) any and all deferrals, renewals, extensions and refundings of, or amendments, modifications or supplements to, any indebtedness, obligation or liability of the kind described in clauses (a) through (f). INDENTURE: The term "Indenture" shall mean this instrument as originally executed or, if amended or supplemented as herein provided, as so amended or supplemented. MONEY INDEBTEDNESS: The term "Money Indebtedness" shall have the meaning specified in Section 7.1(c). NEW RIGHTS PLAN: The term "New Rights Plan" has the meaning specified in Section 15.5(d). NOTE or NOTES: The terms "Note" or "Notes" shall mean any Note or Notes, as the case may be, authenticated and delivered under this Indenture. 4 NOTEHOLDER or HOLDER: The terms "Noteholder" or "holder" as applied to any Note, or other similar terms (but excluding the term "beneficial holder"), shall mean any person in whose name at the time a particular Note is registered on the Note registrar's books. NOTE REGISTER: The term "Note register" shall have the meaning specified in Section 2.5. OFFICERS' CERTIFICATE: The term "Officers' Certificate," when used with respect to the Company, shall mean a certificate signed by both (a) the President, the Chief Executive Officer, Executive or Senior Vice President or any Vice President (whether or not designated by a number or numbers or word or words added before or after the title "Vice President") and (b) by the Treasurer or any Assistant Treasurer or Secretary or any Assistant Secretary of the Company. OPINION OF COUNSEL: The term "Opinion of Counsel" shall mean an opinion in writing signed by legal counsel, who may be an employee of or counsel to the Company, or other counsel acceptable to the Trustee. OUTSTANDING: The term "outstanding," when used with reference to Notes, shall, subject to the provisions of Section 9.4, mean, as of any particular time, all Notes authenticated and delivered by the Trustee under this Indenture, except (a) Notes theretofore canceled by the Trustee or delivered to the Trustee for cancellation; (b) Notes, or portions thereof, for the redemption of which monies in the necessary amount shall have been deposited in trust with the Trustee or with any paying agent (other than the Company) or shall have been set aside and segregated in trust by the Company (if the Company shall act as its own paying agent); PROVIDED that if such Notes are to be redeemed prior to the maturity thereof, notice of such redemption shall have been given as in Article III provided, or provision satisfactory to the Trustee shall have been made for giving such notice; (c) Notes in lieu of which, or in substitution for which, other Notes shall have been authenticated and delivered pursuant to the terms of Section 2.6 unless proof satisfactory to the Trustee is presented that any such Notes are held by bona fide holders in due course; and (d) Notes converted into Common Stock pursuant to Article XV and Notes deemed not outstanding pursuant to Article III or Article XVI. PAYMENT BLOCKAGE NOTICE: The term "Payment Blockage Notice" has the meaning specified in Section 4.2. 5 PERSON: The term "Person" shall mean a corporation, an association, a partnership, an individual, a joint venture, a joint stock company, a trust, an unincorporated organization or a government or an agency or a political subdivision thereof. PREDECESSOR NOTE: The term "Predecessor Note" of any particular Note shall mean every previous Note evidencing all or a portion of the same debt as that evidenced by such particular Note; and, for the purposes of this definition, any Note authenticated and delivered under Section 2.6 in lieu of a lost, destroyed or stolen Note shall be deemed to evidence the same debt as the lost, destroyed or stolen Note that it replaces. REPURCHASE EVENT: The term "Repurchase Event" has the meaning specified in Section 16.4. REPURCHASE PRICE: The term "Repurchase Price" has the meaning specified in Section 16.1. RESPONSIBLE OFFICER: The term "Responsible Officer," when used with respect to the Trustee, shall mean an officer of the Trustee in the Corporate Trust Office assigned and duly authorized by the Trustee to administer its corporate trust matters. RIGHTS PLAN: The term "Rights Plan" means that certain Rights Agreement, dated July 28, 1989, between the Company and The First National Bank of Boston, as amended, supplemented or otherwise modified from time to time. RIGHTS: The term "Rights" shall mean "Rights" as such term is defined in the Rights Plan. SECURITIES ACT: The term "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. SENIOR INDEBTEDNESS: The term "Senior Indebtedness" means the principal of, premium, if any, interest (including all interest accruing subsequent to the commencement of any bankruptcy or similar proceeding, whether or not a claim for post-petition interest is allowable as a claim in any such proceeding) and rent payable on or in connection with, and all fees, costs, expenses and other amounts accrued or due on or in connection with, Indebtedness of the Company, whether outstanding on the date of this Indenture or thereafter created, incurred, assumed, guaranteed or in effect guaranteed by the Company (including all deferrals, renewals, extensions or refundings of, or amendments, modifications or supplements to the foregoing), unless in the case of any particular Indebtedness the instrument creating or evidencing the same or the assumption or guarantee thereof expressly provides that such Indebtedness shall not be senior in right of payment to the Notes or expressly provides that such Indebtedness is "pari passu" or "junior" to the Notes. Notwithstanding the foregoing, the term Senior Indebtedness shall not include any Indebtedness of the Company to any subsidiary of the Company, a majority of the voting stock of which is owned, directly or indirectly, by the Company. 6 SUBSIDIARY: The term "subsidiary" means, with respect to any person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of capital stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such person or one or more of the other subsidiaries of that person (or a combination thereof) and (ii) any partnership (a) the sole general partner or managing general partner of which is such person or a subsidiary of such person or (b) the only general partners of which are such person or one or more subsidiaries of such person (or any combination thereof). TRADING DAY: The term "Trading Day" shall have the meaning specified in Section 15.5(g)(5). TRIGGER EVENT: The term "Trigger Event" shall have the meaning specified in Section 15.5(d). TRUST INDENTURE ACT: The term "Trust Indenture Act" shall mean the Trust Indenture Act of 1939, as amended, as it was in force at the date of execution of this Indenture, except as provided in Sections 11.3 and 15.6; PROVIDED, HOWEVER, that in the event the Trust Indenture Act of 1939 is amended after the date hereof, the term "Trust Indenture Act" shall mean, to the extent required by such amendment, the Trust Indenture Act of 1939 as so amended. TRUSTEE: The term "Trustee" shall mean State Street Bank and Trust Company, and its successors and any corporation resulting from or surviving any consolidation or merger to which it or its successors may be a party and any successor trustee at the time serving as successor trustee hereunder. UNDERWRITER: Means Hambrecht & Quist LLC. The definitions of certain other terms are as specified in Sections 2.3, 2.5, Article XV and Article XVI. ARTICLE II ISSUE, DESCRIPTION, EXECUTION, REGISTRATION AND EXCHANGE OF NOTES Section 2.1 DESIGNATION, AMOUNT AND ISSUE OF NOTES. The Notes shall be designated as "___% Convertible Subordinated Notes due 2001." Notes not to exceed the aggregate principal amount of $40,000,000 (or $46,000,000 if the over-allotment option set forth in Section 3(b) of the Underwriting Agreement dated March __, 1996 (as amended from time to time by the parties thereto) by and between the Company and the Underwriter is exercised in full) (except pursuant to Sections 2.5, 2.6, 3.3, 15.2 and 16.2 hereof) upon the execution of this Indenture, or from time to time thereafter, may be executed by the Company and delivered to the Trustee for authentication, and the Trustee shall thereupon authenticate and deliver said Notes to or upon the written order of the Company, signed by its (a) Chairman of the Board, President, 7 Executive or Senior Vice President or any Vice President (whether or not designated by a number or numbers or word or words added before or after the title "Vice President") and (b) Treasurer or Assistant Treasurer or its Secretary or any Assistant Secretary, without any further action by the Company hereunder. Section 2.2 FORM OF NOTES. The Notes and the Trustee's certificate of authentication to be borne by such Notes shall be substantially in the form set forth in Exhibit A, which is incorporated in and made a part of this Indenture. Any of the Notes may have such letters, numbers or other marks of identification and such notations, legends and endorsements as the officers executing the same may approve (execution thereof to be conclusive evidence of such approval) and as are not inconsistent with the provisions of this Indenture, or as may be required to comply with any law or with any rule or regulation made pursuant thereto or with any rule or regulation of any securities exchange or automated quotation system on which the Notes may be listed, or to conform to usage. The terms and provisions contained in the form of Note attached as Exhibit A hereto shall constitute, and are hereby expressly made, a part of this Indenture and, to the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. Section 2.3 DATE AND DENOMINATION OF NOTES; PAYMENTS OF INTEREST. The Notes shall be issuable in registered form without coupons in denominations of $1,000 principal amount and integral multiples thereof. Every Note shall be dated the date of its authentication, shall bear interest from the applicable date in each case as specified on the face of the form of Note attached as Exhibit A hereto. The person in whose name any Note (or its Predecessor Note) is registered at the close of business on any record date with respect to any interest payment date (including any Note that is converted after the record date and on or before the interest payment date) shall be entitled to receive the interest payable on such interest payment date notwithstanding the cancellation of such Note upon any transfer, exchange or conversion subsequent to the record date and on or prior to such interest payment date; PROVIDED, that in the case of any Note, or portion thereof, redeemed on a redemption date or repurchased in connection with a Repurchase Event on a Repurchase Date that is after a record date and prior to (but excluding) the next succeeding interest payment date, interest shall not be paid to the person in whose name the Note, or portion thereof, is registered on the close of business on such record date and the Company shall have no obligation to pay interest on such Note or such portion except to the extent required to be paid upon redemption or repurchase of such Note or portion thereof, as the case may be, pursuant to Section 3.3 or 16.1 hereof. Interest may, at the option of the Company, be paid by check mailed to the address of such person on the registry kept for such purposes; PROVIDED that, with respect to any holder of Notes with an aggregate principal amount equal to or in excess of $5,000,000, at the request of such holder in writing to the Company (who shall then furnish written notice to such effect to the Trustee), interest on such holder's Notes shall be paid by wire transfer (the costs of such wire transfer to be borne by the Company) in immediately 8 available funds in accordance with the wire transfer instructions supplied by such holder to the Trustee and paying agent (if different from the Trustee). The term "record date" with respect to any interest payment date shall mean the March 1 or September 1 preceding said March 15 or September 15, respectively. Interest on the Notes shall be computed on the basis of a 360-day year comprised of twelve 30-day months. Any interest on any Note which is payable, but is not punctually paid or duly provided for, on any said March 15 or September 15 (herein called "Defaulted Interest") shall forthwith cease to be payable to the Noteholder on the relevant record date by virtue of his having been such Noteholder; and such Defaulted Interest shall be paid by the Company, at its election in each case, as provided in clause (A) or (B) below: (A) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Notes (or their respective Predecessor Notes) are registered at the close of business on a special record date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest to be paid on each Note and the date of the payment (which shall be not less than twenty-five (25) days after the receipt by the Trustee of such notice, unless the Trustee shall consent to an earlier date), and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a special record date for the payment of such Defaulted Interest which shall be not more than fifteen (15) days and not less than ten (10) days prior to the date of the proposed payment and not less than ten (10) days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such special record date and, in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the special record date therefor to be mailed, first-class postage prepaid, to each Noteholder as of such special record date at his address as it appears in the Note register, not less than ten (10) days prior to such special record date. Notice of the proposed payment of such Defaulted Interest and the special record date therefor having been so mailed, such Defaulted Interest shall be paid to the Persons in whose names the Notes (or their respective Predecessor Notes) were registered at the close of business on such special record date and shall no longer be payable pursuant to the following clause (B). (B) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange and automated quotation system on which the Notes may be listed or designated for issuance, and upon such notice as may be required by such exchange and automated quotation system, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. 9 Section 2.4 EXECUTION OF NOTES. The Notes shall be signed in the name and on behalf of the Company by the manual or facsimile signature of its Chairman of the Board, President, any Executive or Senior Vice President or any Vice President (whether or not designated by a number or numbers or word or words added before or after the title "Vice President") and attested by the manual or facsimile signature of its Secretary or any of its Assistant Secretaries (which may be printed, engraved or otherwise reproduced thereon, by facsimile or otherwise). Only such Notes as shall bear thereon a certificate of authentication substantially in the form set forth on the form of Note attached as Exhibit A hereto, manually executed by the Trustee (or an authenticating agent appointed by the Trustee as provided by Section 17.11), shall be entitled to the benefits of this Indenture or be valid or obligatory for any purpose. Such certificate by the Trustee (or such an authenticating agent) upon any Note executed by the Company shall be conclusive evidence that the Note so authenticated has been duly authenticated and delivered hereunder and that the holder is entitled to the benefits of this Indenture. In case any officer of the Company who shall have signed any of the Notes shall cease to be such officer before the Notes so signed shall have been authenticated and delivered by the Trustee, or disposed of by the Company, such Notes nevertheless may be authenticated and delivered or disposed of as though the person who signed such Notes had not ceased to be such officer of the Company; and any Note may be signed on behalf of the Company by such persons as, at the actual date of the execution of such Note, shall be the proper officers of the Company, although at the date of the execution of this Indenture any such person was not such an officer. Section 2.5 EXCHANGE AND REGISTRATION OF TRANSFER OF NOTES. The Company shall cause to be kept at the Corporate Trust Office a register (the register maintained in such office and in any other office or agency of the Company designated pursuant to Section 5.2 being herein sometimes collectively referred to as the "Note register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Notes and of transfers of Notes. The Note register shall be in written form or in any form capable of being converted into written form within a reasonably prompt period of time. The Trustee is hereby appointed "Note registrar" for the purpose of registering Notes and transfers of Notes as herein provided. The Company may change the Note registrar or appoint one or more co-registrars in accordance with Section 5.2 without any prior notice to any holders, PROVIDED that a Note register shall be at all times maintained at the Corporate Trust Office. Upon surrender for registration of transfer of any Note to the Note registrar or any co-registrar, and satisfaction of the requirements for such transfer set forth in this Section 2.5, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Notes of any authorized denominations and of a like aggregate principal amount and bearing such restrictive legends as may be required by this Indenture. Notes may be exchanged for other Notes of any authorized denominations and of a like aggregate principal amount, upon surrender of the Notes to be exchanged at any such office or agency maintained by the Company pursuant to Section 5.2. Whenever any Notes are so surrendered for exchange, the Company shall execute, and the Trustee 10 shall authenticate and deliver, the Notes which the Noteholder making the exchange is entitled to receive bearing registration numbers not contemporaneously outstanding. All Notes issued upon any registration of transfer or exchange of Notes shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Notes surrendered upon such registration of transfer or exchange. All Notes presented or surrendered for registration of transfer or for exchange, redemption, repurchase or conversion shall (if so required by the Company or the Note registrar) be duly endorsed, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Company, and the Notes shall be duly executed by the Noteholder thereof or his attorney duly authorized in writing. No service charge shall be made to a Noteholder for any registration of transfer or exchange of Notes, but the Company may require payment of a sum sufficient to cover any tax, assessment or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Notes. Neither the Company nor the Trustee nor any Note registrar or any Company registrar shall be required to exchange or register a transfer of (a) any Notes for a period of fifteen (15) days next preceding any selection of Notes to be redeemed or (b) any Notes or portions thereof called for redemption pursuant to Article III or (c) any Notes or portion thereof surrendered for conversion pursuant to Article XV. Section 2.6 MUTILATED, DESTROYED, LOST OR STOLEN NOTES. In case any Note shall become mutilated or be destroyed, lost or stolen, the Company in its discretion may execute, and upon its request the Trustee or an authenticating agent appointed by the Trustee shall authenticate and deliver, a new Note, bearing a number not contemporaneously outstanding, in exchange and substitution for the mutilated Note, or in lieu of and in substitution for the Note so destroyed, lost or stolen. In every case the applicant for a substituted Note shall furnish to the Company, to the Trustee and, if applicable, to such authenticating agent such security or indemnity as may be required by them to save each of them harmless for any loss, liability, cost or expense caused by or connected with such substitution, and, in every case of destruction, loss or theft, the applicant shall also furnish to the Company, to the Trustee and, if applicable, to such authenticating agent evidence to their satisfaction of the destruction, loss or theft of such Note and of the ownership thereof. The Trustee or such authenticating agent may authenticate any such substituted Note and deliver the same upon the receipt of such security or indemnity as the Trustee, the Company and, if applicable, such authenticating agent may require. Upon the issuance of any substituted Note, the Company may require from the holder of such Note the payment of a sum sufficient to cover the Company's reasonable out-of-pocket expenses and any tax or other governmental charge that may be imposed in relation thereto and any other expenses connected therewith. In case any Note which has matured or is about to mature or has been called for redemption or is about to be converted into Common Stock shall become mutilated or be destroyed, lost or stolen, the 11 Company may, instead of issuing a substitute Note, pay or authorize the payment of or convert or authorize the conversion of the same (without surrender thereof except in the case of a mutilated Note), as the case may be, if the applicant for such payment or conversion shall furnish to the Company, to the Trustee and, if applicable, to such authenticating agent such security or indemnity as may be required by them to save each of them harmless for any loss, liability, cost or expense caused by or connected with such substitution, and, in case of destruction, loss or theft, evidence satisfactory to the Company, the Trustee and, if applicable, any paying agent or conversion agent of the destruction, loss or theft of such Note and of the ownership thereof. Every substitute Note issued pursuant to the provisions of this Section 2.6 by virtue of the fact that any Note is destroyed, lost or stolen shall constitute an additional contractual obligation of the Company, whether or not the destroyed, lost or stolen Note shall be found at any time, and shall be entitled to all the benefits of (but shall be subject to all the limitations set forth in) this Indenture equally and proportionately with any and all other Notes duly issued hereunder. To the extent permitted by law, all Notes shall be held and owned upon the express condition that the foregoing provisions are exclusive with respect to the replacement or payment or conversion of mutilated, destroyed, lost or stolen Notes and shall preclude any and all other rights or remedies notwithstanding any law or statute existing or hereafter enacted to the contrary with respect to the replacement or payment or conversion of negotiable instruments or other securities without their surrender. Section 2.7 TEMPORARY NOTES. Pending the preparation of definitive Notes, the Company may execute and the Trustee or an authenticating agent appointed by the Trustee shall, upon the written request of the Company, authenticate and deliver temporary Notes (printed, typewritten or lithographed). Temporary Notes shall be issuable in any authorized denomination, and substantially in the form of the definitive Notes, but with such omissions, insertions and variations as may be appropriate for temporary Notes, all as may be determined by the Company. Every such temporary Note shall be executed by the Company and authenticated by the Trustee or such authenticating agent upon the same conditions and in substantially the same manner, and with the same effect, as the definitive Notes. Without unreasonable delay the Company will execute and deliver to the Trustee or such authenticating agent definitive Notes (other than in the case of Notes in global form) and thereupon any or all temporary Notes (other than any such Note in global form) may be surrendered in exchange therefor, at each office or agency maintained by the Company pursuant to Section 5.2 and the Trustee or such authenticating agent shall authenticate and deliver in exchange for such temporary Notes an equal aggregate principal amount of definitive Notes. Such exchange shall be made by the Company at its own expense and without any charge therefor. Until so exchanged, the temporary Notes shall in all respects be entitled to the same benefits and subject to the same limitations under this Indenture as definitive Notes authenticated and delivered hereunder. Section 2.8 CANCELLATION OF NOTES PAID, ETC. All Notes surrendered for the purpose of payment, redemption, repurchase, conversion, exchange or registration of transfer, shall, if surrendered to the Company or any paying agent or any Note registrar or any conversion agent, be surrendered to the Trustee and promptly canceled by it, or, if surrendered to the Trustee, shall be promptly canceled by it (provided that in the case of any Note or portion thereof submitted for repurchase, 12 the Trustee shall not cancel such Note or portion thereof until after the Repurchase Date), and no Notes shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Indenture, provided that any Note or portion thereof surrendered for repurchase shall only be cancelled at such time as such Note or portion thereof has been repurchased pursuant to Article XVI hereof. The Trustee shall destroy canceled Notes (unless the Company directs it to do otherwise) and, after such destruction, shall, if requested by the Company, deliver a certificate of such destruction to the Company. If the Company shall acquire any of the Notes, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Notes unless and until the same are delivered to the Trustee for cancellation. ARTICLE III REDEMPTION OF NOTES Section 3.1 REDEMPTION PRICES. The Company may not redeem the Notes prior to March 15, 1999. At any time on or after March 15, 1999, the Company may, at its option, redeem all or from time to time any part of the Notes on any date prior to maturity, upon notice as set forth in Section 3.2, and at the optional redemption prices set forth in the form of Note attached as Exhibit A hereto, together with accrued interest to, but excluding, the date fixed for redemption; PROVIDED that if the date fixed for redemption is March 15 or September 15, then the interest payable on such date shall be paid to the holder of record of the Note on the next preceding March 1 or September 1, respectively. Section 3.2 NOTICE OF REDEMPTION: SELECTION OF NOTES. In case the Company shall desire to exercise the right to redeem all or, as the case may be, any part of the Notes pursuant to Section 3.1, it shall fix a date for redemption and it or, at its request, the Trustee in the name of and at the expense of the Company, shall mail or cause to be mailed a notice of such redemption at least 30 and not more than 60 days prior to the date fixed for redemption to the holders of Notes so to be redeemed as a whole or in part at their most recent available addresses as the same appear on the Note register (PROVIDED that if the Company shall give such notice, it shall also give written notice, and written notice of the Notes to be redeemed, to the Trustee). Such mailing shall be by first class mail. The notice if mailed in the manner herein provided shall be conclusively presumed to have been duly given, whether or not the holder receives such notice. In any case, failure to give such notice by mail or any defect in the notice to the holder of any Note designated for redemption as a whole or in part shall not affect the validity of the proceedings for the redemption of any other Note. Each such notice of redemption shall specify the aggregate principal amount of Notes to be redeemed, the date fixed for redemption, the redemption price at which Notes are to be redeemed, the place or places of payment, that payment will be made upon presentation and surrender of such Notes, that interest accrued to, but excluding, the date fixed for redemption will be paid as specified in said notice, and that on and after said date interest thereon or on the portion thereof to be redeemed will cease to accrue. Such notice shall also state the current Conversion Price and the date on which the right to convert such Notes or portions thereof into Common Stock will expire. If fewer than all the Notes are to be redeemed, the notice of redemption shall identify the Notes to be redeemed. In case any Note is to be redeemed in part only, the notice of redemption shall state the portion of the principal amount thereof to be 13 redeemed and shall state that on and after the date fixed for redemption, upon surrender of such Note, a new Note or Notes in principal amount equal to the unredeemed portion thereof will be issued. On or prior to the redemption date specified in the notice of redemption given as provided in this Section 3.2, the Company will deposit with the Trustee or with one or more paying agents (or, if the Company is acting as its own paying agent, set aside, segregate and hold in trust as provided in Section 5.4) an amount of money sufficient to redeem on the redemption date all the Notes (or portions thereof) so called for redemption (other than those theretofore surrendered for conversion into Common Stock) at the appropriate redemption price, together with accrued interest to, but excluding, the date fixed for redemption; PROVIDED that if such payment is made on the redemption date it must be received by the Trustee or paying agent, as the case may be, by 10:00 a.m. New York City time, on such date. If any Note called for redemption is converted pursuant hereto, any money deposited with the Trustee or any paying agent or so segregated and held in trust for the redemption of such Note shall be paid to the Company upon its written request, or, if then held by the Company, shall be discharged from such trust. If fewer than all the Notes are to be redeemed, the Company will give the Trustee written notice in the form of an Officers' Certificate not fewer than forty-five (45) days (or such shorter period of time as may be acceptable to the Trustee) prior to the redemption date as to the aggregate principal amount of Notes to be redeemed. If fewer than all the Notes are to be redeemed, the Trustee shall select the Notes or portions thereof to be redeemed (in principal amounts of $1,000 or integral multiples thereof), by lot or, in its discretion, on a pro rata basis with such adjustments up to $1,000 in order to maintain the minimum denominations of the Notes. If any Note selected for partial redemption is converted in part after such selection, the converted portion of such Note shall be deemed (so far as may be) to be the portion to be selected for redemption. The Notes (or portions thereof) so selected shall be deemed duly selected for redemption for all purposes hereof, notwithstanding that any such Note is converted as a whole or in part before the mailing of the notice of redemption. Upon any redemption of less than all Notes, the Company and the Trustee may (but need not) treat as outstanding any Notes surrendered for conversion during the period of fifteen (15) days next preceding the mailing of a notice of redemption and may (but need not) treat as outstanding any Note authenticated and delivered during such period in exchange for the unconverted portion of any Note converted in part during such period. Section 3.3 PAYMENT OF NOTES CALLED FOR REDEMPTION. If notice of redemption has been given as above provided, the Notes or portion of Notes with respect to which such notice has been given shall, unless converted into Common Stock pursuant to the terms hereof, become due and payable on the redemption date and at the place or places stated in such notice at the applicable redemption price, together with interest accrued to (but excluding) the date fixed for redemption, and on and after said date (unless the Company shall default in the payment of such Notes at the redemption price, together with interest accrued to, but excluding, said date) interest on the Notes or portion of Notes so called for redemption shall cease to accrue and such Notes shall cease after the close of business on the second Business Day next preceding the date fixed for redemption to be convertible into Common Stock and, except as provided in Sections 8.5 and 14 13.4, to be entitled to any benefit or security under this Indenture, and the holders thereof shall have no right in respect of such Notes except the right to receive the redemption price thereof and unpaid interest to (but excluding) the date fixed for redemption. On presentation and surrender of such Notes at a place of payment in said notice specified, the said Notes or the specified portions thereof shall be paid and redeemed by the Company at the applicable redemption price, together with interest accrued thereon to (but excluding) the date fixed for redemption; PROVIDED that, if the applicable redemption date is an interest payment date, the semi-annual payment of interest becoming due on such date shall be payable to the holders of such Notes registered as such on the relevant record date instead of the holders surrendering such Notes for redemption on such date. Upon presentation of any Note redeemed in part only, the Company shall execute and the Trustee shall authenticate and deliver to the holder thereof, at the expense of the Company, a new Note or Notes, of authorized denominations, in principal amount equal to the unredeemed portion of the Notes so presented. Notwithstanding the foregoing, the Trustee shall not pay the redemption price of any Notes or mail any notice of optional redemption during the continuance of a default in payment of interest or premium on the Notes or of any Event of Default of which, in the case of any Event of Default other than under Sections 7.1(a) or 7.1(b), a Responsible Officer of the Trustee has knowledge. If any Note called for redemption shall not be so paid upon surrender thereof for redemption, the principal and premium, if any, shall, until paid or duly provided for, bear interest from the date fixed for redemption at the rate borne by the Note and such Note shall remain convertible into Common Stock until the principal and premium, if any, shall have been paid or duly provided for. Section 3.4 CONVERSION ARRANGEMENT ON CALL FOR REDEMPTION. In connection with any redemption of Notes, the Company may arrange for the purchase and conversion of any Notes by an agreement with one or more investment bankers or other purchasers to purchase such Notes by paying to the Trustee in trust for the Noteholders, on or before the date fixed for redemption, an amount not less than the applicable redemption price, together with interest accrued to (but excluding) the date fixed for redemption, of such Notes. Notwithstanding anything to the contrary contained in this Article III, the obligation of the Company to pay the redemption price of such Notes, together with interest accrued to (but excluding) the date fixed for redemption, shall be deemed to be satisfied and discharged to the extent such amount is so paid by such purchasers. If such an agreement is entered into, a copy of which will be filed with the Trustee prior to the date fixed for redemption, any Notes not duly surrendered for conversion by the holders thereof may, at the option of the Company, be deemed, to the fullest extent permitted by law, acquired by such purchasers from such holders and (notwithstanding anything to the contrary contained in Article XV) surrendered by such purchasers for conversion, all as of immediately prior to the close of business on the date fixed for redemption (and the right to convert any such Notes shall be extended through such time), subject to payment of the above amount as aforesaid. At the direction of the Company, the Trustee shall hold and dispose of any such amount paid to it in the same manner as it would monies deposited with it by the Company for the redemption of Notes. Without the Trustee's prior written consent, no arrangement between the Company and such purchasers for the purchase and conversion of any Notes shall 15 increase or otherwise affect any of the powers, duties, responsibilities or obligations of the Trustee as set forth in this Indenture, and the Company agrees to indemnify the Trustee from, and hold it harmless against, any loss, liability or expense arising out of or in connection with any such arrangement for the purchase and conversion of any Notes between the Company and such purchasers to which the Trustee has not consented in writing, including the costs and expenses, including reasonable legal fees, incurred by the Trustee in the defense of any claim or liability arising out of or in connection with the exercise or performance of any of its powers, duties, responsibilities or obligations under this Indenture. ARTICLE IV SUBORDINATION OF NOTES Section 4.1 AGREEMENT OF SUBORDINATION. The Company covenants and agrees, and each holder of Notes issued hereunder by his acceptance thereof likewise covenants and agrees, that all Notes shall be issued subject to the provisions of this Article IV; and each Person holding any Note, whether upon original issue or upon transfer, assignment or exchange thereof, accepts and agrees to be bound by such provisions. The payment of the principal of, premium, if any, and interest on all Notes (including, but not limited to, the redemption price with respect to the Notes called for redemption in accordance with Section 3.2 or submitted for repurchase in accordance with Section 16.2, as the case may be, as provided in the Indenture) issued hereunder shall, to the extent and in the manner hereinafter set forth, be subordinated and subject in right of payment to the prior payment in full of all Senior Indebtedness, whether outstanding at the date of this Indenture or thereafter incurred. No provision of this Article IV shall prevent the occurrence of any default or Event of Default hereunder. Section 4.2 PAYMENTS TO NOTEHOLDERS. No payment shall be made with respect to the principal of, or premium, if any, or interest on the Notes (including, but not limited to, the redemption price or the Repurchase Price with respect to the Notes to be called for redemption in accordance with Section 3.2 or submitted for repurchase in accordance with Section 16.2, as the case may be, as provided in the Indenture), except payments and distributions made by the Trustee as permitted by the first or second paragraph of Section 4.5, if: (1) a default in the payment of principal, premium, interest, rent or other obligations due on any Senior Indebtedness occurs and is continuing (or, in the case of Senior Indebtedness for which there is a period of grace, in the event of such a default that continues beyond the period of grace, if any, specified in the instrument or lease evidencing such Senior Indebtedness), unless and until such default shall have been cured or waived or shall have ceased to exist; or 16 (2) a default, other than a payment default, on any Designated Senior Indebtedness occurs and is continuing that then permits holders of such Designated Senior Indebtedness to accelerate its maturity and the Trustee receives a notice of the default (a "Payment Blockage Notice") from a Person who may give it pursuant to Section 4.5 hereof. If the Trustee receives any Payment Blockage Notice pursuant to clause (2) above, no subsequent Payment Blockage Notice shall be effective for purposes of this Section unless and until (A) at least 365 days shall have elapsed since the effectiveness of the immediately prior Payment Blockage Notice, and (B) all scheduled payments of principal, premium, if any, and interest on the Notes that have come due have been paid in full in cash. No nonpayment default that existed or was continuing on the date of delivery of any Payment Blockage Notice to the Trustee shall be, or be made, the basis for a subsequent Payment Blockage Notice. The Company may and shall resume payments on and distributions in respect of the Notes upon the earlier of: (x) the date upon which the default is cured or waived, or (y) in the case of a default referred to in clause (2) above, 179 days pass after notice is received if the maturity of such Designated Senior Indebtedness has not been accelerated, unless this Article IV otherwise prohibits the payment or distribution at the time of such payment or distribution. Upon any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to creditors upon any dissolution or winding-up or liquidation or reorganization of the Company, whether voluntary or involuntary or in bankruptcy, insolvency, receivership or other proceedings, all amounts due or to become due upon all Senior Indebtedness shall first be paid in full in cash or other payment satisfactory to the holders of such Senior Indebtedness, or payment thereof in accordance with its terms shall be provided for in cash or other payment satisfactory to the holders of such Senior Indebtedness before any payment is made on account of the principal of, premium, if any, or interest on the Notes (except payments made pursuant to Article XIII from monies deposited with the Trustee pursuant thereto prior to commencement of proceedings for such dissolution, winding-up, liquidation or reorganization); and upon any such dissolution or winding-up or liquidation or reorganization of the Company or bankruptcy, insolvency, receivership or other proceeding, any payment by the Company, or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the holders of the Notes or the Trustee would be entitled, except for the provision of this Article IV, shall (except as aforesaid) be paid by the Company or by any receiver, trustee in bankruptcy, liquidating trustee, agent or other Person making such payment or distribution, or by the holders of the Notes or by the Trustee under this Indenture if received by them or it, directly to the holders of Senior Indebtedness (pro rata to such holders on the basis of the respective amounts of Senior Indebtedness held by such holders, or as otherwise required by law or a court order) or their representative or representatives, or to 17 the trustee or trustees under any indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, to the extent necessary to pay all Senior Indebtedness in full, in cash or other payment satisfactory to the holders of such Senior Indebtedness, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness, before any payment or distribution or provision therefor is made to the holders of the Notes or to the Trustee. For purposes of this Article IV, the words, "cash, property or securities" shall not be deemed to include shares of stock of the Company as reorganized or readjusted, or securities of the Company or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinated at least to the extent provided in this Article IV with respect to the Notes to the payment of all Senior Indebtedness which may at the time be outstanding; PROVIDED that (i) the Senior Indebtedness is assumed by the new corporation, if any, resulting from any reorganization or readjustment, and (ii) the rights of the holders of Senior Indebtedness (other than leases which are not assumed by the Company or the new corporation, as the case may be) are not, without the consent of such holders, altered by such reorganization or readjustment. The consolidation of the Company with, or the merger of the Company into, another corporation or the liquidation or dissolution of the Company following the conveyance or transfer of its property as an entirety, or substantially as an entirety, to another corporation upon the terms and conditions provided for in Article XII shall not be deemed a dissolution, winding-up, liquidation or reorganization for the purposes of this Section 4.2 if such other corporation shall, as a part of such consolidation, merger, conveyance or transfer, comply with the conditions stated in Article XII. In the event of the acceleration of the Notes because of an Event of Default, no payment or distribution shall be made to the Trustee or any holder of Notes in respect of the principal of, premium, if any, or interest on the Notes (including, but not limited to, the redemption price with respect to the Notes called for redemption in accordance with Section 3.2 or submitted for repurchase in accordance with Section 16.2, as the case may be, as provided in the Indenture), except payments and distributions made by the Trustee as permitted by the first or second paragraph of Section 4.5, until all Senior Indebtedness has been paid in full in cash or other payment satisfactory to the holders of Senior Indebtedness or such acceleration is rescinded in accordance with the terms of this Indenture. If payment of the Notes is accelerated because of an Event of Default, the Company shall promptly notify holders of Senior Indebtedness of the acceleration. In the event that, notwithstanding the foregoing provisions, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities (including, without limitation, by way of setoff or otherwise), prohibited by the foregoing, shall be received by the Trustee or the holders of the Notes before all Senior Indebtedness is paid in full in cash or other payment satisfactory to the holders of such Senior Indebtedness, or provision is made for such payment thereof in accordance with its terms in cash or other payment satisfactory to the holders of such Senior Indebtedness, such payment or distribution shall be held in trust for the benefit of and shall be paid over or delivered to the holders of Senior Indebtedness or their representative or representatives, or to the trustee or trustees under any 18 indenture pursuant to which any instruments evidencing any Senior Indebtedness may have been issued, as their respective interests may appear, as calculated by the Company, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full in cash or other payment satisfactory to the holders of such Senior Indebtedness, after giving effect to any concurrent payment or distribution to or for the holders of such Senior Indebtedness. Nothing in this Section 4.2 shall apply to claims of, or payments to, the Trustee under or pursuant to Section 8.6. This Section 4.2 shall be subject to the further provisions of Section 4.5. Section 4.3 SUBROGATION OF NOTES. Subject to the payment in full of all Senior Indebtedness, the rights of the holders of the Notes shall be subrogated to the extent of the payments or distributions made to the holders of such Senior Indebtedness pursuant to the provisions of this Article IV (equally and ratably with the holders of all indebtedness of the Company which by its express terms is subordinated to other indebtedness of the Company to substantially the same extent as the Notes are subordinated and is entitled to like rights of subrogation) to the rights of the holders of Senior Indebtedness to receive payments or distributions of cash, property or securities of the Company applicable to the Senior Indebtedness until the principal, premium, if any, and interest on the Notes shall be paid in full; and, for the purposes of such subrogation, no payments or distributions to the holders of the Senior Indebtedness of any cash, property or securities to which the holders of the Notes or the Trustee would be entitled except for the provisions of this Article IV, and no payments pursuant to the provisions of this Article IV, to or for the benefit of the holders of Senior Indebtedness by holders of the Notes or the Trustee, shall, as between the Company, its creditors other than holders of Senior Indebtedness, and the holders of the Notes, be deemed to be a payment by the Company to or on account of the Notes; and no payments or distributions of cash, property or securities to or for the benefit of the holders of the Notes pursuant to the subrogation provisions of this Article IV, which would otherwise have been paid to the holders of Senior Indebtedness shall be deemed to be a payment by the Company to or for the account of the Notes. It is understood that the provisions of this Article IV are and are intended solely for the purposes of defining the relative rights of the holders of the Notes, on the one hand, and the holders of the Senior Indebtedness, on the other hand. Nothing contained in this Article IV or elsewhere in this Indenture or in the Notes is intended to or shall impair, as among the Company, its creditors other than the holders of Senior Indebtedness, and the holders of the Notes, the obligation of the Company, which is absolute and unconditional, to pay to the holders of the Notes the principal of (and premium, if any) and interest on the Notes as and when the same shall become due and payable in accordance with their terms, or is intended to or shall affect the relative rights of the holders of the Notes and creditors of the Company other than the holders of the Senior Indebtedness, nor shall anything herein or therein prevent the Trustee or the holder of any Note from exercising (subject to the provisions hereof) all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article IV of the holders of Senior Indebtedness in respect of cash, property or securities of the Company received upon the exercise of any such remedy. 19 Upon any payment or distribution of assets of the Company referred to in this Article IV, the Trustee, subject to the provisions of Section 8.1, and the holders of the Notes shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which such bankruptcy, dissolution, winding-up, liquidation or reorganization proceedings are pending, or a certificate of the receiver, trustee in bankruptcy, liquidating trustee, agent or other person making such payment or distribution, delivered to the Trustee or to the holders of the Notes, for the purpose of ascertaining the persons entitled to participate in such distribution, the holders of the Senior Indebtedness and other indebtedness of the Company, the amount thereof or payable thereon and all other facts pertinent thereto or to this Article IV. Section 4.4 AUTHORIZATION TO EFFECT SUBORDINATION. Each holder of a Note by the holder's acceptance thereof authorizes and directs the Trustee on the holder's behalf to take such action as may be necessary or appropriate to effectuate the subordination as provided in this Article IV and appoints the Trustee to act as the holder's attorney-in-fact for any and all such purposes. If the Trustee does not file a proper proof of claim or proof of debt in the form required in any proceeding referred to in the third paragraph of Section 7.2 hereof at least 30 days before the expiration of the time to file such claim, the holders of any Senior Indebtedness or their representatives are hereby authorized to file an appropriate claim for and on behalf of the holders of the Notes. Section 4.5 NOTICE TO TRUSTEE. The Company shall give prompt written notice in the form of an Officers' Certificate to a Responsible Officer of the Trustee and to any paying agent of any fact known to the Company which would prohibit the making of any payment of monies to or by the Trustee or any paying agent in respect of the Notes pursuant to the provisions of this Article IV. Notwithstanding the provisions of this Article IV or any other provision of this Indenture, the Trustee shall not be charged with knowledge of the existence of any facts which would prohibit the making of any payment of monies to or by the Trustee in respect of the Notes pursuant to the provisions of this Article IV, unless and until a Responsible Officer of the Trustee shall have received written notice thereof at the Corporate Trust Office from the Company or a holder or holders of Senior Indebtedness or from any trustee thereof; and before the receipt of any such written notice, the Trustee, subject to the provisions of Section 8.1, shall be entitled in all respects to assume that no such facts exist; PROVIDED that if on a date not fewer than two Business Days prior to the date upon which by the terms hereof any such monies may become payable for any purpose (including, without limitation, the payment of the principal of, or premium, if any, or interest on any Note) the Trustee shall not have received, with respect to such monies, the notice provided for in this Section 4.5, then, anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such monies and to apply the same to the purpose for which they were received, and shall not be affected by any notice to the contrary which may be received by it on or after such prior date. Notwithstanding anything in this Article IV to the contrary, nothing shall prevent (a) any payment by the Company or the Trustee to the Trustee or Noteholders of amounts in connection with a redemption of Notes (including a redemption pursuant to Section 3.5) if (i) notice of such redemption has been given pursuant to Article III prior to the receipt by the Trustee of written notice as aforesaid, and (ii) such notice of redemption is given not earlier than sixty (60) days 20 before the redemption date or (b) any payment by the Trustee to the Noteholders of monies deposited with it pursuant to Section 13.1, and any such payment shall not be subject to the provisions of Section 4.1 or 4.2. The Trustee, subject to the provisions of Section 8.1, shall be entitled to rely on the delivery to it of a written notice by a person representing himself to be a holder of Senior Indebtedness (or a trustee on behalf of such holder) to establish that such notice has been given by a holder of Senior Indebtedness or a trustee on behalf of any such holder or holders. In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any person as a holder of Senior Indebtedness to participate in any payment or distribution pursuant to this Article IV, the Trustee may request such person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Indebtedness held by such person, the extent to which such person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such person under this Article IV, and if such evidence is not furnished the Trustee may defer any payment to such person pending judicial determination as to the right of such person to receive such payment. Section 4.6 TRUSTEE'S RELATION TO SENIOR INDEBTEDNESS. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article IV in respect of any Senior Indebtedness at any time held by it, to the same extent as any other holder of Senior Indebtedness, and nothing in Section 8.13 or elsewhere in this Indenture shall deprive the Trustee of any of its rights as such holder. With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article IV, and no implied covenants or obligations with respect to the holders of Senior Indebtedness shall be read into this Indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness and, subject to the provisions of Section 8.1, the Trustee shall not be liable to any holder of Senior Indebtedness if it shall pay over or deliver to holders of Notes, the Company or any other person money or assets to which any holder of Senior Indebtedness shall be entitled by virtue of this Article IV or otherwise. Section 4.7 NO IMPAIRMENT OF SUBORDINATION. No right of any present or future holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof which any such holder may have or otherwise be charged with. Section 4.8 CERTAIN CONVERSIONS DEEMED PAYMENT. For the purposes of this Article IV only, (1) the issuance and delivery of junior securities upon conversion of Notes in accordance with Article XV shall not be deemed to constitute a payment or distribution on account of the principal of (or premium, if any) or interest on Notes or on account of the purchase or other acquisition of Notes, and (2) the payment, issuance or delivery of cash, 21 property or securities (other than junior securities) upon conversion of a Note shall be deemed to constitute payment on account of the principal of such Note. For the purposes of this Section 4.8, the term "junior securities" means (a) shares of any stock of any class of the Company, or (b) securities of the Company which are subordinated in right of payment to all Senior Indebtedness which may be outstanding at the time of issuance or delivery of such securities to substantially the same extent as, or to a greater extent than, the Notes are so subordinated as provided in this Article. Nothing contained in this Article IV or elsewhere in this Indenture or in the Notes is intended to or shall impair, as among the Company, its creditors other than holders of Senior Indebtedness and the Noteholders, the right, which is absolute and unconditional, of the Holder of any Note to convert such Note in accordance with Article XV. Section 4.9 ARTICLE APPLICABLE TO PAYING AGENTS. If at any time any paying agent other than the Trustee shall have been appointed by the Company and be then acting hereunder, the term "Trustee" as used in this Article shall (unless the context otherwise requires) be construed as extending to and including such paying agent within its meaning as fully for all intents and purposes as if such paying agent were named in this Article in addition to or in place of the Trustee; PROVIDED, HOWEVER, that the first paragraph of Section 4.5 shall not apply to the Company or any Affiliate of the Company if it or such Affiliate acts as paying agent. Section 4.10 SENIOR INDEBTEDNESS ENTITLED TO RELY. The holders of Senior Indebtedness (including, without limitation, Designated Senior Indebtedness) shall have the right to rely upon this Article IV, and no amendment or modification of the provisions contained herein shall diminish the rights of such holders unless such holders shall have agreed in writing thereto. ARTICLE V PARTICULAR COVENANTS OF THE COMPANY Section 5.1 PAYMENT OF PRINCIPAL, PREMIUM AND INTEREST. The Company covenants and agrees that it will duly and punctually pay or cause to be paid the principal of and premium, if any, and interest on each of the Notes at the places, at the respective times and in the manner provided herein and in the Notes. Each installment of interest on the Notes due on any semi-annual interest payment date may be paid by mailing checks for the interest payable to or upon the written order of the holders of Notes entitled thereto as they shall appear on the registry books of the Company; PROVIDED, that; with respect to any holder of Notes with an aggregate principal amount equal to or in excess of $5,000,000, at the request of such holder in writing to the Company (who shall then furnish notice to such effect to the Trustee), interest on such holder's Notes shall be paid by wire transfer (the cost of such wire transfer to be borne by the Company) in immediately available funds in accordance with the wire transfer instructions supplied by such holder to the Trustee and paying agent (if different from the Trustee). Section 5.2 MAINTENANCE OF OFFICE OR AGENCY. The Company will maintain in the Borough of Manhattan, The City of New York or in Boston, Massachusetts, an office or agency where the Notes may be surrendered for registration of transfer or exchange or for presentation for payment or for conversion or redemption and where notices and demands to or upon the 22 Company in respect of the Notes and this Indenture may be served. The Company will give prompt written notice to the Trustee of the location, and any change in the location, of such office or agency not designated or appointed by the Trustee. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office or agency of the Trustee in the Borough of Manhattan, The City of New York. The Company may also from time to time designate one or more other offices or agencies where the Notes may be presented or surrendered for any or all such purposes and may from time to time rescind such designations; PROVIDED that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in the Borough of Manhattan, The City of New York for such purposes. The Company will give prompt written notice to the holders of any such designation or rescission and of any change in the location of any such other office or agency. The Company hereby initially designates the Trustee as paying agent, Note registrar and conversion agent, and each of the Corporate Trust Office of the Trustee and the office or agency of the Trustee in the Borough of Manhattan, The City of New York (which shall initially be State Street Bank and Trust Company, N.A., an affiliate of the Trustee) as one such office or agency of the Company for each of the aforesaid purposes. The Trustee agrees to mail, or cause to be mailed, the notices set forth in Section 8.10(a) and the third paragraph of Section 8.11. Section 5.3 APPOINTMENTS TO FILL VACANCIES IN TRUSTEE'S OFFICE. The Company, whenever necessary to avoid or fill a vacancy in the office of Trustee, will appoint, in the manner provided in Section 8.10, a Trustee, so that there shall at all times be a Trustee hereunder. Section 5.4 PROVISIONS AS TO PAYING AGENT. (a) If the Company shall appoint a paying agent other than the Trustee, or if the Trustee shall appoint such a paying agent, it will cause such paying agent to execute and deliver to the Trustee an instrument in which such agent shall agree with the Trustee, subject to the provisions of this Section 5.4: (1) that it will hold all sums held by it as such agent for the payment of the principal of and premium, if any, or interest on the Notes (whether such sums have been paid to it by the Company or by any other obligor on the Notes) in trust for the benefit of the holders of the Notes; (2) that it will give the Trustee notice of any failure by the Company (or by any other obligor on the Notes) to make any payment of the principal of and premium, if any, or interest on the Notes when the same shall be due and payable; and (3) that at any time during the continuance of an Event of Default, upon request of the Trustee, it will forthwith pay to the Trustee all sums so held in trust. 23 The Company shall, on or before each due date of the principal of, premium, if any, or interest on the Notes, deposit with the paying agent in immediately available funds a sum sufficient to pay such principal, premium, if any, or interest, and (unless such paying agent is the Trustee) the Company will promptly notify the Trustee of any failure to take such action; PROVIDED that if such deposit is made on the due date, such deposit shall be received by the paying agent by 10:00 a.m. New York City time, on such date. (b) If the Company shall act as its own paying agent, it will, on or before each due date of the principal of, premium, if any, or interest on the Notes, set aside, segregate and hold in trust for the benefit of the holders of the Notes a sum sufficient to pay such principal, premium, if any, or interest so becoming due and will notify the Trustee of any failure to take such action and of any failure by the Company (or any other obligor under the Notes) to make any payment of the principal of, premium, if any, or interest on the Notes when the same shall become due and payable. (c) Anything in this Section 5.4 to the contrary notwithstanding, the Company may, at any time, for the purpose of obtaining a satisfaction and discharge of this Indenture, or for any other reason, pay or cause to be paid to the Trustee all sums held in trust by the Company or any paying agent hereunder as required by this Section 5.4, such sums to be held by the Trustee upon the trusts herein contained and upon such payment by the Company or any paying agent to the Trustee, the Company or such paying agent shall be released from all further liability with respect to such sums. (d) Anything in this Section 5.4 to the contrary notwithstanding, the agreement to hold sums in trust as provided in this Section 5.4 is subject to Sections 13.3 and 13.4. Section 5.5 CORPORATE EXISTENCE. Subject to Article XII, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence. Section 5.6 STAY, EXTENSION AND USURY LAWS. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of or interest on the Notes as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Indenture and the Company (to the extent it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law has been enacted. Section 5.7 COMPLIANCE CERTIFICATE. The Company shall deliver to the Trustee within 120 days after the end of each fiscal year of the Company (beginning with the fiscal year ending 24 on December 31, 1996) an Officers' Certificate stating whether or not the signers know of any Event of Default that occurred during such period. If such signers know of any Event of Default that occurred during such period, such Officers' Certificate shall describe the Event of Default and its status. ARTICLE VI NOTEHOLDERS' LISTS AND REPORTS BY THE COMPANY AND THE TRUSTEE Section 6.1 NOTEHOLDERS' LISTS. The Company covenants and agrees that it will furnish or cause to be furnished to the Trustee, semiannually, not more than fifteen (15) days after each March 1 and September 1 in each year beginning with September 1, 1996, and at such other times as the Trustee may request in writing, within thirty (30) days after receipt by the Company of any such request (or such lesser time as the Trustee may reasonably request in order to enable it to timely provide any notice to be provided by it hereunder), a list in such form as the Trustee may reasonably require of the names and addresses of the holders of Notes as of a date not more than fifteen (15) days (or such other date as the Trustee may reasonably request in order to so provide any such notices) prior to the time such information is furnished, except that no such list need be furnished so long as the Trustee is acting as Note registrar. Section 6.2 PRESERVATION AND DISCLOSURE OF LISTS. (a) The Trustee shall preserve, in as current a form as is reasonably practicable, all information as to the names and addresses of the holders of Notes contained in the most recent list furnished to it as provided in Section 6.1 or maintained by the Trustee in its capacity as Note registrar, if so acting. The Trustee may destroy any list furnished to it as provided in Section 6.1 upon receipt of a new list so furnished. (b) The rights of Noteholders to communicate with other holders of Notes with respect to their rights under this Indenture or under the Notes, and the corresponding rights and duties of the Trustee, shall be as provided by the Trust Indenture Act. (c) Every Noteholder, by receiving and holding the same, agrees with the Company and the Trustee that neither the Company nor the Trustee nor any agent of either of them shall be held accountable by reason of any disclosure of information as to names and addresses of holders of Notes made pursuant to the Trust Indenture Act. Section 6.3 REPORTS BY TRUSTEE. (a) Within 60 days after May 15 of each year commencing with the year 1996, the Trustee shall transmit to holders of Notes such reports 25 dated as of May 15 of the year in which such reports are made concerning the Trustee and its actions under this Indenture as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. The Trustee shall also transmit all reports as required by Section 313(b)(2) of the Trust Indenture Act to such holders of Notes. The Trustee shall transmit all such reports in such manner as is required by Section 313(c) of the Trust Indenture Act. (b) A copy of such report shall, at the time of such transmission to holders of Notes, be filed by the Trustee with each stock exchange and automated quotation system upon which the Notes are listed and with the Company. The Company will notify the Trustee within a reasonable time when the Notes are listed on any stock exchange and automated quotation system. Section 6.4 REPORTS BY COMPANY. The Company shall file with the Trustee (and the Commission at any time after the Indenture becomes qualified under the Trust Indenture Act), and transmit to holders of Notes, such information, documents and other reports and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant to such Act; PROVIDED that any such information, documents or reports required to be filed with the Commission pursuant to Section 13 or 15(d) of the Exchange Act shall be filed with the Trustee within 15 days after the same is so required to be filed with the Commission. ARTICLE VII REMEDIES OF THE TRUSTEE AND NOTEHOLDERS ON AN EVENT OF DEFAULT Section 7.1 EVENTS OF DEFAULT. In case one or more of the following Events of Default (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body) shall have occurred and be continuing: (a) default in the payment of any installment of interest upon any of the Notes as and when the same shall become due and payable, and continuance of such default for a period of thirty (30) days, whether or not such payment is permitted under Article IV hereof; or (b) default in the payment of the principal of or premium, if any, on any of the Notes as and when the same shall become due and payable either at maturity or in connection with any redemption pursuant to Article III or repurchase pursuant to Article XVI, by acceleration or otherwise, whether or not such payment is permitted under Article IV hereof; or (c) a failure on the part of the Company or any Subsidiary of the Company to make any payment at maturity in respect of any obligations (other than non-recourse obligations) of, or guaranteed or assumed by, the Company or any such subsidiary for borrowed money ("Money Indebtedness") in an amount in 26 excess of $25,000,000 and continuance of such failure for thirty (30) days, or a default by the Company or any such Subsidiary with respect to any Money Indebtedness, which default results in the acceleration of Money Indebtedness in an amount in excess of $25,000,000 without such Indebtedness having been discharged or such acceleration having been cured, waived, rescinded or annulled within thirty (30) days after there shall have been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the holders of not less than 10% in aggregate principal amount of the Notes then outstanding a written notice specifying such default and requiring the Company to cause such Money Indebtedness to be discharged or cause such default to be cured or waived or such acceleration to be rescinded or annulled and stating that such notice is a "Notice of Default" hereunder; or (d) failure on the part of the Company duly to observe or perform any other of the covenants or agreements on the part of the Company in the Notes or in this Indenture (other than a covenant or agreement a default in whose performance or whose breach is elsewhere in this Section 7.1 specifically dealt with) continued for a period of sixty (60) days after the date on which written notice of such failure, requiring the Company to remedy the same, shall have been given to the Company by the Trustee, or to the Company and a Responsible Officer of the Trustee by the holders of at least 25 percent in aggregate principal amount of the Notes at the time outstanding determined in accordance with Section 9.4; or (e) the Company shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, or shall consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or shall make a general assignment for the benefit of creditors, or shall fail generally to pay its debts as they become due; or (f) an involuntary case or other proceeding shall be commenced against the Company seeking liquidation, reorganization or other relief with respect to it or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or any substantial part of its property, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of ninety (90) consecutive days; then, and in each and every such case (other than an Event of Default specified in Section 7.1(e) or (f)), unless the principal of all of the Notes shall have already become due and payable, either the Trustee or the holders of not less than 25 percent in aggregate principal amount of the Notes 27 then outstanding hereunder determined in accordance with Section 9.4, by notice in writing to the Company (and to the Trustee if given by Noteholders), may declare the principal of all the Notes and the interest accrued thereon to be due and payable immediately, and upon any such declaration the same shall become and shall be immediately due and payable, anything in this Indenture or in the Notes contained to the contrary notwithstanding. In the event a declaration of acceleration because of an Event of Default specified in Section 7.1(c) hereof has occurred and is continuing, such declaration of acceleration shall be automatically annulled if such default is cured or waived or the holders of the Debentures have rescinded their declaration of acceleration in respect of such indebtedness within 60 days thereof and the Trustee has received written notice of such cure, waiver or rescission and no other Event of Default described in Section 71(c) hereof has occurred that has not been cured or waived within 60 days of the declaration of such acceleration in respect thereof. If an Event of Default specified in Section 7.1(e) or (f) occurs, the principal of all the Notes and the interest accrued thereon shall be immediately and automatically due and payable without necessity of further action. This provision, however, is subject to the conditions that if, at any time after the principal of the Notes shall have been so declared due and payable, and before any judgment or decree for the payment of the monies due shall have been obtained or entered as hereinafter provided, the Company shall pay or shall deposit with the Trustee a sum sufficient to pay all matured installments of interest upon all Notes and the principal of and premium, if any, on any and all Notes which shall have become due otherwise than by acceleration (with interest on overdue installments of interest (to the extent that payment of such interest is enforceable under applicable law) and on such principal and premium, if any, at the rate borne by the Notes, to the date of such payment or deposit) and amounts due to the Trustee pursuant to Section 8.6, and if any and all defaults under this Indenture, other than the nonpayment of principal of and premium, if any, and accrued interest on Notes which shall have become due by acceleration, shall have been cured or waived pursuant to Section 7.7 -- then and in every such case the holders of a majority in aggregate principal amount of the Notes then outstanding, by written notice to the Company and to the Trustee, may waive all defaults or Events of Default and rescind and annul such declaration and its consequences; but no such waiver or rescission and annulment shall extend to or shall affect any subsequent default or Event of Default, or shall impair any right consequent thereon. The Company shall notify a Responsible Officer of the Trustee, promptly upon becoming aware thereof, of any Event of Default. In case the Trustee shall have proceeded to enforce any right under this Indenture and such proceedings shall have been discontinued or abandoned because of such waiver or rescission and annulment or for any other reason or shall have been determined adversely to the Trustee, then and in every such case the Company, the holders of Notes, and the Trustee shall be restored respectively to their several positions and rights hereunder, and all rights, remedies and powers of the Company, the holders of Notes, and the Trustee shall continue as though no such proceeding had been taken. Section 7.2 PAYMENTS OF NOTES ON DEFAULT: SUIT THEREFOR. The Company covenants that (a) in case default shall be made in the payment of any installment of interest upon any of the Notes as and when the same shall become due and payable, and such default shall have continued for a period of thirty (30) days, or (b) in case default shall be made in the payment of 28 the principal of or premium, if any, on any of the Notes as and when the same shall have become due and payable, whether at maturity of the Notes or in connection with any redemption or repurchase under this Indenture declaration or otherwise -- then, upon demand of the Trustee, the Company will pay to the Trustee, for the benefit of the holders of the Notes, the whole amount that then shall have become due and payable on all such Notes for principal and premium, if any, or interest, or both, as the case may be, with interest upon the overdue principal and premium, if any, and (to the extent that payment of such interest is enforceable under applicable law) upon the overdue installments of interest at the rate borne by the Notes; and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including reasonable compensation to the Trustee, its agents, attorneys and counsel, and any expenses or liabilities incurred by the Trustee hereunder other than through its negligence or bad faith. Until such demand by the Trustee, the Company may pay the principal of and premium, if any, and interest on the Notes to the registered holders, whether or not the Notes are overdue. In case the Company shall fail forthwith to pay such amounts upon such demand, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any actions or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceeding to judgment or final decree, and may enforce any such judgment or final decree against the Company or any other obligor on the Notes and collect in the manner provided by law out of the property of the Company or any other obligor on the Notes wherever situated the monies adjudged or decreed to be payable. In the case there shall be pending proceedings for the bankruptcy or for the reorganization of the Company or any other obligor on the Notes under Title 11 of the United States Code, or any other applicable law, or in case a receiver, assignee or trustee in bankruptcy or reorganization, liquidator, sequestrator or similar official shall have been appointed for or taken possession of the Company or such other obligor, the property of the Company or such other obligor, or in the case of any other judicial proceedings relative to the Company or such other obligor upon the Notes, or to the creditors or property of the Company or such other obligor, the Trustee, irrespective of whether the principal of the Notes shall then be due and payable as therein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand pursuant to the provisions of this Section 7.2, shall be entitled and empowered, by intervention in such proceedings or otherwise, to file and prove a claim or claims for the whole amount of principal, premium, if any, and interest owing and unpaid in respect of the Notes, and, in case of any judicial proceedings, to file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and of the Noteholders allowed in such judicial proceedings relative to the Company or any other obligor on the Notes, its or their creditors, or its or their property, and to collect and receive any monies or other property payable or deliverable on any such claims, and to distribute the same after the deduction of any amounts due the Trustee under Section 8.6; and any receiver, assignee or trustee in bankruptcy or reorganization, liquidator, custodian or similar official is hereby authorized by each of the Noteholders to make such payments to the Trustee, and, in the event that the Trustee shall consent to the making of such payments directly to the Noteholders, to pay to the Trustee any amount due it for reasonable compensation, expenses, advances and disbursements, including counsel fees incurred by it up to the date of such distribution. To the 29 extent that such payment of reasonable compensation, expenses, advances and disbursements out of the estate in any such proceedings shall be denied for any reason, payment of the same shall be secured by a lien on, and shall be paid out of, any and all distributions, dividends, monies, securities and other property which the holders of the Notes may be entitled to receive in such proceedings, whether in liquidation or under any plan of reorganization or arrangement or otherwise. All rights of action and of asserting claims under this Indenture, or under any of the Notes, may be enforced by the Trustee without the possession of any of the Notes, or the production thereof on any trial or other proceeding relative thereto, and any such suit or proceeding instituted by the Trustee shall be brought in its own name and as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the holders of the Notes. In any proceedings brought by the Trustee (and in any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party) the Trustee shall be held to represent all the holders of the Notes, and it shall not be necessary to make any holders of the Notes parties to any such proceedings. Section 7.3 APPLICATION OF MONIES COLLECTED BY TRUSTEE. Any monies collected by the Trustee pursuant to this Article VII shall be applied in the order following, at the date or dates fixed by the Trustee for the distribution of such monies, upon presentation of the several Notes, and stamping thereon the payment, if only partially paid, and upon surrender thereof, if fully paid: First: To the payment of all amounts due the Trustee under Section 8.6; Second: Subject to the provisions of Article IV, in case the principal of the outstanding Notes shall not have become due and be unpaid, to the payment of interest on the Notes in default in the order of the maturity of the installments of such interest, with interest (to the extent that such interest has been collected by the Trustee) upon the overdue installments of interest at the rate borne by the Notes, such payments to be made ratably to the persons entitled thereto; Third: Subject to the provisions of Article IV, in case the principal of the outstanding Notes shall have become due, by declaration or otherwise, and be unpaid, to the payment of the whole amount then owing and unpaid upon the Notes for principal and premium, if any, and interest, with interest on the overdue principal and premium, if any, and (to the extent that such interest has been collected by the Trustee) upon overdue installments of interest at the rate borne by the Notes; and in case such monies shall be insufficient to pay in full the whole amounts so due and unpaid upon the Notes, then to the payment of such principal and premium, if any, and interest without preference or priority of principal and premium, if any, over interest, or of interest over principal and premium, if any, or of any installment of interest over any other installment of interest, or 30 of any Note over any other Note, ratably to the aggregate of such principal and premium, if any, and accrued and unpaid interest; and Fourth: Subject to the provisions of Article IV, to the payment of the remainder, if any, to the Company or any other person lawfully entitled thereto. Section 7.4 PROCEEDINGS BY NOTEHOLDER. No holder of any Note shall have any right by virtue of or by availing of any provision of this Indenture to institute any suit, action or proceeding in equity or at law upon or under or with respect to this Indenture, or for the appointment of a receiver, trustee, liquidator, custodian or other similar official, or for any other remedy hereunder, unless such holder previously shall have given to the Trustee written notice of an Event of Default and of the continuance thereof, as hereinbefore provided, and unless also the holders of not less than 25 percent in aggregate principal amount of the Notes then outstanding shall have made written request upon the Trustee to institute such action, suit or proceeding in its own name as Trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee for sixty (60) days after its receipt of such notice, request and offer of indemnity, shall have neglected or refused to institute any such action, suit or proceeding and no direction inconsistent with such written request shall have been given to the Trustee pursuant to Section 7.7; it being understood and intended, and being expressly covenanted by the taker and holder of every Note with every other taker and holder and the Trustee, that no one or more holders of Notes shall have any right in any manner whatever by virtue of or by availing of any provision of this Indenture to affect, disturb or prejudice the rights of any other holder of Notes, or to obtain or seek to obtain priority over or preference to any other such holder, or to enforce any right under this Indenture, except in the manner herein provided and for the equal, ratable and common benefit of all holders of Notes (except as otherwise provided herein). For the protection and enforcement of this Section 7.4, each and every Noteholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. Notwithstanding any other provision of this Indenture and any provision of any Note, the right of any holder of any Note to receive payment of the principal of and premium, if any, and interest on such Note, on or after the respective due dates expressed in such Note, or to institute suit for the enforcement of any such payment on or after such respective dates against the Company shall not be impaired or affected without the consent of such holder. Anything in this Indenture or the Notes to the contrary notwithstanding, the holder of any Note, without the consent of either the Trustee or the holder of any other Note, in his own behalf and for his own benefit, may enforce, and may institute and maintain any proceeding suitable to enforce, his rights of conversion as provided herein. Section 7.5 PROCEEDINGS BY TRUSTEE. In case of an Event of Default the Trustee may in its discretion proceed to protect and enforce the rights vested in it by this Indenture by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any of such rights, either by suit in equity or by action at law or by proceeding in bankruptcy or otherwise, whether for the specific enforcement of any covenant or agreement contained in this 31 Indenture or in aid of the exercise of any power granted in this Indenture, or to enforce any other legal or equitable right vested in the Trustee by this Indenture or by law. Section 7.6 REMEDIES CUMULATIVE AND CONTINUING. Except as provided in the last paragraph of Section 2.6, all powers and remedies given by this Article VII to the Trustee or to the Noteholders shall, to the extent permitted by law, be deemed cumulative and not exclusive of any thereof or of any other powers and remedies available to the Trustee or the holders of the Notes, by judicial proceedings or otherwise, to enforce the performance or observance of the covenants and agreements contained in this Indenture, and no delay or omission of the Trustee or of any holder of any of the Notes to exercise any right or power accruing upon any default or Event of Default occurring and continuing as aforesaid shall impair any such right or power, or shall be construed to be a waiver of any such default or any acquiescence therein; and, subject to the provisions of Section 7.4, every power and remedy given by this Article VII or by law to the Trustee or to the Noteholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Noteholders. Section 7.7 DIRECTION OF PROCEEDINGS AND WAIVER OF DEFAULTS BY MAJORITY OF NOTEHOLDERS. The holders of a majority in aggregate principal amount of the Notes at the time outstanding determined in accordance with Section 9.4 shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee; provided, however, that (a) such direction shall not be in conflict with any rule of law or with this Indenture, and (b) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. The holders of a majority in aggregate principal amount of the Notes at the time outstanding determined in accordance with Section 9.4 may on behalf of the holders of all of the Notes waive any past default or Event of Default hereunder and its consequences except (i) a default in the payment of interest or premium, if any, on, or the principal of, the Notes, (ii) a failure by the Company to convert any Notes into Common Stock, (iii) a default in the payment of redemption price pursuant to Article III or repurchase price pursuant to Article XVI or (iv) a default in respect of a covenant or provisions hereof which under Article XI cannot be modified or amended without the consent of the holders of all Notes then outstanding. Upon any such waiver the Company, the Trustee and the holders of the Notes shall be restored to their former positions and rights hereunder; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Whenever any default or Event of Default hereunder shall have been waived as permitted by this Section 7.7, said default or Event of Default shall for all purposes of the Notes and this Indenture be deemed to have been cured and to be not continuing; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. Section 7.8 NOTICE OF DEFAULTS. The Trustee shall, within ninety (90) days after it has knowledge of the occurrence of a default, mail to all Noteholders, as the names and addresses of such holders appear upon the Note register, notice of all defaults known to a Responsible Officer, unless such defaults shall have been cured or waived before the giving of such notice; and PROVIDED that, except in the case of default in the payment of the principal of, or premium, if any, or interest on any of the Notes, the Trustee shall be protected in withholding such notice if and so 32 long as a trust committee of directors and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interests of the Noteholders. Section 7.9 UNDERTAKING TO PAY COSTS. All parties to this Indenture agree, and each holder of any Note by his acceptance thereof shall be deemed to have agreed, that any court may, in its discretion, require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken or omitted by it as Trustee, the filing by any party litigant in such suit of an undertaking to pay the costs of such suit and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; PROVIDED that the provisions of this Section 7.9 (to the extent permitted by law) shall not apply to any suit instituted by the Trustee, to any suit instituted by any Noteholder, or group of Noteholders, holding in the aggregate more than ten percent in principal amount of the Notes at the time outstanding determined in accordance with Section 9.4, or to any suit instituted by any Noteholder for the enforcement of the payment of the principal of or premium, if any, or interest on any Note on or after the due date expressed in such Note or to any suit for the enforcement of the right to convert any Note in accordance with the provisions of Article XV or to require the Company to repurchase any Note in accordance with Article XVI. ARTICLE VIII CONCERNING THE TRUSTEE Section 8.1 DUTIES AND RESPONSIBILITIES OF TRUSTEE. The Trustee, prior to the occurrence of an Event of Default and after the curing of all Events of Default which may have occurred, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture. In case an Event of Default has occurred (which has not been cured or waived) the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that (a) prior to the occurrence of an Event of Default and after the curing or waiving of all Events of Default which may have occurred: (1) the duties and obligations of the Trustee shall be determined solely by the express provisions of this Indenture and the Trust Indenture Act, and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture and no implied covenants or obligations shall be read into this Indenture and the Trust Indenture Act against the Trustee; and 33 (2) in the absence of bad faith and willful misconduct on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but, in the case of any such certificates or opinions which by any provisions hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture; (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Officers of the Trustee, unless the Trustee was negligent in ascertaining the pertinent facts; (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the holders of not less than a majority in principal amount of the Notes at the time outstanding determined as provided in Section 9.4 relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; and (d) whether or not therein provided, every provision of this Indenture relating to the conduct or affecting the liability of, or affording protection to, the Trustee shall be subject to the provisions of this Section. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there is reasonable ground for believing that the repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Section 8.2 RELIANCE ON DOCUMENTS, OPINIONS. ETC. Except as otherwise provided in Section 8.1: (a) the Trustee may rely and shall be protected in acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture, note, coupon or other paper or document believed by it in good faith to be genuine and to have been signed or presented by the proper party or parties; (b) any request, direction, order or demand of the Company mentioned herein shall be sufficiently evidenced by an Officers' Certificate (unless other evidence in respect thereof be herein specifically prescribed); and any resolution of the Board of Directors may be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Company; 34 (c) the Trustee may consult with counsel and any advice or Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken or omitted by it hereunder in good faith and in accordance with such advice or Opinion of Counsel; (d) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request, order or direction of any of the Noteholders pursuant to the provisions of this Indenture, unless such Noteholders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which may be incurred therein or thereby; (e) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; PROVIDED, HOWEVER, that if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expenses or liability as a condition to so proceeding; the reasonable expenses of every such examination shall be paid by the Company or, if paid by the Trustee or any predecessor Trustee, shall be repaid by the Company upon demand; and (f) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed by it with due care hereunder. Section 8.3 NO RESPONSIBILITY FOR RECITALS, ETC. The recitals contained herein and in the Notes (except in the Trustee's certificate of authentication) shall be taken as the statements of the Company, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Notes. The Trustee shall not be accountable for the use or application by the Company of any Notes or the proceeds of any Notes authenticated and delivered by the Trustee in conformity with the provisions of this Indenture. Section 8.4 TRUSTEE, PAYING AGENTS, CONVERSION AGENTS OR REGISTRAR MAY OWN NOTES. The Trustee, any paying agent, any authenticating agent, any conversion agent or Note registrar, 35 in its individual or any other capacity, may become the owner or pledgee of Notes with the same rights it would have if it were not Trustee, paying agent, conversion agent or Note registrar. Section 8.5 MONIES TO BE HELD IN TRUST. Subject to the provisions of Section 13.4, all monies received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received. Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as may be agreed from time to time by the Company and the Trustee. Section 8.6 COMPENSATION AND EXPENSES OF TRUSTEE. The Company covenants and agrees to pay to the Trustee from time to time, and the Trustee shall be entitled to, reasonable compensation for all services rendered by it hereunder in any capacity (which shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust), and the Company will pay or reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances reasonably incurred or made by the Trustee in accordance with any of the provisions of this Indenture (including the reasonable compensation and the expenses and disbursements of its counsel and of all persons not regularly in its employ) except any such expense, disbursement or advance as may arise from its negligence, willful misconduct, recklessness or bad faith. The Company also covenants to indemnify the Trustee in any capacity under this Indenture and its agents and any authenticating agent for, and to hold them harmless against, any loss, liability or expense incurred without negligence, willful misconduct, recklessness, or bad faith on the part of the Trustee or such agent or authenticating agent, as the case may be, and arising out of or in connection with the acceptance or administration of this trust or in any other capacity hereunder, including the reasonable costs and expenses of defending themselves against any claim of liability in the premises, PROVIDED that (i) each of the Trustee or such agent or authenticating agent, as the case may be, shall notify the Company promptly of any claim or liability asserted against such party for which it may seek indemnification, (ii) the Company shall defend such claim and each of the Trustee, such agent or authenticating agent, as the case may be, shall cooperate with the Company's defense of such claim or liability, (iii) the Trustee, such agent and authenticating agent may hire separate counsel and the Company shall pay the reasonable fees and expenses of such counsel, but (A) the Company will not be required to pay such fees and expenses if it assumes such parties' defense and there is no conflict of interest between the Company and such parties in connection with such defense and (B) the Company shall not be liable, in connection with any such claim or liability or substantially similar or related claims or liabilities, at any time, for the fees and expenses of more than one separate firm of attorneys (in addition to local counsel). The Company need not pay for any settlement made without its written consent. The obligations of the Company under this Section 8.6 to compensate or indemnify the Trustee and to pay or reimburse the Trustee for expenses, disbursements and advances shall be secured by a lien prior to that of the Notes upon all property and funds held or collected by the Trustee as such, except funds held in trust for the benefit of the holders of particular Notes. The obligation of the Company under this Section shall survive the satisfaction and discharge of this Indenture. 36 When the Trustee and its agents and any authenticating agent incur expenses or render services after an Event of Default specified in Section 7.1(e) or (f) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any bankruptcy, insolvency or similar laws. Section 8.7 OFFICERS' CERTIFICATE AS EVIDENCE. Except as otherwise provided in Section 8.1, whenever in the administration of the provisions of this Indenture the Trustee shall deem it necessary or desirable that a matter be proved or established prior to taking or omitting any action hereunder, such matter (unless other evidence in respect thereof be herein specifically prescribed) may, in the absence of negligence, willful misconduct, recklessness, or bad faith on the part of the Trustee, be deemed to be conclusively proved and established by an Officers' Certificate delivered to the Trustee. Section 8.8 CONFLICTING INTERESTS OF TRUSTEE. If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. Section 8.9 ELIGIBILITY OF TRUSTEE. There shall at all times be a Trustee hereunder which shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has, together with its parent, a combined capital and surplus of at least $50,000,000. If such person publishes reports of condition at least annually, pursuant to law or to the requirements of any supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. Section 8.10 RESIGNATION OR REMOVAL OF TRUSTEE. (a) The Trustee may at any time resign by giving written notice of such resignation to the Company and to the holders of Notes. Upon receiving such notice of resignation, the Company shall promptly appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the resigning Trustee and one copy to the successor trustee. If no successor trustee shall have been so appointed and have accepted appointment sixty (60) days after the mailing of such notice of resignation to the Noteholders, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor trustee, or any Noteholder who has been a bona fide holder of a Note or Notes for at least six months may, subject to the provisions of Section 7.9, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, appoint a successor trustee. 37 (b) In case at any time any of the following shall occur: (1) the Trustee shall fail to comply with Section 8.8 after written request therefor by the Company or by any Noteholder who has been a bona fide holder of a Note or Notes for at least six months; or (2) the Trustee shall cease to be eligible in accordance with the provisions of Section 8.9 and shall fail to resign after written request therefor by the Company or by any such Noteholder; or (3) the Trustee shall become incapable of acting, or shall be adjudged a bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation; then, in any such case, the Company may remove the Trustee and appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors, one copy of which instrument shall be delivered to the Trustee so removed and one copy to the successor trustee, or, subject to the provisions of Section 7.9, any Noteholder who has been a bona fide holder of a Note or Notes for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor trustee. Such court may thereupon, after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor trustee. (c) The holders of a majority in aggregate principal amount of the Notes at the time outstanding may at any time remove the Trustee and nominate a successor trustee which shall be deemed appointed as successor trustee unless within ten (10) days after notice to the Company of such nomination the Company objects thereto, in which case the Trustee so removed or any Noteholder, upon the terms and conditions and otherwise as in Section 8.10(a) provided, may petition any court of competent jurisdiction for an appointment of a successor trustee. (d) Any resignation or removal of the Trustee and appointment of a successor trustee pursuant to any of the provisions of this Section 8.10 shall become effective upon acceptance of appointment by the successor trustee as provided in Section 8.11. Section 8.11 ACCEPTANCE BY SUCCESSOR TRUSTEE. Any successor trustee appointed as provided in Section 8.10 shall execute, acknowledge and deliver to the Company and to its predecessor trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor trustee shall become effective and such successor trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, duties and obligations of its predecessor hereunder, with like effect as if originally named as trustee herein; but, nevertheless, on the written request of the Company or of the 38 successor trustee, the trustee ceasing to act shall, upon payment of any amounts then due it pursuant to the provisions of Section 8.6, execute and deliver an instrument transferring to such successor trustee all the rights and powers of the trustee so ceasing to act. Upon reasonable request of any such successor trustee, the Company shall execute such instruments in writing as necessary for fully and certainly vesting in and confirming to such successor trustee all such rights and powers. Any trustee ceasing to act shall, nevertheless, retain a lien upon all property and funds held or collected by such trustee as such, except for funds held in trust for the benefit of holders of particular Notes, to secure any amounts then due it pursuant to the provisions of Section 8.6. No successor trustee shall accept appointment as provided in this Section 8.11 unless at the time of such acceptance such successor trustee shall be qualified under the provisions of Section 8.8 and be eligible under the provisions of Section 8.9. Upon acceptance of appointment by a successor trustee as provided in this Section 8.11, either the Company or the former trustee shall mail or cause to be mailed notice of the succession of such trustee hereunder to the holders of Notes at their addresses as they shall appear on the Note register. If the Company or the former trustee fails to mail such notice within ten (10) days after acceptance of appointment by the successor trustee, the successor trustee shall mail or cause such notice to be mailed to the holders of Notes. Section 8.12 SUCCESSION BY MERGER, ETC. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee (including any trust created by this Indenture), shall be the successor to the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that in the case of any corporation succeeding to all or substantially all of the corporate trust business of the Trustee such corporation shall be qualified under the provisions of Section 8.8 and eligible under the provisions of Section 8.9. In case at the time such successor to the Trustee shall succeed to the trusts created by this Indenture, any of the Notes shall have been authenticated but not delivered, any such successor to the Trustee may adopt the certificate of authentication of any predecessor trustee or authenticating agent appointed by such predecessor trustee, and deliver such Notes so authenticated; and in case at that time any of the Notes shall not have been authenticated, any successor to the Trustee or an authenticating agent appointed by such successor trustee may authenticate such Notes either in the name of any predecessor trustee hereunder or in the name of the successor trustee; and in all such cases such certificates shall have the full force which it is anywhere in the Notes or in this Indenture provided that the certificate of the Trustee shall have; PROVIDED, HOWEVER, that the right to adopt the certificate of authentication of any predecessor Trustee or authenticate Notes in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. Section 8.13 LIMITATION ON RIGHTS OF TRUSTEE AS CREDITOR. If and when the Trustee shall be or become a creditor of the Company (or any other obligor upon the Notes), the Trustee shall 39 be subject to the provisions of the Trust Indenture Act regarding the collection of the claims against the Company (or any such other obligor). ARTICLE IX CONCERNING THE NOTEHOLDERS Section 9.1 ACTION BY NOTEHOLDERS. Whenever in this Indenture it is provided that the holders of a specified percentage in aggregate principal amount of the Notes may take any action (including the making of any demand or request, the giving of any notice, consent or waiver or the taking of any other action), the fact that at the time of taking any such action, the holders of such specified percentage have joined therein may be evidenced (a) by any instrument or any number of instruments of similar tenor executed by Noteholders in person or by agent or proxy appointed in writing, or (b) by the record of the holders of Notes voting in favor thereof at any meeting of Noteholders duly called and held in accordance with the provisions of Article X, or (c) by a combination of such instrument or instruments and any such record of such a meeting of Noteholders. Whenever the Company or the Trustee solicits the taking of any action by the holders of the Notes by a written instrument or at a meeting, the Company or the Trustee shall fix in advance of such solicitation, a date as the record date for determining holders entitled to execute such instrument or vote at such meeting. The record date shall be not more than fifteen (15) days prior to the date of commencement of solicitation of such action by written instrument and not more than sixty (60) days prior to the date of such meeting, as the case may be. With respect to any record date set pursuant to this Section 9.1 relating to an action by written instrument, the party hereto which sets such record date may designate any day as the "Expiration Date" and from time to time may change the Expiration Date to any earlier or later day; provided that no such change shall be effective unless notice of the proposed new Expiration Date is given to the other party hereto in writing, and to each holder of Notes in the manner set forth in 17.3, on or prior to the existing Expiration Date. If an Expiration Date is not designated with respect to any record date set pursuant to this Section 9.1, the party hereto which set such record date shall be deemed to have initially designated the 180th day after such record date as the Expiration Date with respect thereto, subject to its right to change the Expiration Date as provided in this paragraph. Notwithstanding the foregoing, no Expiration Date shall be later than the 180th day after the applicable record date. Section 9.2 PROOF OF EXECUTION BY NOTEHOLDERS. Subject to the provisions of Sections 8.1, 8.2 and 10.5, proof of the execution of any instrument by a Noteholder or his agent or proxy shall be sufficient if made in accordance with such reasonable rules and regulations as may be prescribed by the Trustee or in such manner as shall be satisfactory to the Trustee. The holding of Notes shall be proved by the Note register or by a certificate of the Note registrar. The record of any Noteholders' meeting shall be proved in the manner provided in Section 10.6. Section 9.3 WHO ARE DEEMED ABSOLUTE OWNERS. The Company, the Trustee, any authenticating agent, any paying agent, any conversion agent and any Note registrar may deem the person in whose name 40 such Note shall be registered upon the Note register to be, and may treat him as, the absolute owner of such Note (whether or not such Note shall be overdue and notwithstanding any notation of ownership or other writing thereon) for the purpose of receiving payment of or on account of the principal of, premium, if any, and interest on such Note, for conversion of such Note and for all other purposes; and neither the Company nor the Trustee nor any paying agent nor any conversion agent nor any authenticating agent nor any Note registrar shall be affected by any notice to the contrary. All such payments so made to any holder for the time being, or upon his order, shall be valid, and, to the extent of the sum or sums so paid, effectual to fully satisfy and discharge the liability for monies payable upon any such Note. Section 9.4 COMPANY-OWNED NOTES DISREGARDED. In determining whether the holders of the requisite aggregate principal amount of Notes have concurred in any direction, consent, waiver or other action under this Indenture, Notes which are owned by the Company or any other obligor on the Notes or by any person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any other obligor on the Notes shall be disregarded and deemed not to be outstanding for the purpose of any such determination; PROVIDED that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, consent, waiver or other action only Notes which a Responsible Officer knows are so owned shall be so disregarded. Notes so owned which have been pledged in good faith may be regarded as outstanding for the purposes of this Section 9.4 if the pledgee shall establish to the satisfaction of the Trustee the pledgee's right to vote such Notes and that the pledgee is not the Company, any other obligor on the Notes or a person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company or any such other obligor. In the case of a dispute as to such right, any decision by the Trustee taken upon the advice of counsel shall be full protection to the Trustee. Upon request of the Trustee, the Company shall furnish to the Trustee promptly an Officers' Certificate listing and identifying all Notes, if any, known by the Company to be owned or held by or for the account of any of the above described persons; and, subject to Section 8.1, the Trustee shall be entitled to accept such Officers' Certificate as conclusive evidence of the facts therein set forth and of the fact that all Notes not listed therein are outstanding for the purpose of any such determination. Section 9.5 REVOCATION OF CONSENTS: FUTURE HOLDERS BOUND. At any time prior to (but not after) the evidencing to the Trustee, as provided in Section 9.1, of the taking of any action by the holders of the percentage in aggregate principal amount of the Notes specified in this Indenture in connection with such action, any holder of a Note which is shown by the evidence to be included in the Notes the holders of which have consented to such action may, by filing written notice with the Trustee at its Corporate Trust Office and upon proof of holding as provided in Section 9.2, revoke such action so far as it concerns such Note. Except as aforesaid, any such action taken by the holder of any Note shall be conclusive and binding upon such holder and upon all future holders and owners of such Note and of any Notes issued in exchange or substitution therefor, irrespective of whether any notation in regard thereto is made upon such Note or any Note issued in exchange or substitution therefor. 41 ARTICLE X NOTEHOLDERS' MEETINGS Section 10.1 PURPOSE OF MEETINGS. A meeting of Noteholders may be called at any time and from time to time pursuant to the provisions of this Article X for any of the following purposes: (1) to give any notice to the Company or to the Trustee or to give any directions to the Trustee permitted under this Indenture, or to consent to the waiving of any default or Event of Default hereunder and its consequences, or to take any other action authorized to be taken by Noteholders pursuant to any of the provisions of Article VII; (2) to remove the Trustee and nominate a successor trustee pursuant to the provisions of Article VIII; (3) to consent to the execution of an indenture or indentures supplemental hereto pursuant to the provisions of Section 11.2; or (4) to take any other action authorized to be taken by or on behalf of the holders of any specified aggregate principal amount of the Notes under any other provision of this Indenture or under applicable law. Section 10.2 CALL OF MEETINGS BY TRUSTEE. The Trustee may at any time call a meeting of Noteholders to take any action specified in Section 10.1, to be held at such time and at such place at a location within 10 miles of the Corporate Trust Office or the Borough of Manhattan, The City of New York, as the Trustee shall determine. Notice of every meeting of the Noteholders, setting forth the time and the place of such meeting and in general terms the action proposed to be taken at such meeting and the establishment of any record date pursuant to Section 9.1, shall be mailed to holders of Notes at their addresses as they shall appear on the Note register. Such notice shall also be mailed to the Company. Such notices shall be mailed not less than twenty (20) nor more than ninety (90) days prior to the date fixed for the meeting. Any meeting of Noteholders shall be valid without notice if the holders of all Notes then outstanding are present in person or by proxy or if notice is waived before or after the meeting by the holders of all Notes outstanding, and if the Company and the Trustee are either present by duly authorized representatives or have, before or after the meeting, waived notice. Section 10.3 CALL OF MEETINGS BY COMPANY OR NOTEHOLDERS. In case at any time the Company, pursuant to a resolution of its Board of Directors, or the holders of at least ten percent in aggregate principal amount of the Notes then outstanding, shall have requested the Trustee to call a meeting of Noteholders, by written request setting forth in reasonable detail the action proposed to be taken at the meeting, and the Trustee shall not have mailed the notice of such meeting within twenty (20) days after receipt of such request, then the Company or such Noteholders may determine the time and the place at any location within 10 miles of the 42 Corporate Trust Office or the Borough of Manhattan, The City of New York for such meeting and may call such meeting to take any action authorized in Section 10.1, by mailing notice thereof as provided in Section 10.2. Section 10.4 QUALIFICATIONS FOR VOTING. To be entitled to vote at any meeting of Noteholders a person shall (a) be a holder of one or more Notes on the record date pertaining to such meeting or (b) be a person appointed by an instrument in writing as proxy by a holder of one or more Notes. The only persons who shall be entitled to be present or to speak at any meeting of Noteholders shall be the persons entitled to vote at such meeting and their counsel and any representatives of the Trustee and its counsel and any representatives of the Company and its counsel. Section 10.5 REGULATIONS. Notwithstanding any other provisions of this Indenture, the Trustee may make such reasonable regulations as it may deem advisable for any meeting of Noteholders, in regard to proof of the holding of Notes and of the appointment of proxies, and in regard to the appointment and duties of inspectors of votes, the submission and examination of proxies, certificates and other evidence of the right to vote, and such other matters concerning the conduct of the meeting as it shall think fit. The Trustee shall, by an instrument in writing, appoint a temporary chairman of the meeting, unless the meeting shall have been called by the Company or by Noteholders as provided in Section 10.3, in which case the Company or the Noteholders calling the meeting, as the case may be, shall in like manner appoint a temporary chairman. A permanent chairman and a permanent secretary of the meeting shall be elected by vote of the holders of a majority in principal amount of the Notes represented at the meeting and entitled to vote at the meeting. Subject to the provisions of Section 9.4, at any meeting each Noteholder or proxyholder shall be entitled to one vote for each $1,000 principal amount of Notes held or represented by him; PROVIDED, HOWEVER, that no vote shall be cast or counted at any meeting in respect of any Note challenged as not outstanding and ruled by the chairman of the meeting to be not outstanding. The chairman of the meeting shall have no right to vote other than by virtue of Notes held by him or instruments in writing as aforesaid duly designating him as the proxy to vote on behalf of other Noteholders. Any meeting of Noteholders duly called pursuant to the provisions of Section 10.2 or 10.3 may be adjourned from time to time by the holders of a majority of the aggregate principal amount of Notes represented at the meeting, whether or not constituting a quorum, and the meeting may be held as so adjourned without further notice. Section 10.6 VOTING. The vote upon any resolution submitted to any meeting of Noteholders shall be by written ballot on which shall be subscribed the signatures of the holders of Notes or of their representatives by proxy and the principal amount of the Notes held or represented by them. The permanent chairman of the meeting shall appoint two inspectors of votes who shall count all votes cast at the meeting for or against any resolution and who shall make and file with the secretary of the meeting their verified written reports in duplicate of all votes cast at the meeting. A record in duplicate of the proceedings of each meeting of Noteholders shall be prepared by the secretary of the meeting and there shall be attached to said 43 record the original reports of the inspectors of votes on any vote by ballot taken thereat and affidavits by one or more persons having knowledge of the facts setting forth a copy of the notice of the meeting and showing that said notice was mailed as provided in Section 10.2. The record shall show the principal amount of the Notes voting in favor of or against any resolution. The record shall be signed and verified by the affidavits of the permanent chairman and secretary of the meeting and one of the duplicates shall be delivered to the Company and the other to the Trustee to be preserved by the Trustee, the latter to have attached thereto the ballots voted at the meeting. Any record so signed and verified shall be conclusive evidence of the matters therein stated. Section 10.7 NO DELAY OF RIGHTS BY MEETING. Nothing in this Article X contained shall be deemed or construed to authorize or permit, by reason of any call of a meeting of Noteholders or any rights expressly or impliedly conferred hereunder to make such call, any hindrance or delay in the exercise of any right or rights conferred upon or reserved to the Trustee or to the Noteholders under any of the provisions of this Indenture or of the Notes. ARTICLE XI SUPPLEMENTAL INDENTURES Section 11.1 SUPPLEMENTAL INDENTURES WITHOUT CONSENT OF NOTEHOLDERS. The Company, when authorized by the resolutions of the Board of Directors, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for one or more of the following purposes: (a) to make provision with respect to the conversion rights of the holders of Notes pursuant to the requirements of Section 15.6; (b) subject to Article IV, to convey, transfer, assign, mortgage or pledge to the Trustee as security for the Notes, any property or assets; (c) to evidence the succession of another corporation to the Company, or successive successions, and the assumption by the successor corporation of the covenants, agreements and obligations of the Company pursuant to Article XII; (d) to add to the covenants of the Company such further covenants, restrictions or conditions as the Board of Directors and the Trustee shall consider to be for the benefit of the holders of Notes, and to make the occurrence, or the occurrence and continuance, of a default in any such additional covenants, restrictions or conditions a default or an Event of Default permitting the enforcement of all or any of the several remedies provided in this Indenture as herein set forth; PROVIDED, HOWEVER, that in respect of any such additional 44 covenant, restriction or condition such supplemental indenture may provide for a particular period of grace after default (which period may be shorter or longer than that allowed in the case of other defaults) or may provide for an immediate enforcement upon such default or may limit the remedies available to the Trustee upon such default; (e) to provide for the issuance under this Indenture of Notes in coupon form (including Notes registrable as to principal only) and to provide for exchangeability of such Notes with the Notes issued hereunder in fully registered form and to make all appropriate changes for such purpose; (f) to cure any ambiguity or to correct or supplement any provision contained herein or in any supplemental indenture which may be defective or inconsistent with any other provision contained herein or in any supplemental indenture, or to make such other provisions in regard to matters or questions arising under this Indenture which shall not materially adversely affect the interests of the holders of the Notes; (g) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Notes; or (h) to modify, eliminate or add to the provisions of this Indenture to such extent as shall be necessary to effect the qualification of this Indenture under the Trust Indenture Act, or under any similar federal statute hereafter enacted. Upon the request of the Company, accompanied by a copy of the resolutions of the Board of Directors certified by its Secretary or Assistant Secretary authorizing the execution of any such supplemental indenture, the Trustee shall join with the Company in the execution of any such supplemental indenture, to make any further appropriate agreements and stipulations which may be therein contained and to accept the conveyance, transfer and assignment of any property thereunder, but the Trustee shall not be obligated to, but may in its discretion, enter into any supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. Any supplemental indenture authorized by the provisions of this Section 11.1 may be executed by the Company and the Trustee without the consent of the holders of any of the Notes at the time outstanding, notwithstanding any of the provisions of Section 11.2. Section 11.2 SUPPLEMENTAL INDENTURES WITH CONSENT OF NOTEHOLDERS. With the consent (evidenced as provided in Article IX) of the holders of not less than a majority in aggregate principal amount of the Notes at the time outstanding, the Company, when authorized by the resolutions of the Board of Directors, and the Trustee may from time to time and at any time enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or any supplemental indenture or of modifying in any manner the rights of the holders of the Notes; 45 PROVIDED, HOWEVER, that no such supplemental indenture shall (i) extend the fixed maturity of any Note, or reduce the rate or extend the time of payment of interest thereon, or reduce the principal amount thereof or premium, if any, thereon, or reduce any amount payable on redemption thereof, or impair the right of any Noteholder to institute suit for the payment thereof, or make the principal thereof or interest or premium, if any, thereon payable in any coin or currency other than that provided in the Notes, or modify the provisions of this Indenture with respect to the subordination of the Notes in a manner adverse to the Noteholders in any material respect, or change the obligation of the Company to repurchase any Note upon the happening of a Repurchase Event in a manner adverse to the holder of Notes, or impair the right to convert the Notes into Common Stock subject to the terms set forth herein, including Section 15.6, in each case without the consent of the holder of each Note so affected, or (ii) reduce the aforesaid percentage of Notes, the holders of which are required to consent to any such supplemental indenture, without the consent of the holders of all Notes then outstanding. Upon the request of the Company, accompanied by a copy of the resolutions of the Board of Directors certified by its Secretary or an Assistant Secretary authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Noteholders as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may in its discretion, but shall not be obligated to, enter into such supplemental indenture. It shall not be necessary for the consent of the Noteholders under this Section 11.2 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such consent shall approve the substance thereof. Section 11.3 EFFECT OF SUPPLEMENTAL INDENTURE. Any supplemental indenture executed pursuant to the provisions of this Article XI shall comply with the Trust Indenture Act, as then in effect; PROVIDED that this Section 11.3 shall not require such supplemental indenture or the Trustee to be qualified under the Trust Indenture Act prior to the time such qualification is in fact required under the terms of the Trust Indenture Act or the Indenture has been qualified under the Trust Indenture Act, nor shall it constitute any admission or acknowledgment by any party to such supplemental indenture that any such qualification is required prior to the time such qualification is in fact required under the terms of the Trust Indenture Act or the Indenture has been qualified under the Trust Indenture Act. Upon the execution of any supplemental indenture pursuant to the provisions of this Article XI, this Indenture shall be and be deemed to be modified and amended in accordance therewith and the respective rights, limitation of rights, obligations, duties and immunities under this Indenture of the Trustee, the Company and the holders of Notes shall thereafter be determined, exercised and enforced hereunder subject in all respects to such modifications and amendments and all the terms and conditions of any such supplemental indenture shall be and be deemed to be part of the terms and conditions of this Indenture for any and all purposes. Section 11.4 NOTATION ON NOTES. Notes authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of this Article XI may bear a notation 46 in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company or the Trustee shall so determine, new Notes so modified as to conform, in the opinion of the Trustee and the Board of Directors, to any modification of this Indenture contained in any such supplemental indenture may, at the Company's expense, be prepared and executed by the Company, authenticated by the Trustee (or an authenticating agent duly appointed by the Trustee pursuant to Section 17.11) and delivered in exchange for the Notes then outstanding, upon surrender of such Notes then outstanding. Section 11.5 EVIDENCE OF COMPLIANCE OF SUPPLEMENTAL INDENTURE TO BE FURNISHED TRUSTEE. The Trustee, subject to the provisions of Sections 8.1 and 8.2, may receive an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant hereto complies with the requirements of this Article XI. ARTICLE XII CONSOLIDATION, MERGER, SALE, CONVEYANCE AND LEASE Section 12.1 COMPANY MAY CONSOLIDATE ETC. ON CERTAIN TERMS. Subject to the provisions of Section 12.2, nothing contained in this Indenture or in any of the Notes shall prevent any consolidation or merger of the Company with or into any other corporation or corporations (whether or not affiliated with the Company), or successive consolidations or mergers in which the Company or its successor or successors shall be a party or parties, or shall prevent any sale, conveyance or lease (or successive sales, conveyances or leases) of all or substantially all of the property of the Company, to any other corporation (whether or not affiliated with the Company), authorized to acquire and operate the same and which shall in each case be organized under the laws of the United States of America, any state thereof or the District of Columbia; PROVIDED, that upon any such consolidation, merger, sale, conveyance or lease, the due and punctual payment of the principal of and premium, if any, and interest on all of the Notes, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of this Indenture to be performed by the Company, shall be expressly assumed, by supplemental indenture satisfactory in form to the Trustee, executed and delivered to the Trustee by the corporation (if other than the Company) formed by such consolidation, or into which the Company shall have been merged, or by the corporation which shall have acquired or leased such property, and such supplemental indenture shall provide for the applicable conversion rights set forth in Section 15.6. Section 12.2 SUCCESSOR CORPORATION TO BE SUBSTITUTED. In case of any such consolidation, merger, sale, conveyance or lease and upon the assumption by the successor corporation, by supplemental indenture, executed and delivered to the Trustee and satisfactory in form to the Trustee, of the due and punctual payment of the principal of and premium, if any, and interest on all of the Notes and the due and punctual performance of all of the covenants and conditions of this Indenture to be performed by the Company, such successor corporation shall succeed to and be substituted for the Company, with the same effect as if it had been named herein as the party of the first part. Such successor corporation thereupon may cause to be signed, and may issue either in its own name or in the name of Iomega Corporation any or all of 47 the Notes issuable hereunder which theretofore shall not have been signed by the Company and delivered to the Trustee; and, upon the order of such successor corporation instead of the Company and subject to all the terms, conditions and limitations in this Indenture prescribed, the Trustee shall authenticate and shall deliver, or cause to be authenticated and delivered, any Notes which previously shall have been signed and delivered by the officers of the Company to the Trustee for authentication, and any Notes which such successor corporation thereafter shall cause to be signed and delivered to the Trustee for that purpose. All the Notes so issued shall in all respects have the same legal rank and benefit under this Indenture as the Notes theretofore or thereafter issued in accordance with the terms of this Indenture as though all of such Notes had been issued at the date of the execution hereof. In the event of any such consolidation, merger, sale or conveyance (but not in the event of such lease), the person named as the "Company" in the first paragraph of this Indenture or any successor which shall thereafter have become such in the manner prescribed in this Article XII may be dissolved, wound up and liquidated at any time thereafter and such person shall be released from its liabilities as obligor and maker of the Notes and from its obligations under this Indenture. In case of any such consolidation, merger, sale, conveyance or lease, such changes in phraseology and form (but not in substance) may be made in the Notes thereafter to be issued as may be appropriate. Section 12.3 OPINION OF COUNSEL TO BE GIVEN TRUSTEE. The Trustee, subject to Sections 8.1 and 8.2, shall receive an Officers' Certificate and an Opinion of Counsel as conclusive evidence that any such consolidation, merger, sale, conveyance or lease and any such assumption complies with the provisions of this Article XII. ARTICLE XIII SATISFACTION AND DISCHARGE OF INDENTURE Section 13.1 DISCHARGE OF INDENTURE. When (a) the Company shall deliver to the Trustee for cancellation all Notes theretofore authenticated (other than any Notes which have been destroyed, lost or stolen and in lieu of or in substitution for which other Notes shall have been authenticated and delivered) and not theretofore canceled, or (b) all the Notes not theretofore canceled or delivered to the Trustee for cancellation shall have become due and payable, or are by their terms to become due and payable within one year or are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption, and the Company shall deposit with the Trustee, in trust, funds sufficient to pay at maturity or upon redemption of all of the Notes (other than any Notes which shall have been mutilated, destroyed, lost or stolen and in lieu of or in substitution for which other Notes shall have been authenticated and delivered) not theretofore canceled or delivered to the Trustee for cancellation, including principal and premium, if any, and interest due or to become due to such date of maturity or redemption date, as the case may be, and if in either case the Company shall also pay or cause to be paid all other sums payable hereunder by the Company, then this Indenture shall cease to be of further effect (except as to (i) remaining rights of registration of transfer, substitution and exchange and conversion of Notes, (ii) rights hereunder of Noteholders 48 to receive payments of principal of and premium, if any, and interest on, the Notes and the other rights, duties and obligations of Noteholders, as beneficiaries hereof with respect to the amounts, if any, so deposited with the Trustee and (iii) the rights, obligations and immunities of the Trustee hereunder), and the Trustee, on demand of the Company accompanied by an Officers' Certificate and an Opinion of Counsel as required by Section 17.5 and at the cost and expense of the Company, shall execute proper instruments acknowledging satisfaction of and discharging this Indenture; the Company, however, hereby agreeing to reimburse the Trustee for any costs or expenses thereafter reasonably and properly incurred by the Trustee and to compensate the Trustee for any services thereafter reasonably and properly rendered by the Trustee in connection with this Indenture or the Notes. Section 13.2 DEPOSITED MONIES TO BE HELD IN TRUST BY TRUSTEE. Subject to Section 13.4, all monies deposited with the Trustee pursuant to Section 13.1 and not in violation of Article IV shall be held in trust for the sole benefit of the Noteholders and not to be subject to the subordination provisions of Article IV, and such monies shall be applied by the Trustee to the payment, either directly or through any paying agent (including the Company if acting as its own paying agent), to the holders of the particular Notes for the payment or redemption of which such monies have been deposited with the Trustee, of all sums due and to become due thereon for principal and interest and premium, if any. Section 13.3 PAYING AGENT TO REPAY MONIES HELD. Upon the satisfaction and discharge of this Indenture, all monies then held by any paying agent of the Notes (other than the Trustee) shall, upon written request of the Company, be repaid to it or paid to the Trustee, and thereupon such paying agent shall be released from all further liability with respect to such monies. Section 13.4 RETURN OF UNCLAIMED MONIES. Subject to the requirements of applicable law, any monies deposited with or paid to the Trustee for payment of the principal of, premium, if any, or interest on Notes and not applied but remaining unclaimed by the holders of Notes for two years after the date upon which the principal of, premium, if any, or interest on such Notes, as the case may be, shall have become due and payable, shall be repaid to the Company by the Trustee on demand and all liability of the Trustee shall thereupon cease with respect to such monies; and the holder of any of the Notes shall thereafter look only to the Company for any payment which such holder may be entitled to collect unless an applicable abandoned property law designates another Person. Section 13.5 REINSTATEMENT. If the Trustee or the paying agent is unable to apply any money in accordance with Section 13.2 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, the Company's obligations under this Indenture and the Notes shall be revived and reinstated as though no deposit had occurred pursuant to Section 13.1 until such time as the Trustee or the paying agent is permitted to apply all such money in accordance with Section 13.2; PROVIDED, HOWEVER, that if the Company makes any payment of interest on or principal of any Note following the reinstatement of its obligations, the Company shall be subrogated to the rights of the holders of such Notes to receive such payment from the money held by the Trustee or paying agent. 49 ARTICLE XIV IMMUNITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS AND DIRECTORS Section 14.1 INDENTURE AND NOTES SOLELY CORPORATE OBLIGATIONS. No recourse for the payment of the principal of or premium, if any, or interest on any Note, or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in this Indenture or in any supplemental indenture or in any Note, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, employee, agent, officer, or director or subsidiary, as such, past, present or future, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that all such liability is hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of the Notes. ARTICLE XV CONVERSION OF NOTES Section 15.1 RIGHT TO CONVERT. Subject to and upon compliance with the provisions of this Indenture, the holder of any Note shall have the right, at his option, at any time after sixty (60) days following the latest date of original issuance of the Notes and prior to the close of business on March 15, 2001 (except that, with respect to any Note or portion of a Note which shall be called for redemption, such right shall terminate, except as provided in Section 15.2 or Section 3.4, at the close of business on the second Business Day next preceding the date fixed for redemption of such Note or portion of a Note unless the Company shall default in the payment due upon redemption thereof or that, with respect to a Note or portion of a Note submitted for repurchase, such right shall terminate at the close of business on the second Business Date next preceding the Repurchase Date unless the Company shall default in the payment due on repurchase) to convert the principal amount of any such Note, or any portion of such principal amount which is $1,000 or an integral multiple thereof, into that number of fully paid and non-assessable shares of Common Stock (as such shares shall then be constituted) obtained by dividing the principal amount of the Note or portion thereof surrendered for conversion by the Conversion Price in effect at such time, by surrender of the Note so to be converted in whole or in part in the manner provided, together with any required funds, in Section 15.2. A holder of Notes is not entitled to any rights of a holder of Common Stock until such holder has converted his Notes to Common Stock, and only to the extent such Notes are deemed to have been converted to Common Stock under this Article XV. Section 15.2 EXERCISE OF CONVERSION PRIVILEGE; ISSUANCE OF COMMON STOCK ON CONVERSION; NO ADJUSTMENT FOR INTEREST OR DIVIDENDS. In order to exercise the conversion privilege with respect to any Note, the holder of any such Note to be converted in whole or in part shall surrender such Note, duly endorsed, at an office or agency maintained by the Company 50 pursuant to Section 5.2, accompanied by the funds, if any, required by the last paragraph of this Section 15.2, and shall give written notice of conversion in the form provided on the Notes (or such other notice which is acceptable to the Company) to the office or agency that the holder elects to convert such Note or the portion thereof specified in said notice. Such notice shall also state the name or names (with address or addresses) in which the certificate or certificates for shares of Common Stock which shall be issuable on such conversion shall be issued, and shall be accompanied by transfer taxes, if required pursuant to Section 15.7. Each such Note surrendered for conversion shall, unless the shares issuable on conversion are to be issued in the same name as the registration of such Note, be duly endorsed by, or be accompanied by instruments of transfer in form satisfactory to the Company duly executed by, the holder or his duly authorized attorney. As promptly as practicable after satisfaction of the requirements for conversion set forth above, subject to compliance with any restrictions on transfer if shares issuable on conversion are to be issued in a name other than that of the Noteholder (as if such transfer were a transfer of the Note or Notes (or portion thereof) so converted), the Company shall issue and shall deliver to such holder at the office or agency maintained by the Company for such purpose pursuant to Section 5.2, a certificate or certificates for the number of full shares of Common Stock issuable upon the conversion of such Note or portion thereof in accordance with the provisions of this Article and a check or cash in respect of any fractional interest in respect of a share of Common Stock arising upon such conversion, as provided in Section 15.3. In case any Note of a denomination greater than $1,000 shall be surrendered for partial conversion, and subject to Section 2.3, the Company shall execute and the Trustee shall authenticate and deliver to the holder of the Note so surrendered, without charge to him, a new Note or Notes in authorized denominations in an aggregate principal amount equal to the unconverted portion of the surrendered Note. Each conversion shall be deemed to have been effected as to any such Note (or portion thereof) on the date on which the requirements set forth above in this Section 15.2 have been satisfied as to such Note (or portion thereof), and the person in whose name any certificate or certificates for shares of Common Stock shall be issuable upon such conversion shall be deemed to have become on said date the holder of record of the shares represented thereby; PROVIDED, HOWEVER, that any such surrender on any date when the stock transfer books of the Company shall be closed shall constitute the person in whose name the certificates are to be issued as the record holder thereof for all purposes on the next succeeding day on which such stock transfer books are open, but such conversion shall be at the Conversion Price in effect on the date upon which such Note shall be surrendered. Any Note or portion thereof surrendered for conversion during the period from the close of business on the record date for any interest payment date to the close of business on the Business Day next preceding the following interest payment date shall (unless such Note or portion thereof being converted shall have been called for redemption during the period from the close of business on such record date to the close of business on the second Business Day next succeeding the following interest payment date) be accompanied by payment, in New York Clearing House funds or other funds acceptable to the Company, of an amount equal to the 51 interest payable on such interest payment date on the principal amount being converted; PROVIDED, HOWEVER, that no such payment need be made if there shall exist at the time of conversion a default in the payment of interest on the Notes. Except as provided above in this Section 15.2 or the second paragraph of Section 2.3, no adjustment shall be made for interest accrued on any Note converted or for dividends on any shares issued upon the conversion of such Note as provided in this Article. Section 15.3 CASH PAYMENTS IN LIEU OF FRACTIONAL SHARES. No fractional shares of Common Stock or scrip representing fractional shares shall be issued upon conversion of Notes. If more than one Note shall be surrendered for conversion at one time by the same holder, the number of full shares which shall be issuable upon conversion shall be computed on the basis of the aggregate principal amount of the Notes (or specified portions thereof to the extent permitted hereby) so surrendered. If any fractional share of stock would be issuable upon the conversion of any Note or Notes, the Company shall make an adjustment and payment therefor in cash at the current market value thereof to the holder of Notes. The current market value of a share of Common Stock shall be the Closing Price on the first Trading Day immediately preceding the day on which the Notes (or specified portions thereof) are deemed to have been converted. Section 15.4 CONVERSION PRICE. The conversion price shall be as specified in the form of Note (herein called the "Conversion Price") attached as Exhibit A hereto, subject to adjustment as provided in this Article XV. Section 15.5 ADJUSTMENT OF CONVERSION PRICE. The Conversion Price shall be adjusted from time to time by the Company as follows: (a) In case the Company shall hereafter pay a dividend or make a distribution to all holders of the outstanding Common Stock in shares of Common Stock, the Conversion Price in effect at the opening of business on the date following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Conversion Price by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination and the denominator shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. The Company will not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company. If any dividend or distribution of the type described in this Section 15.5(a) is declared but not so paid or made, the Conversion Price shall again be adjusted to the Conversion Price which would then be in effect if such dividend or distribution had not been declared. (b)In case the Company shall issue rights or warrants to all holders of its outstanding shares of Common Stock entitling them (for a period 52 expiring within 45 days after the date fixed for determination of stockholders entitled to receive such rights or warrants) to subscribe for or purchase shares of Common Stock at a price per share less than the Current Market Price (as defined below) on the date fixed for determination of stockholders entitled to receive such rights or warrants, the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the date fixed for determination of stockholders entitled to receive such rights or warrants by a fraction of which the numerator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for determination of stockholders entitled to receive such rights and warrants plus the number of shares which the aggregate offering price of the total number of shares so offered would purchase at such Current Market Price, and of which the denominator shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for determination of stockholders entitled to receive such rights and warrants plus the total number of additional shares of Common Stock offered for subscription or purchase. Such adjustment shall be successively made whenever any such rights and warrants are issued, and shall become effective immediately after the opening of business on the day following the date fixed for determination of stockholders entitled to receive such rights or warrants. To the extent that shares of Common Stock are not delivered after the expiration of such rights or warrants, the Conversion Price shall be readjusted to the Conversion Price which would then be in effect had the adjustments made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of shares of Common Stock actually delivered. In the event that such rights or warrants are not so issued, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such date fixed for the determination of stockholders entitled to receive such rights or warrants had not been fixed. In determining whether any rights or warrants entitle the holders to subscribe for or purchase shares of Common Stock at less than such Current Market Price, and in determining the aggregate offering price of such shares of Common Stock, there shall be taken into account any consideration received by the Company for such rights or warrants, the value of such consideration, if other than cash, to be determined by the Board of Directors. (c) In case outstanding shares of Common Stock shall be subdivided into a greater number of shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and conversely, in case outstanding shares of Common Stock shall be combined into a smaller number of shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately after the opening of business 53 on the day following the day upon which such subdivision or combination becomes effective. (d) In case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock shares of any class of capital stock of the Company (other than any dividends or distributions to which Section 15.5(a) applies) or evidences of its indebtedness or assets (including securities, but excluding any rights or warrants referred to in Section 15.5(b), and excluding any dividend or distribution (x) in connection with the liquidation, dissolution or winding up of the Company, whether voluntary or involuntary, (y) paid exclusively in cash or (z) referred to in Section 15.5(a) (any of the foregoing hereinafter in this Section 15.5(d) called the "Securities")), then, in each such case (unless the Company elects to reserve such Securities for distribution to the Noteholders upon the conversion of the Notes so that any such holder converting Notes will receive upon such conversion, in addition to the shares of Common Stock to which such holder is entitled, the amount and kind of such Securities which such holder would have received if such holder had converted its Notes into Common Stock immediately prior to the Record Date (as defined in Section 15.5(h) for such distribution of the Securities)), the Conversion Price shall be reduced so that the same shall be equal to the price determined by multiplying the Conversion Price in effect at the close of business on the Record Date with respect to such distribution by a fraction of which the numerator shall be the Current Market Price per share of the Common Stock on such Record Date less the fair market value (as determined by the Board of Directors, whose determination shall be conclusive, and described in a resolution of the Board of Directors) on the Record Date of the portion of the Securities so distributed applicable to one share of Common Stock and the denominator shall be the Current Market Price per share of the Common Stock, such reduction to become effective immediately prior to the opening of business on the day following such Record Date; PROVIDED, HOWEVER, that in the event the then fair market value (as so determined) of the portion of the Securities so distributed applicable to one share of Common Stock is equal to or greater than the Current Market Price of the Common Stock on the Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each Noteholder shall have the right to receive upon conversion the amount of Securities such holder would have received had such holder converted each Note on the Record Date. In the event that such dividend or distribution is not so paid or made, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such dividend or distribution had not been declared. If the Board of Directors determines the fair market value of any distribution for purposes of this Section 15.5(d) by reference to the actual or when issued trading market for any securities, it must in doing so consider the prices in such market over the same period used in computing the Current Market Price of the Common Stock. 54 Each share of Common Stock issued upon conversion of Notes pursuant to this Article XV shall be entitled to receive the appropriate number of Rights, and the certificates representing the Common Stock issued upon such conversion shall bear such legends, in each case as provided by and subject to the terms of the Rights Plan as in effect at the time of such conversion (whether or not such Rights have separated from the Common Stock at the time of conversion). In the event that the Company implements any new stockholders' rights plan, as amended, supplemented or modified from time to time (a "New Rights Plan"), such New Rights Plan shall provide that upon conversion of the Notes the holders will receive, in addition to the Common Stock issuable upon such conversion, the rights (whether or not such rights have separated from Common Stock at the time of the conversion) issuable pursuant to the New Rights Plan. Rights or warrants distributed by the Company to all holders of Common Stock entitling the holders thereof to subscribe for or purchase shares of the Company's capital stock (either initially or under certain circumstances), which rights or warrants, until the occurrence of a specified event or events ("Trigger Event"): (i) are deemed to be transferred with such shares of Common Stock; (ii) are not exercisable; and (iii) are also issued in respect of future issuances of Common Stock, shall be deemed not to have been distributed for purposes of this Section 15.5 (and no adjustment to the Conversion Price under this Section 15.5 will be required) until the occurrence of the earliest Trigger Event, whereupon such rights and warrants shall be deemed to have been distributed and an appropriate adjustment (if any is required) to the Conversion Price shall be made under this Section 15.5(d). If any such right or warrant, including any such existing rights or warrants distributed prior to the date of this Indenture, are subject to events, upon the occurrence of which such rights or warrants become exercisable to purchase different securities, evidences of indebtedness or other assets, then the date of the occurrence of any and each such event shall be deemed to be the date of distribution and record date with respect to new rights or warrants with such rights (and a termination or expiration of the existing rights or warrants without exercise by any of the holders thereof). In addition, in the event of any distribution (or deemed distribution) of rights or warrants, or any Trigger Event or other event (of the type described in the preceding sentence) with respect thereto that was counted for purposes of calculating a distribution amount for which an adjustment to the Conversion Price under this Section 15.5 was made, (1) in the case of any such rights or warrants which shall all have been redeemed or repurchased without exercise by any holders thereof, the Conversion Price shall be readjusted upon such final redemption or repurchase to give effect to such distribution or Trigger Event, as the case may be, as though it were a cash distribution, equal to the per share redemption or repurchase price received by a holder or holders of Common Stock with respect to such rights or warrants (assuming such holder had retained such rights or warrants), made to all holders of Common Stock as of the date of such redemption or repurchase, and (2) in the case of such rights or warrants which shall have expired or been terminated without exercise by any holders thereof, the Conversion Price shall be readjusted as if such rights and warrants had not been issued. 55 For purposes of this Section 15.5(d) and Sections 15.5(a) and (b), any dividend or distribution to which this Section 15.5(d) is applicable that also includes shares of Common Stock, or rights or warrants to subscribe for or purchase shares of Common Stock (or both), shall be deemed instead to be (1) a dividend or distribution of the evidences of indebtedness, assets or shares of capital stock other than such shares of Common Stock or rights or warrants (and any Conversion Price reduction required by this Section 15.5(d) with respect to such dividend or distribution shall then be made) immediately followed by (2) a dividend or distribution of such shares of Common Stock or such rights or warrants (and any further Conversion Price reduction required by Sections 15.5(a) and (b) with respect to such dividend or distribution shall then be made), except (A) the Record Date of such dividend or distribution shall be substituted as "the date fixed for the determination of stockholders entitled to receive such dividend or other distribution" and "the date fixed for such determination" within the meaning of Sections 15.5(a) and (b) and (B) any shares of Common Stock included in such dividend or distribution shall not be deemed "outstanding at the close of business on the date fixed for such determination" within the meaning of Section 15.5(a). (e) In case the Company shall, by dividend or otherwise, distribute to all holders of its Common Stock cash (excluding (x) any quarterly cash dividend on the Common Stock to the extent the aggregate cash dividend per share of Common Stock in any fiscal quarter does not exceed the greater of (A) the amount per share of Common Stock of the next preceding quarterly cash dividend on the Common Stock to the extent that such preceding quarterly dividend did not require any adjustment of the Conversion Price pursuant to this Section 15.5(e) (as adjusted to reflect subdivisions or combinations of the Common Stock), and (B) 3.75% of the arithmetic average of the Closing Prices (determined as set forth in Section 15.5(h)) during the ten consecutive Trading Days (as defined in Section 15.5(h)) immediately prior to the date of declaration of such dividend, and (y) any dividend or distribution in connection with the liquidation, dissolution or winding up of the Company, whether voluntary or involuntary), then, in such case, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on the Record Date for such dividend or distribution by a fraction of which the numerator shall be the Current Market Price of the Common Stock on the Record Date less the amount of cash so distributed (and not excluded as provided above) applicable to one share of Common Stock and the denominator shall be such Current Market Price of the Common Stock, such reduction to be effective immediately prior to the opening of business on the day following the Record Date; PROVIDED, HOWEVER, that in the event the portion of the cash so distributed applicable to one share of Common Stock is equal to or greater than the Current Market Price of the Common Stock on the Record Date, in lieu of the foregoing adjustment, adequate provision shall be made so that each Noteholder shall have the right to receive upon conversion the amount of cash such holder would have received had such holder converted each Note on the Record Date. In the event that such dividend or distribution is not so paid or made, the Conversion 56 Price shall again be adjusted to be the Conversion Price which would then be in effect if such dividend or distribution had not been declared. If any adjustment is required to be made as set forth in this Section 15.5(e) as a result of a distribution that is a quarterly dividend, such adjustment shall be based upon the amount by which such distribution exceeds the amount of the quarterly cash dividend permitted to be excluded pursuant hereto. If an adjustment is required to be made as set forth in this Section 15.5(e) above as a result of a distribution that is not a quarterly dividend, such adjustment shall be based upon the full amount of the distribution. (f) In case a tender or exchange offer made by the Company or any subsidiary of the Company for all or any portion of the Common Stock shall expire and such tender or exchange offer (as amended upon the expiration thereof) shall require the payment to stockholders of consideration per share of Common Stock having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive and described in a resolution of the Board of Directors) that, as of the last time (the "Expiration Time") tenders or exchanges may be made pursuant to such tender or exchange offer (as it may be amended) exceeds the Current Market Price of the Common Stock on the Trading Day next succeeding the Expiration Time, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the Expiration Time by a fraction of which the numerator shall be the number of shares of Common Stock outstanding (including any tendered or exchanged shares) on the Expiration Time multiplied by the Current Market Price of the Common Stock on the Trading Day next succeeding the Expiration Time and the denominator shall be the sum of (x) the fair market value (determined as aforesaid) of the aggregate consideration payable to shareholders based on the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and (y) the product of the number of shares of Common Stock outstanding (less any Purchased Shares) on the Expiration Time and the Current Market Price of the Common Stock on the Trading Day next succeeding the Expiration Time, such reduction to become effective immediately prior to the opening of business on the day following the Expiration Time. In the event that the Company is obligated to purchase shares pursuant to any such tender or exchange offer, but the Company is permanently prevented by applicable law from effecting any such purchases or all such purchases are rescinded, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such tender or exchange offer had not been made. (g) In case of a tender or exchange offer made by a person other than the Company or any subsidiary of the Company for an amount which increases the offeror's ownership of Common Stock to more than 25% of the 57 Common Stock outstanding and shall involve the payment by such person of consideration per share of Common Stock having a fair market value (as determined by the Board of Directors, whose determination shall be conclusive, and described in a resolution of the Board of Directors) at the last time (the "Expiration Time") tenders or exchanges may be made pursuant to such tender or exchange offer (as it shall have been amended) that exceeds the Current Market Price of the Common Stock on the Trading Day next succeeding the Expiration Time, and in which, as of the Expiration Time the Board of Directors is not recommending rejection of the offer, the Conversion Price shall be reduced so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the Expiration Time by a fraction of which the numerator shall be the number of shares of Common Stock outstanding (including any tendered or exchanged shares) on the Expiration Time multiplied by the current Market Price of the Common Stock on the Trading Day next succeeding the Expiration Time and the denominator shall be the sum of (x) the fair market value (determined as aforesaid) of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the tender or exchange offer) of all shares validly tendered or exchanged and not withdrawn as of the Expiration Time (the shares deemed so accepted, up to any such maximum, being referred to as the "Purchased Shares") and (y) the product of the number of shares of Common Stock outstanding (less any Purchased Shares) on the Expiration Time and the Current Market Price of the Common Stock on the Trading Day next succeeding the Expiration Time, such reduction to become effective as of immediately prior to the opening of business on the day following the Expiration Time. In the event that such person is obligated to purchase shares pursuant to any such tender or exchange offer, but such person is permanently prevented by applicable law from effecting any such purchases or all such purchases are rescinded, the Conversion Price shall again be adjusted to be the Conversion Price which would then be in effect if such tender or exchange offer had not been made. Notwithstanding the foregoing, the adjustment described in this Section 15.5(g) shall not be made if, as of the Expiration Time, the offering documents with respect to such offer disclose a plan or intention to cause the Company to engage in any transaction described in Article XII. (h) For purposes of this Section 15.5, the following terms shall have the meaning indicated: (1) "Closing Price" with respect to any securities on any day shall mean the closing sale price regular way on such day or, in case no such sale takes place on such day, the average of the reported closing bid and asked prices, regular way, in each case on the New York Stock Exchange, or, if such security is not listed or admitted to trading on such Exchange, on the principal national security exchange or quotation system on which such security is quoted or listed or admitted to trading, or, if not quoted or listed or admitted to trading on any national securities exchange or 58 quotation system, the average of the closing bid and asked prices of such security on the over-the-counter market on the day in question as reported by the National Quotation Bureau Incorporated, or a similar generally accepted reporting service, or if not so available, in such manner as furnished by any New York Stock Exchange member firm selected from time to time by the Board of Directors for that purpose, or a price determined in good faith by the Board of Directors or, to the extent permitted by applicable law, a duly authorized committee thereof, whose determination shall be conclusive. (2) "Current Market Price" shall mean the average of the daily Closing Prices per share of Common Stock for the ten consecutive Trading Days immediately prior to the date in question; PROVIDED, HOWEVER, that (1) if the "ex" date (as hereinafter defined) for any event (other than the issuance or distribution or Repurchase Event requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 15.5(a), (b), (c), (d), (e), (f) or (g) occurs during such ten consecutive Trading Days, the Closing Price for each Trading Day prior to the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the same fraction by which the Conversion Price is so required to be adjusted as a result of such other event, (2) if the "ex" date for any event (other than the issuance, distribution or Repurchase Event requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 15.5(a), (b), (c), (d), (e), (f) or (g) occurs on or after the "ex" date for the issuance or distribution requiring such computation and prior to the day in question, the Closing Price for each Trading Day on and after the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the reciprocal of the fraction by which the Conversion Price is so required to be adjusted as a result of such other event, and (3) if the "ex" date for the issuance, distribution or Repurchase Date requiring such computation is prior to the day in question, after taking into account any adjustment required pursuant to clause (1) or (2) of this proviso, the Closing Price for each Trading Day on or after such "ex" date shall be adjusted by adding thereto the amount of any cash and the fair market value (as determined by the Board of Directors or, to the extent permitted by applicable law, a duly authorized committee thereof in a manner consistent with any determination of such value for purposes of Section 15.5(d) or (f), whose determination shall be conclusive and described in a resolution of the Board of Directors or such duly authorized committee thereof, as the case may be) of the evidences of indebtedness, shares of capital stock or assets being distributed applicable to one share of Common Stock as of the close of business on the day before such "ex" date. For purposes of any computation under Section 15.5(f), the Current Market Price of the Common Stock on any date shall be deemed to be the average of the daily Closing Prices per share of Common Stock for such day and the next two succeeding Trading Days; PROVIDED, HOWEVER, that if the "ex" date for any event (other than the tender or exchange offer requiring such computation) that requires an adjustment to the Conversion Price pursuant to Section 15.5(a), (b), (c), (d), (e), (f) or (g) occurs on or after the Expiration Time for the tender or exchange offer requiring such computation and prior to the day in question, the Closing Price for each Trading Day on and after the "ex" date for such other event shall be adjusted by multiplying such Closing Price by the reciprocal of the fraction 59 by which the Conversion Price is so required to be adjusted as a result of such other event. For purposes of this paragraph, the term "ex" date, (1) when used with respect to any issuance or distribution, means the first date on which the Common Stock trades regular way on the relevant exchange or in the relevant market from which the Closing Price was obtained without the right to receive such issuance or distribution, (2) when used with respect to any subdivision or combination of shares of Common Stock, means the first date on which the Common Stock trades regular way on such exchange or in such market after the time at which such subdivision or combination becomes effective, and (3) when used with respect to any tender or exchange offer means the first date on which the Common Stock trades regular way on such exchange or in such market after the Expiration Time of such offer. (3) "fair market value" shall mean the amount which a willing buyer would pay a willing seller in an arm's length transaction. (4) "Record Date" shall mean, with respect to any dividend, distribution or other transaction or event in which the holders of Common Stock have the right to receive any cash, securities or other property or in which the Common Stock (or other applicable security) is exchanged for or converted into any combination of cash, securities or other property, the date fixed for determination of shareholders entitled to receive such cash, securities or other property (whether such date is fixed by the Board of Directors or by statute, contract or otherwise). (5) "Trading Day" shall mean (x) if the applicable security is listed or admitted for trading on the New York Stock Exchange or another national security exchange, a day on which the New York Stock Exchange or another national security exchange is open for business or (y) if the applicable security is quoted on the Nasdaq National Market, a day on which trades may be made on thereon or (z) if the applicable security is not so listed, admitted for trading or quoted, any day other than a Saturday or Sunday or a day on which banking institutions in the State of New York are authorized or obligated by law or executive order to close. (i) The Company may make such reductions in the Conversion Price, in addition to those required by Sections 15.5 (a), (b), (c), (d), (e), (f) and (g) as the Board of Directors considers to be advisable to avoid or diminish any income tax to holders of Common Stock or rights to purchase Common Stock resulting from any dividend or distribution of stock (or rights to acquire stock) or from any event treated as such for income tax purposes. To the extent permitted by applicable law, the Company from time to time may reduce the Conversion Price by any amount for any period of time if the period is at least twenty (20) days, the reduction is irrevocable during the period and the Board of Directors shall have made a determination that such reduction would be in the best interests of the Company, which determination shall be conclusive. Whenever the Conversion Price is reduced pursuant to the preceding sentence, the Company shall mail 60 to holders of record of the Notes a notice of the reduction at least fifteen (15) days prior to the date the reduced Conversion Price takes effect, and such notice shall state the reduced Conversion Price and the period during which it will be in effect. (j) No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price; PROVIDED, HOWEVER, that any adjustments which by reason of this Section 15.5(j) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article XV shall be made by the Company and shall be made to the nearest cent or to the nearest one hundredth of a share, as the case may be. No adjustment need be made for rights to purchase Common Stock pursuant to a Company plan for reinvestment of dividends or interest. To the extent the Notes become convertible into cash, assets, property or securities (other than capital stock of the Company), no adjustment need be made thereafter as to the cash, assets, property or such securities. Interest will not accrue on the cash. (k) Whenever the Conversion Price is adjusted as herein provided, the Company shall promptly file with the Trustee and any conversion agent other than the Trustee an Officers' Certificate setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment. Promptly after delivery of such certificate, the Company shall prepare a notice of such adjustment of the Conversion Price setting forth the adjusted Conversion Price and the date on which each adjustment becomes effective and shall mail such notice of such adjustment of the Conversion Price to the holder of each Note at his last address appearing on the Note register provided for in Section 2.5 of this Indenture, within 20 days after execution thereof. Failure to deliver such notice shall not affect the legality or validity of any such adjustment. (l) In any case in which this Section 15.5 provides that an adjustment shall become effective immediately after a record date for an event, the Company may defer until the occurrence of such event (i) issuing to the holder of any Note converted after such record date and before the occurrence of such event the additional shares of Common Stock issuable upon such conversion by reason of the adjustment required by such event over and above the Common Stock issuable upon such conversion before giving effect to such adjustment and (ii) paying to such holder any amount in cash in lieu of any fraction pursuant to Section 15.3. (m) For purposes of this Section 15.5, the number of shares of Common Stock at any time outstanding shall not include shares held in the treasury of the Company but shall include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock. The Company 61 will not pay any dividend or make any distribution on shares of Common Stock held in the treasury of the Company. Section 15.6 EFFECT OF RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE. If any of the following events occur, namely (i) any reclassification or change of the outstanding shares of Common Stock (other than a subdivision or combination to which Section 15.5(c) applies), (ii) any consolidation, merger or combination of the Company with another corporation as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, or (iii) any sale or conveyance of the properties and assets of the Company as, or substantially as, an entirety to any other corporation as a result of which holders of Common Stock shall be entitled to receive stock, securities or other property or assets (including cash) with respect to or in exchange for such Common Stock, then the Company or the successor or purchasing corporation, as the case may be, shall execute with the Trustee a supplemental indenture (which shall comply with the Trust Indenture Act as in force at the date of execution of such supplemental indenture) providing that such Note shall be convertible into the kind and amount of shares of stock and other securities or property or assets (including cash) receivable upon such reclassification, change, consolidation, merger, combination, sale or conveyance by a holder of a number of shares of Common Stock issuable upon conversion of such Notes (assuming, for such purposes, a sufficient number of authorized shares of Common Stock available to convert all such Notes) immediately prior to such reclassification, change, consolidation, merger, combination, sale or conveyance assuming such holder of Common Stock did not exercise his rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance (provided that, if the kind or amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance is not the same for each share of Common Stock in respect of which such rights of election shall not have been exercised ("nonelecting share")), then for the purposes of this Section 15.6 the kind and amount of securities, cash or other property receivable upon such consolidation, merger, statutory exchange, sale or conveyance for each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares. Such supplemental indenture shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article. The Company shall cause notice of the execution of such supplemental indenture to be mailed to each holder of Notes, at his address appearing on the Note register provided for in Section 2.5 of this Indenture, within twenty (20) days after execution thereof. Failure to deliver such notice shall not affect the legality or validity of such supplemental indenture. The above provisions of this Section shall similarly apply to successive reclassifications, changes, consolidations, mergers, combinations, sales and conveyances. If this Section 15.6 applies to any event or occurrence, Section 15.5 shall not apply. 62 Section 15.7 TAXES ON SHARES ISSUED. The issue of stock certificates on conversions of Notes shall be made without charge to the converting Noteholder for any tax in respect of the issue thereof. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue and delivery of stock in any name other than that of the holder of any Note converted, and the Company shall not be required to issue or deliver any such stock certificate unless and until the person or persons requesting the issue thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. Section 15.8 RESERVATION OF SHARES; SHARES TO BE FULLY PAID; COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS; LISTING OF COMMON STOCK. The Company shall reserve, free from preemptive rights, out of its authorized but unissued shares or shares held in treasury, sufficient shares of Common Stock to provide for the conversion of the Notes from time to time as such Notes are presented for conversion. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value, if any, of the shares of Common Stock issuable upon conversion of the Notes, the Company will take all corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue shares of such Common Stock at such adjusted Conversion Price. The Company covenants that all shares of Common Stock which may be issued upon conversion of Notes will upon issue be fully paid and non-assessable by the Company and free from all taxes, liens and charges with respect to the issue thereof. The Company covenants that if any shares of Common Stock to be provided for the purpose of conversion of Notes hereunder require registration with or approval of any governmental authority under any federal or state law before such shares may be validly issued upon conversion, the Company will in good faith and as expeditiously as possible endeavor to secure such registration or approval, as the case may be. The Company further covenants that if at any time the Common Stock shall be listed on the Nasdaq National Market or any other national securities exchange or automated quotation system the Company will, if permitted by the rules of such exchange or automated quotation system, list and keep listed, so long as the Common Stock shall be so listed on such exchange or automated quotation system, all Common Stock issuable upon conversion of the Notes. Section 15.9 RESPONSIBILITY OF TRUSTEE. The Trustee and any other conversion agent shall not at any time be under any duty or responsibility to any holder of Notes to determine whether any facts exist which may require any adjustment of the Conversion Price, or with respect to the nature or extent or calculation of any such adjustment when made, or with respect to the method employed, or herein or in any supplemental indenture provided to be employed, in making the same. The Trustee and any other conversion agent shall not be accountable with respect to the validity or value (or the kind or amount) of any shares of Common Stock, or of any 63 securities or property, which may at any time be issued or delivered upon the conversion of any Note; and the Trustee and any other conversion agent make no representations with respect thereto. Subject to the provisions of Section 8.1, neither the Trustee nor any conversion agent shall be responsible for any failure of the Company to issue, transfer or deliver any shares of Common Stock or stock certificates or other securities or property or cash upon the surrender of any Note for the purpose of conversion or to comply with any of the duties, responsibilities or covenants of the Company contained in this Article. Without limiting the generality of the foregoing, neither the Trustee nor any conversion agent shall be under any responsibility to determine the correctness of any provisions contained in any supplemental indenture entered into pursuant to Section 15.6 relating either to the kind or amount of shares of stock or securities or property (including cash) receivable by Noteholders upon the conversion of their Notes after any event referred to in such Section 15.6 or to any adjustment to be made with respect thereto, but, subject to the provisions of Section 8.1, may accept as conclusive evidence of the correctness of any such provisions, and shall be protected in relying upon, the Officers' Certificate (which the Company shall be obligated to file with the Trustee prior to the execution of any such supplemental indenture) with respect thereto. Section 15.10 NOTICE TO HOLDERS PRIOR TO CERTAIN ACTIONS. In case: (a) the Company shall declare a dividend (or any other distribution) on its Common Stock that would require an adjustment in the Conversion Price pursuant to Section 15.5; or (b) the Company shall authorize the granting to the holders of its Common Stock of rights or warrants to subscribe for or purchase any share of any class or any other rights or warrants (other than the Rights granted pursuant to the Rights Plan, provided that the holders of the Notes receive the same notice received by all holders of Common Stock regarding such grant in accordance with the applicable notice provisions of the Rights Plan); or (c) of any reclassification or reorganization of the Common Stock of the Company (other than a subdivision or combination of its outstanding Common Stock, or a change in par value, or from par value to no par value, or from no par value to par value), or of any consolidation or merger to which the Company is a party and for which approval of any shareholders of the Company is required, or of the sale or transfer of all or substantially all of the assets of the Company; or (d) of the voluntary or involuntary dissolution, liquidation or winding-up of the Company; the Company shall cause to be filed with the Trustee and to be mailed to each holder of Notes at his address appearing on the Note register provided for in Section 2.5 of this Indenture, as promptly as possible but in any event at least fifteen (15) days prior to the applicable date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, rights or warrants, or, if a record is not to be taken, the date as of 64 which the holders of Common Stock of record to be entitled to such dividend, distribution, rights or warrants are to be determined, or (y) the date on which such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up is expected to become effective or occur, and the date as of which it is expected that holders of Common Stock of record shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up. Failure to give such notice, or any defect therein, shall not affect the legality or validity of such dividend, distribution, reclassification, consolidation, merger, sale, transfer, dissolution, liquidation or winding-up. ARTICLE XVI REPURCHASE OF NOTES AT THE OPTION OF THE HOLDER UPON REPURCHASE EVENT Section 16.1 RIGHT TO REQUIRE REPURCHASE. In the event that a Repurchase Event (as hereinafter defined) shall occur, then each holder shall have the right, at the holder's option, to require the Company to repurchase, and upon the exercise of such right the Company shall repurchase, all of such holder's Notes, or any portion of the principal amount thereof that is an integral multiple of U.S. $1,000 (provided that no single Note may be repurchased in part unless the portion of the principal amount of such Note to be outstanding after such repurchase is equal to U.S. $1,000 or integral multiples of U.S. $1,000), on the date (the "Repurchase Date") that is 30 days after the date of the Company Notice (as defined in Section 16.2) for cash at a purchase price equal to 100% of the principal amount plus interest accrued and unpaid interest to, but excluding, the Repurchase Date (the "Repurchase Price"); PROVIDED that if the Repurchase Date is March 15 or September 15, then the interest payable on such date shall be paid to the holder of record of the Note on the next preceding March 1 or September 1, respectively. Whenever in this Indenture there is a reference, in any context, to the principal of any Note as of any time, such reference shall be deemed to include reference to the Repurchase Price payable in respect of such Note to the extent that such Repurchase Price is, was or would be so payable at such time, and express mention of the Repurchase Price in any provision of this Indenture shall not be construed as excluding the Repurchase Price in those provisions of this Indenture when such express mention is not made. Section 16.2 NOTICES; METHOD OF EXERCISING REPURCHASE RIGHT, ETC. (a) Unless the Company shall have theretofore called for redemption all of the outstanding Notes pursuant to Article III, on or before the 30th day after the occurrence of a Repurchase Event, the Company or, at the request of the Company on or before the 15th day after such occurrence, the Trustee shall give to all holders of Notes notice (the "Company Notice") of the occurrence of the Repurchase Event and of the repurchase right set forth herein arising as a result thereof. The Company shall also deliver a copy of such notice of a repurchase right to the Trustee. 65 Each notice of a repurchase right shall state: (1) the Repurchase Date, (2) the date by which the repurchase right must be exercised, (3) the Repurchase Price, (4) a description of the procedure which a holder must follow to exercise a repurchase right, (5) that on the Repurchase Date the Repurchase Price will become due and payable upon each such Note designated by the holder to be repurchased, and that interest thereon shall cease to accrue on and after said date, (6) the Conversion Price, the date on which the right to convert the Notes to be repurchased will terminate, the places where such Notes may be surrendered for conversion, and a statement that if the holder wishes to convert any Notes or any portion thereof after having tendered them for repurchase, such written notice of exercise of the right to require repurchase of such Note or portion thereof to be repurchased must first be withdrawn by delivery of a proper notice to the Trustee, and (7) the place or places where such Notes are to be surrendered for payment of the Repurchase Price and accrued interest, if any. No failure of the Company to give the foregoing notices or defect therein shall limit any holder's right to exercise a repurchase right or affect the validity of the proceedings for the repurchase of Notes. If any of the foregoing provisions or other provisions of this Article are inconsistent with applicable law, such law shall govern. (b) To exercise a repurchase right, a holder shall deliver to the Trustee or any paying agent on or before the 30th day after the date of the Company Notice (i) written notice of the holder's exercise of such right, which notice shall set forth the name of the holder, the principal amount of the Notes to be repurchased (and, if any Note is to repurchased in part, the serial number thereof, the portion of the principal amount thereof to be repurchased and the name of the Person in which the portion thereof to remain outstanding after such repurchase is to be registered) and a statement that an election to exercise the repurchase right is being made thereby, and (ii) the Notes with respect to which the repurchase right is being exercised. (c) In the event a repurchase right shall be exercised in accordance with the terms hereof, the Company shall pay or cause to be paid to the Trustee or the paying agent the Repurchase Price in cash, for payment to the holder on the Repurchase Date. (d) If any Note (or portion thereof) surrendered for repurchase (in accordance herewith and not properly withdrawn) shall not be so paid on the Repurchase Date, the principal amount of such Note (or portion thereof, as the case may be) shall, until paid, bear interest from the Repurchase Date at the rate of ____% per annum, and each Note shall remain convertible into Common Stock until the principal of such Note (or portion thereof, as the case may be) shall have been paid or duly provided for. 66 (e) Any Note which is to be repurchased only in part shall be surrendered to the Trustee (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the holder thereof or his attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the holder of such Note without service charge, a new Note or Notes, containing identical terms and conditions, each in an authorized denomination in aggregate principal amount equal to and in exchange for the unrepurchased portion of the principal of the Note so surrendered. Section 16.3 CERTAIN DEFINITIONS. For purposes of this Article XVI, (a) the term "beneficial owner" shall be determined in accordance with Rule 13d-3 promulgated by the Commission pursuant to the Exchange Act; and (b) the term "Person" shall include any syndicate or group which would be deemed to be a "person" under Section 13(d)(3) of the Exchange Act. Section 16.4 REPURCHASE EVENT. A "Repurchase Event" shall be deemed to have occurred at such time as: (a) any Person, other than the Company, any subsidiary of the Company, or any employee benefit plan of the Company or any such subsidiary, is or becomes the beneficial owner, directly or indirectly, through a purchase or other acquisition transaction or series of transactions (other than a merger or consolidation involving the Company), of shares of capital stock of the Company entitling such Person to exercise in excess of 50% of the total voting power of all shares of capital stock of the Company entitled to vote generally in the election of directors; or (b) there occurs any consolidation of the Company with, or merger of the Company into, any other Person, any merger of another Person into the Company, or any sale or transfer of all or substantially all of the assets of the Company to another Person (other than (i) any such transaction pursuant to which the holders of the Common Stock immediately prior to such transaction have, directly or indirectly, shares of capital stock of the continuing or surviving corporation immediately after such transaction which entitle such holders to exercise in excess of 50% of the total voting power of all shares of capital stock of the continuing or surviving corporation entitled to vote generally in the election of directors and (ii) any merger (1) which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock or (2) which is effected solely to change the jurisdiction of incorporation of the Company and results in a reclassification, conversion or exchange of outstanding shares of Common Stock solely into shares of common stock); 67 provided, however, that a Repurchase Event shall not be deemed to have occurred if either (a) the Closing Price per share of the Common Stock for any five Trading Days within the period of ten consecutive Trading Days ending immediately before the Repurchase Event shall equal or exceed 105% of the Conversion Price in effect on each such trading day, or (b) at least 90% of the consideration (excluding cash payments for fractional shares) in the transaction or transactions constituting the Repurchase Event consists of shares of common stock traded on a national securities exchange or quoted on the Nasdaq National Market (or which will be so traded or quoted when issued or exchanged in such connection with such Repurchase Event) and as a result of such transaction or transactions such Notes become convertible solely into such common stock. ARTICLE XVII MISCELLANEOUS PROVISIONS Section 17.1 PROVISIONS BINDING ON COMPANY'S SUCCESSORS. All the covenants, stipulations, promises and agreements by the Company contained in this Indenture shall bind its successors and assigns whether so expressed or not. Section 17.2 OFFICIAL ACTS BY SUCCESSOR CORPORATION. Any act or proceeding by any provision of this Indenture authorized or required to be done or performed by any board, committee or officer of the Company shall and may be done and performed with like force and effect by the like board, committee or officer of any corporation that shall at the time be the lawful sole successor of the Company. Section 17.3 ADDRESSES FOR NOTICES, ETC. Any notice or demand which by any provision of this Indenture is required or permitted to be given or served by the Trustee or by the holders of Notes on the Company shall be deemed to have been sufficiently given or made, for all purposes, if given or served by being deposited postage prepaid by registered or certified mail in a post office letter box addressed (until another address is filed by the Company with the Trustee) to Iomega Corporation, 1821 West Iomega Way, Roy Utah, 84067, Attention: Chief Financial Officer. Any notice, direction, request or demand hereunder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or served by being deposited postage prepaid by registered or certified mail in a post office letter box addressed to the Corporate Trust Office, which office is, at the date as of which this Indenture is dated, located at Two International Place, 4th Floor, Boston, Massachusetts 02110, Attention: Corporate Trust Division (Iomega Corporation ___% Convertible Subordinated Notes due 2001). The Trustee, by notice to the Company, may designate additional or different addresses for subsequent notices or communications. Any notice or communication mailed to a Noteholder shall be mailed to him by first class mail, postage prepaid, at his address as it appears on the Note register and shall be sufficiently given to him if so mailed within the time prescribed. 68 Failure to mail a notice or communication to a Noteholder or any defect in it shall not affect its sufficiency with respect to other Noteholders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. Section 17.4 GOVERNING LAW. This Indenture and each Note shall be deemed to be a contract made under the laws of the Commonwealth of Massachusetts, and for all purposes shall be construed in accordance with the laws of the Commonwealth of Massachusetts. Section 17.5 EVIDENCE OF COMPLIANCE WITH CONDITIONS PRECEDENT; CERTIFICATES TO TRUSTEE. Upon any application or demand by the Company to the Trustee to take any action under any of the provisions of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with, an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with, and such other evidence of compliance as may be required with respect to such application or demand under the Trust Indenture Act. Each certificate or opinion provided for in this Indenture and delivered to the Trustee with respect to compliance with a condition or covenant provided for in this Indenture shall include (1) a statement that the person making such certificate or opinion has read such covenant or condition; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statement or opinion contained in such certificate or opinion is based; (3) a statement that, in the opinion of such person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such person, such condition or covenant has been complied with. Section 17.6 LEGAL HOLIDAYS. In any case where the date of maturity of interest on or principal of the Notes or the date fixed for redemption or repurchase of any Note will not be a Business Day, then payment of such interest on or principal of the Notes need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the date of maturity or the date fixed for redemption or repurchase, and no interest shall accrue for the period from and after such date. Section 17.7 TRUST INDENTURE ACT. This Indenture is hereby made subject to, and shall be governed by, the provisions of the Trust Indenture Act required to be part of and to govern indentures qualified under the Trust Indenture Act; PROVIDED, HOWEVER, that this Section 17.7 shall not require this Indenture or the Trustee to be qualified under the Trust Indenture Act prior to the time such qualification is in fact required under the terms of the Trust Indenture Act, nor shall it constitute any admission or acknowledgment by any party to such supplemental indenture that any such qualification is required prior to the time such qualification is in fact required under the terms of the Trust Indenture Act. If any provision hereof limits, qualifies or conflicts with another provision hereof which is required to be included in an indenture qualified under the Trust Indenture Act, such required provision shall control. Section 17.8 NO SECURITY INTEREST CREATED. Nothing in this Indenture or in the Notes, whether expressed or implied, shall be construed to constitute, create or perfect a security interest 69 under the Uniform Commercial Code or similar legislation, as now or hereafter enacted and in effect, in any jurisdiction where property of the Company or its subsidiaries is located. Section 17.9 BENEFITS OF INDENTURE. Nothing in this Indenture or in the Notes, whether expressed or implied, shall give to any Person, other than the parties hereto, any paying agent, any authenticating agent, any Note registrar and their successors hereunder, the holders of Notes and the holders of Senior Indebtedness, any benefit or any legal or equitable right, remedy or claim under this Indenture. Section 17.10 TABLE OF CONTENTS, HEADINGS, ETC. The table of contents and the titles and headings of the articles and sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. Section 17.11 AUTHENTICATING AGENT. The Trustee may appoint an authenticating agent which shall be authorized to act on its behalf and subject to its direction in the authentication and delivery of Notes in connection with the original issuance thereof and transfers and exchanges of Notes hereunder, including under Sections 2.4, 2.5, 2.6, 2.7, 3.3, 15.2 and 16.2, as fully to all intents and purposes as though the authenticating agent had been expressly authorized by this Indenture and those Sections to authenticate and deliver Notes. For all purposes of this Indenture, the authentication and delivery of Notes by the authenticating agent shall be deemed to be authentication and delivery of such Notes "by the Trustee" and a certificate of authentication executed on behalf of the Trustee by an authenticating agent shall be deemed to satisfy any requirement hereunder or in the Notes for the Trustee's certificate of authentication. Such authenticating agent shall at all times be a person eligible to serve as trustee hereunder pursuant to Section 8.9. Any corporation into which any authenticating agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, consolidation or conversion to which any authenticating agent shall be a party, or any corporation succeeding to the corporate trust business of any authenticating agent, shall be the successor of the authenticating agent hereunder, if such successor corporation is otherwise eligible under this Section 17.11, without the execution or filing of any paper or any further act on the part of the parties hereto or the authenticating agent or such successor corporation. Any authenticating agent may at any time resign by giving written notice of resignation to the Trustee and to the Company. The Trustee may at any time terminate the agency of any authenticating agent by giving written notice of termination to such authenticating agent and to the Company. Upon receiving such a notice of resignation or upon such a termination, or in case at any time any authenticating agent shall cease to be eligible under this Section, the Trustee shall promptly appoint a successor authenticating agent (which may be the Trustee), shall give written notice of such appointment to the Company and shall mail notice of such appointment to all holders of Notes as the names and addresses of such holders appear on the Note register. The Trustee agrees to pay to the authenticating agent from time to time reasonable compensation for its services (to the extent pre-approved by the Company in writing), and the 70 Trustee shall be entitled to be reimbursed for such pre-approved payments, subject to Section 8.6. The provisions of Sections 8.2, 8.3, 8.4, 9.3 and this Section 17.11 shall be applicable to any authenticating agent. Section 17.12 EXECUTION IN COUNTERPARTS. This Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. State Street Bank and Trust Company, hereby accepts the trusts in this Indenture declared and provided, upon the terms and conditions hereinabove set forth. 71 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly signed, all as of the date first written above. IOMEGA CORPORATION By: ___________________________________ Name: _________________________________ Title: ________________________________ STATE STREET BANK AND TRUST COMPANY, as Trustee By: ___________________________________ Name: _________________________________ Title: ________________________________ EXHIBIT A IOMEGA CORPORATION ___% CONVERTIBLE SUBORDINATED NOTE DUE 2001 No. __ CUSIP 462030 AA 5 Iomega Corporation, a corporation duly organized and validly existing under the laws of the State of Delaware (herein called the "Company"), which term includes any successor corporation under the Indenture referred to on the reverse hereof, for value received hereby promises to pay to __________________ or registered assigns, the principal sum of _______________ ($____________) on March 15, 2001, at the office or agency of the Company maintained for that purpose in the Borough of Manhattan, The City of New York, or, at the option of the holder of this Note, at the Corporate Trust Office, in such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts, and to pay interest, semi-annually on March 15 and September 15 of each year, commencing September 15, 1996, on said principal sum at said office or agency, in like coin or currency, at the rate per annum of ___%, from March 15 or September 15, as the case may be, next preceding the date of this Note to which interest has been paid or duly provided for, unless the date hereof is a date to which interest has been paid or duly provided for, in which case from the date of this Note, or unless no interest has been paid or duly provided for on the Notes, in which case from March __, 1996, until payment of said principal sum has been made or duly provided for. Notwithstanding the foregoing, if the date hereof is after any March 1 or September 1, as the case may be, and before the following March 15 or September 15, this Note shall bear interest from such March 15 or September 15; PROVIDED, HOWEVER, that if the Company shall default in the payment of interest due on such March 15 or September 15, then this Note shall bear interest from the next preceding March 15 or September 15 to which interest has been paid or duly provided for or, if no interest has been paid or duly provided for on such Note, from March __, 1996. The interest payable on the Note pursuant to the Indenture on any March 15 or September 15 will be paid to the person in whose name this Note (or one or more Predecessor Notes) is registered at the close of business on the record date, which shall be the March 1 or September 1 (whether or not a Business Day) next preceding such March 15 or September 15, as provided in the Indenture; PROVIDED that any such interest not punctually paid or duly provided for shall be payable as provided in the Indenture. Interest may, at the option of the Company, be paid by check mailed to the registered address of such person; PROVIDED that, with respect to any holder of Notes with an aggregate principal amount equal to or in excess of $5,000,000, at the request of such holder in writing to the Company (who shall then furnish written notice to such effect to the Trustee), interest on such holder's Notes shall be paid by wire transfer (the costs of such wire transfer to be borne by the Company) in immediately available funds in accordance with the wire transfer instructions supplied by such holder to the Trustee and paying agent (if different from the Trustee). Reference is made to the further provisions of this Note set forth on the reverse hereof, including, without limitation, provisions subordinating the payment of principal of and premium, if any, and interest on the Notes to the prior payment in full of all Senior Indebtedness, as defined in the Indenture, and provisions giving the holder of this Note the right to convert this Note into Common Stock of the Company on the terms and subject to the limitations referred to on the reverse hereof and as more fully specified in the Indenture. Such further provisions shall for all purposes have the same effect as though fully set forth at this place. This Note shall be deemed to be a contract made under the laws of the Commonwealth of Massachusetts, and for all purposes shall be construed in accordance with and governed by the laws of said Commonwealth. This Note shall not be valid or become obligatory for any purpose until the certificate of authentication hereon shall have been manually signed by the Trustee or a duly authorized authenticating agent under the Indenture. 2 IN WITNESS WHEREOF, the Company has caused this Note to be duly executed under its corporate seal. Dated: March __, 1996 IOMEGA CORPORATION By: ___________________________________ Attest: _______________________________ TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Notes described in the within-named Indenture. STATE STREET BANK AND TRUST COMPANY, as Trustee By: __________________________________________________ Authorized Signatory By: ___________________________________________________ As Authenticating Agent (if different from Trustee) 3 [FORM OF REVERSE OF NOTE] IOMEGA CORPORATION ____% CONVERTIBLE SUBORDINATED NOTE DUE 2001 This Note is one of a duly authorized issue of Notes of the Company, designated as its ___% Convertible Subordinated Notes due 2001 (herein called the "Notes"), limited to the aggregate principal amount of $46,000,000 all issued or to be issued under and pursuant to an indenture dated as of March __, 1996 (herein called the "Indenture"), between the Company and State Street Bank and Trust Company, as trustee (herein called the "Trustee"), to which Indenture and all indentures supplemental thereto reference is hereby made for a description of the rights, limitations of rights, obligations, duties and immunities thereunder of the Trustee, the Company and the holders of the Notes. In case an Event of Default, as defined in the Indenture, shall have occurred and be continuing, the principal of and accrued interest on all Notes may be declared, and upon said declaration shall become, due and payable, in the manner, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions permitting the Company and the Trustee, with the consent of the holders of not less than a majority in aggregate principal amount of the Notes at the time outstanding, evidenced as in the Indenture provided, to execute supplemental indentures adding any provisions to or changing in any manner or eliminating any of the provisions of the Indenture or of any supplemental indenture or modifying in any manner the rights of the holders of the Notes; PROVIDED, HOWEVER, that no such supplemental indenture shall (i) extend the fixed maturity of any Note, or reduce the rate or extend the time of payment of interest thereon, or reduce the principal amount thereof or premium, if any, thereon, or reduce any amount payable on redemption thereof, or impair the right of any Noteholder to institute suit for the payment thereof, or make the principal thereof or interest or premium, if any, thereon payable in any coin or currency other than that provided in the Note, or modify the provisions of the Indenture with respect to the subordination of the Notes in a manner adverse to the Noteholders in any material respect, or change the obligation of the Company to make repurchase of any Note upon the happening of a Repurchase Event in a manner adverse to the holder of the Notes, or impair the right to convert the Notes into Common Stock subject to the terms set forth in the Indenture, including Section 15.6 thereof, without the consent of the holder of each Note so affected or (ii) reduce the aforesaid percentage of Notes, the holders of which are required to consent to any such supplemental indenture, without the consent of the holders of all Notes then outstanding. It is also provided in the Indenture that the holders of a majority in aggregate principal amount of the Notes at the time outstanding may on behalf of the holders of all of the Notes waive any past default or Event of Default under the Indenture and its consequences except a default in the payment of interest or any premium on or the principal of any of the Notes, a default in the payment of redemption price pursuant to Article III or repurchase price pursuant to Article XVI, a failure by the Company to convert any 4 Notes into Common Stock of the Company or a default in respect of a covenant or provisions hereof which under Article XI cannot be modified or amended without the consent of holders of all notes then outstanding. Any such consent or waiver by the holder of this Note (unless revoked as provided in the Indenture) shall be conclusive and binding upon such holder and upon all future holders and owners of this Note and any Notes which may be issued in exchange or substitute hereof, irrespective of whether or not any notation thereof is made upon this Note or such other Notes. The indebtedness evidenced by the Notes is, to the extent and in the manner provided in the Indenture, expressly subordinate and subject in right of payment to the prior payment in full of all Senior Indebtedness of the Company, as defined in the Indenture, whether outstanding at the date of the Indenture or thereafter incurred, and this Note is issued subject to the provisions of the Indenture with respect to such subordination. Each holder of this Note, by accepting the same, agrees to and shall be bound by such provisions and authorizes the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination so provided and appoints the Trustee his attorney-in-fact for such purpose. No reference herein to the Indenture and no provision of this Note or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and any premium and interest on this Note at the place, at the respective times, at the rate and in the coin or currency herein prescribed. Interest on the Notes shall be computed on the basis of a 360-day year comprised of twelve 30-day months. The Notes are issuable in registered form without coupons in denominations of $1,000 and any integral multiple of $1,000. At the office or agency of the Company referred to on the face hereof, and in the manner and subject to the limitations provided in the Indenture, without payment of any service charge but with payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration or exchange of Notes, Notes may be exchanged for a like aggregate principal amount of Notes of other authorized denominations. The Notes will not be redeemable at the option of the Company prior to March 15, 1999. At any time on or after March 15, 1999, and prior to maturity, the Notes may be redeemed at the option of the Company as a whole, or from time to time in part, upon mailing a notice of such redemption not less than 30 nor more than 60 days before the date fixed for redemption to the holders of Notes at their last registered addresses, all as provided in the Indenture, at the following optional redemption prices (expressed as percentages of the principal amount), together in each case with accrued interest to, but excluding, the date fixed for redemption. If redeemed during the 12-month period beginning March 15: 5
YEAR PERCENTAGE ----- ----------- 1999.......................... __________% 2000.......................... __________%
PROVIDED that if the date fixed for redemption is on March 15 or September 15, then the interest payable on such date shall be paid to the holder of record on the next preceding March 1 or September 1, respectively. The Notes are not subject to redemption through the operation of any sinking fund. If a Repurchase Event (as defined in the Indenture) occurs prior to March 15, 2001, the holder of this Note shall have the right, in accordance with the provisions of the Indenture, to require the Company to repurchase this Note for cash at a Repurchase Price equal to 100% of the principal amount plus accrued and unpaid interest to, but excluding, the Repurchase Date; provided that if such Repurchase Date is March 15 or September 15, then the interest payable on such date shall be to the holder of record of the Note on the next preceding March 1 or September 1, respectively. Within 30 days after the occurrence of a Repurchase Event, the Company is obligated to give all holders of record of Notes notice of the occurrence of such Repurchase Event and of the repurchase right arising as a result thereof. Subject to the provisions of the Indenture, the holder hereof has the right, at its option, at any time after 60 days following the latest date of original issuance of the Notes and prior to the close of business on March 15, 2001, or, as to all or any portion hereof called for redemption, prior to the close of business on the second Business Day immediately preceding the date fixed for redemption (unless the Company shall default in payment due upon redemption thereof), to convert the principal hereof or any portion of such principal which is $1,000 or an integral multiple thereof, into that number of shares of Company's Common Stock, as said shares shall be constituted at the date of conversion, obtained by dividing the principal amount of this Note or portion thereof to be converted by the Conversion Price of $_______ or such Conversion Price as adjusted from time to time as provided in the Indenture, upon surrender of this Note, together with a conversion notice as provided in the Indenture, to the Company at the office or agency of the Company maintained for that purpose in the Borough of Manhattan, The City of New York, or at the option of such holder, the Corporate Trust Office, and, unless the shares issuable on conversion are to be issued in the same name as this Note, duly endorsed by, or accompanied by instruments of transfer in form satisfactory to the Company duly executed by, the holder or by his duly authorized attorney. No adjustment in respect of interest or dividends will be made upon any conversion; PROVIDED, HOWEVER, that if this Note shall be surrendered for conversion during the period from the close of business on any record date for the payment of interest to the close of business on the Business Day preceding the interest payment date, this Note (unless it or the portion being converted shall have been called for redemption during the period from the close of business on any record date for the payment of interest to the close of business on the Business Day preceding the interest payment date) must 6 be accompanied by an amount, in New York Clearing House funds or other funds acceptable to the Company, equal to the interest payable on such interest payment date on the principal amount being converted. No fractional shares will be issued upon any conversion, but an adjustment in cash will be made, as provided in the Indenture, in respect of any fraction of a share which would otherwise be issuable upon the surrender of any Note or Notes for conversion. Any Notes called for redemption, unless surrendered for conversion on or before the close of business on the second Business Day next preceding date fixed for redemption, may be deemed to be purchased from the holder of such Notes at an amount equal to the applicable redemption price, together with accrued interest to, but excluding, the date fixed for redemption, by one or more investment bankers or other purchasers who may agree with the Company to purchase such Notes from the holders thereof and convert them into Common Stock of the Company and to make payment for such Notes as aforesaid to the Trustee in trust for such holders. Upon due presentment for registration of transfer of this Note at the office or agency of the Company in the Borough of Manhattan, The City of New York or Boston, Massachusetts, or at the option of the holder of this Note, at the Corporate Trust Office, a new Note or Notes of authorized denominations for an equal aggregate principal amount will be issued to the transferee in exchange thereof, subject to the limitations provided in the Indenture, without charge except for any tax or other governmental charge imposed in connection therewith. The Company, the Trustee, any authenticating agent, any paying agent, any conversion agent and any Note registrar may deem and treat the registered holder hereof as the absolute owner of this Note (whether or not this Note shall be overdue and notwithstanding any notation of ownership or other writing hereon), for the purpose of receiving payment hereof, or on account hereof, for the conversion hereof and for all other purposes, and neither the Company nor the Trustee nor any other authenticating agent nor any paying agent nor any other conversion agent nor any Note registrar shall be affected by any notice to the contrary. All payments made to or upon the order of such registered holder shall, to the extent of the sum or sums paid, satisfy and discharge liability for monies payable on this Note. No recourse for the payment of the principal of or any premium or interest on this Note, or for any claim based hereon or otherwise in respect hereof, and no recourse under or upon any obligation, covenant or agreement of the Company in the Indenture or any indenture supplemental thereto or in any Note, or because of the creation of any indebtedness represented thereby, shall be had against any incorporator, stockholder, employee, agent, officer or director or subsidiary, as such, past, present or future, of the Company or of any successor corporation, either directly or through the Company or any successor corporation, whether by virtue of any constitution, statute or rule of law or by the enforcement of any assessment or penalty or otherwise, all such liability being, by the acceptance hereof and as part of the consideration for the issue hereof, expressly waived and released. 7 Terms used in this Note and defined in the Indenture are used herein as therein defined. 8 ABBREVIATIONS The following abbreviations, when used in the inscription of the face of this Note, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM as tenants in UNIF GIFT MIN ACT -- ____________Custodian _______ common (Cust) (Minor) under Uniform Gifts to Minors Act ________________ (State) TEN ENT as tenants by the entireties JT TEN as joint tenants with right of survivorship and not as tenants in common Additional abbreviations may also be used though not in the above list. 9 CONVERSION NOTICE To: IOMEGA CORPORATION The undersigned registered owner of this Note hereby irrevocably exercises the option to convert this Note, or the portion hereof (which is $1,000 or an integral multiple thereof) below designated, into shares of Common Stock of Iomega Corporation in accordance with the terms of the Indenture referred to in this Note, and directs that the shares issuable and deliverable upon such conversion, together with any check in payment for fractional shares and any Notes representing any unconverted principal amount hereof, be issued and delivered to the registered holder hereof unless a different name has been indicated below. If shares or any portion of this Note not converted are to be issued in the name of a person other than the undersigned, the undersigned will check the appropriate box below and pay all transfer taxes payable with respect thereto. Any amount required to be paid to the undersigned on account of interest accompanies this Note. Dated: ________________________ _______________________________________ _______________________________________ Signature(s) Signature(s) must be guaranteed by an eligible Guarantor Institution (banks, stock brokers, savings and loan associations and credit unions) with membership in an approved signature guarantee medallion program pursuant to Securities and Exchange Commission Rule 17Ad-15 if shares of Common Stock are to be issued, or Notes to be delivered, other than to and in the name of the registered holder. ______________________________________________________________________________ Signature Guarantee 10 Fill in for registration of shares of Common Stock if to be issued, and Notes if to be delivered, other than to and in the name of the registered holder: _______________________________ (Name) _______________________________ (Street Address) _______________________________ (City, State and Zip Code) Please print name and address Principal amount to be converted (if less than all): $_____________ __________________________________ Social Security or Other Taxpayer Identification Number 11 OPTION TO ELECT REPURCHASE UPON A REPURCHASE EVENT To: IOMEGA CORPORATION The undersigned registered owner of this Note hereby acknowledges receipt of a notice from Iomega Corporation (the "Company") as to the occurrence of a Repurchase Event with respect to the Company and requests and instructs the Company to repay the entire principal amount of this Note, or the portion thereof (which is $1,000 or an integral multiple thereof) below designated, in accordance with the terms of the Indenture referred to in this Note at the repurchase price, together with accrued interest to, but excluding, such date, to the registered holder hereof. Dated: ________________________ _______________________________________ _______________________________________ Signature(s) NOTICE: The above signatures of the holder(s) hereof must correspond with the name as written upon the face of the Note in every particular without alteration or enlargement or any change whatever. Principal amount to be converted (if less than all): $__________ _______________________________________ Social Security or Other Taxpayer Identification Number 12 ASSIGNMENT For value received ____________________________ hereby sell(s), assign(s) and transfer(s) unto _________________________________ (Please insert social security or other Taxpayer Identification Number of assignee) the within Note, and hereby irrevocably constitutes and appoints _________________________________________________ attorney to transfer the said Note on the books of the Company, with full power of substitution in the premises. Dated: ____________________ _______________________________________ _______________________________________ Signature(s) Signature(s) must be guaranteed by an eligible Guarantor Institution (banks, stock brokers, savings and loan associations and credit unions) with membership in an approved signature guarantee medallion program pursuant to Securities and Exchange Commission Rule 17Ad-15 if shares of Common Stock are to be issued, or Notes to be delivered, other than to or in the name of the registered holder. _______________________________________ Signature Guarantee 13 EX-23.2 4 EX-23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of this registration statement. ARTHUR ANDERSEN LLP Salt Lake City, Utah March 7, 1996 -----END PRIVACY-ENHANCED MESSAGE-----