-----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, EOcQ4NUG5mG/JtPLYKYBr8Hbs8Zi/WLolAcQ6uwfi8wP6viBWHf0xx/q4jC5ct6q aBhZzLJh5Xoy9eiL24TqFw== 0000912057-96-009104.txt : 19960514 0000912057-96-009104.hdr.sgml : 19960514 ACCESSION NUMBER: 0000912057-96-009104 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19960513 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 SEC ACT: 1933 Act SEC FILE NUMBER: 333-03577 FILM NUMBER: 96561005 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 1 S-3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 13, 1996 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------------------- 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 MARK P. LONG, ESQ. 60 State Street GUNDERSON DETTMER STOUGH Boston, Massachusetts 02109 VILLENEUVE FRANKLIN & HACHIGIAN, LLP (617) 526-6000 600 Hansen Way 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. / / ------------------------------------------ CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM OFFERING PROPOSED MAXIMUM TITLE OF EACH CLASS AMOUNT TO BE PRICE PER AGGREGATE AMOUNT OF OF SECURITIES TO BE REGISTERED REGISTERED (1) SHARE (2) OFFERING PRICE (2) REGISTRATION FEE Common Stock, $.03 1/3 par value per share........................... 5,750,000 shares $30.50 $175,375,000 $60,474.14 (1) Includes 750,000 shares which the Underwriters have the option to purchase from the Company to cover over-allotments, if any. See "Underwriting." Number of shares gives effect to the two-for-one stock split (to be effected in the form of a 100% stock dividend) expected to be paid on or about May 20, 1996 to stockholders of record on May 6, 1996. (2) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457(c) under the Securities Act of 1933 and based upon prices on the Nasdaq National Market on May 8, 1996 (as adjusted to give effect to the two-for-one stock split referenced in Note (1) above).
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 MAY 13, 1996 PROSPECTUS 5,000,000 SHARES [LOGO] COMMON STOCK All of the shares of Common Stock offered hereby are being sold by the Company. The Company's Common Stock is quoted on the Nasdaq National Market under the symbol IOMG. On May 10, 1996, the last reported sale price of the Common Stock on the Nasdaq National Market was $31 per share. See "Price Range of Common Stock and Dividend Policy." -------------- THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" ON PAGE 5 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 DISCOUNT (1) COMPANY (2) Per Share..................................... $ $ $ Total (3)..................................... $ $ $
(1) See "Underwriting" for indemnification arrangements with the Underwriters. (2) Before deducting estimated expenses of $450,000 payable by the Company. (3) The Company has granted to the Underwriters a 30-day option to purchase up to 750,000 additional shares of Common Stock solely to cover over-allotments, if any. If all such shares are purchased, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." -------------- The shares of Common Stock are offered by the several Underwriters, subject to prior sale, receipt and acceptance by them and subject to the right of the Underwriters to reject any order in whole or in part and certain other conditions. It is expected that certificates for such shares 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 J.P. MORGAN & CO. , 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 UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF 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 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 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 generally sold by retailers for under $600, while the internal version is generally sold by retailers for under $500. The 1-GB Jaz disks typically sell for approximately $99 per disk 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 Hewlett-Packard Company, Micron Electronics and Power Computing for the incorporation of Zip, Jaz or Ditto drives into certain models of their computers, has OEM arrangements with audio/visual equipment manufacturers such as Sony Pictures for the incorporation of Jaz drives into certain products 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, Memorex, Sony 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 Zip, Jaz and Ditto products 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 Common Stock offered by the Company.......... 5,000,000 shares Common Stock to be outstanding after the offering..................................... 124,541,442 shares (1) Use of proceeds.............................. Working capital needs and other general corporate purposes, including the repayment of a portion of the amounts outstanding under the Company's bank loan agreements. Nasdaq National Market symbol................ IOMG
SUMMARY CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, ---------------------- ---------------------------------- APRIL 2, MARCH 31, 1993 1994 1995 1995 1996 ---------- ---------- ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA: Sales....................................................... $ 147,123 $ 141,380 $ 326,225 $ 40,112 $ 221,988 Cost of sales............................................... 92,585 92,453 235,838 28,395 162,088 Gross margin................................................ 54,538 48,927 90,387 11,717 59,900 Restructuring costs (reversal).............................. 14,131 (2,491) -- -- -- Operating income (loss)..................................... (17,427) (882) 13,622 (1,758) 19,753 Net income (loss)........................................... (14,525) (1,882) 8,503 (1,498) 10,121 Net income (loss) per common share (2)...................... $ (0.13) $ (0.02) $ 0.07 $ (0.01) $ 0.08 Weighted average common shares outstanding (2).............. 108,636 110,838 120,360 112,602 128,838
MARCH 31, 1996 -------------------------- ACTUAL AS ADJUSTED(3) ---------- -------------- BALANCE SHEET DATA: Cash and cash equivalents........................................................... $ 701 $ 147,501 Working capital..................................................................... 54,397 201,197 Total assets........................................................................ 341,366 488,166 Stockholders' equity................................................................ 73,595 220,395
- ------------------------ (1) Based upon number of shares outstanding as of April 30, 1996. Does not include 13,199,534 shares reserved for issuance upon the exercise of stock options outstanding as of April 30, 1996 at a weighted average exercise price of $2.12 per share or approximately 4,658,228 shares issuable upon conversion of the Company's 6 3/4% Convertible Subordinated Notes due 2001 (the "Convertible Notes"). (2) See Note 1 of Notes to Consolidated Financial Statements. (3) Adjusted to reflect the sale of the 5,000,000 shares of Common Stock offered hereby at an assumed public offering price of $31.00 per share, 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, THE THREE- FOR-ONE STOCK SPLIT (EFFECTED AS A 200% STOCK DIVIDEND) THAT OCCURRED IN JANUARY 1996 AND THE TWO-FOR-ONE STOCK SPLIT (TO BE EFFECTED AS A 100% STOCK DIVIDEND) EXPECTED TO BE PAID ON OR ABOUT MAY 20, 1996 TO STOCKHOLDERS OF RECORD ON MAY 6, 1996, AND (II) THE INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION. 4 RISK FACTORS THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS BEFORE PURCHASING THE SHARES OF COMMON STOCK OFFERED HEREBY. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE DISCUSSION IN THIS PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS PROSPECTUS SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS PROSPECTUS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED ELSEWHERE HEREIN. ABSENCE OF SUPPLY CONTRACTS; DEPENDENCE ON SUPPLIERS; SHORTAGES OF CRITICAL COMPONENTS. 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 some difficulty and expects to continue to experience difficulty in the future, in obtaining a sufficient supply of many key components on a timely basis. 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 at times been unable to obtain a sufficient supply of certain of these integrated circuits due to industry-wide shortages, and there can be no assurance that the Company will be able to obtain a sufficient supply to fully satisfy the Company's demands for such integrated circuits. These component shortages have limited the Company's ability to produce sufficient Zip and Jaz 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 and an internal IDE-interface version of the Zip drive, the interface most commonly required by OEM vendors, commenced commercial shipment in the first quarter of 1996. 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, 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 and the first quarter of 1996 is an indication of future sales. 5 The Company began shipping Jaz drives and disks 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, 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 higher 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 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--Absence of Supply Contracts; Dependence on Suppliers; Shortages of Critical Components" 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"), 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") and the success of the Company in generating demand for Zip and Jaz by educating consumers about the possible uses for such products. 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 $40.1 million in the first quarter of 1995 to $222.0 million in the first quarter of 1996. 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 and 1996. 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, including its internal operations, has placed significant demands on the systems and management of the Company. For example, demand for the Company's Zip disk drives has generally 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, accounting 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." 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 and for the first quarter of 1996, 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 6 introduction and market acceptance of new products by the Company or its competitors, product returns, the availability of critical components, the lower gross margins associated with the Company's Zip, Jaz and Ditto products, the ratio of sales of higher-margin Zip and Jaz disks to lower-margin Zip and Jaz drives, seasonality, the success of the Company in reducing manufacturing costs, the ratio between retail sales and sales to OEM customers and the condition of retail markets could contribute to this variability. For example, as is common in the industry, the Company expects to reduce the prices of its products in the future, including its Zip, Jaz and Ditto products. 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 first quarter of 1996 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 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 and sales slowdowns commonly occurring during the summer months. 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 revenues for any prior quarter 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 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 in some 7 cases require or may require the Company to share control over its manufacturing and marketing programs and technologies. See "Business--Company Strategy--Broadening Distribution Through Strategic Alliances" and "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 and Sentinel (Zip disks), Sequel (Jaz drives) and First Engineering Plastics (Ditto drives). Currently, all of the Company's Jaz drives are manufactured for the Company by Sequel. 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. The loss of any of the Company's existing manufacturing relationships could have a material adverse effect on the Company. 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 has granted to Seiko Epson the right to sell for its own account significant quantities of the Zip drives it produces and may grant other third-party manufacturers, among others, the right to sell for their own account significant quantities of the drives they produce, thereby reducing the supply of such drives to the Company and increasing competition, including price competition since the Company does not control the price at which such third parties sell products for their own account. See "Business--Manufacturing." DECLINE IN LIQUIDITY; FUTURE CAPITAL NEEDS. The Company had cash and cash equivalents of $1.0 million as of December 31, 1995 and $0.7 million as of March 31, 1996. During 1995, the Company used $27.0 million in operating activities and an additional $45.2 million in the purchase of property and equipment. During the first three months of 1996, the Company used $11.4 million in operating activities and an additional $14.6 million in the purchase of property and equipment. Also during 1995 and the first three months of 1996, 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 that the proceeds of this offering, together with current sources of financing available to the Company, will be sufficient to fund the Company's operations into 1997. Thereafter, the Company may 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 success of programs the Company is seeking to implement to improve its inventory management, the Company's management of its cash and accounts payable, and the Company's ability to refinance its outstanding debt, a significant portion of which matures in late 1996. There can be no assurance that funds required by the Company in the future will be available on terms satisfactory to the Company, if at all. 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." 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 8 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. The Company believes that in order to compete successfully against current and future sources of competition, it will be necessary to further reduce the manufacturing costs of its products, thus enabling the Company to sell its products at lower prices. Failure to achieve such reductions in manufacturing costs could have a material adverse effect on the Company's business and financial results. 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. (which was recently acquired by Seagate Technology) 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." 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. To date, two patents relating to the Zip drive have been issued. There can be no assurance that any additional patents with respect to Zip drives or any patents with respect to Zip disks or the Company's other products will be issued in the future. 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 (including the price at which the Company sells disks) 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 products. 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." 9 STOCK MARKET VOLATILITY. There has been significant volatility in the market price of the Company's Common Stock (see "Price Range of Common Stock and Dividend Policy") as well as in the market price of securities of technology-based companies similar in size to the Company. In addition, the Company's Common Stock has recently experienced substantial levels of short selling, which has also affected the volatility of the market price of the Company's Common Stock. Factors such as announcements of new products by the Company or its competitors, variations in the Company's quarterly operating results, continued high levels of short selling of the Common Stock 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. 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. 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." 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. 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. Any build up of inventory at the Company or in its distribution channels that does not sell through to end users could have a material adverse effect on the Company's operating results and financial condition. 10 As is typical in the industry, from time to time the Company experiences product defects and product returns. There can be no assurance that the Company will not experience quality or reliability problems in the future which have an adverse effect on the Company's business or financial results. 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 March 31, 1996, the customers with the ten highest outstanding accounts receivable balances totaled $57.0, million or 37%, of gross accounts receivable, with one customer accounting for $20.7 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 continue 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." DILUTION. The net tangible book value of the Common Stock as of March 31, 1996 was $0.62 per share. Assuming a public offering price of $31.00 per share, investors purchasing shares of Common Stock in this offering will suffer an immediate dilution of $29.22 per share. Moreover, as of March 31, 1996, there were outstanding stock options for the purchase of 13,498,606 shares of Common Stock at a weighted average exercise price of $1.94 per share and Convertible Notes convertible into approximately 4,658,228 shares of Common Stock at a conversion price of $9.875 per share. The exercise of such stock options or conversion of such Convertible Notes will result in further dilution to purchasers of shares in this offering. See "Capitalization." 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 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." 11 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 shares of Common Stock offered hereby at an assumed public offering price of $31.00 per share are estimated to be approximately $146,800,000 (approximately $168,887,500 if the Underwriters' 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, the success of the Company in improving its inventory management, the Company's management of its cash and accounts payable and the Company's ability to refinance its outstanding debt, a significant portion of which matures in late 1996. 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 0.5% and become due and payable on June 30, 1997, and term loans, which bear interest at the bank's prime rate plus 0.75% and become due and payable on June 30, 1997. As of April 28, 1996, borrowings under this loan agreement were $20.7 million, consisting of $17.5 million under the revolving credit facility and $3.2 million under the term loan facility. As of April 28, 1996, there was $24.4 million of borrowings outstanding under the loan agreement between a foreign subsidiary of the Company and a German commercial bank at an interest rate of 7.75%. The agreement expires on November 30, 1996. 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 Note 5 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, the Company has no specific agreements or commitments and is not currently engaged in any negotiations for any such acquisition. Pending the uses described above, the net proceeds will be invested in short-term, investment-grade, interest-bearing securities. 12 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. All amounts are adjusted to give effect to the two-for-one stock split (effected as a 100% stock dividend) expected to be paid on or about May 20, 1996 to stockholders of record on May 6, 1996.
HIGH LOW --------- --------- 1994 - ----------------------------------------------------------------------------------------------- First Quarter.................................................................................. $ 0.41 $ 0.30 Second Quarter................................................................................. $ 0.35 $ 0.26 Third Quarter.................................................................................. $ 0.53 $ 0.35 Fourth Quarter................................................................................. $ 0.75 $ 0.38 1995 - ----------------------------------------------------------------------------------------------- First Quarter.................................................................................. $ 1.30 $ 0.54 Second Quarter................................................................................. $ 4.35 $ 1.16 Third Quarter.................................................................................. $ 5.00 $ 3.39 Fourth Quarter................................................................................. $ 8.96 $ 2.75 1996 - ----------------------------------------------------------------------------------------------- First Quarter.................................................................................. $ 13.63 $ 5.71 Second Quarter (through May 10, 1996).......................................................... $ 34.94 $ 12.31
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. 13 CAPITALIZATION The following table sets forth the capitalization of the Company as of March 31, 1996 and as adjusted to give effect to the sale by the Company of the 5,000,000 shares of Common Stock offered hereby, at an assumed public offering price of $31.00 per share, after deducting the estimated underwriting discount and offering expenses.
MARCH 31, 1996 ----------------------- ACTUAL AS ADJUSTED ---------- ----------- (IN THOUSANDS) Convertible Subordinated Notes, 6 3/4%, due 2001......................................... $ 46,000 $ 46,000 ---------- ----------- ---------- ----------- 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; 119,046,218 shares outstanding (actual); 124,046,218 shares outstanding (as adjusted) (1)......... 3,968 4,135 Additional paid-in capital............................................................. 51,175 197,808 Deferred compensation.................................................................. (922) (922) Retained earnings...................................................................... 19,374 19,374 ---------- ----------- Total stockholders' equity........................................................... 73,595 220,395 ---------- ----------- Total capitalization................................................................. $ 119,595 $ 266,395 ---------- ----------- ---------- -----------
- ------------------------ (1) Number of outstanding shares gives effect to the two-for-one stock split (to be effected as a 100% stock dividend) expected to be paid on or about May 20, 1996 to stockholders of record on May 6, 1996, and excludes (i) an aggregate of 13,498,606 shares of Common Stock reserved for issuance upon the exercise of stock options outstanding as of March 31, 1996 with a weighted average exercise price of $1.94 per share and (ii) an aggregate of approximately 4,658,228 shares issuable upon conversion of the Convertible Notes. 14 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 and for and as of the three months ended April 2, 1995 and March 31, 1996. The selected consolidated financial data for and as of the years ended December 31, 1991, 1992, 1993, 1994 and 1995 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. The selected consolidated financial data for and as of the three months ended April 2, 1995 and March 31, 1996 have been derived from the Company's unaudited consolidated financial statements which, in the opinion of management of the Company, have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results of operations and financial position for and as of these periods. Operating results for the three months ended March 31, 1996 are not necessarily indicative of the results to be expected for the entire year. 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.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31, ---------------------- ----------------------------------------------------- APRIL 2, MARCH 31, 1991 1992 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- --------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Sales................................... $ 136,566 $ 139,174 $ 147,123 $ 141,380 $ 326,225 $ 40,112 $ 221,988 Cost of sales........................... 68,404 74,090 92,585 92,453 235,838 28,395 162,088 --------- --------- --------- --------- --------- --------- ----------- Gross margin........................ 68,162 65,084 54,538 48,927 90,387 11,717 59,900 --------- --------- --------- --------- --------- --------- ----------- Operating expenses: Selling, general and administrative... 34,323 37,572 38,862 36,862 57,189 9,349 33,156 Research and development.............. 17,939 21,959 18,972 15,438 19,576 4,126 6,991 Restructuring costs (reversal)........ -- -- 14,131 (2,491) -- -- -- --------- --------- --------- --------- --------- --------- ----------- Total operating expenses............ 52,262 59,531 71,965 49,809 76,765 13,475 40,147 --------- --------- --------- --------- --------- --------- ----------- Operating income (loss)................. 15,900 5,553 (17,427) (882) 13,622 (1,758) 19,753 Interest and other income (expense)..... 1,661 592 771 908 (1,983) (20) (3,161) --------- --------- --------- --------- --------- --------- ----------- Income (loss) before income taxes and cumulative effect of accounting change................................. 17,561 6,145 (16,656) 26 11,639 (1,778) 16,592 Benefit (provision) for income taxes (1).................................... (5,236) (1,474) (206) (1,908) (3,136) 280 (6,471) --------- --------- --------- --------- --------- --------- ----------- Net income (loss) before cumulative effect of accounting change (1)........ 12,325 4,671 (16,862) (1,882) 8,503 (1,498) 10,121 Cumulative effect of accounting change (1).................................... -- -- 2,337 -- -- -- -- --------- --------- --------- --------- --------- --------- ----------- Net income (loss)....................... $ 12,325 $ 4,671 $ (14,525) $ (1,882) $ 8,503 $ (1,498) $ 10,121 --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- ----------- Net income (loss) per common share (2).................................... $ 0.10 $ 0.04 $ (0.13) $ (0.02) $ 0.07 $ (0.01) $ 0.08 --------- --------- --------- --------- --------- --------- ----------- --------- --------- --------- --------- --------- --------- ----------- Weighted average common shares outstanding (2)........................ 123,534 121,590 108,636 110,838 120,360 112,602 128,838 DECEMBER 31, ----------------------------------------------------- MARCH 31, 1991 1992 1993 1994 1995 1996 --------- --------- --------- --------- --------- ----------- (IN THOUSANDS) BALANCE SHEET DATA: Cash, cash equivalents and temporary investments... $ 31,611 $ 19,691 $ 18,804 $ 19,793 $ 1,023 $ 701 Working capital.................................... 43,165 35,038 30,550 34,818 12,623 54,397 Total assets....................................... 87,046 86,955 81,089 75,833 266,227 341,366 Stockholders' equity............................... 64,845 65,024 51,090 49,063 62,686 73,595
- ------------------------------ (1) See Note 3 of Notes to Consolidated Financial Statements. (2) See Note 1 of Notes to Consolidated Financial Statements. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with "Selected Consolidated Financial Data" and the Company's Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus. Except for the historical information contained herein, the discussion in this Prospectus contains certain forward-looking statements that involve risks and uncertainties, such as statements of the Company's plans, objectives, expectations and intentions. The cautionary statements made in this Prospectus should be read as being applicable to all related forward-looking statements wherever they appear in this Prospectus. The Company's actual results could differ materially from those discussed here. Factors that could cause or contribute to such differences include those discussed in "Risk Factors," as well as those discussed elsewhere herein. 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 $222.0 million in the first quarter of 1996. 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. During the first quarter of 1996, Bernoulli products accounted for less than 5% of 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. 16 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 manufacturers and in educating consumers about the existence and possible uses of Zip and Jaz products as storage devices. In addition, component shortages or other factors limiting the supply of the Company's products could 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," "--Absence of Supply Contracts; Dependence on Suppliers; Shortages of Critical Components" "--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 its Zip, Jaz and Ditto products. 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 would likely have an adverse effect on gross margins for those products. In March 1996, the Company lowered prices on internal models of its Ditto Easy 800 and Ditto Easy 3200 products. As is common in the industry, the Company expects to reduce the prices of its products in the future, including its Zip, Jaz and Ditto products. In addition, the Company's future operating results are significantly dependent on offsetting any such price reductions with manufacturing cost reductions, and failure to achieve such cost reductions could have an adverse effect on gross margins. 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 the sales mix between disks and drives is below levels anticipated by the Company, 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 and sales of Zip and Jaz drives and disks were the primary reason for the Company's revenue growth during the first quarter of 1996, 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 Jaz, 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 sales slowdowns commonly occuring during the summer months. In addition, some retailers have been experiencing sales decreases and certain analysts have predicted continued softening of this market. Accordingly, investors should not assume that the sales growth experienced by the Company in 1995 or the first quarter of 1996 is an indication of future sales. Moreover, in light of the Company's revenue growth in 1995 and the first quarter of 1996 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 Factors--Recent Operating Losses; Quarterly Fluctuations in Operating Results; Risk of Failure to Satisfy Market Expectations." 17 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." RESULTS OF OPERATIONS The following table sets forth, for the periods indicated, certain financial data as a percentage of sales:
PERCENTAGE OF SALES ---------------------------------------------------------------- THREE MONTHS ENDED YEAR ENDED DECEMBER 31, ------------------------- ------------------------------------- APRIL 2, MARCH 31, 1993 1994 1995 1995 1996 ----------- ----------- ----------- ----------- ------------ Sales..................................................... 100.0% 100.0% 100.0% 100.0% 100.0% Cost of sales............................................. 62.9 65.4 72.3 70.8 73.0 ----- ----- ----- ----- ----- Gross margin............................................ 37.1 34.6 27.7 29.2 27.0 ----- ----- ----- ----- ----- Operating expenses: Selling, general and administrative..................... 26.4 26.1 17.5 23.3 14.9 Research and development................................ 12.9 10.9 6.0 10.3 3.2 Restructuring costs (reversal).......................... 9.6 (1.8) -- -- -- ----- ----- ----- ----- ----- Total operating expenses.............................. 48.9 35.2 23.5 33.6 18.1 ----- ----- ----- ----- ----- Operating income (loss)................................... (11.8) (0.6) 4.2 (4.4) 8.9 Interest and other income (expense)....................... 0.5 0.6 (0.6) -- (1.4) ----- ----- ----- ----- ----- Income (loss) before income taxes and cumulative effect of accounting change........................................ (11.3) -- 3.6 (4.4) 7.5 Benefit (provision) for income taxes...................... (0.2) (1.3) (1.0) 0.7 (2.9) ----- ----- ----- ----- ----- Net income (loss) before cumulative effect of accounting change................................................... (11.5) (1.3) 2.6 (3.7) 4.6 Cumulative effect of accounting change.................... 1.6 -- -- -- -- ----- ----- ----- ----- ----- Net income (loss)......................................... (9.9)% (1.3)% 2.6% (3.7)% 4.6% ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
THREE MONTHS ENDED MARCH 31, 1996 AS COMPARED TO THREE MONTHS ENDED APRIL 2, 1995 SALES. Sales for the three months ended March 31, 1996 increased by $181.9 million, or 453%, when compared to the corresponding period of 1995. The primary reason for the increase was sales of Zip and Jaz products, which began shipping in March 1995 and December 1995, respectively. Increased sales of Ditto products also contributed to the increased sales. These sales increases were partially offset by reduced sales of Bernoulli products. In the first quarter of 1996, sales of Zip and Jaz products accounted for $185 million, or 84% of sales. Ditto products accounted for $28 million, or 12%, of sales in the first quarter of 1996, an increase of 60% over the first quarter of 1995. Bernoulli and other product sales totaled $9 million, or 4% of sales, in the first quarter of 1996 compared to $21 million, or 52% of sales, in the first quarter of 1995. Sales outside of the United States in the first quarter of 1996 were $83.9 million, or 38% of sales, compared to $17.1 million, or 43%, for the corresponding period in 1995. The reasons for the sales increase outside of the United States were similar to the reasons for the total increase in consolidated sales. Management expects increased sales of Zip, Jaz and Ditto products through the remainder of 1996. However, the Company is still experiencing some component shortages which may continue to limit production and, therefore, sales. In addition, future market demand for the Company's products cannot be predicted with certainty. Accordingly, there can be no assurance that future sales will materialize as expected. 18 GROSS MARGIN. The Company's gross margin percentage for the three-month period ended March 31, 1996 was 27%, compared to 29% for the comparable period of 1995. The decline in gross margin percentage is due to a shift in product mix from higher margin Bernoulli products to lower margin Zip, Jaz and Ditto products. Start-up costs associated with Jaz products also contributed to the decline in gross margin percentage. Gross margins for the remainder of 1996 will depend in large part on sales of Zip and Jaz disks, which generate significantly higher gross margins than the corresponding drives, and on the sales mix between disks and drives. Historically, the gross margin of Bernoulli products was generally in excess of 40%; the gross margin of Zip, Jaz and Ditto product lines have been significantly lower. Although the Company expects the gross margins of Zip and Jaz products to increase as production increases and start-up costs associated with Jaz products decrease, it does not expect them to achieve the levels historically achieved by Bernoulli. In addition, gross margins may be affected significantly by the mix between OEM and retail sales, the Company's ability to achieve planned cost reductions, the level of any future price reductions to the Company's Zip, Jaz or Ditto products and other factors. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses represented 15% of sales for the first quarter of 1996, compared to 23% for the corresponding period of 1995. The decline in this percentage was due primarily to the increased sales volumes in 1996. The actual selling, general and administrative expenses increased by $23.8 million for the three-month period ended March 31, 1996, as compared to the corresponding prior year period. The increased expenses were primarily the result of advertising expenses incurred to increase awareness of Ditto and Zip, 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, in absolute dollars, to increase further in the remainder of 1996 due to planned additional advertising expenses, trade show expenses, variable selling expenses, and increased fixed administrative expenses. RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were 3% of sales for the three-month period ended March 31, 1996, compared to 10% for the three-month period ended April 2, 1995. The decline in percentages is primarily due to the increased sales volumes in 1996. The actual research and development expenses increased by $2.9 million for the first quarter of 1996, compared to the corresponding period of 1995. These increases were primarily the result of expenditures related to the continued development of the Zip, Ditto and Jaz products. Management expects continued increases in research and development expenses, in absolute dollars, in the remainder of 1996 as the result of planned increases in resources dedicated to future product development and enhancement. OTHER. Interest expense increased by $2.3 million in the first quarter of 1996, as compared to the first quarter of 1995. This increase is primarily due to interest expense associated with the Wells Fargo line of credit, financing of European accounts receivable, capital leases, other term notes and the Convertible Notes. Management expects continued increases in interest expenses, in absolute dollars, in the remainder of 1996 as a result of the issuance of the Convertible Notes in March 1996 and anticipated additional borrowings under the Company's credit facilities. During the first quarter of 1995, the Company recorded a net foreign currency loss of $1.0 million as a result of the weakening of the U.S. dollar against European currencies. Other income in the first quarter of 1995 consisted primarily of royalty income and other miscellaneous income. Other expense in the first quarter of 1996 consisted of various miscellaneous other expense items. INCOME TAXES. For the first quarter of 1996, the Company recorded a tax provision of $6.5 million representing an effective tax rate of 39%. The tax rate has increased from an effective rate of 27% during 1995 due to the Company's full utilization of available tax credits and foreign net operating loss carryforwards in 1996. The Company anticipates that the effective tax rate will remain at 39% throughout 1996. However, differences between the currently anticipated mix of foreign income versus domestic income, and the actual mix, will have an impact on the effective tax rate that is recorded in future quarters. 19 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. 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 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. 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. 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. 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. 20 For 1995, the Company recorded a tax provision of $3.1 million representing an effective income tax rate of 27%, which reflects utilization of available tax credits and foreign net operating loss carryforwards. 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 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. 21 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 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 and the first quarter of 1996. 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, MARCH 31, 1995 1995 1995 1995 1996 --------- --------- ----------- ------------- ---------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Sales................................................ $ 40,112 $ 52,594 $ 84,721 $ 148,798 $ 221,988 Cost of sales........................................ 28,395 40,907 63,225 103,311 162,088 --------- --------- ----------- ------------- ---------- Gross margin....................................... 11,717 11,687 21,496 45,487 59,900 --------- --------- ----------- ------------- ---------- Operating expenses: Selling, general and administrative................ 9,349 10,162 13,878 23,800 33,156 Research and development........................... 4,126 3,976 4,691 6,783 6,991 --------- --------- ----------- ------------- ---------- Total operating expenses........................... 13,475 14,138 18,569 30,583 40,147 --------- --------- ----------- ------------- ---------- Operating income (loss).............................. (1,758) (2,451) 2,927 14,904 19,753 Interest and other income (expense).................. (20) (55) (230) (1,678) (3,161) --------- --------- ----------- ------------- ---------- Income (loss) before income taxes.................... (1,778) (2,506) 2,697 13,226 16,592 Benefit (provision) for income taxes................. 280 559 (672) (3,303) (6,471) --------- --------- ----------- ------------- ---------- Net income (loss).................................... $ (1,498) $ (1,947) $ 2,025 $ 9,923 $ 10,121 --------- --------- ----------- ------------- ---------- --------- --------- ----------- ------------- ---------- Net income (loss) per common share................... $ (0.01) $ (0.02) $ 0.02 $ 0.08 $ 0.08 --------- --------- ----------- ------------- ---------- --------- --------- ----------- ------------- ---------- Weighted average common shares outstanding........... 112,602 114,036 127,236 127,560 128,838
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 and the first quarter of 1996. Sales of Zip products throughout 1995 and the first quarter of 1996 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 5% of total sales by the first quarter of 1996. In the first quarter of 1996, Zip and Jaz accounted for 84% of sales, and Ditto represented 12% 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 22 quarter of 1995 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 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. In the first quarter of 1996, gross margin was 27%. The decline in the first quarter of 1996 compared to the fourth quarter of 1995 was primarily due to start up costs associated with the Company's Jaz products and the relative mix in the quarter between lower margin and higher margin products. Although sales of Zip products were the primary reason for the Company's revenue growth during 1995 and sales of Zip and Jaz products were the primary reason for the Company's revenue growth during the first quarter of 1996, such sales may be attributable in large part to the novelty of the product and the initial publicity surrounding the introduction of Zip and Jaz, and may not be indicative of the long-term demand for such products. Accordingly, investors should not assume that the sales growth experienced by the Company in 1995 or the first quarter of 1996 is an indication of future sales. Moreover, in light of the Company's revenue growth in 1995 and the first quarter of 1996 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; Risk of Failure to Satisfy Market Expectations." LIQUIDITY AND CAPITAL RESOURCES At March 31, 1996, the Company had cash and cash equivalents of $0.7 million, working capital of $54.4 million and a ratio of current assets to current liabilities of 1.3 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. For the first three months of 1996, the Company's cash position remained flat, with $11.4 million used in operating activities and $14.5 million used in investing activities, offset by $25.6 million provided by financing activities. On July 5, 1995, the Company entered into a loan agreement with the Commercial Finance Division of Wells Fargo. Effective May 13, 1996, the Company renewed and amended its loan agreement with Wells Fargo. The amended agreement permits revolving loans, term loans and letters of credit up to an aggregate outstanding principal amount equal to the lesser of $100 million or 80% of eligible accounts receivable. Amounts outstanding are collateralized by accounts receivable, inventory, equipment, general intangibles and certain other assets. The new revolving line bears interest at the bank's prime rate plus 0.5% and the term loans bear interest at the bank's prime rate plus 0.75%. This agreement expires June 30, 1997. Under this agreement, the Company may also secure financing of equipment purchases from third parties up to a maximum of $75 million, less term loans outstanding to Wells Fargo. Among other restrictions, the agreement requires the Company to maintain minimum levels of working capital and net worth. 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 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's balance sheet at March 31, 1996 reflected short-term borrowings of $32.4 million, representing utilization of the revolving credit line with Wells Fargo of $1.8 million, term loans with Wells Fargo of $3.3 million, borrowings under the German loan agreement of $23.9 million and the short-term portion of capital lease obligations and other term loans of $3.4 million. At March 31, 1996, the Company's long-term borrowings were $52.6 million, consisting of $46.0 million of the Convertible Notes, $4.3 million in capitalized leases and $2.3 million of other term notes. 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 $38.8 million at March 31, 1996 compared to December 31, 1995, due to increased sales. Inventory increased by $6.9 million during the first quarter of 1996 due to build-ups in 23 manufacturing capacity. The 7% increase in inventory, as compared to the 49% increase in sales volume from the fourth quarter of 1995, reflects an increase in inventory turnover in the first quarter of 1996 versus the fourth quarter of 1995. Also, the inventory balance at March 31, 1996 was reduced by the sale of inventory, which had previously been consigned to one of the Company's suppliers, to that supplier. The increases in receivables and inventory were more than offset by increases in accounts payable and accrued liabilities of $25.4 million and $43.2 million in net proceeds from issuance of the Convertible Notes. Fixed asset additions for the first quarter of 1996 totaled $19.4 million, offset by $4.8 million of proceeds from capital leases. 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 current sources of financing available to the Company, will be sufficient to fund the Company's operations into 1997, including any planned expense increases or capital expenditures discussed above. Thereafter, the Company may 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 success of the Company in improving its inventory management, the Company's management of its cash and accounts payable, and the Company's ability to refinance its outstanding debt, a significant portion of which matures in late 1996. 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, if at all. See "Risk Factors-- Decline in Liquidity; Future Capital Needs." 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 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 generally sold by retailers for under $600, while the internal version is generally sold by retailers for under $500. The 1-GB Jaz disks typically sell for approximately $99 per disk 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 2 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 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 satisfy these demands. In developing and introducing the Zip and Jaz drives, the Company undertook a 28 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 Hewlett-Packard Company, 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 certain models of their computers, and with Sony Pictures for the incorporation of Jaz drives into certain products; and the Company 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, Memorex, Sony 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. The Company also plans to increase sales of Zip and Jaz disks by educating consumers about the many possible uses for Zip and Jaz disks. For example, 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 (other than the Jaz drive) 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 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 and Fuji began selling 29 co-branded versions of the Zip drive in Japan, and the Company has expanded 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 Easy 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 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. Internal versions of the Zip drive include SCSI interface and IDE interface models. In September 1995, Power Computing, the first Macintosh clone manufacturer, began offering internal 5 1/4-inch Zip SCSI drives as an option on its computers. Beginning in the first quarter of 1996, internal IDE interface models of the Zip drive were sold by Hewlett-Packard Company, which is including them in one model of its Pavilion line of home computers, and Micron Electronics, which is offering them as a factory installable option on certain of 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. The Zip drive has received numerous awards from industry publications and trade groups in select categories including: PC/COMPUTING'S Most Valuable Product (1995); PUBLISH magazine's 1995 Publish Impact Award; CADENCE magazine's Editor's Choice Award (1995); the International Digital Imaging Association's "Best New Hardware" award (1995); listing in COMPUTER LIFE magazine's "Best of Everything" list (1995); and the Millennium Hardware of the Year award in the Product Excellence Category (1996). The Zip drive carries a limited 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 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 is available in an external SCSI version, which is generally sold by retailers for under $600, and is available in an internal SCSI version, which is generally sold by retailers for under $500. Each 1-GB Jaz cartridge sells for approximately $99, 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 and operating lights. 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 was named as Storage Product of the Year at the COMDEX trade show in November 1995. The Jaz drive carries a limited 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 31 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-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 limited two-year warranty and the Ditto 420 carries a limited five-year warranty. Ditto media is sold with a limited 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, Micron Electronics, a mail-order manufacturer of IBM PC-compatible personal computers, is offering Zip, Ditto and Jaz drives as a factory-installable option in certain of its new computers, Hewlett-Packard is offering one model of its Pavilion line of home computers with a built-in Zip drive and Escom, a European manufacturer of computers, has announced plans to offer certain models with built-in Zip drives. 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, Memorex, Sony 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 opened 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. 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. During the first quarter of 1996 the Company launched major print and television advertising campaigns in support of its Zip and Ditto products and the Company expects marketing and advertising expenses to continue to increase significantly as the Company seeks to expand market awareness of its products and educate consumers about the many possible uses for Zip and Jaz disks. 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. 33 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 March 31, 1996, the customers with the ten highest outstanding accounts receivable balances totaled $57.0 million, or 37%, of gross accounts receivable, with one customer accounting for $20.7 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. During the quarter ended March 31, 1996, sales to Ingram Micro D, Inc. accounted for 11% of sales. No other single customer accounted for more than 10% of the Company's sales in 1994, 1995 or the first quarter of 1996. 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 (other than Jaz drives) 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. Currently, all of the Company's Jaz drives are manufactured for the Company by a third-party manufacturer. 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 and Sentinel (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 has granted to Seiko Epson the right to sell for its own account significant quantities of the Zip drives it produces and may grant other third-party manufacturers, among others, the right to sell for their own account significant quantities of the drives they produce, thereby reducing the supply of such drives to the Company and increasing competition, including price competition since the Company does not control the price at which such third parties sell products for their own account. 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 some difficulty, and expects to continue to experience difficulty in the future, in obtaining a sufficient supply of many key components on a timely basis. 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 at times been unable to obtain a sufficient supply of certain of these integrated circuits due to industry-wide shortages, and there can be no assurance that the Company will be able to obtain a sufficient supply to fully satisfy the Company's demands for such integrated circuits. These component shortages have limited the Company's ability to produce sufficient Zip and Jaz 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. 34 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 products to achieve market acceptance and otherwise adversely affect the Company's business and financial results. See "Risk Factors--Absence of Supply Contracts; Dependence on Suppliers; Shortages of Critical Components." The Company had a backlog as of March 31, 1996 of approximately $146 million, compared to a backlog at the end of the first quarter of 1995 of approximately $23.5 million. Substantially all of the March 31, 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 March 31, 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 March 31, 1996 backlog during the next six months, unless such orders are scheduled for delivery outside of this six months period 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--Absence of Supply Contracts; Dependence on Suppliers; Shortages of Critical Components." 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 an IDE interface version of 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 35 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. 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. 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 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. The Company believes that in order to compete successfully against current and future sources of competition, it will be necessary to further reduce the manufacturing costs of its products, thus enabling the Company to sell its products at lower prices. 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 was recently acquired 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 Zip and Jaz 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. 36 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). Additional competitive considerations, particularly in the OEM market, are the size (form factor) of the drive and the interface type with which the drive is compatible. 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. The most common system interface for the OEM market is IDE. The Company currently offers internal Zip drives in IDE and SCSI interface models and offers Jaz drives in a SCSI interface model. The Company expects an internal IDE version of the Jaz drive to be available beginning in the second half of 1996. 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, two of which relate to its Zip products, 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 the two issued Zip-related patents and 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 (including the price at which the Company sells disks) 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 in addition to 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 or both. 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 products. The Company is in the process of negotiating a definitive license agreement for the 37 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 March 31, 1996, the Company employed 1,972 persons, including 160 in research and development, 1,453 in manufacturing, 148 in sales, marketing and service, 128 in general management and administration, and 83 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. The Company has hired a large number of new employees in the last year and 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 373,000 square feet of space in 10 buildings located in the Roy, Utah area, 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 require an aggregate base rent of approximately $2.3 million for 1996. The Company is in the process of negotiating leases for two other buildings in the Roy, Utah area, aggregating approximately 115,000 square feet of space. The rent for such additional space is anticipated to be approximately $600,000 a year. The Company leases a 27,000 square foot facility in San Diego, California and a 51,000 square foot facility in Milpitas, California, each for certain research and development activities. 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, the United Kingdom and Singapore. 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 54 Senior Vice President, Europe Anton J. Radman, Jr. 44 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 Robert J. Simmons 33 Treasurer 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 (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. 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. Robert J. Simmons has been Treasurer since January 1996. He was Assistant Treasurer of Oracle Corporation, a software company, from June 1989 to January 1996. 40 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 of Melvin C. Dill Co., Inc., a manufacturer of industrial labels, since October 1990. He was also President and CEO of ERISS Corporation, an information services company, from January 1996 to May 1996. Mr. Kucha 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 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 April 30, 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)..................................................... 15,979,356 13.4% 4660 La Jolla Village Drive Suite 775 San Diego, CA 92122 Willem H.J. Andersen (4)..................................................... 85,582 * Robert P. Berkowitz.......................................................... 0 -- Anthony L. Craig............................................................. 67,500 * David J. Dunn (5)............................................................ 16,662,828 13.9 Kim B. Edwards (6)........................................................... 1,471,050 1.2 Michael J. Kucha (7)......................................................... 75,516 * John R. Myers (8)............................................................ 81,000 * John E. Nolan (9)............................................................ 172,500 * The Honorable John E. Sheehan (10)........................................... 612,000 * All current directors and executive officers as a group (20 persons) (11).......................................................... 22,947,158 18.6
- ------------------------ * 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 April 30, 1996 (and any reference in these footnotes to shares subject to stock options held by the person in question refers only to such shares) and (ii) any shares issuable upon conversion of Convertible Notes held by such person. (2) Number of shares deemed outstanding for purposes of calculating these percentages is comprised of the 119,541,442 shares outstanding as of April 30, 1996, plus any shares subject to stock options held by the person in question and any shares issuable upon conversion of Convertible Notes held by the person in question. (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 75,000 shares subject to a stock option held by Mr. Andersen and 5,062 shares issuable upon conversion of Convertible Notes held by Mr. Andersen. (5) Includes 15,979,356 shares held by Idanta Partners Ltd., of which Mr. Dunn is Managing General Partner, and 683,526 shares held by a family trust, of which Mr. Dunn is trustee. (6) Includes 993,750 shares subject to stock options held by Mr. Edwards. Also includes 6,000 shares held by Mr. Edwards' wife, as to which shares Mr. Edwards disclaims beneficial ownership. (7) Includes 15,000 shares held by Mr. Kucha as custodian for his children, as to which shares Mr. Kucha disclaims beneficial ownership. Also includes 516 shares held as co-trustee with his wife, as to which shares Mr. Kucha has shared voting and investment power, and 60,000 shares subject to stock options held by Mr. Kucha. (8) Includes 75,000 shares subject to a stock option held by Mr. Myers. (9) Includes 112,500 shares subject to a stock option held by Mr. Nolan. 42 (10) Includes 187,500 shares subject to a stock option held by Mr. Sheehan. Also includes 132,000 shares held by Mr. Sheehan's wife, as to which shares Mr. Sheehan disclaims beneficial ownership. (11) Includes 15,979,356 shares of Common Stock held by Idanta Partners Ltd. Also includes an aggregate of 3,822,930 shares subject to stock options and 5,062 shares issuable upon conversion of Convertible Notes. 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 April 30, 1996, there were outstanding 119,541,442 shares of Common Stock held by 3,344 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 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-thirtieths of one preferred stock purchase right (a "Right") for each outstanding share of Common Stock. Under certain 43 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 three-thousandths of a share of Series C Preferred Stock purchasable upon exercise of the four-thirtieths 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 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 44 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 Underwriters named below, through their Representatives, Hambrecht & Quist LLC and J.P. Morgan Securities Inc., have severally agreed to purchase from the Company the following respective numbers of shares of Common Stock:
NUMBER OF NAME SHARES - ------------------------------------------------------------------------------------------------------ ---------- Hambrecht & Quist LLC................................................................................. J.P. Morgan Securities Inc............................................................................ ---------- Total 5,000,000 ---------- ----------
The Underwriting Agreement provides that the obligations of the Underwriters 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 Underwriters' obligation is such that they are committed to purchase all shares of Common Stock offered hereby if any of such shares are purchased. The Underwriters propose to offer the shares of Common Stock 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 share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the offering contemplated hereby, the offering price and other selling terms may be changed by the Underwriters. The Company has granted to the Underwriters an option, exercisable no later than 30 days after the date of this Prospectus, to purchase up to 750,000 additional shares of Common Stock at the public offering price, less the underwriting discount, set forth on the cover page of this Prospectus. To the extent that the Underwriters exercise this option, each of the Underwriters will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of Common Stock to be purchased by it shown in the above table bears to the total number of shares of Common Stock offered hereby. The Company will be obligated, pursuant to the option, to sell such shares to the Underwriters to the extent the option is exercised. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of shares of Common Stock offered hereby. The offering of the shares is made for delivery when, as and if accepted by the Underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The Underwriters reserve the right to reject an order for the purchase of shares in whole or in part. The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, and to contribute to payments the Underwriters may be required to make in respect thereof. 45 The executive officers and directors of the Company have agreed, with certain limited exceptions, that they will not, without the prior written consent of Hambrecht & Quist LLC, 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 Hambrecht & Quist LLC, 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 or upon conversion of the Convertible Notes). LEGAL MATTERS The validity of the shares of Common Stock offered hereby will be passed upon for the Company by Hale and Dorr, Boston, Massachusetts. Partners of Hale and Dorr beneficially own 187,500 shares of Common Stock of the Company. Certain legal matters will be passed upon for the Underwriters 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 National Market. Reports and other information concerning the Company may be inspected at the office of The Nasdaq Stock Market, Inc., 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 Common Stock offered hereby. 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 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. 46 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, 1995; (2) the Company's Current Report on Form 8-K dated February 1, 1996; (3) the Company's Form 10-C filed on February 6, 1996; and (4) the Company's Registration Statement on Form 8-A registering the Common Stock under Section 12(g) of the Exchange Act, as amended. 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 May 13, 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 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). 47 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants.............................................. F-2 Consolidated Balance Sheets as of December 31, 1994 and 1995 and March 31, 1996....... F-3 Consolidated Statements of Operations for the years ended December 31, 1993, 1994 and 1995 and the three months ended April 2, 1995 and March 31, 1996..................... F-5 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1993, 1994 and 1995 and the three months ended March 31, 1996.............................. F-6 Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the three months ended April 2, 1995 and March 31, 1996..................... F-8 Notes to Consolidated Financial Statements............................................ F-9
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 (except with respect to the matters discussed in Note 13, as to which the date is April 23, 1996) F-2 IOMEGA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ASSETS
DECEMBER 31, --------------------- MARCH 31, 1994 1995 1996 --------- --------- --------- (UNAUDITED) Current assets: Cash and cash equivalents............................... $ 16,861 $ 1,023 $ 701 Temporary investments................................... 2,932 -- -- Trade receivables, less allowance for doubtful accounts of $1,627, $1,861 and $4,051, respectively............. 18,892 105,955 144,746 Inventories............................................. 17,318 98,703 105,631 Deferred tax assets..................................... 477 2,778 9,929 Other current assets.................................... 4,077 3,673 8,537 --------- --------- --------- Total current assets................................ 60,557 212,132 269,544 --------- --------- --------- Property and equipment, at cost: Machinery and equipment................................. 45,585 67,812 95,729 Leasehold improvements.................................. 6,034 6,475 7,625 Furniture and fixtures.................................. 4,737 4,805 5,364 Equipment and construction in process................... 2,837 24,057 12,883 --------- --------- --------- 59,193 103,149 121,601 Less: Accumulated depreciation and amortization......... (43,917) (49,779) (52,961) --------- --------- --------- 15,276 53,370 68,640 --------- --------- --------- Deferred tax assets....................................... -- 520 248 --------- --------- --------- Other assets.............................................. -- 205 2,934 --------- --------- --------- $ 75,833 $ 266,227 $341,366 --------- --------- --------- --------- --------- ---------
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, -------------------- MARCH 31, 1994 1995 1996 -------- --------- --------- (UNAUDITED) Current liabilities: Current portion of notes payable......................... $ -- $ 47,640 $ 30,051 Accounts payable......................................... 7,228 94,782 116,643 Bank overdraft........................................... -- 11,833 6,582 Accrued payroll and bonus................................ 3,047 6,777 3,559 Deferred revenue......................................... 1,947 3,207 6,613 Accrued vacation......................................... 1,954 2,939 3,060 Accrued warranty......................................... 3,943 4,652 7,014 Other accrued liabilities................................ 7,620 21,756 27,922 Income taxes payable..................................... -- 5,141 11,364 Current portion of capitalized lease obligations......... -- 782 2,339 -------- --------- --------- Total current liabilities............................ 25,739 199,509 215,147 -------- --------- --------- Capitalized lease obligations, net of current portion...... -- 1,481 4,324 -------- --------- --------- Notes payable, net of current portion...................... -- 2,551 2,300 -------- --------- --------- Commitments and contingencies (Note 4) Convertible subordinated notes, 6 3/4%, due 2001........... -- -- 46,000 -------- --------- --------- Redeemable Series A Convertible Preferred Stock; outstanding 258,816 shares in 1994........................ 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 111,118,494, 117,638,670 and 119,046,218 shares, respectively.................................... 3,704 3,921 3,968 Notes receivable from stockholders....................... (597) -- -- Additional paid-in capital............................... 45,171 49,512 51,175 Deferred compensation.................................... -- -- (922) Retained earnings........................................ 785 9,253 19,374 -------- --------- --------- Total stockholders' equity........................... 49,063 62,686 73,595 -------- --------- --------- $ 75,833 $ 266,227 $341,366 -------- --------- --------- -------- --------- ---------
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)
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, --------------------- --------------------------------- APRIL 2, MARCH 31, 1993 1994 1995 1995 1996 --------- --------- --------- --------- --------- (UNAUDITED) Sales.......................................... $ 147,123 $ 141,380 $ 326,225 $ 40,112 $ 221,988 Cost of sales.................................. 92,585 92,453 235,838 28,395 162,088 --------- --------- --------- --------- --------- Gross margin................................... 54,538 48,927 90,387 11,717 59,900 --------- --------- --------- --------- --------- Operating expenses: Selling, general and administrative.......... 38,862 36,862 57,189 9,349 33,156 Research and development..................... 18,972 15,438 19,576 4,126 6,991 Restructuring costs (reversal)............... 14,131 (2,491) -- -- -- --------- --------- --------- --------- --------- Total operating expenses................. 71,965 49,809 76,765 13,475 40,147 --------- --------- --------- --------- --------- Operating income (loss)........................ (17,427) (882) 13,622 (1,758) 19,753 Foreign currency gain (loss)................. 328 353 (1,243) (1,044) (93) Interest income.............................. 620 871 537 241 13 Interest expense............................. (70) (15) (1,652) (6) (2,257) Other income (expense)....................... (107) (301) 375 789 (824) --------- --------- --------- --------- --------- Income (loss) before income taxes and cumulative effect of accounting change........ (16,656) 26 11,639 (1,778) 16,592 Benefit (provision) for income taxes........... (206) (1,908) (3,136) 280 (6,471) --------- --------- --------- --------- --------- Net income (loss) before cumulative effect of accounting change............................. (16,862) (1,882) 8,503 (1,498) 10,121 Cumulative effect of accounting change......... 2,337 -- -- -- -- --------- --------- --------- --------- --------- Net income (loss)............................ $ (14,525) $ (1,882) $ 8,503 $ (1,498) $ 10,121 --------- --------- --------- --------- --------- Net income (loss) per common share: Net income (loss) before cumulative effect of accounting change........................... $ (0.15) $ (0.02) $ 0.07 $ (0.01) $ 0.08 Cumulative effect of accounting change....... 0.02 -- -- -- -- --------- --------- --------- --------- --------- Net income (loss)............................ $ (0.13) $ (0.02) $ 0.07 $ (0.01) $ 0.08 --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Weighted average common shares outstanding..... 108,636 110,838 120,360 112,602 128,838
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 DEFERRED RETAINED SHARES AMOUNT STOCKHOLDERS CAPITAL COMPENSATION EARNINGS ---------- ------ ------------ ---------- ------------ ----------- Balances at December 31, 1992................ 107,265,312 $3,575 $ -- $55,959 $ -- $ 17,347 Sale of shares to employees at an average price of $0.35 per share pursuant to exercise of stock options................... 1,141,776 38 -- 354 -- -- Sale of shares to officer at an average price of $0.34 per share for a note receivable.... 1,764,000 59 (597) 538 -- -- Accretion of Series A Convertible Preferred Stock redemption premium.................... -- -- -- (51) -- -- Dividends on Series A Convertible Preferred Stock....................................... -- -- -- -- -- (78) Tax benefit from early dispositions of employee stock.............................. -- -- -- 214 -- -- Recognition of compensation from Employee Stock Purchase Plan......................... -- -- -- 84 -- -- Issuance of 69,306 -- -- -- (30) -- -- Net loss..................................... -- -- -- -- -- (14,525) ---------- ------ ------ ---------- ------ ----------- Balances at December 31, 1993................ 110,171,088 3,672 (597) 57,068 -- 2,744 Sale of shares to employees at an average price of $0.28 per share pursuant to excercise of stock options.................. 947,406 32 -- 224 -- -- Purchase of 780,000 shares at an average cost of $0.39 per share.......................... -- -- -- -- -- -- Accretion of Series A Convertible Preferred Stock redemption premium.................... -- -- -- (55) -- -- Dividends on Series A Convertible Preferred Stock....................................... -- -- -- -- -- (77) Tax benefit from early dispositions of employee stock.............................. -- -- -- 28 -- -- Recognition of compensation from Employee Stock Purchase Plan......................... -- -- -- 8 -- -- Issuance of 30,342 treasury shares under Employee Stock Purchase Plan................ -- -- -- (17) -- -- Five-for-four Common Stock split effected in the form of a 25% stock dividend............ -- -- -- (12,085) -- -- Net loss..................................... -- -- -- -- -- (1,882) ---------- ------ ------ ---------- ------ ----------- Balances at December 31, 1994................ 111,118,494 $3,704 $ (597) $45,171 $ -- $ 785 TREASURY STOCK TOTAL --------- -------- Balances at December 31, 1992................ $ (11,857) $ 65,024 Sale of shares to employees at an average price of $0.35 per share pursuant to exercise of stock options................... -- 392 Sale of shares to officer at an average price of $0.34 per share for a note receivable.... -- -- Accretion of Series A Convertible Preferred Stock redemption premium.................... -- (51) Dividends on Series A Convertible Preferred Stock....................................... -- (78) Tax benefit from early dispositions of employee stock.............................. -- 214 Recognition of compensation from Employee Stock Purchase Plan......................... -- 84 Issuance of 69,306 60 30 Net loss..................................... -- (14,525) --------- -------- Balances at December 31, 1993................ (11,797) 51,090 Sale of shares to employees at an average price of $0.28 per share pursuant to excercise of stock options.................. -- 256 Purchase of 780,000 shares at an average cost of $0.39 per share.......................... (305) (305) Accretion of Series A Convertible Preferred Stock redemption premium.................... -- (55) Dividends on Series A Convertible Preferred Stock....................................... -- (77) Tax benefit from early dispositions of employee stock.............................. -- 28 Recognition of compensation from Employee Stock Purchase Plan......................... -- 8 Issuance of 30,342 treasury shares under Employee Stock Purchase Plan................ 17 -- Five-for-four Common Stock split effected in the form of a 25% stock dividend............ 12,085 -- Net loss..................................... -- (1,882) --------- -------- Balances at December 31, 1994................ $ -- $ 49,063
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 COMMON STOCK RECEIVABLE ADDITIONAL ------------------ FROM PAID-IN DEFERRED RETAINED SHARES AMOUNT STOCKHOLDERS CAPITAL COMPENSATION EARNINGS ---------- ------ ------------ ---------- ------------ ----------- Sale of shares to employees at an average price of $0.42 per share pursuant to excercise of stock options.................. 4,859,502 162 -- 1,864 -- -- Sale of shares to an officer at an average price of $0.29 per share for a note receivable.................................. 993,750 33 (283) 250 -- -- Accretion of Series A Convertible Preferred Stock redemption premium.................... -- -- -- (14) -- -- Dividends on Series A Convertible Preferred Stock....................................... -- -- -- -- -- (35) Tax benefit from early dispositions of employee stock.............................. -- -- -- 860 -- -- Recognition of compensation from Employee Stock Purchase Plan......................... -- -- -- 185 -- -- Conversion of Series A Convertible Preferred Stock to Common Stock....................... 637,200 22 -- 1,183 -- -- Issuance of Common Shares under Employee Stock Purchase Plan......................... 29,724 -- -- 13 -- -- Collection of notes receivable from stockholders................................ -- -- 880 -- -- -- Net income................................... -- -- -- -- -- 8,503 ---------- ------ ------ ---------- ------ ----------- Balances at December 31, 1995................ 117,638,670 3,921 -- 49,512 -- 9,253 (unaudited) Sale of shares to employees at an average price of $0.42 per share pursuant to exercise of stock options................... 1,407,548 47 -- 548 -- -- Deferred compensation related to Executive Compensation Agreement...................... -- -- -- 1,005 (1,005) -- Amortization of deferred compensation........ -- -- -- -- 83 -- Recognition of compensation from Employee Stock Purchase Plan......................... -- -- -- 24 -- -- Tax benefit from early dispositions of employee stock.............................. -- -- -- 86 -- -- Net income................................... -- -- -- -- -- 10,121 ---------- ------ ------ ---------- ------ ----------- Balances at March 31, 1996 (unaudited)....... 119,046,218 $3,968 $ -- $51,175 $ (922) $ 19,374 ---------- ------ ------ ---------- ------ ----------- ---------- ------ ------ ---------- ------ ----------- TREASURY STOCK TOTAL --------- -------- Sale of shares to employees at an average price of $0.42 per share pursuant to excercise of stock options.................. -- 2,026 Sale of shares to an officer at an average price of $0.29 per share for a note receivable.................................. -- -- Accretion of Series A Convertible Preferred Stock redemption premium.................... -- (14) Dividends on Series A Convertible Preferred Stock....................................... -- (35) Tax benefit from early dispositions of employee stock.............................. -- 860 Recognition of compensation from Employee Stock Purchase Plan......................... -- 185 Conversion of Series A Convertible Preferred Stock to Common Stock....................... -- 1,205 Issuance of Common Shares under Employee Stock Purchase Plan......................... -- 13 Collection of notes receivable from stockholders................................ -- 880 Net income................................... -- 8,503 --------- -------- Balances at December 31, 1995................ -- 62,686 (unaudited) Sale of shares to employees at an average price of $0.42 per share pursuant to exercise of stock options................... -- 595 Deferred compensation related to Executive Compensation Agreement...................... -- -- Amortization of deferred compensation........ -- 83 Recognition of compensation from Employee Stock Purchase Plan......................... -- 24 Tax benefit from early dispositions of employee stock.............................. -- 86 Net income................................... -- 10,121 --------- -------- Balances at March 31, 1996 (unaudited)....... $ -- $ 73,595 --------- -------- --------- --------
The accompanying notes to consolidated financial statements are an integral part of these statements. F-7 IOMEGA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED YEARS ENDED DECEMBER 31, --------------------- -------------------------------- APRIL 2, MARCH 31, 1993 1994 1995 1995 1996 --------- -------- --------- --------- --------- (UNAUDITED) Increase (Decrease) in Cash and Cash Equivalents Cash Flows from Operating Activities: Net Income (Loss)........................... $ (14,525) $ (1,882) $ 8,503 $ (1,498) $ 10,121 Non-Cash Revenue and Expense Adjustments: Depreciation and amortization expense... 8,472 6,853 8,943 1,843 4,179 Cumulative effect of accounting change................................ (2,337) -- -- -- -- Deferred income tax provision (benefit)............................. -- 4,508 (2,821) (367) (6,879) Change in restructuring reserves........ 5,554 1,590 -- -- -- Other................................... (751) (314) 926 432 107 Changes in Assets and Liabilities: Trade receivables (net)................. (6,203) 2,793 (87,063) (3,485) (38,791) Inventories............................. 3,786 (3,747) (81,385) (2,796) (6,928) Income taxes payable.................... -- -- 6,823 (24) 6,223 Other current assets.................... (694) (1,135) (1,278) (1,316) (4,864) Accounts payable and bank overdraft..... 1,696 161 87,554 5,744 16,610 Accrued liabilities..................... 6,333 (3,516) 32,808 804 8,837 --------- -------- --------- --------- --------- Net cash provided from (used in) operating activities.............. 1,331 5,311 (26,990) (663) (11,385) --------- -------- --------- --------- --------- Cash Flows from Investing Activities: Purchase of property and equipment.......... (6,567) (7,083) (45,232) (4,302) (14,608) Purchase of temporary investments........... -- (8,825) (2,090) (2,090) -- Sale of temporary investments............... -- 5,893 5,022 990 -- 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) -- 108 --------- -------- --------- --------- --------- Net cash used in investing activities........................ (2,763) (7,233) (42,505) (5,402) (14,500) --------- -------- --------- --------- --------- Cash Flows from Financing Activities: Proceeds from sales of Common Stock......... 402 256 2,028 217 595 Proceeds from issuance of notes payable..... -- -- 259,667 -- 365,096 Payments on notes payable and capitalized lease obligations......................... (11) -- (209,748) -- (383,377) Tax benefit from early dispositions of employee stock............................ 214 28 860 53 86 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.............................. -- -- 880 597 -- Net proceeds from issuance of convertible notes..................................... -- -- -- -- 43,163 --------- -------- --------- --------- --------- Net cash provided from (used in) financing activities.............. 545 (21) 53,657 867 25,563 --------- -------- --------- --------- --------- Net Change in Cash and Cash Equivalents......... (887) (1,943) (15,838) (5,198) (322) Cash and Cash Equivalents at Beginning of the Period.......................................... 19,691 18,804 16,861 16,861 1,023 --------- -------- --------- --------- --------- Cash and Cash Equivalents at End of the Period.......................................... $ 18,804 $ 16,861 $ 1,023 $ 11,663 $ 701 --------- -------- --------- --------- --------- --------- -------- --------- --------- --------- Supplemental Schedule of Non-Cash Investing and Financing Activities: Sale of Common Stock for a Note............. $ 597 $ -- $ 283 $ 283 $ -- --------- -------- --------- --------- --------- --------- -------- --------- --------- --------- Conversion of Series A Preferred Stock to Common Stock.............................. $ -- $ -- $ 1,205 $ -- $ -- --------- -------- --------- --------- --------- --------- -------- --------- --------- --------- Machinery and equipment financed under capitalized lease obligations............. $ -- $ -- $ 2,535 $ -- $ 4,841 --------- -------- --------- --------- --------- --------- -------- --------- --------- ---------
The accompanying notes to consolidated financial statements are an integral part of these statements. F-8 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (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 specialty 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 and from $40.1 million in the first quarter of 1995 to $222.0 million in the first quarter of 1996. 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 stock offering, together with current sources of financing available to the Company, will be sufficient to fund the Company's operations into 1997. Thereafter, the Company anticipates that it may 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. F-9 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (1) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 normal customers' inventory requirements totaled $1,494,000, $1,947,000, $3,207,000 and $6,613,000 at December 31, 1993, 1994, 1995, and March 31, 1996, 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, $1,633,000 and $3,487,000 at December 31, 1994, 1995, and March 31, 1996, 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 ------- ------- MARCH 31, 1996 ------- (UNAUDITED) Raw materials........................................... $ 7,524 $89,030 $88,564 Work in process......................................... 4,839 5,680 8,299 Finished goods.......................................... 4,955 3,993 8,768 ------- ------- ------- $17,318 $98,703 $105,631 ------- ------- ------- ------- ------- -------
PROPERTY AND EQUIPMENT 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. F-10 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (1) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. For the three month period ended March 31, 1996, advertising expenses totaled approximately $10,539,000. 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.) 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 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 Notes 2 and 13. 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. F-11 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (1) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of the convertible subordinated notes was approximately $63.8 million at March 31, 1996. The book value of all other financial instruments approximates fair value. The estimated fair values have been determined using appropriate market information and valuation methodologies. UNAUDITED INFORMATION The accompanying financial data as of March 31, 1996 and for the three month periods ended April 2, 1995 and March 31, 1996 is unaudited and has been prepared on substantially the same basis as the annual financial statements. In the opinion of management, the unaudited information contains all adjustments (consisting only of normal recurring accruals) necessary to present fairly the financial position and results of operations as of such date and for such periods. 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 18,102,000 were treasury shares and the remainder were 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, which was effected in the form of a 200% Common Stock dividend paid on 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 --------- -------- -------- --------- -------- --------
F-12 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (3) INCOME TAXES (CONTINUED) 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 Income 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. Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases 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 ------------ ------------ ------------ ------------
F-13 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (3) INCOME TAXES (CONTINUED) 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. At March 31, 1996, the valuation allowance was reduced to $6.2 million which represents the 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. 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, $71,000 in 1995 and $4,772,000 for the three month period ended March 31, 1996. The Company received cash refunds of $2,247,000 in 1994 and $1,592,000 in 1995. Income tax expense for the three months ended March 31, 1996 has been provided at an effective rate of 39% compared to an effective rate of 27% for 1995. This tax rate is based on the Company's projected domestic and foreign pre-tax income for 1996. The increase in the effective tax rate is due to the Company's full utilization of available tax credits and foreign net operating loss carryforwards in 1996, and because pre-tax income of certain foreign operations is subject to foreign income taxes at a rate in excess of the U.S. statutory rate. The higher tax on foreign operations is expected to offset the benefits of the tax credits and net operating loss carryforwards. For income tax purposes, the Company had approximately $5,056,000 in foreign net operating loss carryforwards and $1,273,000 of tax credit carryforwards at December 31, 1995. The tax credit carryforwards will begin expiring in 2008. F-14 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (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 and for the three-month period ended March 31, 1996 was approximately $2,336,000, $1,989,000, $1,981,000 and $775,000, respectively. 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 were paid in March 1996. 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 120,000 shares of stock, subject to a three year vesting, contingent upon the F-15 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (4) COMMITMENTS AND CONTINGENCIES (CONTINUED) 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 120,000 shares of stock. The shares will be issued at a cost equal to par value. Deferred compensation related to these shares has been reflected in the accompanying consolidated financial statements. 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 accrued approximately $600,000 for the 1995 profit sharing plan, which was paid in March 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. The outstanding forward exchange sale and (purchase) contracts at December 31, 1995 and March 31, 1996 are as follows. The contracts mature in April through June 1996.
AMOUNT CONTRACTED FORWARD RATE --------------------------------- -------------------------------- DECEMBER 31, DECEMBER 31, 1995 CURRENCY 1995 --------------- MARCH 31, 1996 -------- --------------- MARCH 31, 1996 --------------- --------------- (UNAUDITED) (UNAUDITED) German Deutsche Mark............... -- (6,300,000) DM -- 1.4688 Great Britain Pound -- 4,900,000 GBP -- 1.5255 French Franc........ 1,939,000 15,500,000 FRF 5.169 5.017 Spanish Peseta...... 64,524,000 337,000,000 ESP 134.45 124.98 Italian Lira........ 363,000,000 5,700,000,000 ITL 1692.0 1584.8 Japanese Yen........ (1,109,678,923) (1,298,372,000) YEN 100.60 - 101.00 102.45 - 106.68
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 and March 31, 1996, 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, inventory, equipment, general intangibles and certain other assets. 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%. F-16 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (5) NOTES PAYABLE (CONTINUED) The Company segregated $25 million of the revolving line into a 60 day LIBOR loan to achieve a lower interest rate at December 31, 1995. Effective May 13, 1996, the Company renewed and amended its loan agreement with Wells Fargo. The amended agreement permits revolving loans, term loans and letters of credit up to an aggregate outstanding principal amount equal to the lesser of $100 million or 80% of eligible accounts receivable. Amounts outstanding are collateralized by accounts receivable, inventory, equipment, general intangibles and certain other assets. The new revolving line bears interest at the bank's prime rate plus .5% and the term loans bear interest at the bank's prime rate plus .75%. This agreement expires June 30, 1997. Under this agreement the Company may also secure financing of equipment purchases from third parties up to a maximum of $75 million, less term loans outstanding to Wells Fargo. Among other restrictions, covenants within the agreement require the Company to maintain minimum levels of working capital and net worth. 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. Total availability under the Wells Fargo agreement at March 31, 1996 was $56.4 million, of which $5.1 million (exclusive of bank overdrafts of $6.6 million) had been drawn. (See Note 1.) The weighted average outstanding balance was $23.3 million during 1995 and $41.7 million during the three month period ended March 31, 1996. The maximum amount outstanding during 1995 was $38.2 million. The weighted average interest rate was 10.6% for the year ended December 31, 1995. The maximum amount outstanding during 1996 was $58.5 million. The weighted average interest rate was 9.2% for the three month period ended March 31, 1996. 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 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 depending on the currency and ranges from 7.75% to 15.0% at December 31, 1995 and at March 31, 1996. 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 and 14% for the three month period ended March 31, 1996. During 1995, the Company received a total of $17.8 million in proceeds under the arrangement. During the three month period ended March 31, 1996, the Company received $63.5 million in proceeds under the agreement. At December 31, 1995, $9.8 million was outstanding and at March 31, 1996, $23.9 million was outstanding and is included in notes payable in the accompanying consolidated balance sheets. F-17 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (5) NOTES PAYABLE (CONTINUED) The following table summarizes the notes payable outstanding at December 31, 1995 and March 31, 1996 (in thousands):
DECEMBER 31, 1995 ----------------- MARCH 31, 1996 -------------- (UNAUDITED) LIBOR loan (8.875% Fixed interest rate) $ 25,000 $ -- Revolving credit line (interest rate 9.5% and 9.25% at 12/31/95 and 3/31/96)..... 8,241 1,825 Term loan (interest rate 9.75% and 9.50% at 12/31/95 and 3/31/96).... 3,612 3,284 Other term notes............................................ 3,537 3,301 European agreement.......................................... 9,801 23,941 ------- ------- 50,191 32,351 Less: Current portion....................................... (47,640) (30,051) ------- ------- $ 2,551 $ 2,300 ------- ------- ------- -------
Maturities of notes payable as of December 31, 1995 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, and $1,524,000 during the first quarter of 1996, 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 March 31, 1996, 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, 637,200 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) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (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 $750 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 750 votes per share. (7) PREFERRED STOCK PURCHASE RIGHTS In July 1989, the Company adopted a Shareholder Rights Plan and declared a dividend of four-thirtieths 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 41,250,000 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 and March 31, 1996, the Company had reserved an aggregate of 22,269,180, and 20,861,812 shares, respectively, 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) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (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 and the three months ended March 31, 1996 at their respective exercise price ranges. All options and option prices have been restated for the stock splits (see Notes 2 and 13).
NUMBER OF OPTION PRICE OPTIONS PER SHARE ---------- --------------- Options outstanding at December 31, 1992... 17,868,306 $0.05 to $1.46 Granted.................................... 610,068 $0.35 to $0.95 Exercised.................................. (3,632,220) $0.05 to $0.50 Forfeited.................................. (747,816) $0.14 to $1.45 ---------- Options outstanding at December 31, 1993... 14,098,338 $0.14 to $1.46 Granted.................................... 4,409,250 $0.30 to $0.53 Exercised.................................. (948,282) $0.14 to $0.40 Forfeited.................................. (2,836,782) $0.21 to $1.46 ---------- Options outstanding at December 31, 1994... 14,722,524 $0.14 to $1.46 Granted.................................... 2,001,600 $0.57 to $7.11 Exercised.................................. (4,946,106) $0.14 to $1.46 Forfeited.................................. (114,064) $0.21 to $1.05 ---------- Options outstanding at December 31, 1995... 11,663,954 $0.14 to $7.11 (unaudited) Granted.................................... 2,521,000 $6.29 to $11.03 Exercised.................................. (1,407,368) $0.14 to $1.22 Forfeited.................................. (28,980) $0.35 to $0.82 ---------- Options outstanding at March 31, 1996 (unaudited)............................... 12,748,606 $0.14 to $11.03 ---------- ----------
Options to purchase 11,321,700, 9,772,122, 9,508,188 and 8,680,396 shares were exercisable at December 31, 1993, 1994, 1995 and March 31, 1996, respectively. Options to purchase 10,605,226 and 8,113,206 shares were reserved for future grant at December 31, 1995 and March 31, 1996, respectively. DIRECTOR STOCK OPTION PLANS The 1987 Director Stock Option Plan (the "Director Plan") covered 1,500,000 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 187,500 shares of Common Stock. The exercise price per share of the option was 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 1,200,000 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 150,000 shares of Common Stock. F-20 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (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, (there were no options granted, exercised or forfeited during the three month period ended March 31, 1996) at their respective exercise price ranges. All options and option prices have been restated for the stock splits (see Notes 2 and 13).
NUMBER OF OPTION PRICE OPTIONS PER SHARE --------- -------------- Options outstanding at December 31, 1992.... 825,000 $0.29 to $0.46 Granted..................................... 187,500 $0.59 Exercised................................... -- Forfeited................................... -- --------- Options outstanding at December 31, 1993.... 1,012,500 $0.29 to $0.59 Granted..................................... 375,000 $0.27 Exercised................................... (187,500) $0.29 Forfeited................................... -- --------- Options outstanding at December 31, 1994.... 1,200,000 $0.27 to $0.59 Granted..................................... -- Exercised................................... (450,000) $0.37 to $0.44 Forfeited................................... -- --------- Options outstanding at December 31, 1995.... 750,000 $0.27 to $0.59 --------- ---------
Options to purchase 562,500, 600,000, 600,000 and 600,000 shares were exercisable at December 31, 1993, 1994 and 1995 and March 31, 1996, respectively. Options to purchase 1,200,000 shares were reserved for future grant at December 31, 1995 and March 31, 1996. 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 187,500 shares of Common Stock. The exercise price of these options was $0.20 per share in the case of four options, and $0.24 per share in the case of the other option. Each option is exercisable in increments of 37,500 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 487,500 shares were exercised at $0.20 and $0.24 per share. At December 31, 1994, options for the purchase of 487,500 shares were outstanding and exercisable at $0.20 and $0.24 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 9,000,000 shares were approved for the three-year plan with 1,500,000 shares plus the premium of 1,500,000 shares approved for each F-21 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (9) STOCK PURCHASE PLAN (CONTINUED) 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 261,846 shares have been purchased pursuant to this plan and a total of 82,740 of premium shares have been issued under this plan. (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, $319,000 and $671,000 to the IRIS Plan for the years ended December 31, 1993, 1994 and 1995, respectively. (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 and the three months ended March 31, 1996 were $7,534,000, $6,133,000, $18,160,000 and $21,454,000, 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 and the three months ended March 31, 1996 were approximately $23,868,000, $29,903,000, $49,526,000, and $39,460,000 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) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (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 ---------- ---------- ------------ ------------ ---------- ---------- ------------ ------------
F-23 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (11) OPERATIONS BY GEOGRAPHIC REGION (CONTINUED) FOR THE PERIOD ENDED MARCH 31, 1996 (UNAUDITED):
DOMESTIC EUROPEAN INTERCOMPANY OPERATIONS OPERATIONS TRANSACTIONS CONSOLIDATED ---------- ---------- ------------ ------------ (IN THOUSANDS) Net Sales: Unaffiliated Customers........ $ 159,520 $ 62,468 $ -- $221,988 Affiliates........ 54,585 -- (54,585) -- Cost of Sales....... (160,858) (55,693) 54,463 (162,088) ---------- ---------- ------------ ------------ Gross Margin........ 53,247 6,775 (122) 59,900 ---------- ---------- ------------ ------------ Operating Expenses........... 34,889 5,258 -- 40,147 ---------- ---------- ------------ ------------ Net Income.......... $ 7,911 $ 2,332 $ (122) $ 10,121 ---------- ---------- ------------ ------------ ---------- ---------- ------------ ------------ Identifiable Assets............. $ 292,478 $ 59,019 $(10,131) $341,366 ---------- ---------- ------------ ------------ ---------- ---------- ------------ ------------ Capital Expenditures....... $ 13,956 $ 652 $ -- $ 14,608 ---------- ---------- ------------ ------------ ---------- ---------- ------------ ------------
(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. For the three month period ended March 31, 1996, sales to Ingram Micro D, Inc. accounted for 11% of the Company's 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 outstanding accounts receivable balances totaled $47.1 million or 43% of gross accounts receivable. At March 31, 1996, the customers with the ten highest outstanding accounts receivable balance totalled $57.0 million or 37% 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. At March 31, 1996, outstanding accounts receivable balance from one customer was $20.7 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, $1,130,000 and $634,000 for the years ended December 31, 1993, 1994, 1995 and the three months ended March 31, 1996, 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 stockholders in the accompanying consolidated balance F-24 IOMEGA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS) (12) OTHER MATTERS (CONTINUED) 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) EVENTS SUBSEQUENT TO DATE OF THE AUDITORS' REPORT CONVERTIBLE SUBORDINATED NOTES In March 1996, the Company issued $46,000,000 in convertible subordinated notes. The net proceeds from the issuance of notes totaled $43.2 million and were used to pay down other debts and for operating requirements. The notes carry an interest rate of 6.75% and interest payments are payable semiannually on March 15 and September 15 in each year commencing on September 15, 1996. The notes mature on March 15, 2001. The notes are unsecured and subordinated to all existing and future senior indebtedness of the Company and are effectively subordinated to all existing and future indebtedness and other liabilities of the Company's subsidiaries. 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 $9.875 per share (equivalent to a conversion rate of approximately 101.26 shares per $1,000 principal amount of notes), subject to adjustment in certain events. The notes are redeemable at any time on or after March 31, 1999, in whole or in part, at the option of the Company, at declining redemption prices, 102.7% for 1999 and 101.35% for 2000, together with accrued interest, if any, to the redemption date. In the event any repurchase event, as defined in the indenture agreement, 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. STOCK SPLIT On April 23, 1996, the Company's Board of Directors declared a 2-for-1 stock split which will be effected in the form of a 100% stock dividend. The dividend will be paid on or about May 20, 1996 to stockholders of record on May 6, 1996. This stock split has been retroactively reflected in the accompanying consolidated financial statements. F-25 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 UNDERWRITERS. 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................................... 5 The Company.................................... 12 Use of Proceeds................................ 12 Price Range of Common Stock and Dividend Policy........................................ 13 Capitalization................................. 14 Selected Consolidated Financial Data........... 15 Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 16 Business....................................... 25 Management..................................... 39 Principal Stockholders......................... 42 Description of Capital Stock................... 43 Underwriting................................... 45 Legal Matters.................................. 46 Experts........................................ 46 Available Information.......................... 46 Incorporation of Certain Documents by Reference..................................... 47 Index to Consolidated Financial Statements..... F-1
5,000,000 SHARES [LOGO] COMMON STOCK -------------- PROSPECTUS -------------- HAMBRECHT & QUIST J.P. MORGAN & CO. , 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.............................................................. $ 60,475 NASD Filing Fee................................................................... 18,038 Nasdaq National Market Listing Fee................................................ 17,500 Blue Sky Fees and Expenses........................................................ 15,000 Accounting Fees and Expenses...................................................... 50,000 Legal Fees and Expenses........................................................... 150,000 Printing, Engraving and Mailing Expenses.......................................... 100,000 Miscellaneous..................................................................... 38,987 --------- Total............................................................................. $ 450,000 --------- ---------
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 Underwriters are 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(1) Certificate of Incorporation 4.2(2) By-laws 4.3(3) Rights Agreement between the Company and The First National Bank of Boston, as Rights Agent, dated July 28, 1989 5* Opinion of Hale and Dorr 23.1* Consent of Hale and Dorr (included in Exhibit 5) 23.2 Consent of Arthur Andersen LLP 24 Powers of Attorney 27 Financial Data Schedule
- ------------------------ * To be filed by amendment. (1) Incorporated by reference from the Company's Registration Statement on Form S-3 (33-64995). (2) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended July 4, 1993. (3) 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 Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Roy and State of Utah on the 13th day of May, 1996. IOMEGA CORPORATION By: /s/ LEONARD C. PURKIS -------------------------------------- Leonard C. Purkis Senior Vice President, Finance and Chief Financial Officer SIGNATURES AND POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Leonard C. Purkis, Patrick J. Rondeau and Jonathan Wolfman, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution in each of them, for him and in his name, place and stead, and in any and all capacities, to sign (i) any and all amendments (including post-effective amendments) to this Registration Statement on Form S-3 of Iomega Corporation and (ii) any and all registration statements (including any amendments thereto) relating to the offering covered hereby which may be filed with the Securities and Exchange Commission pursuant to Rule 462(b) under the Securities Act of 1933, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities indicated below on the 13th day of May, 1996.
SIGNATURE TITLE - ------------------------------------------------------ --------------------------------------------------------- /s/ KIM B. EDWARDS ------------------------------------------- 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) /s/ DAVID J. DUNN ------------------------------------------- Chairman of the Board of Directors David J. Dunn ------------------------------------------- Director Willem H.J. Andersen
II-3
SIGNATURE TITLE - ------------------------------------------------------ --------------------------------------------------------- /s/ ROBERT P. BERKOWITZ ------------------------------------------- Director Robert P. Berkowitz ------------------------------------------- Director Anthony L. Craig /s/ MICHAEL J. KUCHA ------------------------------------------- Director Michael J. Kucha /s/ JOHN R. MYERS ------------------------------------------- Director John R. Myers /s/ JOHN E. NOLAN ------------------------------------------- Director John E. Nolan /s/ JOHN E. SHEEHAN ------------------------------------------- Director The Honorable John E. Sheehan
II-4 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - --------- --------------------------------------------------------------------------------------------------------- 1* Form of Underwriting Agreement 4.1(1) Certificate of Incorporation 4.2(2) By-laws 4.3(3) Rights Agreement between the Company and The First National Bank of Boston, as Rights Agent, dated July 28, 1989 5* Opinion of Hale and Dorr 23.1* Consent of Hale and Dorr (included in Exhibit 5) 23.2 Consent of Arthur Andersen LLP 24 Powers of Attorney 27 Financial Data Schedule
- ------------------------ * To be filed by amendment. (1) Incorporated by reference from the Company's Registration Statement on Form S-3 (No. 33-64995). (2) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended July 4, 1993. (3) Incorporated by reference from the Company's Current Report on Form 8-K dated July 28, 1989. EX-23.2 2 EXH 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 May 13, 1996 EX-27 3 FDS
5 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 701 0 149,378 (4,632) 105,631 269,544 121,601 (52,961) 341,366 215,147 46,000 0 0 3,968 69,627 341,366 221,988 221,988 162,088 202,235 964 0 2,257 16,592 6,471 10,121 0 0 0 10,121 .08 .08
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