UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
|
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
|
EXCHANGE ACT OF 1934
|
FOR
THE QUARTERLY PERIOD ENDED MARCH 30, 2008
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
the Transition Period from ………… to……………
COMMISSION
FILE NUMBER 1-12333
Iomega
Corporation
(Exact
name of registrant as specified in its charter)
Delaware
|
86-0385884
|
(State
or other jurisdiction
of
incorporation or organization)
|
(IRS
employer identification
number)
|
10955
Vista Sorrento Parkway, San Diego, CA 92130
(Address
of principal executive offices)
(858)
314-7000
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past
90 days. Yes
x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting company. See
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule#12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer
o
Accelerated
filer
x
Non-accelerated
filer
o
Smaller
reporting company
o
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act) Yes
o
No
x
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock
as of April 28, 2008.
Common
Stock, par value $0.03 1/3
|
54,783,070
|
(Title
of each class)
|
(Number
of shares)
|
IOMEGA CORPORATION
AND SUBSIDIARIES
TABLE OF CONTENTS
PART I -
FINANCIAL INFORMATION
Item
1. Financial Statements
(Unaudited)
PART II -
OTHER INFORMATION
__________________________________
Copyright©
2008 Iomega Corporation. All rights reserved. Iomega, Zip,
REV, OfficeScreen, eGo, ScreenPlay, Jaz, IoClub and iStorage are either
registered trademarks or trademarks of Iomega Corporation in the United States
and/or other countries. Certain other product names, brand names and
company names may be trademarks or designations of their respective
owners.
IOMEGA
CORPORATION AND SUBSIDIARIES
NOTE
REGARDING FORWARD-LOOKING
STATEMENTS
Forward-Looking
Statements
This document contains forward-looking
statements within the meaning of the federal securities laws. Any statements
that do not relate to historical or current facts or matters are forward-looking
statements. You can identify some of the forward-looking statements by the use
of forward-looking words, such as “may,” “will,” “could,” “project,” “believe,”
“anticipate,” “expect,” “estimate,” “continue,” “potential,” “contingency(ies),”
“plan
s
,” “forecasts,”
“reserves,”
“
goals,” “objectives” and
other similar expressions
, or the use of future tense.
Statements concerning current conditions may also be forward-looking if they
imply a continuation of current conditions.
These
forward-looking statements include,
but are not limited to, statements concerning
:
·
|
Our
goals for 2008, which are: (1) to continue to grow and deliver sustained
profitability; (2) to further increase the size of our hard disk drive
(“HDD”) business and excel in the high-growth network attached storage
(“NAS”) market; (3) to ramp the next generation of REV
®
products and (4) to work with EMC to complete the acquisition of Iomega
which will allow us greater resources and opportunities to accomplish our
other goals;
|
·
|
Our
goal to maintain profitability in 2008 and to improve cash flow from
operations through containing operating expense spending, growing HDD and
REV product sales and maintaining or improving the gross margins of
HDD;
|
·
|
Our
fourth quarter being seasonally strong, or our summer months being
seasonally slow in Europe due to
holidays;
|
·
|
Expected
future taxes including taxes on repatriation of foreign cash to the
U.S.;
|
·
|
Expected
volatility, expected term and value of stock
options;
|
·
|
Risk
factors we face, including all discussions in the section below entitled
“Risk Factors”, concerning things that could happen to Iomega, its
products, employees, profits or other aspects of the business in the
future;
|
·
|
Our
focus or intended focus for our sales efforts
and
|
·
|
Our
belief that our balance of cash, cash equivalents and temporary
investments, together with cash flows from future operations, will be
sufficient to fund anticipated working capital requirements, capital
expenditures and cash required for other activities for at least one
year.
|
There are
numerous factors that could cause actual events or our actual results to differ
materially from those indicated by such forward-looking
statements. These factors include, without limitation, those set
forth under the captions “Application of Critical Accounting Policies,”
“Liquidity and Capital Resources” and “Quantitative and Qualitative
Disclosures About Market Risk” included in Items 2 and 3 of Part I and “Risk
Factors” included in Item 1A of Part II of this Quarterly Report on Form
10-Q. In addition, any forward-looking statements represent our
estimates only as of the day this Quarterly Report was first filed with the SEC
and undue reliance should not be placed on these statements. Our
forward-looking statements do not include the potential impact of any mergers,
acquisitions or divestitures that may be announced after the date
hereof. We specifically disclaim any obligation to update
forward-looking statements, even if our estimates change.
IOMEGA
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except for share data)
|
|
Mar.
30,
2008
|
|
|
Dec.
31,
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
39,699
|
|
|
$
|
53,559
|
|
Restricted
cash
|
|
|
107
|
|
|
|
93
|
|
Temporary
investments
|
|
|
7,909
|
|
|
|
9,961
|
|
Trade receivables, less
allowance for doubtful accounts of
$2,233 at Mar. 30, 2008 and
$2,507 at Dec. 31, 2007
|
|
|
41,000
|
|
|
|
41,101
|
|
Inventories
|
|
|
59,078
|
|
|
|
79,883
|
|
Deferred income
taxes
|
|
|
2,175
|
|
|
|
2,175
|
|
Other current
assets
|
|
|
3,323
|
|
|
|
2,902
|
|
Total Current
Assets
|
|
|
153,291
|
|
|
|
189,674
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment, at Cost
|
|
|
63,407
|
|
|
|
63,869
|
|
Accumulated
Depreciation
|
|
|
(59,955
|
)
|
|
|
(60,002
|
)
|
Net Property and
Equipment
|
|
|
3,452
|
|
|
|
3,867
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
9,818
|
|
|
|
9,818
|
|
Other
Intangibles, Net
|
|
|
790
|
|
|
|
840
|
|
Long
Term Cash Investments
|
|
|
-
|
|
|
|
1,000
|
|
Other
Assets
|
|
|
9
|
|
|
|
9
|
|
Total Assets
|
|
$
|
167,360
|
|
|
$
|
205,208
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
26,148
|
|
|
$
|
61,951
|
|
Other current
liabilities
|
|
|
23,196
|
|
|
|
27,862
|
|
Income taxes
payable
|
|
|
4,145
|
|
|
|
3,368
|
|
Total Current
Liabilities
|
|
|
53,489
|
|
|
|
93,181
|
|
|
|
|
|
|
|
|
|
|
Deferred
Income Taxes
|
|
|
7,644
|
|
|
|
8,220
|
|
Long
Term Contingency Reserves
|
|
|
2,677
|
|
|
|
2,652
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies (Note 4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Common Stock, $0.03 1/3 par
value - authorized 400,000,000
shares, issued 55,342,020
shares at March 30, 2008 and
55,340,020 shares at December
31, 2007
|
|
|
1,848
|
|
|
|
1,848
|
|
Additional paid-in
capital
|
|
|
61,376
|
|
|
|
60,926
|
|
Less: 575,200 Common Stock
treasury shares, at cost, at
March 30, 2008 and December 31,
2007
|
|
|
(5,662
|
)
|
|
|
(5,662
|
)
|
Retained
earnings
|
|
|
45,988
|
|
|
|
44,043
|
|
Total Stockholders’
Equity
|
|
|
103,550
|
|
|
|
101,155
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
167,360
|
|
|
$
|
205,208
|
|
The
accompanying notes to condensed consolidated financial statements are
an
integral
part of these statements.
IOMEGA
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
|
|
For the Three Months Ended
|
|
|
|
March
30,
2008
|
|
|
April
1,
2007
|
|
|
|
(Unaudited)
|
|
Sales
|
|
$
|
95,900
|
|
|
$
|
75,984
|
|
Cost
of sales
|
|
|
81,927
|
|
|
|
61,681
|
|
Gross Margin
|
|
|
13,973
|
|
|
|
14,303
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
Selling, general and
administrative
|
|
|
10,851
|
|
|
|
10,384
|
|
Research and
development
|
|
|
1,929
|
|
|
|
1,739
|
|
Restructuring
reversals
|
|
|
-
|
|
|
|
(38
|
)
|
Goodwill impairment
charge
|
|
|
-
|
|
|
|
1,710
|
|
License fee and patent
income
|
|
|
(1,278
|
)
|
|
|
(350
|
)
|
Bad debt
credit
|
|
|
(236
|
)
|
|
|
(264
|
)
|
Total Operating
Expenses
|
|
|
11,266
|
|
|
|
13,181
|
|
Operating
income
|
|
|
2,707
|
|
|
|
1,122
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
361
|
|
|
|
670
|
|
Interest
expense and other income (expense), net
|
|
|
(132
|
)
|
|
|
(415
|
)
|
Income before income
taxes
|
|
|
2,936
|
|
|
|
1,377
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
(991
|
)
|
|
|
(228
|
)
|
Net
Income
|
|
$
|
1,945
|
|
|
$
|
1,149
|
|
|
|
|
|
|
|
|
|
|
Net
Income Per Basic Share
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
Net
Income Per Diluted Common Share
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Common Shares Outstanding
|
|
|
54,765
|
|
|
|
54,733
|
|
Weighted
Average Common Shares Outstanding - Assuming Dilution
|
|
|
55,384
|
|
|
|
54,979
|
|
The
accompanying notes to condensed consolidated financial statements are
an
integral
part of these statements.
IOMEGA
CORPORATION AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF
CASH FLOWS
(In
thousands)
|
|
For the Three Months Ended
|
|
|
|
March
30,
2008
|
|
|
April
1,
2007
|
|
|
|
(Unaudited)
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
Net income
|
|
$
|
1,945
|
|
|
$
|
1,149
|
|
Adjustments to Reconcile Net
Income to Cash Flows from Operations:
|
|
|
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
719
|
|
|
|
863
|
|
Deferred income tax
benefit
|
|
|
(576
|
)
|
|
|
(598
|
)
|
Tax contingency
reserve
|
|
|
25
|
|
|
|
4,414
|
|
Stock-related compensation
expense
|
|
|
445
|
|
|
|
297
|
|
Goodwill impairment
charge
|
|
|
-
|
|
|
|
1,710
|
|
Non-cash inventory
write-offs
|
|
|
453
|
|
|
|
210
|
|
Bad debt expense
(credit)
|
|
|
(236
|
)
|
|
|
(264
|
)
|
Other
|
|
|
(32
|
)
|
|
|
(63
|
)
|
Changes in Assets and
Liabilities:
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
(14
|
)
|
|
|
-
|
|
Trade
receivables
|
|
|
337
|
|
|
|
7,325
|
|
Inventories
|
|
|
20,352
|
|
|
|
901
|
|
Other current
assets
|
|
|
(421
|
)
|
|
|
444
|
|
Accounts
payable
|
|
|
(35,803
|
)
|
|
|
225
|
|
Other current
liabilities
|
|
|
(4,666
|
)
|
|
|
(7,005
|
)
|
Accrued
restructuring
|
|
|
-
|
|
|
|
(1,501
|
)
|
Income taxes
|
|
|
777
|
|
|
|
504
|
|
Net cash provided by (used in)
operating activities
|
|
|
(16,695
|
)
|
|
|
8,611
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of property and
equipment
|
|
|
(263
|
)
|
|
|
(117
|
)
|
Proceeds from sales of
assets
|
|
|
2
|
|
|
|
49
|
|
Purchases of temporary
investments
|
|
|
(4,984
|
)
|
|
|
(2,054
|
)
|
Sales of temporary
investments
|
|
|
8,075
|
|
|
|
3,704
|
|
Net change in other assets and
other liabilities
|
|
|
-
|
|
|
|
44
|
|
Net cash provided by investing
activities
|
|
|
2,830
|
|
|
|
1,626
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from sales of Common
Stock
|
|
|
5
|
|
|
|
2
|
|
Net cash provided by financing
activities
|
|
|
5
|
|
|
|
2
|
|
Net
Increase (Decrease) in Total Cash and Cash Equivalents
|
|
|
(13,860
|
)
|
|
|
10,239
|
|
Total
Cash and Cash Equivalents at Beginning of Period
|
|
|
53,559
|
|
|
|
56,617
|
|
Total
Cash and Cash Equivalents at End of Period
|
|
$
|
39,699
|
|
|
$
|
66,856
|
|
|
|
|
|
|
|
|
|
|
Non-Cash
Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Adjustment of CSCI, Inc.
acquisition
|
|
$
|
-
|
|
|
$
|
210
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes to condensed consolidated financial statements are
an
integral
part of these statements
IOMEGA
CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED
CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
(1) Operations
and Significant Accounting Policies
In
management’s opinion, the accompanying condensed consolidated financial
statements reflect all adjustments of a normal recurring nature which are
necessary to present fairly our financial position as of March 30, 2008 and
December 31, 2007, the results of operations for the quarter ended March 30,
2008 and April 1, 2007 and cash flows for the three months ended March 30, 2008
and April 1, 2007.
The
results of operations for the quarter ended March 30, 2008 are not necessarily
indicative of the results to be expected for the entire year or for any future
period.
The
accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes included in our
latest Annual Report on Form 10-K.
Reclassifications
Certain
reclassifications have been made to the prior period’s condensed consolidated
financial statements to conform to the current period’s
presentation.
Inventories
Inventories
include material costs and inventory related overhead costs and are recorded at
the lower of cost (first-in, first-out) or market and consist of the
following:
|
|
Mar.
30,
|
|
|
Dec.
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
19,003
|
|
|
$
|
29,202
|
|
Finished
goods
|
|
|
40,075
|
|
|
|
50,681
|
|
|
|
$
|
59,078
|
|
|
$
|
79,883
|
|
We
evaluate the carrying value of inventory on a quarterly basis to determine if
the carrying value is recoverable at estimated selling prices (including known
future price decreases). We include product costs and direct selling
expenses in our analysis of inventory realization. To the extent that
estimated selling prices do not exceed such costs and expenses, valuation
reserves are established against inventories through a charge to cost of
sales. In addition, we generally consider inventory that is not
expected to be sold within established timelines, as forecasted by our material
requirements planning system, as excess and thus appropriate inventory reserves
are established through a charge to cost of sales.
IOMEGA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(1) Operations
and Significant Accounting Policies (Continued)
Net Income Per Common
Share
Basic net
income per common share (“Basic EPS”) excludes dilution and is computed by
dividing net income by the weighted average number of common shares outstanding
during the period. Diluted net income per common share (“Diluted
EPS”) reflects the potential dilution that could occur if stock options or other
contracts to issue common stock were exercised or converted into Common
Stock. The computation of Diluted EPS assumes no exercise or
conversion of securities that would have an anti-dilutive effect on net income
per common share. In periods where losses are recorded, common stock
equivalents would decrease the loss per share and therefore are would not be
added to the weighted average shares outstanding.
The
following is a reconciliation of the numerator and denominator of Basic EPS to
the numerator and denominator of Diluted EPS for all periods
presented.
|
|
Net
Income
(Numerator)
|
|
|
Shares
(Denominator)
|
|
|
Per
Share
Amount
|
|
|
|
(In
thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
For
the Three Months Ended:
|
|
|
|
|
|
|
|
|
|
March
30, 2008:
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
1,945
|
|
|
|
54,765
|
|
|
$
|
0.04
|
|
Effect of
options
|
|
|
-
|
|
|
|
619
|
|
|
|
-
|
|
Diluted EPS
|
|
$
|
1,945
|
|
|
|
55,384
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 1,
2007
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
1,149
|
|
|
|
54,733
|
|
|
$
|
0.02
|
|
Effect of
options
|
|
|
-
|
|
|
|
246
|
|
|
|
-
|
|
Diluted EPS
|
|
$
|
1,149
|
|
|
|
54,979
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IOMEGA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(1) Operations
and Significant Accounting Policies (Continued)
Net Income Per Common
Share
(Continued)
The table
below shows the number of outstanding options that had an exercise price greater
than the average market price of the common shares (out of the money options)
for the respective period and are excluded from the calculation, as they are
anti-dilutive. The average market price of our Common Stock was $2.97
for the three months ended March 30, 2008 and $3.71 for the three months ended
April 1, 2007.
|
|
For the Three Months
Ended
|
|
|
|
March
30,
|
|
|
April
1,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Out
of the money options
|
|
|
866,312
|
|
|
|
713,092
|
|
Stock Compensation
Expense
Our
condensed consolidated statements of operations included $0.4 million of
compensation expense related to stock-based compensation plans for the three
months ended March 30, 2008 and $0.3 million for the three months ended April 1,
2007.
Valuation and
Amortization.
We use the Black-Scholes option-pricing model to
estimate the fair value of each option grant on the date of grant or
modification. We amortize the fair value on an accelerated method for
recognizing stock compensation expense over the vesting period of the
option.
Expected Term.
The
expected term is the period of time that granted options are expected to be
outstanding. We estimate the expected term based on historical
patterns of option exercises, which we believe reflect future exercise
behavior. We examined patterns in our historical data in order to
ascertain if there were any discernable patterns of exercises for demographic
characteristics (such as geographic, job level, plan and significantly out of
the money exercise prices).
Expected
Volatility.
We calculate volatility by using the historical
stock prices going back over the estimated life of the option.
Risk-Free Interest
Rate.
We base the risk-free interest rate used in the
Black-Scholes option-valuation model on the market yield in effect at the time
of option grant provided from the Federal Reserve Board’s Statistical Releases
and Historical Publications from the Treasury constant maturities rates for the
equivalent remaining terms.
Dividends.
We have
no plans to pay cash dividends in the future. Therefore, we use an
expected dividend yield of zero in the Black-Scholes option-valuation
model.
Forfeitures.
SFAS
123r requires us to estimate forfeitures at the time of grant and revise those
estimates in subsequent periods if actual forfeitures differ from those
estimates. We use historical data to estimate pre-vesting option
forfeitures and record share-based compensation expense only for those awards
that are expected to vest. In calculating the forfeiture rates, we
have excluded options that were significantly out of the money, primarily
because they relate to older, fully vested awards.
IOMEGA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(1) Operations
and Significant Accounting Policies (Continued)
Stock Compensation Expense
(Continued)
We used
the following assumptions to estimate the fair value of options granted for the
three months ended March 30, 2008 and April 1, 2007:
|
For the Three Months
Ended
|
|
Assumption
|
March
30,
2008
|
April
1,
2007
|
|
|
(In
thousands)
|
|
|
|
|
Average
expected term (in years)
|
5.3
|
3.9
|
|
Expected
stock price volatility
|
42%
|
39%
|
|
Risk-free
interest rate (range)
|
2.9
– 4.1%
|
4.5
– 4.9%
|
|
Expected
dividends
|
Zero
|
Zero
|
|
Warranty
Costs
We accrue
for warranty costs based on estimated warranty return rates and estimated costs
to repair. We use a statistical-based model to estimate warranty
accrual requirements. The statistical model, used to project future
returns, is based upon a rolling monthly calculation that computes the number of
units required in the warranty reserve and is based upon monthly sales, actual
returns and projected return rates. Actual warranty costs are charged
against the warranty reserve. Factors that affect our warranty
liability include the number of units sold, historical and anticipated rates of
warranty returns and repair cost. We review the adequacy of our
recorded warranty liability on a quarterly basis and record the necessary
adjustments to the warranty liability.
Changes
in our warranty liability during all periods presented were as
follows:
|
|
For the Three Months Ended
|
|
|
|
March
30 ,
|
|
|
April
1,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
Balance
at beginning of period
|
|
$
|
6,202
|
|
|
$
|
4,576
|
|
Accruals/additions
|
|
|
1,987
|
|
|
|
1,996
|
|
Claims
|
|
|
(2,330
|
)
|
|
|
(1,473
|
)
|
Balance
at end of period
|
|
$
|
5,859
|
|
|
$
|
5,099
|
|
IOMEGA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(1) Operations
and Significant Accounting Policies (Continued)
Fair Value
Measurements
Effective
January 1, 2008, we adopted Financial Accounting Standards Board (“FASB”) SFAS
Statement No. 157, “Fair Value Measurements” (“SFAS 157”), which defines fair
value as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants at the measurement date. SFAS 157 establishes a
three-level fair value hierarchy that prioritizes the inputs used to measure
fair value. This hierarchy requires entities to maximize the use of
observable inputs and minimizes the use of unobservable inputs. The
three levels of inputs used to measure fair value are as follows:
·
|
Level
1 – Quoted prices in active markets for identical assets and
liabilities.
|
·
|
Level
2 – Observable inputs other than quoted prices included in Level 1, such
as quoted priced for similar assets and liabilities in active markets;
quoted prices for identical or similar assets and liabilities in markets
that are not active; or other inputs that are observable or can be
corroborated by observable market
data.
|
·
|
Level
3 – Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or
liabilities. This includes certain pricing models, discounted
cash flow methodologies and similar techniques that use significant
unobservable inputs.
|
The
adoption of SFAS 157 did not have an impact on our financial position or results
of operations. The Company has segregated all financial assets and
liabilities that are measured at fair value on a recurring basis (at least
annually) into the most appropriate level within the fair value hierarchy based
on the inputs used to determine the fair value at the measurement date in the
table below. FSP FAS 157-2 delayed the effective date for all
nonfinancial assets and liabilities until January 1, 2009, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis.
Effective
January 1, 2008, we adopted FASB Statement No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS 159”), which provides
entities the option to measure many financial instruments and certain other
items at fair value. Entities that choose the fair value option will
recognize unrealized gains and losses on items for which the fair value option
was elected in earnings at each subsequent reporting date. We have
chosen not to elect the fair value option for any items that are not already
required to be measured at fair value in accordance with accounting principles
generally accepted in the United States.
Assets
and liabilities measured at fair value on a recurring basis are summarized
below:
|
|
March 30, 2008
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Fair
Value
Measurements
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Temporary
investments
|
|
$
|
7,909
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,909
|
|
Total Assets
|
|
$
|
7,909
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,909
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward
contracts
|
|
$
|
1,895
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,895
|
|
Total
Liabilities
|
|
$
|
1,895
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IOMEGA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(1) Operations
and Significant Accounting Policies (Continued)
Recent Accounting
Pronouncements
In March
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 161,
Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement
No. 133
. SFAS No. 161 changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments; (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133, as amended; and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance and cash flows. SFAS No. 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. The adoption of SFAS No. 161 will not have a
material impact on the Company’s financial statements.
In
December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51
. SFAS
No. 160 establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The statement is effective for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal years. The
adoption of SFAS No. 160 is not expected to have a material impact on the
Company’s financial statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS
No. 141R”),
Business
Combinations
. SFAS No. 141R requires the acquiring entity in a
business combination to recognize the assets acquired, the liabilities assumed
and any noncontrolling interest in the acquiree to be measured at their
respective fair values at the acquisition date. Acquisition-related costs
incurred prior to the acquisition are required to be expensed rather than
included in the purchase-price determination. SFAS No. 141(R) also provides
guidance for recognizing and measuring the goodwill acquired in a business
combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. The statement applies prospectively to business
combinations for which the acquisition date is on or after January 1, 2009.
The adoption of SFAS No. 141R is not expected to have a material impact on
the Company’s financial statements.
IOMEGA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(2) Income
Taxes
We
adopted the provisions of FASB Interpretation Number 48, “Accounting for
Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN
48”) on January 1, 2007. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in accordance with SFAS No. 109,
“Accounting for Income Taxes”, and prescribes a recognition threshold and
measurement process for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
At March
30, 2008 and December 31, 2007, we have $4.5 million of unrecognized tax
benefits, $2.6 million of which would affect our effective tax rate if
recognized.
We
recognize interest and penalties related to uncertain tax positions in income
tax expense. As of March 30, 2008 and December 31, 2007, we have
approximately $0.3 million of accrued interest related to uncertain tax
positions, which was also reclassified from current to non-current liabilities
upon adoption of FIN 48.
We expect
that a reduction of approximately $2.7 million of unrecognized tax benefits may
occur within 12 months as a result of projected resolutions of worldwide tax
disputes and the lapse of various statutes of limitations. The
portion of this reduction which is expected to result in cash payments to tax
authorities has been shown as a current liability on the financial
statements.
The tax
years 2003-2007 remain open to examination by major taxing jurisdictions to
which we are subject. We are no longer subject to examination by the
IRS for periods prior to 2003, although carryforward attributes that were
generated prior to 2003 may still be adjusted upon examination by the IRS if
they either have been or will be used in a future period. Various
state and foreign income tax returns are under examination by taxing
authorities. We do not believe that the outcome of any examination
will have a material impact on our financial statements.
For the
quarter ended March 30, 2008, we recorded a net income tax provision of $1.0
million on pre-tax income of $2.9 million. This tax provision was
primarily comprised of taxes provided on foreign earnings and foreign and
domestic capital taxes.
For the
quarter ended April 1, 2007, we recorded a net income tax provision of $0.2
million on pre-tax income of $1.4 million. This tax provision was
primarily comprised of taxes provided on foreign earnings and foreign capital
taxes, partially offset by a release of the deferred tax liability resulting
from the goodwill impairment charge recognized.
IOMEGA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(3) Business
Segment Information
We have
six reportable segments, which are organized into three business categories as
follows:
Business
Categories
|
Reportable
Segments
|
|
|
Consumer
Products
|
1. Consumer
Storage Solutions
|
|
2. Zip
®
Products
|
|
|
Business
Products
|
3. REV
®
Products
|
|
4. Network
Storage Systems
|
|
5. Services
|
|
|
Other
Products
|
6. Other
Products
|
Consumer
Products
Our
Consumer Products category is comprised of the Consumer Storage Solutions
(“CSS”) segment and the Zip Products segment.
Our CSS
segment involves the worldwide distribution and sale of various storage devices
including external hard disk drives (“HDD”), CD-RW drives, DVD rewritable drives
and external floppy disk drives. HDD products account for the
substantial majority of this segment.
The Zip
Products segment involves the distribution and sale of Zip drives and disks to
retailers, distributors, resellers and OEMs. We have ceased selling
Zip drives to distributors or resellers in the European Union (“EU”) as of July
1, 2006, in the wake of the Restriction of Hazardous Substances (“RoHS”) lead
free initiative. Sales of Zip disks continue worldwide, including the
EU.
IOMEGA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(3) Business
Segment Information (Continued)
Business
Products
Our
Business Products category is comprised of the REV Products, the Network Storage
Systems (“NSS”) and the Services segments.
Our REV
Products segment involves the development, distribution and sale of REV drives
and disks to retailers, distributors, OEMs and resellers throughout the
world.
Our NSS
segment involves the development, distribution and sale of Network Attached
Storage servers and Network HDD drives (which were previously reported under the
CSS segment in the Consumer Products category) in the entry-level and low-end
Network Attached Storage market.
Our
Services segment consists of the operations of CSCI, Inc. (“CSCI”), including
OfficeScreen
®
solutions and system integration and Iomega services such as iStorage
TM
. We
acquired CSCI in August of 2006; CSCI’s OfficeScreen managed security services
include managing firewalls, VPNs and
providing remote access
for
small businesses.
Other
Products
Our Other
Products segment consists of license and patent fee income (when not assigned to
specific products) and products that have been discontinued or are otherwise
immaterial, including Jaz, Iomega software products such as Iomega Automatic
Backup software and other miscellaneous products.
Product Operating Income
(Loss)
Product
operating income is defined as sales and other income related to a segment’s
operations, less both fixed and variable product costs, and direct and allocated
operating expenses. Operating expenses are charged to the product
segments primarily as a percentage of sales and on a direct method to a lesser
extent. When such costs and expenses exceed sales and other income,
this is referred to as a product operating loss. The accounting
policies of the product segments are the same as those described in Note
1. Intersegment sales, eliminated in consolidation, are not
material. Non-allocated operating expenses include restructuring
charges/reversals.
IOMEGA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(3) Business
Segment Information (Continued)
The
information in the following table was derived directly from our internal
segments’ financial information used for corporate management
purposes.
Reportable
Operating Segment Information:
|
|
For the Quarter Ended
|
|
|
|
March
30,
2008
|
|
|
April
1,
2007
|
|
|
|
(In
thousands)
|
|
Sales:
|
|
|
|
|
|
|
Consumer
Products:
|
|
|
|
|
|
|
Consumer Storage
Solutions
|
|
$
|
74,989
|
|
|
$
|
52,489
|
|
Zip Products
|
|
|
2,803
|
|
|
|
5,518
|
|
Total Consumer
Products
|
|
|
77,792
|
|
|
|
58,007
|
|
Business
Products:
|
|
|
|
|
|
|
|
|
REV Products
|
|
|
6,835
|
|
|
|
11,204
|
|
Network Storage
Systems
|
|
|
9,078
|
|
|
|
4,738
|
|
Services
|
|
|
1,984
|
|
|
|
1,892
|
|
Total Business
Products
|
|
|
17,897
|
|
|
|
17,834
|
|
Other
Products
|
|
|
211
|
|
|
|
143
|
|
Total Sales
|
|
$
|
95,900
|
|
|
$
|
75,984
|
|
|
|
|
|
|
|
|
|
|
Product
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
Consumer
Products:
|
|
|
|
|
|
|
|
|
Consumer Storage
Solutions
|
|
$
|
(999
|
)
|
|
$
|
354
|
|
Zip Products
|
|
|
1,543
|
|
|
|
355
|
|
Total Consumer
Products
|
|
|
544
|
|
|
|
709
|
|
Business
Products:
|
|
|
|
|
|
|
|
|
REV Products
|
|
|
272
|
|
|
|
304
|
|
Network Storage
Systems
|
|
|
700
|
|
|
|
409
|
|
Services
|
|
|
(99
|
)
|
|
|
(520
|
)
|
Total Business
Products
|
|
|
873
|
|
|
|
193
|
|
Other
Products
|
|
|
1,290
|
|
|
|
182
|
|
Restructuring
reversals
|
|
|
-
|
|
|
|
38
|
|
Total Operating
Income
|
|
$
|
2,707
|
|
|
$
|
1,122
|
|
IOMEGA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(4) Commitments
and Contingencies
Litigation
There are no material legal proceedings
to which we are a party. We are involved in lawsuits and claims
generally incidental to our business, none of which are expected to have a
material impact on our results of operations, business or financial
condition.
(5) Stockholders’
Equity
Share-Based
Compensation Plans
Stock
Option Plans
On May
23, 2007, our shareholders approved the 2007 Stock Incentive Plan (“2007
Plan”). Prior to the adoption of the 2007 Plan, we had several stock
incentive plans: the 1997 Stock Incentive Plan (“1997 Plan”), the 1995 Director
Stock Option Plan (“1995 Director Plan”) and the 2005 Director Stock Option Plan
(“2005 Director Plan”). The 1997 Plan expired in January of 2007 and
no other options have been granted under the plan after its expiration date;
however, all outstanding, un-expired options under the 1997 Plan remain in
effect. The 1995 Director plan expired on April 25, 2005 and no
further options have been granted under the plan after is expiration date;
however, all outstanding, un-expired options under the 1995 Director Plan remain
in effect. The 2005 Director Plan was terminated on May 23, 2007, as
a result of the shareholder approval of the 2007 Plan, and no further options
have been granted under this plan after its termination date; however, all
outstanding, un-expired options under the 2005 Director Plan remain in
effect.
Under the
standard executive option agreement under the 1997 Plan, effective immediately
prior to an acquisition event (as defined in the 1997 Plan to include, among
other events, both the consummation of the Offer and the Merger), one-half of
the unvested portion of each outstanding option granted will become immediately
exercisable. If any option is still outstanding after the acquisition
event, then on the second anniversary of the acquisition event or if the option
holder resigns for good cause (as defined in the standard executive option
agreement under the 1997 Plan) or is terminated without cause (as defined in the
standard executive option agreement under the 1997 Plan), all options become
immediately exercisable.
The 1995
Director Plan provides that in the event of a change of control (as defined in
the 1995 Director Plan to include, among other events, both the consummation of
the Offer and the Merger) one-half of the unvested portion of each outstanding
option granted under the 1995 Director Plan will become immediately
exercisable. According to the terms of the 1995 Director Plan, all
options which are not exercised at or prior to the occurrence of the change of
control will terminate immediately upon the consummation of the change of
control.
Stock
Option Activity and Weighted Average Prices
The 2005
Director Plan provides that in the event of a change of control (as defined in
the 2005 Director Plan to include, among other events, both the consummation of
the Offer and the Merger) one-half of the unvested portion of each outstanding
option granted under the 2005 Director Plan will become immediately
exercisable. According to the terms of the 2005 Director Plan, all
options which are not exercised at or prior to the occurrence of the change of
control will terminate immediately upon the consummation of the change of
control.
IOMEGA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(
6) Stockholders’ Equity
(Continued)
The 2007
Plan provides for the grant of various awards including incentive stock options
(as defined in Section 422 of the Internal Revenue Code), nonqualified options,
restricted shares, performance awards and other stock based awards, as
determined at the time of grant. Under the 2007 Plan, we can grant
options or awards for up to 5,500,000 shares of Common Stock to our employees,
officers, directors, consultants and advisors. The exercise price for
all options granted under the plan will be the closing price of our Common Stock
on the date of grant. Each option shall be exercisable at such times
and subject to such terms and conditions as the Board may specify in the
applicable option agreement. The duration of options awarded under
this plan cannot exceed ten years from the date of grant, except as may be
required under laws of other countries. The Board may award
restricted shares of our Common Stock, which shares may be subject to risk of
forfeiture or restrictions as may be imposed by the Board. The total
of all shares subject to awards other than stock options may not exceed 33% of
the authorized shares under the 2007 Plan. At March 30, 2008, we had
reserved 5,500,000 shares of Common Stock pursuant to awards granted or to be
granted under this plan.
The 2007
Plan provides that immediately prior to a change in control event (as defined in
the 2007 Plan to include, among other events, both the consummation of the Offer
and the Merger), except to the extent specifically provided to the contrary in
any agreement between the option or restricted stock holder and the Company, the
vesting schedule will continue as set forth in the instrument evidencing the
option or restricted stock. Notwithstanding the foregoing, each option will be
immediately exercisable in full and each restricted stock award will immediately
become free of all conditions or restrictions, if, on or prior to the second
anniversary of the date of the consummation of the change in control event, the
option or restricted stock holder resigns for good reason (as defined in the
2007 Plan) or is terminated without cause (as defined in the 2007
Plan).
The
following table presents the aggregate options granted, exercised and forfeited
under all stock option plans at March 30, 2008 and their respective weighted
average exercise prices:
|
|
|
|
|
Weighted
|
|
|
|
Shares
|
|
|
Average
|
|
|
|
|
(000’s
|
)
|
|
Exercise Price
|
|
|
|
|
|
|
|
|
|
Outstanding
at beginning of year
|
|
|
3,059
|
|
|
$
|
3.89
|
|
Granted
(1)
|
|
|
1,470
|
|
|
|
2.81
|
|
Exercised
|
|
|
(2
|
)
|
|
|
2.66
|
|
Forfeited
/ Cancelled / Expired
|
|
|
(16
|
)
|
|
|
8.38
|
|
Outstanding
at March 30, 2008
|
|
|
4,511
|
|
|
|
3.52
|
|
Options
exercisable at March 30, 2008
|
|
|
1,632
|
|
|
$
|
4.48
|
|
(1)
Options were granted to
employees on February 8, 2008
IOMEGA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(7) Other
Matters
Other Intangible
Assets
At March
30, 2008, we had $0.8 million in net intangible assets, all of which are subject
to amortization. Our intangible assets include the OfficeScreen trade
name and technology, and customer and vendor relationships obtained through the
CSCI acquisition. Intangible assets are amortized using the
straight-line method, our best estimate of the pattern of economic benefit, over
the estimated useful life of the asset, subject to periodic review for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the asset may not be recoverable. Amortization
expense was less than $0.1 million for quarter ended March 30,
2008. Amortization expense for each of the next five fiscal years is
anticipated to be less than $0.2 million for the remainder of 2008,
approximately $0.2 million each year from 2009 through 2010, $0.1 million in
2011 and $0.1 million thereafter. At March 30, 2008, the weighted
average useful life of our intangible assets was approximately 4.6
years.
The
following table presents the other intangible assets and associated accumulated
amortization for all periods presented:
|
|
Mar.
30,
2008
|
|
|
Dec.
31,
2007
|
|
|
|
(In
thousands)
|
|
Other
Intangible Assets:
|
|
|
|
|
|
|
Gross value
|
|
$
|
1,127
|
|
|
$
|
1,127
|
|
Accumulated
amortization
|
|
|
(337
|
)
|
|
|
(287
|
)
|
Net intangible
assets
|
|
$
|
790
|
|
|
$
|
840
|
|
Goodwill
Impairment
The
goodwill related to the CSCI acquisition will be tested for impairment in the
fourth quarter of 2008, as part of our annual impairment testing.
IOMEGA
CORPORATION AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(8) Subsequent
Events
Potential EMC
Acquisition
On April
8, 2008, Iomega Corporation and EMC Corporation (“EMC”) announced a definitive
agreement for EMC to acquire Iomega in a cash tender offer of $3.85 per
outstanding share. On April 25, 2008, EMC commenced a cash tender
offer for all outstanding shares (“Shares”) of the common stock of Iomega at a
price of $3.85 per share, net to the seller in cash. The cash tender
is being made pursuant to an Offer to Purchase, dated April 24, 2008 and in
connection with the Agreement and Plan of Merger, dated as of April 8, 2008,
among EMC, Emerge Merger Corporation (a wholly owned subsidiary of EMC formed
for the purpose of making the Offer) and Iomega.
There is
no financing condition to the tender offer, but the tender offer is subject to
certain other conditions set forth in the Offer to Purchase, including,
obtaining regulatory approvals from antitrust authorities in the U.S. and the
European Commission. On April 22, 2008, the Federal Trade Commission
granted early termination of the waiting period under the under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, with respect
to the tender offer and merger.
ExcelStor Group
Transaction
On April
8, 2008 concurrent with the announcement regarding the definitive agreement for
EMC to acquire Iomega, Iomega announced the termination of the Share Purchase
Agreement, dated December 12, 2007, by and among Iomega Corporation, ExcelStor
Great Wall Technology Limited, a Cayman Islands company, Shenzhen ExcelStor
Technology Limited, a People’s Republic of China (“PRC”) company, Great Wall
Technology Company Limited, a PRC Company, ExcelStor Group Limited, a Cayman
Islands company, and ExcelStor Holdings Limited, a British Virgin Islands
company. Additionally, on April 8, 2008, we paid $7.5 million to
ExcelStor as required under the Share Purchase Agreement in conjunction with
terminating the Agreement.
IOMEGA
CORPORATION AND SUBSIDIARIES
ITEM
2.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS:
|
Overview
We design
and market products and provide services that help our customers store and
protect their valuable digital information. Our six reportable
segments are based primarily on the nature of our products and include Consumer
Storage Solutions (“CSS”) Products, Zip
®
Products, REV
®
Products, Network Storage Systems (“NSS”) Products, Services and Other
Products.
The CSS
Products segment involves the worldwide distribution and sale of various storage
devices including external hard disk drives (“HDD”), CD-RW drives, DVD
rewritable drives and external floppy disk drives. The Zip Products
segment involves the distribution and sale of Zip drives and disks to retailers,
distributors and resellers. The REV Products segment involves the
development, distribution and sale of REV drives and disks to retailers,
distributors, OEMs and resellers throughout the world. The NSS
Products segment consists primarily of the development, distribution and sale of
network attached storage servers and Network HDD drives (previously included in
the CSS Products segment) in the entry-level and low-end network attached
storage market. The Services segment consists of the operations of
CSCI, Inc. (“CSCI”), including OfficeScreen
®
solutions, systems integration and Iomega services such as iStorage
TM
. We
acquired CSCI in August of 2006. CSCI’s OfficeScreen managed security
services include managing firewalls, virtual private networks (“VPNs”) and
providing remote access for small businesses. The Other Products
segment consists of license and patent fee income (not assigned to specific
products) and products that have been discontinued or are otherwise
immaterial.
As the
Zip business has approached the end of its product lifecycle, we strived to find
other profitable sources of revenue to replace the declining high gross margin
Zip revenue. In recent years, we have invested significant efforts
and dollars on the development of the first, second and third generation REV
products. Sales of REV products have exceeded Zip product sales for
the past several quarters. However, REV products were unprofitable
every quarter until 2007 from which point the product line has been slightly
profitable.
In other
efforts to replace the declining Zip business, we have launched and expanded our
CSS and NSS businesses. CSS business segment product sales (primarily
HDD) significantly exceed Zip product sales and accounts for the majority of our
revenue. Our CSS business segment achieved operating profitability
for the first time in the fourth quarter of 2006. However, the HDD
market is very competitive and the product costs and customer programs must be
monitored closely to be profitable. The NSS segment product sales
have also been steadily increasing with moderate profits in most
periods. We are continuing to develop our NAS product line, targeting
the consumer, home office and small business segments.
IOMEGA
CORPORATION AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Overview
(Continued)
During
the past two years, we have taken several steps to return our Company to
profitability such as a restructuring plan to significantly reduce costs and
simplify our organizational structure, the release of new HDD products and
changes to our HDD product supply chain to reduce the cost of these products to
allow us to be more competitive in the market. Primarily as a result
of the above actions, at March 30, 2008, we have recorded our seventh
consecutive quarter of net income and sixth consecutive quarter of
year-over-year revenue growth. The revenue growth has been primarily
a result of the HDD business, which remains extremely competitive.
Our goals for 2008 are: (1) to continue
to grow and deliver sustained profitability; (2) to further increase the size of
our HDD business and excel in the high-growth network attached storage (“NAS”)
market; (3) to ramp the next generation of REV 120GB drive
product line and (4) to cooperate with EMC to complete and close the
acquisition of Iomega, as unanimously recommended by our Board of
Directors. Notwithstanding our recent accomplishments, there can be
no assurance that we will achieve these goals
.
Application
of Critical Accounting Policies
Areas
where significant judgments occur include, but are not limited to: revenue
recognition, price protection and rebate reserves, inventory valuation reserves
and tax valuation allowances. Actual results could differ materially
from these estimates. For a more detailed explanation of the
judgments included in these areas, refer to our Annual Report on Form 10-K for
the year ended December 31, 2007. Our critical accounting policies
have not changed materially since December 31, 2007.
Seasonality
Our CSS
business is typically strongest during the fourth quarter. Our
European sales, which comprise approximately two-thirds of our total sales, are
typically weakest during the summer months due to holidays. There can
be no assurance that any historic sales patterns will continue and, as a result,
sales for any prior quarter are not necessarily indicative of the sales to be
expected in any future periods.
Results
of Operations
Our net
income for the quarter ended March 30, 2008 was $1.9 million, or $0.04 per
diluted share, compared with net income of $1.1 million, or $0.02 per diluted
share, for the quarter ended April 1, 2007.
IOMEGA
CORPORATION AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Sales
As shown
in the table below, total sales for the quarter ended March 30, 2008 increased
over the same period in the prior year due to the market acceptance of our new
HDD and NSS products.
|
|
For the Three Months
Ended
|
|
|
|
March 30,
|
|
|
April
1,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(In
thousands, except %)
|
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Storage
Solutions
|
|
$
|
74,989
|
|
|
$
|
52,489
|
|
|
$
|
22,500
|
|
|
|
43
|
%
|
Zip Products
|
|
|
2,803
|
|
|
|
5,518
|
|
|
|
(2,715
|
)
|
|
|
(49
|
)
|
Total Consumer
Products
|
|
|
77,792
|
|
|
|
58,007
|
|
|
|
19,785
|
|
|
|
34
|
|
Business
Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REV Products
|
|
|
6,835
|
|
|
|
11,204
|
|
|
|
(4,369
|
)
|
|
|
(39
|
)
|
Network Storage
Systems
|
|
|
9,078
|
|
|
|
4,738
|
|
|
|
4,340
|
|
|
|
92
|
|
Services
|
|
|
1,984
|
|
|
|
1,892
|
|
|
|
92
|
|
|
|
5
|
|
Total Business
Products
|
|
|
17,897
|
|
|
|
17,834
|
|
|
|
63
|
|
|
|
1
|
|
Other
Products
|
|
|
211
|
|
|
|
143
|
|
|
|
68
|
|
|
|
48
|
|
Total Sales
|
|
$
|
95,900
|
|
|
$
|
75,984
|
|
|
$
|
19,916
|
|
|
|
26
|
%
|
The $22.5
million higher CSS sales resulted from $23.2 million of higher HDD drives,
partially offset by $0.4 million of lower Optical products and $0.3 million of
lower floppy external drive sales Zip product sales continued their expected
decline for the quarter ended March 30, 2008, in terms of both units and sales
dollars. The decrease in REV product sales is due to competition from
substitute products. NSS sales increased primarily as a result of the
launch of new products focused on the home and home office segment.
Our sales
by region for the three months ended March 30, 2008 and April 1, 2007 are shown
in the table below:
|
|
For the Three Months
Ended
|
|
|
|
March
30,
|
|
|
April
1,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(In
thousands, except %)
|
|
Sales
Dollars:
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
67,987
|
|
|
$
|
51,413
|
|
|
$
|
16,574
|
|
|
|
32
|
%
|
Americas
(includes Latin America)
|
|
|
24,999
|
|
|
|
21,999
|
|
|
|
3,000
|
|
|
|
14
|
|
Asia
Pacific
|
|
|
2,914
|
|
|
|
2,572
|
|
|
|
342
|
|
|
|
13
|
|
Total
|
|
$
|
95,900
|
|
|
$
|
75,984
|
|
|
$
|
19,916
|
|
|
|
26
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of Total Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
|
71
|
%
|
|
|
68
|
%
|
|
|
|
|
|
|
|
|
Americas
(includes Latin America)
|
|
|
26
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
Asia
Pacific
|
|
|
3
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
IOMEGA
CORPORATION AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Sales
(Continued)
The
increase in sales dollars in Europe was primarily due to higher sales of HDD and
NSS products, offset by a decline in REV and Zip product sales. Sales
dollars in the Americas increased due to higher sales of HDD products, offset by
a decline in Zip, REV and Optical products sales. Sales dollars in
the Asia Pacific region increased slightly due to higher sales of HDD products,
offset by a decline in REV and Zip products sales.
The sales
growth in Europe has been primarily due to the introduction of lower cost,
competitive HDD products in mid-2006, a more efficient supply chain, and strong
retail distribution throughout Europe. The Americas retail
environment is more challenging than the environment we face in Europe and is
generally promotional and discount driven. We currently focus on
gross margin generation and other sales channels where we believe we can
profitably sell our products and intend to continue this focus in the
future.
Gross
Margin
Our gross
margin details for the three months ended March 30, 2008 and April 1, 2007 are
shown in the table below:
|
|
For the Three Months Ended
|
|
|
|
March
30,
|
|
|
April
1,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(In
thousands, except %)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Gross Margin (dollars)
|
|
$
|
13,973
|
|
|
$
|
14,303
|
|
|
$
|
(330
|
)
|
|
|
(2
|
)%
|
Total
Gross Margin (%)
|
|
|
14.6
|
%
|
|
|
18.8
|
%
|
|
|
|
|
|
|
|
|
The
decrease in the gross margin dollars and decrease in gross margin percentage was
primarily a result of growth in Consumer Storage Solution product revenue, which
generally carry a lower gross margin percentage than other product lines and an
expected ongoing decrease in Zip revenue, which carries a higher gross margin
percentage.
The CSS
product gross margins increased in terms of dollars for the quarter ended March
30, 2008 as compared to the quarter ended April 1, 2007, primarily due to the
higher sales volumes. The CSS product gross margin percentage
decreased due to a mix of lower gross margin HDD products, increased market
competition, and higher promotions in the first quarter of 2008, partially
offset by freight and other supply chain improvements.
The Zip
product gross margin decreased in terms of dollars for the quarter ended March
30, 2008 as compared to the quarter ended April 1, 2007 due to the expected
ongoing decline in revenue.
The REV
product gross margins increased in terms of percentage for the quarter ended
March 30, 2008, compared to the quarter ended April 1, 2007 due to a mix of
higher margin REV 70GB product sales. The REV product gross margin
decreased in terms of dollars due to lower revenue, partially offset by better
margin percentage.
The NSS
product gross margins increased in terms of dollars for the quarter ended March
30, 2008, compared to the quarter ended April 1, 2007. The
improvement was a result of revenue growth from the release of new, cost
reduced, more competitive network HDD and NAS products.
IOMEGA
CORPORATION AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Product
Segment Operating Income (Loss)
Product
operating income is defined as sales and other income related to a segment’s
operations, less both fixed and variable product costs, and direct and allocated
operating expenses. Operating expenses are charged to the product
segments primarily as a percentage of sales and on a direct method to a lesser
extent. As a result, the growing product lines (such as HDD and NAS)
by allocation absorb more and more of the general and administrative
costs. When such costs and expenses exceed sales and other income,
this is referred to as a product operating loss. The accounting
policies of the product segments are the same as those described in Note 1.
Intersegment sales, eliminated in consolidation, are not
material. Non-allocated operating expenses include restructuring
charges/reversals.
The
information in the following table was derived directly from our internal
segments’ financial information used for corporate management
purposes.
|
|
For the Three Months
Ended
|
|
|
|
March
30,
|
|
|
April
1,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(In
thousands, except %)
|
|
Product
Operating Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer Storage
Solutions
|
|
$
|
(999
|
)
|
|
$
|
354
|
|
|
$
|
(1,353
|
)
|
|
|
(382
|
)%
|
Zip Products
|
|
|
1,543
|
|
|
|
355
|
|
|
|
1,188
|
|
|
|
335
|
|
Total Consumer
Products
|
|
|
544
|
|
|
|
709
|
|
|
|
(165
|
)
|
|
|
(23
|
)
|
Business
Products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REV Products
|
|
|
272
|
|
|
|
304
|
|
|
|
(32
|
)
|
|
|
(11
|
)
|
Network Storage
Systems
|
|
|
700
|
|
|
|
409
|
|
|
|
291
|
|
|
|
71
|
|
Services
|
|
|
(99
|
)
|
|
|
(520
|
)
|
|
|
421
|
|
|
|
81
|
|
Total Business
Products
|
|
|
873
|
|
|
|
193
|
|
|
|
680
|
|
|
|
352
|
|
Other
Products
|
|
|
1,290
|
|
|
|
182
|
|
|
|
1,108
|
|
|
|
609
|
|
Restructuring
reversals
|
|
|
-
|
|
|
|
38
|
|
|
|
(38
|
)
|
|
|
(100
|
)
|
Total Operating Income
(Loss)
|
|
$
|
2,707
|
|
|
$
|
1,122
|
|
|
$
|
1,585
|
|
|
|
141
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The CSS
product operating loss as a percentage of CSS product sales decreased to a
negative 1% for the quarter ended March 30, 2008 from a positive 1% product
operating income for the quarter ended April 1, 2007. The CSS product
segment operating loss resulted primarily from increased market competition,
promotional sales programs, and allocated general and administrative
expenses.
Zip
product operating income as a percentage of Zip product sales increased to 55%
for the quarter ended March 30, 2008 from 6% for the quarter ended April 1, 2007
primarily due to a goodwill impairment charge taken during the quarter ended
April 1, 2007. We anticipate future volatility in Zip product
operating income as the segment reaches the end of its life
cycle. There is no remaining goodwill related to the Zip product line
on the balance sheet at March 30, 2008, as the final impairment charge was taken
in the second quarter of 2007.
The REV
product operating income as a percentage of REV product sales improved to 4% for
the quarter ended March 30, 2008 compared to 3% for the quarter ended April 1,
2007. The improved REV product operating income for the quarter ended
March 30, 2008 resulted primarily from improved gross margins and lower selling
and marketing expenses.
IOMEGA
CORPORATION AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Product
Segment Operating Income (Loss) (Continued)
The NSS
product operating income as a percentage of NSS product sales decreased slightly
to 8% for the quarter ended March 30, 2008 compared to 9% for the
quarter ended April 1, 2007 due the a mix of lower gross margin product
sales. NSS product operating income increased for the quarter ended
March 30, 2008 as compared to the quarter ended April 1, 2007 primarily due to
higher revenue.
The
Services operating loss was primarily a result of continued start-up and
marketing costs associated with our managed Services business.
Other
products product operating income increased for the quarter ended March 30, 2008
as compared to the quarter ended April 1, 1007 primarily due to higher license
and patent fee income.
Operating
Expenses
The table
below shows the details of and the changes in operating expenses for the three
months ended March 30, 2008 and April 1, 2007.
|
|
For the Three Months
Ended
|
|
|
|
Mar.
30,
|
|
|
Apr.
1,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(In
thousands, except %)
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and
administrative
|
|
$
|
10,851
|
|
|
$
|
10,384
|
|
|
$
|
467
|
|
|
|
5
|
%
|
Research and
development
|
|
|
1,929
|
|
|
|
1,739
|
|
|
|
190
|
|
|
|
11
|
|
Restructuring
reversals
|
|
|
-
|
|
|
|
(38
|
)
|
|
|
38
|
|
|
|
100
|
|
Goodwill impairment
charge
|
|
|
-
|
|
|
|
1,710
|
|
|
|
(1,710
|
)
|
|
|
(100
|
)
|
License and patent fee
income
|
|
|
(1,278
|
)
|
|
|
(350
|
)
|
|
|
(928
|
)
|
|
|
(265
|
)
|
Bad debt
credit
|
|
|
(236
|
)
|
|
|
(264
|
)
|
|
|
28
|
|
|
|
11
|
|
Total Operating
Expenses
|
|
$
|
11,266
|
|
|
$
|
13,181
|
|
|
$
|
(1,915
|
)
|
|
|
(15
|
)%
|
Selling, General and
Administrative Expenses
Selling,
general and administrative expenses remained relatively flat from the quarter
ended March 30, 2008 as compared to the quarter ended April 1,
2007. However, the first quarter of 2008 expenses included $0.7
million of third party costs associated with the ExcelStor Group and EMC
transactions.
Research and Development
Expenses
Research
and development expenses increased for the quarter ended March 30, 2008 compared
to the quarter ended April 1, 2007 due to increased development expenses for NAS
and HDD products, partially offset by lower development costs for REV
products. Research and development expenses remained relatively flat
as a percentage of sales for the quarter ended March 30, 2008 as compared to the
quarter ended April 1, 2007.
IOMEGA
CORPORATION AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Operating
Expenses (Continued)
Goodwill Impairment
Charges
For the
quarter ended March 30, 2008, there was no goodwill impairment charge included
in operating expenses as compared to a $1.7 million charge for the quarter ended
April 1, 2007, relating to Zip goodwill.
This
charge was recorded as a result of quarterly impairment tests due to declining
Zip sales, profits and estimated future cash flows as Zip products reach the end
of their lifecycle. There was no remaining goodwill related to the
Zip product line as of July 1, 2007.
License and Patent Fee
Income
License
and patent fee income increased for the quarter ended March 30, 2008 to $1.3
million compared to $0.4 million for the quarter ended April 1,
2007. License and patent fee income for the quarter ended March 30,
2008 was comprised of software patents which were sold to a third
party.
Bad Debt
Credit
For the
quarter ended March 30, 2008, we had a bad debt credit of $0.2 million compared
a $0.3 million bad debt credit for the quarter ended April 1, 2007.
Restructuring
Charges
We had no
restructuring charges for the quarter ended March 30, 2008. During
the first quarter of 2007, we recorded a net restructuring release of less than
$0.1 million.
Interest
Income
Interest
income was $0.4 million for the quarter ended March 30, 2008, compared to $0.7
million for the quarter ended April 1, 2007. The decrease was
primarily a result of lower cash balances.
Interest
Expense and Other Income (Expense), Net
Interest
expense and other income (expense) was a net other expense of $0.1 million for
the quarter ended March 30, 2008, compared to a net other expense of $0.4
million for the quarter ended April 1, 2007. The primary reason for
the lower other expense is a slight foreign currency gain in the first quarter
of 2008 compared to a foreign currency loss in the same period of
2007.
Income
Taxes
For the
quarter ended March 30, 2008, we recorded a tax provision of $1.0 million on
pre-tax income of $2.9 million. This tax provision was primarily
comprised of taxes provided on foreign earnings and foreign and domestic capital
taxes.
For the
quarter ended April 1, 2007, we recorded a tax provision of $0.2 million on a
pre-tax income of $1.4 million. This tax provision was primarily
comprised of taxes provided on foreign earnings and foreign capital taxes,
partially offset by a release of the deferred tax liability resulting from the
goodwill impairment charge recognized.
IOMEGA
CORPORATION AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Income
Taxes (Continued)
We
adopted the provisions of Financial Accounting Standards Board (“FASB”)
Interpretation No. 48,
Accounting for Uncertainty in Income
Taxes – an interpretation of FASB Statement No. 109
(“FIN 48”) on January
1, 2007. FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in accordance with SFAS No. 109, “Accounting for Income Taxes”,
and prescribes a recognition threshold and measurement process for financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return.
At March
30, 2008, we have $4.5 million of unrecognized tax benefits, $2.6 million of
which would affect our effective tax rate if recognized.
We
recognize interest and penalties related to uncertain tax positions in income
tax expense. As of March 30, 2008 and December 31, 2007, we have
approximately $0.3 million of accrued interest related to uncertain tax
positions, which was also reclassified from current to non-current liabilities
upon adoption of FIN 48.
We expect
that a reduction of approximately $2.7 million of unrecognized tax benefits may
occur within 12 months as a result of projected resolutions of worldwide tax
disputes and the lapse of various statutes of limitations. The
portion of this reduction which is expected to result in cash payments to tax
authorities has been shown as a current liability on the financial
statements.
The tax
years 2003-2007 remain open to examination by the Internal Revenue Service
(“IRS”). We are no longer subject to examination by the IRS for
periods prior to 2003, although carryforward attributes that were generated
prior to 2002 may still be adjusted upon examination by the IRS if they either
have been or will be used in a future period. Various state and
foreign income tax returns are also under examination by taxing
authorities. We do not believe that the outcome of any examination
will have a material impact on our financial statements.
IOMEGA
CORPORATION AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Liquidity
and Capital Resources
Details
of our total cash, cash equivalents and temporary investments are shown in the
table below:
|
|
Mar.
30,
|
|
|
Dec.
31,
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
(In
thousands, except %)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
cash, cash equivalents and temporary
investments for the U.S.
entity
|
|
$
|
4,345
|
|
|
$
|
7,285
|
|
|
$
|
(2,940
|
)
|
|
|
(40
|
)%
|
Total
cash, cash equivalents and temporaryinvestments for non-U.S. entities
(1)
|
|
|
43,370
|
|
|
|
56,328
|
|
|
|
(12,958
|
)
|
|
|
(23
|
)
|
Total
consolidated cash, cash equivalentsand temporary
investments
|
|
$
|
47,715
|
|
|
$
|
63,613
|
|
|
$
|
(15,898
|
)
|
|
|
(25
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
capital
|
|
$
|
100,108
|
|
|
$
|
96,493
|
|
|
$
|
3,615
|
|
|
|
4
|
%
|
(1)
|
Of
the $43.4 million in total cash, cash equivalents and temporary
investments for non-U.S. entities, $0.1 million was restricted at March
30, 2008. At December 31, 2007, $0.1 million of the non-U.S.
entity cash was restricted.
|
On
average, we anticipate incurring taxes of approximately 5% or less on cash
balances repatriated to the U.S.
For the
three months ended March 30, 2008, cash used in operations amounted to $16.7
million. The primary uses of cash from operations for three months
ended March 30, 2008 were to pay down accounts payable, which decreased by $35.8
million from December 31, 2007. The reduction in accounts payable was
partially offset by a reduction in inventories.
Trade
receivables at March 30, 2008 were basically flat with December 31, 2007 trade
receivables despite lower sales due to the timing of sales within the respective
quarters. Days sales outstanding (“DSO”) in receivables increased
from 31 days at December 31, 2007 to 38 days at March 30, 2008. DSO
increased primarily due to the timing of sales within the respective
periods. Inventories decreased during the three months ended March
30, 2008 due to normal seasonality.
Our goal
is to increase cash flows from operations by improving the financial results of
the CSS business, in particular HDD and improving NSS and REV product sales and
margins. Although we have made significant progress on most of these
initiatives, we can give no assurance that this progress is sustainable due to
the seasonality of sales and inventory purchases, as well as the timing of
payments made on vendor payables and cash receipts from customers on trade
receivables.
IOMEGA
CORPORATION AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Liquidity
and Capital Resources (Continued)
We
believe that our current balance of total unrestricted cash, cash equivalents
and temporary investments will be sufficient to fund anticipated working capital
requirements, capital expenditures and cash required for other activities for at
least one year.
We
do not believe that our cash balances would be adequate to fund a material
acquisition. In that situation, we would need to borrow cash or fund
the acquisition through a stock offering. Additionally, cash flow
from future operations, investing activities and the precise amount and timing
of our future financing needs cannot be determined. Future cash flow
will depend on a number of factors, including management’s ability to achieve
the goals set forth herein and those factors set forth in the section labeled
“Risk Factors” in Item 1A of Part II in this Form 10-Q. Should we be
unable to meet our cash needs from our current balance of total unrestricted
cash, cash equivalents and temporary investments and future cash flows from
operations, we would most likely incur additional restructuring charges to
adjust our expenditures to a level that our cash flows could support and/or seek
financing from other sources.
Our
current balance of total unrestricted cash, cash equivalents and temporary
investments is our sole source of liquidity. There is no assurance
that, if needed, we would be able to obtain financing from external sources or
obtain a competitive interest rate.
Other
Matters
Recent Accounting
Pronouncements
In March
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards (“SFAS”) No. 161,
Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement
No. 133
. SFAS No. 161 changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments; (b) how derivative instruments and related hedged items are
accounted for under SFAS No. 133, as amended; and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance and cash flows. SFAS No. 161 is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. The adoption of SFAS No. 161 will not have a
material impact on the Company’s financial statements.
In
December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in
Consolidated Financial Statements—an amendment of ARB No. 51
. SFAS
No. 160 establishes accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. The statement is effective for fiscal years beginning after
December 15, 2008 and interim periods within those fiscal years. The
adoption of SFAS No. 160 is not expected to have a material impact on the
Company’s financial statements.
In
December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS
No. 141R”),
Business
Combinations
. SFAS No. 141R requires the acquiring entity in a
business combination to recognize the assets acquired, the liabilities assumed
and any noncontrolling interest in the acquiree to be measured at their
respective fair values at the acquisition date. Acquisition-related costs
incurred prior to the acquisition are required to be expensed rather than
included in the purchase-price determination. SFAS No. 141(R) also provides
guidance for recognizing and measuring the goodwill acquired in a business
combination and determines what information to disclose to enable users of the
financial statements to evaluate the nature and financial effects of the
business combination. The statement applies prospectively to business
combinations for which the acquisition date is on or after January 1, 2009.
The adoption of SFAS No. 141R is not expected to have a material impact on
the Company’s financial statements.
IOMEGA
CORPORATION AND SUBSIDIARIES
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Continued)
Other
Matters (Continued)
Potential EMC
Acquisition
On April
8, 2008, Iomega Corporation and EMC Corporation (“EMC”) announced a definitive
agreement for EMC to acquire Iomega in a cash tender offer of $3.85 per
outstanding share. On April 25, 2008, EMC commenced a cash tender
offer for all outstanding shares (“Shares”) of the common stock of Iomega at a
price of $3.85 per share, net to the seller in cash. The cash tender
is being made pursuant to the Offer to Purchase, dated April 24, 2008 and in
connection with the Agreement and Plan of Merger, dated as of April 8, 2008,
among EMC, Emerge Merger Corporation (a wholly owned subsidiary of EMC formed
for the purpose of making the Offer) and Iomega.
There is
no financing condition to the tender offer, but the tender offer is subject to
certain other conditions set forth in the Offer to Purchase, including,
obtaining regulatory approvals from antitrust authorities in the U.S. and the
European Commission. On April 22, 2008, the Federal Trade Commission
granted early termination of the waiting period under the under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, with respect
to the tender offer and merger.
ExcelStor Group
Transaction
On April
8, 2008 concurrent with the announcement regarding the definitive agreement for
EMC to acquire Iomega, Iomega announced the termination of the Share Purchase
Agreement, dated December 12, 2007, by and among Iomega Corporation, ExcelStor
Great Wall Technology Limited, a Cayman Islands company, Shenzhen ExcelStor
Technology Limited, a People’s Republic of China (“PRC”) company, Great Wall
Technology Company Limited, a PRC Company, ExcelStor Group Limited, a Cayman
Islands company, and ExcelStor Holdings Limited, a British Virgin Islands
company. Additionally, we paid $7.5 million to ExcelStor as required
under the Share Purchase Agreement in conjunction with terminating the
Agreement.
IOMEGA
CORPORATION AND SUBSIDIARIES
ITEM
3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK:
For
quantitative and qualitative disclosures about market risk affecting Iomega, see
Item 7A, “Quantitative and Qualitative Disclosures about Market Risk”, of our
Annual Report on Form 10-K for the fiscal year ended December 31,
2007. Our exposure to market risk has not changed materially since
December 31, 2007.
ITEM
4.
CONTROLS
AND PROCEDURES:
Our
management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of March 30, 2008. Management recognizes that any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving their objectives and management
necessarily applies its judgment in evaluating the cost-benefit relationship of
possible controls and procedures. Based on the evaluation of the
Company’s disclosure controls and procedures as of March 30, 2008, our chief
executive officer and chief financial officer concluded that, as of such date,
our disclosure controls and procedures were effective at the reasonable
assurance level.
No change
in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the first quarter ended
March 30, 2008 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
The
certifications of our chief executive officer and chief financial officer
attached as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q
include, in paragraph 4 of such certifications, information concerning our
disclosure controls and procedures and internal control over financial
reporting. Such certifications should be read in conjunction with the
information contained in this Item 4 for a more complete understanding of the
matters covered by such certifications.
IOMEGA
CORPORATION AND SUBSIDIARIES
PART
II – OTHER INFORMATION
ITEM
1.
LEGAL
PROCEEDINGS
On May 8,
2008, the Company was served with a complaint filed in California state court
against Iomega, each of Iomega’s directors, EMC Corporation and Emerge Merger
Corporation. The Complaint alleges breach of fiduciary duties by Iomega’s
directors in connection with the recently announced proposed acquisition of
Iomega by EMC. The action,
Feivel Gottlieb v. Stephen David, et
al. (Case No. 37-2008-00054-CU-MC-NC
.,
Superior Court of the State of
California, County of Vista
–
North County
), seeks to bring
claims on behalf of an individual and an alleged class of public stockholders of
Iomega, seeking, among other things, injunctive relief with respect to the
proposed transaction and damages. At this stage, there have been no rulings on
the merits. Iomega intends to vigorously defend against the
lawsuit.
There are
no other material legal proceedings to which we or any of our subsidiaries are a
party or to which any of our property is subject. We are involved in
lawsuits and claims generally incidental to our business, none of which are
expected to have a material adverse effect on our business, financial condition
or results of operations.
ITEM
1A.
RISK
FACTORS
Demand for Our Products and
Services and Operating Efficiencies
Our
operating results depend on our ability to develop or acquire new products or
services and to operate profitably in an industry characterized by intense
competition, rapid technological advances and low margins. This, in
turn, will depend on a number of factors, including:
·
|
Our
ability to avoid business distraction and disruption while in the midst of
closing the acquisition of Iomega by
EMC;
|
·
|
Our
ability to improve and/or sustain satisfactory HDD gross
margins;
|
·
|
Our
ability to generate significant sales and profit margins from REV
®
and NAS products;
|
·
|
Our
ability to replace declining Zip
®
revenues and profits with revenues and profits from other
products;
|
·
|
Worldwide
market conditions and demand for digital storage products and other
products we continue to add as we move
forward;
|
·
|
Our
success in meeting targeted availability dates for new and enhanced
products;
|
·
|
Our
ability to develop and commercialize new intellectual property and to
protect existing intellectual
property;
|
·
|
Our
ability to maintain profitable relationships with our distributors,
retailers and other resellers;
|
·
|
Our
ability to maintain an appropriate cost
structure;
|
·
|
Our
ability to attract and retain competent, motivated
employees;
|
·
|
Our
ability to comply with applicable legal requirements throughout the
world;
|
·
|
Our
ability to utilize reliable outsource partners for certain critical
functions at prices that keep us
competitive;
|
·
|
Our
ability to successfully manage litigation, including enforcing our rights,
protecting our interests and defending claims made against
us.
|
These
factors are difficult to manage, satisfy and influence. Although we
have recorded net income in the past seven quarters, 2007 was the first year
that we have been able to operate profitably on an annual basis since 2002 and
we cannot provide any assurance that we will be able to sustain profits in the
future.
32
IOMEGA
CORPORATION AND SUBSIDIARIES
PART
II – OTHER INFORMATION
Risk
Factors (Continued)
Zip
Products
Zip
®
products have accounted for the
majority of our product operating income since 1997 and have provided our only
meaningful source of product operating income until 2007. However,
Zip product sales have declined consistently and significantly on a
year-over-year basis since peaking in 1999. These declines are
expected to continue through the end of the Zip product lifecycle, due to the
general obsolescence of Zip technology and the emergence of alternate storage
solutions. Given this continuing decline, we can offer no assurance
that we will be able to maintain profitable operations on our Zip business in
the future. Further, we will not be profitable unless we generate
significant product operating income from products other than Zip
products. We can provide no assurance that we will be able to do so
in the future.
REV
Products
Future
results of our REV products entail numerous risks relating to factors such
as:
·
|
Any
lack of market acceptance of our third generation of REV products, the REV
120GB products;
|
·
|
Failure
to maintain acceptable arrangements with product component suppliers,
particularly in light of lower than anticipated
volumes;
|
·
|
Manufacturing,
technical, supplier, or quality-related delays, issues or concerns,
including the loss of any key supplier or failure of any key supplier to
deliver high quality products on
time;
|
·
|
The
inability of our OEM partner in the broadcast industry, Thomson
N.A., to achieve significant volumes of its recently
launched products utilizing REV drives and
disks;
|
·
|
Potential
declines in demand for REV 35GB and REV 70GB products because of the
launch of REV 120GB products and
|
·
|
Risks
that third parties may assert intellectual property claims against REV
products.
|
IOMEGA
CORPORATION AND SUBSIDIARIES
PART
II – OTHER INFORMATION (Continued)
Risk
Factors (Continued)
Consumer Storage Solutions
Products
Virtually
all of our CSS products are commodity-type products, which are similar to many
other widely available products. These competing products are
marketed by both name-brand manufacturers and generic competitors and we source
hard drives from the same companies we compete with. Hard drive
manufacturers, who are suppliers and also competitors, have an inherent cost
advantage and therefore can undercut Iomega’s pricing in the market at any
time. Moreover, besides our trademarks, we own limited intellectual
property relating to many of our CSS products. Consequently, this
segment is characterized by intense competition, the frequent introduction of
new products and upgrades for existing products, supply fluctuations and
frequent end user price reductions. In order to compete successfully,
we must accurately forecast demand, closely monitor inventory levels, secure
quality products, meet aggressive product price and performance targets, create
market demand for our brand and hold sufficient, but not excess,
inventory. In light of these new challenges, we can offer no
assurance that we will achieve sustainable profitability on this
segment. Additionally, in order to reduce the product costs of our
HDD drives, we have changed our supply chain. We now have several low
cost, manufacturers in Asia that assemble our drives. The raw drives
are consigned to these vendors which increases our cash conversion cycle on
these products. Due to a combination of the lower margins, the longer
cash conversion cycle, and the growth of this business segment, there can be
cash flow pressures.
Further,
in their own effort to seek the highest margin possible, large retail customers
seek levels of promotional funds or other consideration and benefits that may
not be consistent with our profit goals; lower retail sales or higher selling
expenses therefore can result from positions taken by large
retailers.
Development, Introduction
and Expansion of New Products and Services and New Revenue
Streams
We
believe that we must continually either develop or acquire the right to
profitably sell new products or services in order to remain viable in the data
storage industry. However, our efforts in this regard have frequently
been unsuccessful. Since 1999, we have developed and/or acquired the
right to market a variety of new products, but many have not delivered
consistent, material profits.
We are
spending significant resources attempting to develop new products. We
may spend additional resources attempting to acquire the rights to new
technologies or services, to fund development of such technologies or to
otherwise differentiate existing products. We can provide no
assurance that any of these expenditures will yield profits.
IOMEGA
CORPORATION AND SUBSIDIARIES
PART
II – OTHER INFORMATION (Continued)
Risk
Factors (Continued)
Restructuring, Other Cost
Reduction Activities and Retention of Key Personnel
We have
initiated various restructuring actions in the past in conjunction with our
desire to reduce costs, operate efficiently and maintain lean staffing
levels. Other restructuring actions may be necessary in the
future. Our ability to retain key employees or our success at
maintaining institutional knowledge and consistent application of controls, may
be adversely affected because of past or any future restructuring activities or
any regrettable turnover of personnel.
Internal Control Reporting
Compliance Efforts
Under
Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in
each Annual Report a report on internal control over financial
reporting.
We are
always at risk that any future failure of our own controls or the controls at
any of our outsourcing partners could result in reported material
weaknesses. Responsibility for the finance function for Europe has
changed hands internally as we have restructured and experienced voluntary
turnover over the past year. We have many employees performing tasks
that they have not performed in the past, which could result in errors or lost
knowledge. Although we continue to invest resources in Section 404
compliance activities, we can provide no assurance that we will be successful in
these efforts to avoid reporting a future material weakness in internal control
over financial reporting. Any such reported material weakness could
have a material impact on our market capitalization, financial statements or
have other adverse consequences.
Product Manufacturing and
Procurement
We have
fully outsourced all manufacturing and have no direct control over the
manufacturing processes of our products. This lack of control may
increase quality or reliability risks and could limit our ability to quickly
increase or decrease production rates.
Outsourced Distribution and
Logistics
Because
we have outsourced our distribution and logistics operations, we rely upon the
computer systems, business processes and internal controls of our distribution
and logistics services provider. These systems may develop
communication, compatibility, control or reliability problems. In
addition, we face risks of operational interruptions, missed or delayed
shipments, unexpected price increases and inventory management
risks. We have periodically experienced operating disruptions and in
our 2004 Form 10-K, we reported a material weakness (subsequently remediated) in
internal controls over financial reporting due to some of these
factors.
Reporting of Channel
Inventory and Product Sales by Channel Partners
We defer
recognition of sales on estimated excess inventory in the distribution, retail
and DMR (direct merchandising retailers) channels. For this purpose,
excess inventory is the amount of inventory that exceeds the channel’s four-week
requirement as estimated by management. We rely on reports from our
distributors, resellers and DMR customers to make these
estimations. Although we have processes and systems checks in place
to help reasonably ensure the accuracy of the reports, we cannot guarantee that
the third-party data, as reported, will be accurate.
IOMEGA
CORPORATION AND SUBSIDIARIES
PART
II – OTHER INFORMATION (Continued)
Risk
Factors (Continued)
Concentration
of Credit Risk
We market
our products primarily through computer product distributors, retailers and
OEMs. Accordingly, as we grant credit to our customers, a substantial
portion of outstanding trade receivables are due from computer product
distributors, certain large retailers and OEMs. If any one or a group
of these customers’ receivable balances should be deemed uncollectible, it would
have a material adverse effect on our results of operations and financial
condition. As we sell fewer products through the retail channel, we
have less leverage with such retailers and increased exposure to payment delays
or other collection issues with retailers. Additionally, the retail
market is very competitive and consolidating and, as a result, major retailers
could reorganize, consolidate, go out of business, and any such events could
impact our external HDD sales.
Company Operations,
Component Supplies and Inventory
It is
difficult to negotiate or maintain favorable pricing, supply, business or credit
terms with our vendors, suppliers and service providers. We
anticipate continued challenges in this area for the foreseeable
future. Zip and REV products, as well as certain key components, are
each manufactured by single manufacturers, which creates risks of disruption in
the event of labor, quality or other problems at Zip or REV product
manufacturers or certain key component manufacturers. In addition,
product manufacturing costs may increase if we fail to achieve anticipated
volumes. There can be no assurance that we will be able to
successfully manage these risks.
As
suppliers upgrade their components, they regularly “end of life” older
components. As we become aware of an end of life situation, we
attempt to make purchases to cover all estimated future requirements or find a
suitable substitute component. In such cases, we may not be
successful in obtaining sufficient numbers of components or in finding a
substitute. In particular, Zip products are quickly approaching the
end of their lifecycle and we have experienced supplier charges and excess
inventory components. Although we cannot quantify the charges, we
anticipate future charges related to Zip end of life. In summary, we
can offer no assurance that we will be able to obtain a sufficient supply of
components on a timely and cost effective basis. Our failure to do so
would lead to a material adverse impact on our business.
Purchase
orders for components or finished products are based on forecasted future sales
requirements. It is difficult to estimate future product demand for
new products or products with declining sales. Further, our customers
frequently adjust their ordering patterns in response to factors such as
inventory on hand, new product introductions, seasonal fluctuations, promotions,
market demand and other factors. As a result, our estimates, when
inaccurate, can result in excess or insufficient purchase
commitments. We have recorded significant charges in the past
relating to excess purchase commitments and inventory reserves and these charges
can adversely affect our financial results. We may be required to
take similar charges attributable to forecasting inaccuracies in the
future.
IOMEGA
CORPORATION AND SUBSIDIARIES
PART
II – OTHER INFORMATION (Continued)
Risk
Factors (Continued)
Intellectual Property
Risks
Patent,
copyright, trademark or other intellectual property infringement claims have
been and may continue to be asserted against us at any time. As we
increase our revenue, it is possible that the volume of such assertions may
increase, based upon our increased visibility, range of products, or
attractiveness as a potential target for licensing fees. Such
intellectual property claims could have a number of adverse consequences,
including an injunction against current or future product shipments, liability
for damages and/or royalties, indemnification obligations and significant legal
expenses. We try to protect our intellectual property rights through
a variety of means, including seeking and obtaining patents, trademarks and
copyrights, and through license, nondisclosure and other
agreements. Any failure or inability to adequately protect our
intellectual property rights could have material adverse
consequences.
International
Operations
Our
International operations currently account for more than two-thirds of our
revenue. Additionally, we have a relatively small administrative
staff to support these operations. Much of the support is coming from
Corporate in the U.S. International laws and rules can be very
complicated and there is a risk that we will not meet all of the legal, tax and
other requirements which could result in penalties or other
actions.
Legal
Risks
We have
entered into multiple agreements, including license, service, supply, resale,
distribution, development and other agreements in multiple jurisdictions
throughout the world. We are also subject to an array of regulatory
and compliance requirements, including foreign legal requirements and a complex
worldwide tax structure. In addition, we employ people throughout the
world. Although we attempt to fulfill all of our obligations, enforce
all of our rights appropriately and comply with all applicable laws and
regulations under these agreements and relationships, our organization is
complex and errors may occur.
We have
been sued and may be sued, under numerous legal theories, including breach of
contract, tort, product liability, intellectual property infringement and other
theories. Such litigation, regardless of the outcome, may have an
adverse effect upon our profitability or public perception.
IOMEGA
CORPORATION AND SUBSIDIARIES
PART
II – OTHER INFORMATION (Continued)
Risk
Factors (Continued)
EMC Transaction
Risks
We are
spending substantial resources and time in support of our pending strategic
transaction with EMC. This raises numerous risks for
Iomega. The acquisition of Iomega by EMC is a fundamental change, and
employees may become distracted from normal operational duties because of the
changes or fear of changes associated with such a transaction. While
management continues to focus on its business results as an independent company,
diverted time and attention prior to closing the transaction could impact
business focus and ultimately our results. Litigation is always a
risk when strategic deals are pending. If the EMC transaction were to
fail to close, we would have substantial additional expenses to cover and would
not have received the benefit of the transaction. Current business
partners could ask to change terms or could cancel their business dealings with
Iomega in response to our new ownership and affiliation.
Other
Risk Factors
We are
subject to risks associated with general economic conditions and consumer
confidence. Any disruption in consumer confidence or general economic
conditions including those caused by acts of war, natural disasters affecting
key suppliers or key facilities, terrorism or other factors could affect our
operating results. Significant portions of our sales are generated in
Europe and, to a lesser extent, Asia. We invoice the majority of our
European customers in Euros and invoice most of our remaining customers in U.S.
dollars. Fluctuations in the value of foreign currencies relative to
the U.S. dollar that are not sufficiently hedged by international customers
invoiced in U.S. dollars could result in lower sales and have an adverse effect
on future operating results. Additionally, the majority of our
products are produced and/or assembled in Asia. Although we primarily
purchase these products in US dollars, our vendors incur costs in the local
currency. With the weakening of the US dollar against these
currencies, it causes lower margins for our vendors and could result in price
increases
IOMEGA
CORPORATION AND SUBSIDIARIES
PART
II – OTHER INFORMATION
ITEM
2.
UNREGISTERED
SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS:
During
the quarter ended March 30, 2008, we did not repurchase any shares of our Common
Stock. As of March 30, 2008, approximately $122.3 million remained
available for future repurchases under the $150 million stock repurchase plan
authorized by our Board of Directors on March 28, 2000. The
repurchase plan does not have a fixed termination date.
ITEM
6.
EXHIBITS:
The
exhibits listed on the Exhibit Index filed as a part of this Quarterly Report on
Form 10-Q are incorporated herein by reference.
39
IOMEGA
CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
IOMEGA
CORPORATION
(Registrant)
/s/
Jonathan S.
Huberman
.
Dated: May
9,
2008 Jonathan
S. Huberman
Vice Chairman and Chief
Executive Officer
/s/ Preston
Romm
.
Dated: May
9,
2008 Preston
Romm
|
Vice
President of Finance and
|
Chief Financial Officer(Principal
financial and
accounting officer)
IOMEGA
CORPORATION AND SUBSIDIARIES
EXHIBIT INDEX
The
following exhibits are filed as part of this Quarterly Report on Form
10-Q:
Exhibit
No.
|
Description
|
|
|
|
Lease
agreement with Boyer Iomega II, a Utah Limited Liability Company, by its
managing partner, The Boyer Company, L.C., (the “Landlord”), and Iomega
Corporation (the “Tenant”).
|
|
Section
302 certification letter from Jonathan S. Huberman, Vice Chairman and
Chief Executive Officer.
|
|
Section
302 certification letter from Preston Romm, Vice President of Finance and
Chief Financial Officer.
|
|
Section
906 certification letter from Jonathan S. Huberman, Vice Chairman and
Chief Executive Officer.
|
|
Section
906 certification letter from Preston Romm, Vice President of Finance and
Chief Financial Officer.
|
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