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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
1-12333
(Commission file number)
Iomega Corporation
(Exact name of registrant as specified in its charter)
Delaware 86-0385884
(State of Incorporation) (IRS employer identification number)
1821 West Iomega Way, Roy, UT 84067
(Address of principal executive offices) (ZIP Code)
(801) 778-1000
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------------ -----------------------------------------
Common Stock, par value
$.03-1/3 per share New York Stock Exchange
Rights to Purchase Series
C Junior Participating
Preferred Stock, $0.01
par value per share New York Stock Exchange
6-3/4% Convertible
Subordinated Notes due 2001 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No _______
Indicate by checkmark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. __
The aggregate market value of Common Stock held by non-affiliates of the
registrant at January 31, 1998, was $1,984,021,439, based upon the last reported
sales price of the Common Stock as reported by the New York Stock Exchange. The
number of shares of the registrant's Common Stock outstanding at January 31,
1998, was 261,764,985.
Documents incorporated by reference:
Specifically identified portions of the Company's Annual Report to
Stockholders for the year ended December 31, 1997, into Part I and
Part II of Form 10-K.
Specifically identified portions of the Company's Definitive Proxy
Statement for its 1998 annual meeting of stockholders into Part III of
Form 10-K .
PART I
This Annual Report on Form 10-K contains a number of forward-looking statements,
including information with respect to Iomega Corporation's ("Iomega" or the
"Company") plans to position its products as industry standards, establish OEM
relationships and license its Zip(R) and Jaz(R) technologies to third parties,
the Company's manufacturing strategies, cost control and cost reduction
initiatives, relationships with third parties, the availability of key
components, current and future product development projects, including the
anticipated availability, pricing and specifications of Clik!(TM) efforts to
protect its intellectual property rights, the possible effects of another party
succeeding in producing and selling Zip- or Jaz-compatible disks without
infringing or violating the Company's intellectual property rights, the possible
effects of adverse outcomes in litigation or in resolutions of infringement
claims asserted by third parties and the projection of revenue and losses. For
this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects" and
similar expressions are intended to identify forward-looking statements. There
are a number of important factors that could cause actual events or the
Company's actual results to differ materially from those indicated by such
forwarding-looking statements. These factors include, without limitation, market
acceptance of, and demand for, the Company's drive and removable disk products,
manufacturing issues, including availability of certain key components of the
Iomega Zip and Jaz drives and disks, product development delays, quality issues,
the Company's success in filling a number of key management vacancies, including
the appointment of a new permanent President and Chief Executive Officer, a
senior executive responsible for Sales and Marketing and General Managers for
certain of the Company's divisions, intellectual property rights, the outcome of
litigation described in Part I, item 3 of this Annual Report on Form 10-K and
the other factors set forth under the caption "Factors Affecting Future
Operating Results" included under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" in Part II of this Annual Report
on Form 10-K.
ITEM 1. BUSINESS:
The Company designs, manufactures and markets innovative personal data
storage solutions, based on removable-media technology for personal computer and
consumer electronics device users. The Company's primary data storage solutions
include disk drives and disks for personal computers marketed under the
trademarks Zip and Jaz and a family of tape drives and tapes for personal
computers marketed under the trademark Ditto(TM) In addition, the Company has
announced, and plans to introduce in the second half of 1998, Clik!, a
miniaturized removable-media storage solution for use in a variety of hand-held
electronic devices. The Company's Zip and Jaz storage systems are designed to
provide users with the benefits of high capacity and rapid access generally
associated with hard disk drives and the benefits of media storage generally
associated with floppy disk drives and disks, including expandable storage
capacity and data transportability, management and security. The Company's Ditto
tape drives primarily address the need for backup data storage.
Iomega Storage Solutions
The Company believes its Zip and Jaz disk drives and disks address key
information storage and management needs of personal computer users by providing
affordable, easy-to-use storage solutions that combine the high capacity and
rapid access of hard disk drives with the benefits of media removability
generally associated with floppy disk drives. The Company's Ditto tape drives
offer a convenient and effective way for personal computer users to create
backup copies of their programs and files. Specifically, the Company's Zip, Jaz
and Ditto products are designed to offer the following benefits to personal
computer users:
- --------
Iomega, Zip, Jaz, Bernoulli and the stylized "i" logo are registered
trademarks; Clik!, ZipPlus, Ditto, Ditto Max, Ditto Dash, n hand, Zip Built-In,
AutoDetect and RecordIt are trademarks of Iomega Corporation. All other products
and brand names mentioned are the property of their respective owners.
Expandable Storage Capacity. As personal computer users are increasingly forced
to expand their primary storage capacity (generally provided by the hard disk
drive incorporated in the computer), Zip and Jaz provide an easy and efficient
way to do so. The Zip and Jaz drives can be easily connected or installed and
offer unlimited additional storage capacity, in increments of 100 megabytes
(MBs) (in the case of Zip) and 1 or 2 gigabytes (GBs) (in the case of Jaz).
Media Removability. The Company's Zip and Jaz products store data on
high-capacity removable disks, thus enabling personal computer users to:
- take programs and files from an office computer to use on a home or
laptop computer;
- share or transfer programs and files with other personal computer
users;
- organize data by storing different files on different disks;
- create a "separate personal computer" for each person using the
computer (such as different family members) -- each user can store his
or her software and data on a single disk that can be removed from the
computer and privately stored when that person is not using the
computer; and
- remove particularly sensitive or valuable information from the
computer for storage in a different location, thus protecting it
against viewing, modification or damage by another user of the
computer.
Data Backup. The Company's family of Ditto tape drives and tapes, as well as the
Zip and Jaz storage systems, offer a convenient and effective way for personal
computer users to create backup copies of their programs and files.
Attractive Price, Performance and Features. The Company believes that its
storage systems provide a combination of price, performance and features that
make them attractive data storage solutions for their target markets. Zip offers
data access times, transfer rates and storage capacity that greatly exceed those
offered by conventional floppy disk drives and disks, along with the benefits of
removable media, at a price that is attractive to mass-market customers. Jaz
offers many performance features comparable to those of most other data storage
devices (including conventional hard disk drives), at a competitive price. Ditto
offers high backup capacities (up to 10 GBs assuming 2:1 compression) more
suitable to today's larger hard disks, at prices competitive with low-capacity
tape drives while incorporating simple "one-step" software that allows users to
backup while they continue working.
Products
The Company offers products targeted at both the mass market and the
high-performance market. Zip drives and the Ditto 2GB tape drives were designed
to achieve price levels which the Company deems crucial to mass-market
consumers. The Jaz 1GB and 2GB drives and Ditto Max(TM) and Ditto Max
Professional tape drives, on the other hand, are principally targeted to more
technically demanding, high-end customers, while still offering affordability.
Iomega's Zip and Jaz products continued to be recognized by industry
publications and trade groups during 1997, receiving a number of prestigious
awards, including: Computer Currents' "Readers Choice Award" (Zip); PC World's
"The Best products of 1997 - Removable media/portable drive" (Zip); Home Office
Computing's "6th Annual Editors' Pick Award" (Jaz 1GB); PC/Computing's "1997 MVP
Awards Finalist - Removable Storage" (Jaz 1GB); PC/Computing's "Most Valuable
Products" award (Jaz 1GB); and Computer Shopper's "Best Removable/Backup Drive"
(Jaz 1GB).
The following table lists the principal data storage devices currently
being offered by the Company:
Product Typical Retail Price
(Year Introduced) Media and Capacity(1) Drive/Disk (2) Technology
Zip (1995) (3) 100MB Zip Disks $149/$12.95 Drive: Winchester heads
ZipPlus(TM) (1997) 100MB Zip Disks $199/$12.95 Disks: Advanced flexible media
Notebook Zip (1997) 100MB Zip Disks OEM Product
Jaz 1GB (1995) (3) 1GB Jaz Disks $299/$89.95 Drive: Thin-film heads
Jaz 2GB (1998) (3) 2GB Jaz Disks $649/$149.95 Disks: Two rigid disk platters
Ditto 2GB (1996) (3) Ditto Tape 3.7GB $169/$19.95 Drive: Direct drive mechanism
Ditto Max (1997) (3) Ditto Tape 7-GB $199/$29.95 Media: Proprietary format of Ditto
Ditto Max Professional quarter inch tape cartridges
(1998) (3) Ditto Tape 10-GB $299/$34.95
(1) The indicated capacities for Ditto tape cartridges represent the maximum
capacity assuming 2:1 data compression.
(2) Indicates the minimum advertised price or, if none, the typical price at
which the external version of the drive and the highest capacity media
for that drive is sold at retail. Prices for the internal version of a
drive are generally lower. Disk prices represent per unit purchase price
in multi-packs.
(3) Drives are available in internal and external versions.
Zip
Since its introduction in March 1995 and through the end of 1997, more than
11 million Zip drives have been shipped. Designed as an affordable mass-market
product, the Zip drive addresses multiple needs of personal computer users: data
storage, archiving, hard drive expansion, data transportability, distributing
files, including multimedia presentations, data security and backup. The drive
uses interchangeable 100 MB Zip disks to provide users of personal computers,
including Apple/Macintosh-compatible personal computers, with 70 times the
capacity of, and up to 20 times faster performance than, traditional floppy
disks. Zip drives were designed with 100 MB disks based on the results of the
Company's market research, which showed that a substantial majority of the files
stored on personal computers were 100 MBs or less.
Zip drives use durable, high-capacity flexible media and Winchester-type
nanoslide heads with a special airbearing surface combined with a linear voice
coil motor. The Zip drive provides high capacity and rapid access and can be
used for a number of data storage purposes. The SCSI and ATAPI interface
versions of the Zip drive, which offer faster performance than the parallel port
version of the drive, feature 29 millisecond average seek time and an average
sustained data transfer rate of slightly over 1.1 MBs per second. Software
included with the Zip drive provides a total data storage solution by helping
users organize, copy, move and backup their data and offers software read/write
protection, which further enables users to secure and protect their data.
The external, portable version of the Zip drive weighs approximately one
pound and is offered in a parallel port version for use with IBM PC-compatible
computers and a SCSI version for use with Apple/Macintosh-compatible computers
or IBM PC-compatible computers which have a SCSI adapter board with an external
SCSI connector. The SCSI version has two connectors allowing it to be connected
with other SCSI devices. The external Zip drive has a compact design, a window
allowing visibility of the label on the cartridge being used, rubber feet for
positioning the drive flat or on its side, operation lights and a finger slot
for easy cartridge insertion and removal. Internal versions of the Zip drive
include SCSI and ATAPI interface models.
ZipPlus
Building on the success of the original Zip, in the third quarter of 1997,
Iomega expanded the Zip family to include ZipPlus. ZipPlus includes all of the
features of the original Zip in addition to many new enhancements such as easier
connections; faster performance; bundled Iomega and third-party multimedia
software; and an on/off switch. Iomega's AutoDetect(TM) technology enables the
ZipPlus drive to be used with either SCSI or parallel port connections, offering
the industry's first parallel port drive with a built-in path to SCSI for higher
performance. Windows 95 users benefit from a 40 percent increase in speed for
opening, saving and copying files. The ZipPlus drive includes a small, universal
power supply (4 oz.) that is compatible with voltages worldwide.
Notebook Zip
To bring the high capacity, high performance and ease of use of Zip to the
mobile computer market, the Company began shipping notebook Zip drives in
November 1997. Features include 40 percent faster performance than the original
SCSI or ATAPI Zip drives in a Windows 95 environment, a Zip lock feature which
helps ensure reliability even during excessive or abrupt movement, a
user-defined power management feature that helps preserve a notebook computer's
battery, a slim 15mm design that fits most notebook computer bays, and a suite
of software including Iomega RecordIt(TM) and FileFit.
OEMs
As of March 1998, the following PC and consumer electronics companies
incorporate, or have announced plans to incorporate, Zip drives in selected
models of their lines of personal computers as a standard or optional feature:
Acer, Apple, APS Technologies, Chicony, Cisco, Clevo, Compal, Compaq, Dell,
Digital, Gateway, Glyph, Hitachi - Japan, Hewlett-Packard, IBM, Micron
Electronics, NEC - U.S., NEC - Japan, Packard Bell, Packard Bell - Europe,
Sharp, Sony, Umax and Unisys.
The Zip drive carries a one-year limited warranty and Zip disks are
currently sold with a limited lifetime warranty except where local law prohibits
such warranties.
Jaz
The Company began shipping Jaz 1GB drives and Jaz 1GB disks in December
1995. Jaz addresses the high-performance needs of personal computer and other
system users in several areas: professional applications (graphics, desktop
publishing, software development, IT/MIS, CAD/CAM, audio and video), corporate
users (sales force automation and back-up) and personal computer enthusiasts
(multimedia, worldwide web applications). The Jaz 1GB drive offers data transfer
rates comparable to those of most current hard disk drives, with an average
sustained transfer rate of 5.4 MBs per second, 12 millisecond average seek time
and 17.5 millisecond average access time. Jaz disks are available in a capacity
of 1 GB, which the Company's market research indicated was a capacity that many
high-performance computer users demanded. Using 1 GB disks, Jaz is capable of
storing 1,000 24-bit full color pictures, 56 minutes of video (2X CD-ROM quality
data), or 1.7 hours of audio (CD quality, stereo). The Jaz 1GB drive is
available in an external SCSI version, with a suggested retail price of $299,
and is available in an internal SCSI version, with a typical retail price of
$279. Each Jaz 1GB cartridge sells for an estimated price of $89, if purchased
in quantities of six or more.
The Jaz 1GB drive incorporates many advanced technological features
including tri-pad, thin-film recording heads, dynamic head loading and drag and
drop motorized cartridge ejection. Jaz disks feature a dual rigid platter
cartridge and a proprietary disk capture system which secure the dual disk
platters when not installed in a drive, eliminating rattle and reducing the
possibility of losing valuable information. The drive operates with leading
operating systems for personal computers and workstations, including Windows 95,
Windows NT, Windows 3.x, Macintosh and OS/2. Software included with the Jaz
drive provides a total data storage solution by helping users organize, copy,
move and backup their data and offers software read/write protection, which
further enables users to secure and protect their data.
The external version of the drive, which weighs approximately two pounds,
features design enhancements similar to those introduced with the external Zip
drive, including a unique jade colored casing, a window to allow visibility of
the label on the cartridge being used and operating lights. Additional features
include an auto-switching power supply to allow operation in different countries
and auto-sensing SCSI termination.
Jaz 2GB
Due to the demand for an even higher capacity drive, the Company announced
Jaz 2GB, a 2-gigabyte storage solution, in September 1997. The Jaz 2GB removable
drive utilizes an ultra-SCSI interface, includes a complete software suite,
provides twice the capacity and up to 40 percent faster performance than the
original Jaz drive. With a maximum sustained transfer rate of 8.7 megabytes per
second, Jaz 2GB is fast enough to deliver full-screen, full-motion video. The
Jaz 2GB drive is also capable of reading and writing to Jaz 1GB disks. The
Company began shipping Jaz 2GB in February 1998.
Jaz drives carry a one-year limited warranty and Jaz disks are currently
sold with a limited lifetime warranty except where local law prohibits such
warranties.
Ditto
The Company's Ditto family of tape drives addresses the need of personal
computer users for an easy-to-use, affordable and dependable backup solution. In
response to information learned from consumers regarding the characteristics
demanded from backup storage devices, the Company, in 1996, redesigned its
family of tape drives, which had originally been introduced in 1992. The Company
offers internal and external models ranging in capacity from 2 GBs to 10 GBs
(assuming 2:1 data compression). The tape drives are primarily designed to
backup and protect against loss of data stored on hard disk drives in IBM
PC-compatible computers, with storage capacities large enough to protect all of
the data on most hard drives, not just selected files. In 1996, the Company
introduced a proprietary tape format for use with the Ditto 2GB drive which is
available only from the Company and Sony, the manufacturer of the cartridges. In
November 1997, the Company shipped a new 3.7 GB compressed capacity cartridge
for the Ditto 2GB drive. The storage media offered by Iomega for use with Ditto
tape drives is based on proprietary formatting of quarter inch tape cartridges.
The Company continued its proprietary strategy by introducing the Ditto Max (in
late 1997) and Ditto Max Professional (in early 1998) drives and tapes. The
Ditto Max drives can be used with 3, 5, and 7 GB compressed capacity proprietary
tapes and the Ditto Max Professional can read 3, 5, 7, and 10 GB compressed
capacity proprietary tapes. Each of the proprietary format tapes used in the
Ditto Max and the Ditto Max Professional drives are manufactured for the Company
by a third party and marketed by the Company under the Ditto brand and by the
third-party manufacturer of such tapes. The 3 GB tape is manufactured by Sony, 5
GB tapes are manufactured by Sony and Imation, and the 7 GB and 10 GB tapes are
manufactured by Verbatim. During 1997, the Company discontinued production of
its Ditto 3200 drives.
The Company's tape drives are generally available in either internal or
external models. The internal version of the Ditto 2GB attaches to the standard
1 Mbps floppy drive interface in IBM PC-compatible computers or, in the case of
Ditto Max and Ditto Max Professional, the Ditto Dash(TM) DX, a high speed
adapter card which ships with the drives, while the external versions attach to
the parallel printer port on IBM PC-compatible computers and offer pass-through
capability for a printer. The drives are shipped with backup software for
specified DOS, Windows, and Windows 95 environments. In addition, Ditto Max
Professional ships with backup software for specified Windows NT environments as
well. The Company's tape products include 1-Step software designed to permit the
backup of an entire hard disk in a single step while the user continues working.
The Ditto 2GB, the Ditto Max and the Ditto Max Professional each carry a
two-year limited warranty. The Company's proprietary Ditto media is also sold
with a two-year limited warranty.
Clik!
The Company has announced, and plans to introduce in the second half of
1998, a miniaturized removable-media storage solution for use in a variety of
hand-held consumer electronics devices. This technology, initially announced
under the name n hand(TM), will be marketed under the trademark Clik!. Clik!
drives are designed to be used with digital cameras, laptop computers, smart
phones, personal digital assistants and other personal electronic devices and
are designed to allow users to transfer data between these devices, personal
computers and other Iomega products.
The Clik! product family is expected to include a small, low-cost portable
drive (external and internal versions) designed for hand-held electronic devices
and is expected to utilize 40 MB disks, each approximately half the size of a
business card, at an expected retail price of $9.95 per Clik! disk.
Marketing and Sales
The Company believes that broadening the distribution of its products
through strategic marketing alliances with a variety of key companies within the
computer industry is a critical element in the Company's strategic goal of
establishing its products as industry standards. The Company's initial marketing
strategy for the introduction of its new products has been to generate consumer
awareness of and demand for such products by focusing on aftermarket sales to
existing users of personal computers through leading computer retail channels.
The Company's current strategy is to position its products as industry
standards. To accomplish this, the Company has focused and will continue to
focus on establishing and maintaining OEM relationships with leading personal
computer manufacturers as well as granting royalty-based licenses that allow
third-party manufacturers to produce and sell the Company's drives to OEMs and
other customers for their own accounts. Sales of Zip drives to OEM customers
increased to approximately 32% of total Zip drive unit sales in 1997, as
compared to approximately 5% in 1996. To support and foster increased OEM sales,
Iomega initiated a broad-based Zip Built-In(TM) campaign during 1997.
During 1997, the Company decreased the suggested retail prices of its Zip,
Jaz and Ditto drives and conducted other promotions designed to further increase
market share. During 1998, the Company plans to increase spending, by a
substantial amount, on print and television advertising campaigns which are
designed to create greater consumer awareness of, and demand for, both its
aftermarket and OEM drives and to educate users on the potential uses for
multiple disks so as to increase demand for disks. In addition, in order to help
offset the expenses associated with the additional advertising, the Company is
currently planning to delay certain price decreases that may have otherwise been
effected earlier in 1998. Such delays in price decreases could allow competing
solutions to gain market share.
Retail Distribution
Retail outlets for the Company's products include mail order catalogs,
computer superstores, office supply superstores, consumer electronics
superstores, specialty computer stores and other retail outlets. The Company
sells its products to retail channels directly, as well as indirectly through
distributors. The Company's products are sold at a retail level by most of the
leading retailers of computer products in the United States and Europe and can
be found in more than 10,000 storefronts around the world. Retailers carrying
the Company's products include Best Buy, Circuit City, CompUSA, Computer City,
Costco Warehouse, Egghead, Fry's Electronics, MicroCenter, Office Max and
Staples in the U.S., and Dixons, FINAC, MicroWarehouse and Vobis in Europe.
Distributors include Ingram Micro, Merisel, MicroAge and Tech Data in the U.S.;
Actebis, Computer 2000, Ingram Micro Europe, and Karma International in Europe;
and Gennett Technologies, Q*Soft Australia Pty. Ltd. and Sunkyong Distribution
Ltd. in Asia.
Strategic Marketing Alliances
In addition to sales through retail and distribution channels, the Company
has entered into a number of strategic marketing alliances with a variety of
companies within the computer industry. These alliances include OEM arrangements
providing for certain of the Company's products to be incorporated in new
computer systems at the time of purchase. During 1997, the Company continued to
gain significant industry support from major PC companies that began or
announced plans to begin to incorporate Zip drives into their computer systems
as standard or optional features. At the end of 1997, the Company's OEM partners
included, among others: Acer, Apple, APS Technologies, Axis Communications,
Chicony, Cisco, Clevo, CNF, Compal, Compaq, Dell, Fuji, Gateway, Glyph, Hitachi,
Hewlett-Packard, IBM, Maxell, Micron Electronics, NEC, Packard Bell, Sharp,
Sony, Umax, Unisys and VST.
The Company's strategic alliances also include private-branding and
co-branding arrangements with major vendors of computer products covering the
resale of the Company's products by such companies as Maxell and Fuji, who offer
Zip drives in Japan and Zip disks globally in packages which feature Iomega's
name in addition to the partner's name.
International
The Company sells its products outside of North America primarily through
international distributors and retailers. The Company has increased its sales
and marketing efforts in the European and Asian markets in the past several
years and has established several sales offices in both Europe and Asia. Prior
to 1997, the Company had been invoicing predominantly in foreign currencies in
Europe. In 1997, the majority of sales to European customers were denominated in
U.S. dollars. Sales to Asian customers are typically denominated in U.S.
dollars. In total, sales outside of the United States represented 39%, 34% and
32% for the years ended December 31, 1997, 1996 and 1995, respectively, (see
note 13 to Consolidated Financial Statements).
Marketing
The Company's worldwide marketing group is responsible for positioning and
promoting the Company's products. The Company participates in various industry
tradeshows, including MacWorld, CeBIT and COMDEX, and seeks to generate coverage
of its products in a wide variety of trade publications. During 1997, the
Company continued its major print advertising campaigns for its Zip, Jaz and
Ditto products and television advertising campaigns in support of its Zip
products with an emphasis on the Company's Zip Built-In campaign aimed at
increasing awareness and demand of the availability of Zip storage solutions as
a built-in feature in personal computers. The Company expects marketing and
advertising expenses to increase substantially in 1998 as the Company seeks to
expand market awareness of its products and brand and educate consumers about
the many possible uses for Zip and Jaz disks.
As is common practice in the industry, the Company's arrangements with its
retail and distribution customers generally allow customers, in the event of a
price decrease, credit equal to the difference between the price originally paid
and the new decreased price on units in the customers' inventories on the date
of the price decrease. When a price decrease is anticipated, the Company
establishes reserves for amounts estimated to be reimbursed to qualifying
customers. In addition, distribution and retail customers generally have the
right to return excess inventory within specified time periods. The Company
establishes reserves for inventory returns. There can be no assurance that these
reserves will be sufficient or that any future returns or price protection
charges will not have a material adverse effect on the Company's results of
operations and financial condition.
The Company markets its products primarily through computer product
distributors, retailers and OEMs. Accordingly, since the Company grants credit
to its customers, a substantial portion of outstanding accounts receivable are
due from computer product distributors, certain large retailers and OEMs. At
December 31, 1997, the customers with the ten highest outstanding accounts
receivable balances totaled $140.9 million, or 44% of gross accounts receivable,
with one customer accounting for $31.6 million, or 10% of gross accounts
receivable. If any one or a group of these customers' receivable balances should
be deemed uncollectible, it would have a material adverse effect on the
Company's results of operations and financial condition.
During the year ended December 31, 1997, sales to Ingram Micro, Inc., a
distributor, accounted for 14% of sales. During the year ended December 31,
1996, sales to Ingram Micro, Inc., accounted for 15% of sales. No other single
customer accounted for more than 10% of the Company's sales in 1997 or 1996.
Seasonality and Other Fluctuations of Revenue
Iomega's Zip products are targeted to the retail consumer market and to
personal computer OEMs. The Company's Jaz and Ditto products are targeted
primarily to the retail consumer market. Management believes the markets for the
Company's products are generally seasonal, with a higher proportional share of
total sales occurring in the fourth quarter and sales slowdowns commonly
occurring during the first quarter and summer months. Primarily as a result of
such seasonality, the Company experienced a decline in sales between the fourth
quarter of 1996 and the succeeding first quarter of 1997, and, partly because of
such seasonality, the Company expects to experience a decline in sales between
the fourth quarter of 1997 and the first quarter of 1998.
In March 1998, the Company announced, based on review of its preliminary
first quarter results, that it anticipates first quarter 1998 revenue to be
relatively flat with first quarter 1997 revenues and anticipates incurring a
loss for the first quarter 1998 in the range of $10 million to $25 million.
Revenues and growth rates for any prior quarter are not necessarily indicative
of revenues or growth rates to be expected in any future quarter.
Manufacturing
The Company's products are manufactured by the Company at facilities in
Roy, Utah and Penang, Malaysia and by independent parties manufacturing products
for the Company on a contract basis. Manufacturing activity generally consists
of assembling various components, subcomponents and prefabricated parts
manufactured by outside vendors. Since the first quarter of 1997, a substantial
portion of the Company's Zip drives, Jaz drives and disks and Ditto drives have
been manufactured in the Penang, Malaysia facility that was purchased by the
Company in September 1996. Due to the rapid growth of the Company's
manufacturing output and due to certain design changes and supplier quality
issues, combined with the shift of production to Penang, during 1997 the Company
experienced manufacturing quality problems, including higher than desired
manufacturing defect rates. The Company is undertaking a number of programs
designed to improve quality and reduce manufacturing defect rates and intends to
apply greater focus during 1998 on continuing to improve its manufacturing
processes.
During 1995, the Company was unable to produce enough of its products to
fill all of its orders and, therefore, turned to third-party manufacturers to
help satisfy demand. During 1996, the Company purchased a 376,000 square-foot,
manufacturing facility in Penang, Malaysia to serve as an additional
manufacturing site for the Company's Zip drives, Jaz drives and disks and Ditto
drives. Although the Company believes it is positioned (either through existing
capacity or planned additional capacity) to produce the majority of its products
in the future, it still intends to use certain third-party manufacturers for the
foreseeable future. There can be no assurance that the Company will not from
time to time encounter difficulties in providing necessary levels of
manufacturing capacity or that it will be successful in managing relationships
with third-party manufacturers, or that third-party manufacturing will be able
to meet the Company's quality requirements or third-party quantity requirements
for manufactured products. The Company currently has third-party manufacturing
relationships with Electronics Assembly, Inc. (which currently produces external
Zip drives), MegaMedia Corporation and Sentinel N.V. (which produce a
significant majority of all Zip disks) and Sony, Imation and Verbatim (each of
which produces one or more of the proprietary format tapes used with the
Company's Ditto products.
During 1996 and 1997, the Company granted non-exclusive worldwide licenses
to NEC Corporation (NEC) and Matsushita Communication Industrial Co., Ltd. of
Japan (MCI), respectively, to manufacture and sell Zip drives under NEC's and
MCI's brand names, as well as to OEMs. MCI commenced shipping drives in April
1997, and NEC commenced shipping drives in May 1997. In March 1998, the Company
granted a non-exclusive worldwide license to Citizen Watch Co., Ltd. of Japan
(Citizen), to manufacture and sell Clik! drives for use in its own portable
electronic products, to other OEMs and consumers worldwide. These agreements
increase competition faced by the Company, including price competition, since
the Company does not control the price at which NEC, MCI or Citizen sells
products for its own account. The Company receives (or will receive) royalties
on units sold to third parties by NEC, MCI and Citizen.
Many components incorporated in, or used in, the manufacture of the
Company's products are currently available only from single or sole source
suppliers. In particular, media used in Zip disks is obtained exclusively from
Fuji Photo Film and certain integrated circuits used in Zip drives are obtained
exclusively from Symbios Logic. The Company has experienced difficulty in the
past, and may experience difficulty in the future, in obtaining a sufficient
supply of many key components on a timely basis. The Company continues to
develop relationships with qualified manufacturers with the goal of securing
high-volume manufacturing capabilities and controlling the cost of current and
future models of the Company's products; however, there can be no assurance that
the Company will be able to obtain a sufficient supply of components on a timely
basis or realize any future cost savings. For example, sales were adversely
affected during the second and third quarters of 1997 due to a shortage of
certain integrated circuits for Zip drives and supplier quality problems, and
were adversely affected in the fourth quarter due to a shortage of components
for Notebook Zip drives which became commercially available during November
1997. Sales may be adversely affected for these or similar reasons in the
future.
The Company purchases a portion of its single, sole and limited source
components pursuant to purchase orders without guaranteed supply arrangements.
The inability to obtain sufficient components and equipment, or to obtain or
develop alternative sources of supply at competitive prices and quality, or to
avoid manufacturing delays could prevent the Company from producing sufficient
quantities of its products to satisfy market demand (or, in the case of a
component purchased exclusively from one supplier, the Company could be
prevented from producing any quantity of the affected product(s) until such
component becomes available from an alternative source), delay product
shipments, increase the Company's material or manufacturing costs or cause an
imbalance in the inventory levels of certain components. Moreover, difficulties
in obtaining sufficient components may cause the Company to modify the design of
its products to use a more readily available component, and such design
modifications may result in product performance problems. Any or all of these
problems could in turn result in the loss of customers, provide an opportunity
for competing products to achieve market acceptance and otherwise adversely
affect the Company's business and financial results.
The Company had a backlog at the end of January 1998 of approximately $220
million, compared to a backlog at the end of January 1997 of approximately $76
million. The backlogs at the end of January 1998 and 1997 were related primarily
to orders with scheduled shipment dates in future months and in January 1998, a
portion of the backlog was a result of delays in new product introductions. The
purchase agreements or purchase orders pursuant to which orders are made
generally allow the customer to cancel orders without penalty, and the Company
has experienced some cancellations or rescheduling of orders in backlog.
Moreover, it is common in the industry during periods of product shortages or
perceived product shortages for customers to engage in practices such as double
ordering in order to increase a customer's allowance of available product.
Accordingly, the Company's backlog as of any particular date should not be
relied upon as an indication of the Company's actual sales for any future
period.
Product Development
An important element of the Company's business strategy is the ongoing
enhancement of existing products and the development of new products. During
1996 and 1997, the Company's efforts were primarily focused on enhancing the
features, developing different system interfaces, developing higher capacity and
performance versions, enhancing and expanding compatibility with various
computers and operating systems and reducing the production costs of its
existing Zip, Jaz and Ditto products. Moreover, the Company is looking at
advanced head/media systems for future platforms beyond the current family of
Jaz products and plans to increase its efforts in the areas of software
utilities and solutions, which will continue to emphasize "ease of use"
functionality.
In addition to development and enhancements to its Zip, Jaz and Ditto
products, the Company is developing a new storage technology called Clik!
(successor to the nohand technology announced in 1996), which is designed to be
built into hand-held consumer electronics devices ranging from digital cameras
and game devices to cellular phones and personal digital assistants. This
technology is expected to provide a single, affordable means of capturing,
moving and storing information across multiple products. Each Clik! disk is
expected to be approximately half the size of a business card and is expected to
hold 40 MB of data. The Company believes Clik! has the potential to open up
several new markets for removable magnetic recording devices and expects it to
be available beginning in the second half of 1998. There can be no assurance
that the Company will be successful in developing, manufacturing and marketing
this product or that it will be able to do so within in the desired time frame.
During 1997, 1996 and 1995, the Company's research and development expenses
were $78.0 million, $42.1 million and $19.6 million, respectively (or 4.5%, 3.5%
and 6.0%, respectively of net sales). Increased research and development
spending in 1997 was primarily related to efforts focused on the Company's Zip,
Jaz and Clik! product lines.
The Company operates in an industry that is subject to both rapid
technological change and rapid change in consumer demands. The Company's future
success will depend in significant part on its ability to continually develop
and introduce, in a timely manner, new removable-media disk drive products with
improved features, and to develop and manufacture those new products within a
cost structure that enables the Company to sell such products through effective
channels at lower prices than those of competitive products. There can be no
assurance that the Company will be successful in developing, manufacturing and
marketing new and enhanced products that meet both the performance and price
demands of the data storage market.
Competition
The Company believes that its Zip and Jaz products compete with other data
storage devices, such as fixed hard drives (for upgrade), magnetic cartridge
disk drives (that use either floppy or rigid media), magnetic tape drives,
magneto optical drives, optical disk drives and "floptical" disk drives. Current
competing solutions of removable media data storage devices include the LS-120,
or SuperDisk (product co-developed by the consortium of Compaq Computer,
Imation, O.R. Technology and MKE), the SyJet 1.5 GB, EZ Flyer 230 and SparQ 1.0
GB (products of Syquest Technology, Inc.), the Shark 250 (product of Avatar
Peripherals, Inc.), products of Nomai S.A. and the new CD-R and CD-RW drives. In
addition, a number of new systems have been announced including the 200 MB
high-capacity 3.5 inch floppy disk system being developed jointly by Sony
Corporation and Fuji Photo Film Co., Ltd. which they announced is planned to be
introduced in the spring of 1998 and the 2.16 GB Orb drive which has been
announced by Castlewood Systems, Inc. Although the Company believes that its Zip
and Jaz products offer advantages over the other removable-media storage devices
and other storage solutions available today, the Company believes that the
price, performance and usability levels of existing removable-media products
have improved and will continue to improve and that other companies will
introduce new removable-media storage devices and new non-removable storage
solutions. Accordingly, the Company believes that its Zip and Jaz products will
face increasingly intense competition.
The Company believes that in order to compete successfully against current
and future sources of competition, it will be necessary to further reduce the
manufacturing costs of its products, thus enabling the Company to sell its
products at lower prices. As new and competing removable-media storage solutions
are introduced, it is possible that any such solution that achieves a
significant market presence or establishes a number of significant OEM
relationships will emerge as an industry standard and achieve a leading market
position. If such is the case, there can be no assurance that the Company's
products would achieve significant market acceptance.
To the extent that Zip and Jaz drives are used for incremental primary
storage capacity, they compete with non-removable media storage devices such as
conventional hard disk drives, which are offered by companies such as Seagate
Technology, Western Digital Corporation, Quantum Corporation and Maxtor
Corporation, as well as integrated computer manufacturers such as NEC, IBM,
Fujitsu, Hitachi and Toshiba. In addition, the leading suppliers of conventional
hard disk drives could at any time determine to enter the removable-media
storage market.
The Company believes that it is currently the only source of supply for the
disks used in its Jaz drives and believes Nomai S.A., a French company, is the
only source of supply other than the Company for disks marketed for use with Zip
drives. The Company is involved in litigation with Nomai in several
jurisdictions regarding Nomai's disk products. It is possible that other sources
of supply for disks used in Zip or Jaz drives will emerge, either as a result of
Nomai or another party succeeding in producing disks that are compatible with
Zip and/or Jaz drives without infringing the Company's proprietary rights, or as
a result of licenses granted by the Company to other parties. (See Note 4 to
Consolidated Financial Statements and the "Legal Proceedings" section in item 3
of this report.)
The Company's tape drives compete in the market for backup data storage
with other QIC and Travan products. Travan products currently offer capacities
up to 8 GBs (assuming 2:1 data compression). The Company's two major competitors
in the tape drive market are Seagate Technology and Hewlett-Packard. Tape drives
may in the future encounter increased competition from other forms of
removable-media storage devices. The proprietary format tapes used in the
Company's Ditto 2GB, Ditto Max and Ditto Max Professional drives are each
marketed by the Company and the third-party manufacturer or manufacturers of
such tapes.
In the OEM market for both its disk drives and tape drives, the Company
competes with the vendors mentioned above, as well as with the manufacturers of
personal computers, who may elect to manufacture data storage devices
themselves.
The Company has entered into license agreements with Matsushita
Communication Industrial Co., Ltd. of Japan and NEC Corporation for the
manufacture and sale of Zip drives. Accordingly, the Company faces competition
from such licensees and expects to compete in the future with any other
licensees of the Company's products. In addition, the Company has granted
certain companies the right to purchase drives or disks from the Company
(generally at a discount to the price paid by retail channels) and resell such
products under private brand names, and the Company's products may become
subject to increased price competition from such private branded resellers.
Price competition from other resellers of the Company's products, whether or not
the Company has a manufacturing relationship with such party, may result in
increased pressure on the Company to reduce the prices at which its products are
sold to such resellers or others or to offer rebates. The Company continually
evaluates its prices and may elect to reduce prices or offer rebates in the
future. Reductions in the prices at which the Company sells its products or any
rebates offered by the Company would adversely affect gross margins to the
extent such reductions or rebates are not offset by reductions in the cost of
manufacturing such products.
The Company believes that most consumers distinguish among competitive data
storage products on the basis of some or all of the following criteria: price
(cost per unit and cost per megabyte of storage capacity), performance (speed
and capacity), functionality (reliability, product size, removability,
transportability and size of installed base of users), ease of installation and
use, and security of data. Price is a particularly important factor with respect
to the Company's mass-market products (the Zip and Ditto 2GB drives). Additional
competitive considerations, particularly in the OEM market, are the size (form
factor) of the drive and the interface type with which the drive is compatible.
Winchester drives are available in 5.25-inch, 3.5-inch, 2.5-inch and 1.8-inch
form factors. The most common form factor for Winchester and floppy drives is
3.5-inches. The Company currently offers 3.5-inch Zip and Jaz drives. The most
common system interface for the OEM market is ATAPI. The Company currently
offers internal Zip drives in ATAPI and SCSI interface models, internal Jaz
drives in SCSI interface models, internal Ditto 2GB drives in floppy interface
models and internal Ditto Max drives which use the Ditto Dash DX controller
card.
The data storage industry is highly competitive, and the Company expects
that competition will substantially increase in the future. In addition, the
data storage industry is characterized by rapid technological development. The
Company competes with a number of companies that have greater financial,
manufacturing and marketing resources than the Company. The availability of
competitive products with superior performance, functionality, ease of use,
security or substantially lower prices could adversely affect the Company's
business.
Proprietary Rights
The Company relies on a combination of patent, copyright and trade secret
laws to protect its technology. While the Company currently intends to
vigorously enforce its intellectual property rights, there can be no assurance
that the steps taken by the Company to protect its technology and enforce its
rights will be successful (see "Legal Proceedings" section in item 3 of this
report). The Company has filed approximately 300 U.S. and foreign patent
applications relating to its Zip, Jaz and Clik! drives and disks, although there
can be no assurance that such patents will be issued. The Company holds more
than 100 individually or jointly owned U.S. and foreign patents relating to its
Zip, Jaz, Ditto and Bernoulli(R) technologies. There can be no assurance that
any patents obtained by the Company will provide substantial value or protection
to the Company, or that their validity will not be challenged or that
affirmative defenses to infringement will not be asserted. The validity of
certain of the Company's patents has been challenged by parties against whom
infringement claims have been asserted. If another party were to succeed in
producing and selling Zip- or Jaz-compatible disks in volume, without infringing
or violating the Company's intellectual property rights, the Company's sales
would be adversely affected and such adverse effects could be material. It is
also possible that the price at which the Company sells its proprietary disks
could be adversely affected by the availability of such disks from other
parties. Moreover, because the Company's Zip and Jaz disks have higher gross
margins than the Zip and Jaz drives, the Company's net income would be
disproportionately affected by any such sales shortfall. Due to the rapid
technological change that characterizes the Company's industry, the Company
believes that the success of its disk drives will also depend on the technical
competence and creative skill of its personnel in addition to legal protections
afforded its existing drive technology.
As is typical in the data storage industry, from time to time the Company
has been, and may in the future be, notified of claims that it may be infringing
certain patents, trademarks and other intellectual property rights of third
parties. It is not possible to predict the outcome of such claims and there can
be no assurance that such claims will be resolved in the Company's favor. If one
or more of such claims is resolved unfavorably, there can be no assurance that
such outcomes will not have a material adverse effect on the Company's business
or financial results. The data storage industry has been characterized by
significant litigation relating to infringement of patents and other
intellectual property rights. The Company has in the past been engaged in patent
infringement litigation, both as plaintiff and defendant. There can be no
assurance that future intellectual property claims will not result in
litigation. If infringement were established, the Company could be required to
pay substantial damages or be enjoined from manufacturing and selling the
infringing product(s) in one or more countries, or both. In addition, the costs
of engaging in intellectual property litigation may be substantial regardless of
outcome, and there can be no assurance that the Company will be able to obtain
any necessary licenses on satisfactory terms.
Certain technology used in the Company's products is licensed on a
royalty-bearing basis from third parties, including certain patent rights
relating to Zip products and the backup software included with the Company's
Ditto products. The Company is in the process of negotiating a definitive
license agreement for the Ditto backup software and the failure to execute such
definitive agreement or the termination of any such license arrangements could
have a material adverse effect on the Company's business and financial results.
Employees
As of December 31, 1997, the Company employed 4,816 persons worldwide,
consisting of 381 in research and development, 3,302 in manufacturing, 416 in
sales, marketing and service, 281 in customer satisfaction and 436 in general
management and administration. None of the Company's employees are subject to a
collective bargaining agreement, and the Company has never experienced a work
stoppage. The Company's success will depend in large part upon the services of a
number of key employees. The loss of the services of one or more of these key
employees could have a material adverse effect on the Company. Effective March
24, 1998, Kim B. Edwards, resigned as President and Chief Executive Officer of
the Company. James E. Sierk, a member of the Company's Board of Directors, has
assumed the role of acting President and Chief Executive Officer while the
Company conducts a search for a new President and Chief Executive Officer. The
Company is also seeking to fill a number of other key management vacancies,
including the appointment of a senior executive responsible for Sales and
Marketing and General Managers of the Company's Europe, Asia Pacific and Mobile
Storage Divisions.
Government Contracts
No material portion of the Company's business is subject to renegotiation
of profits or termination of contracts at the election of the United States
government.
Environmental Matters
Compliance with federal, state and local environmental protection laws had
no material effect on the Company in 1997 and is not expected to have a material
effect in 1998.
ITEM 2. PROPERTIES:
The Company's executive offices, certain distribution facilities, certain
manufacturing facilities, and certain research and development facilities are
located in leased offices and warehouses in the Roy, Utah area. During 1997, the
Company leased warehouse facilities in North Carolina to serve as its principal
distribution center for North America. In addition, the Company also leases
office space in various locations throughout North America for local sales,
marketing and technical support personnel, as well as other locations used for
research and development activities.
Additionally, the Company leases office space in Geneva, Switzerland for
use as its international headquarters, and in Utrecht, the Netherlands for use
by its European logistics and distribution personnel. The Company also leases
office space throughout Europe and Asia for local sales, marketing and technical
support personnel. In September 1996, the Company purchased a 376,000 square
foot manufacturing facility in Penang, Malaysia.
The Company owns substantially all equipment used in its facilities through
either outright purchases or capital leases.
ITEM 3. LEGAL PROCEEDINGS:
Except as set forth below, in management's opinion, there are no material
pending legal proceedings, other than ordinary routine litigation incidental to
its business, to which the Company or any of its subsidiaries is a party or to
which any of their property is subject.
The Company is engaged in ongoing litigation in several jurisdictions
against Nomai S.A., a French company, Nomai's U.S. subsidiary and several Nomai
distributors in connection with Nomai's XHD disk products, which Nomai claims to
be compatible with certain of the Company's Zip drives, and a disk product
planned by Nomai, but not yet introduced, purportedly for use with the Company's
Jaz drives, and in connection with various claims asserted by Nomai, including
claims of patent and copyright invalidity, abuse of dominant position, and
improper patent markings and warranty terms in Germany. The principal ongoing
proceedings are as follows:
Iomega Corporation v. Nomai S.A. filed in the Paris District Court on
March 25, 1997 and on September 30, 1997; Nomai S.A. v. Iomega
International S.A. and Iomega Corporation filed in the District Court of
Hamburg on October 13, 1997; Nomus, Inc., and Nomai S.A. v. Iomega
Corporation filed in the United States District Court for the Northern
District of California on October 15, 1997, and amended counterclaims in
such action filed by Iomega on December 17, 1997; a confidential complaint
submitted by Nomai S.A. against Iomega Corporation on October 15, 1997, to
the European Commission in Brussels; Iomega Corporation v. Mac and More
Limited, Nomai S.A. and Marc-Andre Frouin filed in the London High Court of
Justice Chancery Division on October 29, 1997, and Iomega Corporation v.
Nomai S.A. filed in the London High Court of Justice Chancery Division on
March 9, 1998; Iomega Corporation v. Nomai S.A. filed in the Paris District
Court on November 12, 1997, (with respect to Nomai's so-called "DUO"
product in development that purports to be compatible with Iomega Jaz
drives); Iomega Corporation v Triangel Computer GmbH filed in the
Dusseldorf District Court on November 19, 1997; Iomega Corporation v.
Prutting (MediaCom) filed in the Mannheim District Court on November 12,
1997; Iomega Corporation v. Speirings Computers & Supplies B.V. and Nomai
S.A. filed in the Amsterdam Regional Court on December 24, 1997, and
counterclaims in such action filed by the defendants on January 28, 1998;
Iomega Corporation v. boeder Deutschland GmbH filed in the Frankfurt
District Court on December 11, 1997 and on February 6, 1998; Nomai S.A. v.
Misco Germany, Inc. filed in the Frankfurt District Court on January 16,
1998 and Iomega Corporation v. Nomai S.A., et al. filed in the Federal
Court of Australia Victoria District, Registry General Division on March 6,
1998.
In these proceedings the Company has maintained that Nomai's products
infringe the Company's copyrights, patents, trademarks or other intellectual
property rights and/or that Nomai and its distributors have engaged in unfair
competition or passing off. Nomai has denied such infringement, contested the
validity of the underlying intellectual property right and/or denied such unfair
competition and passing off, and in certain European proceedings has asserted
antitrust claims against the Company. The Company has also applied for
declaratory relief against Nomai in respect of certain antitrust allegations
under English and European law. The proceedings are at various stages. In a
number of the proceedings, the court has declined to enjoin preliminarily or to
continue to enjoin preliminarily sales by Nomai of its XHD cartridge, subject in
many cases to certain restrictions on advertising claims made with respect to
XHD cartridges, or on use by Nomai or its distributors of Iomega trademarks
and/or logos. In February 1998, the Amsterdam Regional Court issued a
preliminary order requiring the Company to remove the light baffle from notebook
Zip drives in the possession of European Union distributors and enjoining Iomega
from including in Zip drives, brought in the future to the European Union
market, any device which has no purpose other than to prevent the compatibility
of the XHD disks with Zip storage systems.
An adverse outcome in these proceedings could result in the continuing sale
by Nomai in one or more countries, or the introduction for sale in the United
Kingdom (or other countries where the product is not presently offered for
sale), of a disk product claimed to be compatible with certain Zip drives, and
could result in the introduction and sale by Nomai of a disk product claimed to
be compatible with the Company's Jaz drives. Any such continuing sales or
introductions would adversely affect the Company's sales and would have a
disproportionately negative effect on the Company's net income. Such adverse
effects could be material. In addition, Nomai has asserted various antitrust
claims against the Company, which if decided against the Company could
materially and adversely affect the Company.
On July 23, 1997, the Company initiated litigation against SyQuest
Technology, Inc. ("SyQuest") in the United States District Court in the District
of Delaware for infringing the Company's U.S. Patent No. 5.644,444, U.S. Design
Patent No. D378,518 and the Company's registered trademark "JET". The complaint
requests monetary damages and injunctive relief enjoining SyQuest from further
infringement. The matter is scheduled for trial in January 1999. On March 6,
1998, the Company also initiated litigation against SyQuest, its French
subsidiary and a French distributor of SyQuest products, in the Paris District
Court, based on claims of copyright and patent infringement.
The Company continues to be committed to vigorously protecting and
enforcing its intellectual property rights and to attacking unfair competition
in the proceedings referenced above.
During 1997, two consumer class-action suits against the Company,
Pizzimenti, et al. v. Iomega Corporation, filed in the Chancery Court of the
State of Delaware in and for New Castle County on March 10, 1997, relating to
administration of consumer rebate programs and Cox v. Iomega Corporation, filed
in the Chancery Court of the State of Delaware in and for New Castle County on
July 16, 1997, relating to technical support, were settled. A settlement of the
rebate related Pizzimenti class-action suit was approved by the Chancery Court
on March 24, 1998. The Company has also responded to inquiries received from the
Federal Trade Commission relating to certain rebate and registration card
programs and certain product advertisements. The Company is engaged in
discussions with the Commission staff concerning alleged violations by the
Company of the FTC Act and the Mail Order Rule and is attempting to reach a
resolution with the Commission that would avoid the necessity of litigating
these matters. In the event such discussions do not lead to a mutually
acceptable resolution, management of the Company does not believe an adverse
outcome in any resulting litigation would be material. A settlement of the
technical support related Cox class-action suit has been approved preliminarily
by the Chancery Court and a hearing on the motion for final court approval is
scheduled for April 3, 1998.
Beginning on February 10, 1998, several purported class-action complaints
were filed in the United States District Court for the District of Utah against
the Company and certain of its officers on behalf of certain persons who
purchased the Company's common stock during the period from September 22, 1997,
to January 22, 1998. The complaints allege that the Company and certain of its
officers violated certain federal securities laws. The complaints seek an
unspecified amount of damages. Management believes that the named defendants
have highly meritorious defenses to the allegations made in the lawsuits and the
Company intends to vigorously defend against such allegations.
On February 25, 1998, the Company was served with a complaint in a
purported class action filed in the Supreme Court of the State of New York,
entitled Christian Champod v. Iomega Corporation. The named plaintiff claims to
have commenced the action on behalf of a purported class consisting of certain
persons who purchased Iomega Ditto tape drives since February 18, 1992, and a
subclass consisting of such purchasers who called the Company's "800" or "888"
telephone number for technical assistance and/or customer service and were
charged a fee for the call. The complaint claims violations of certain
provisions of the New York General Business Law and fraudulent inducement, based
on, among other things, alleged advertising and product packaging
representations regarding the Ditto products' ability to "read" certain
non-Ditto cartridges. Additionally, the complaint alleges that Iomega's product
packaging, indicating that a customer could call a toll free "800" or "888"
telephone number for technical assistance, implicitly, but falsely, represented
that the customer could receive free telephone technical support. It is the
Company's belief that these latter claims, at least through September 1, 1997,
i.e., the end of the class period for the Cox action discussed above, would be
subject to release upon approval of the settlement now pending before the
Delaware Chancery Court in the Cox action. As for the remainder of the action,
the Company is assessing the maintainability of the suit as a class action and
intends to defend itself vigorously against the claims asserted.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:
No matters were submitted to a vote of the Company's security holders
during the quarter ended December 31, 1997.
EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company as of March 1, 1998, were as follows:
Name Age Position
Kim B. Edwards 50 President, Chief Executive Officer and Director*
Leonard C. Purkis 49 Senior Vice President - Finance and Chief Financial Officer
L. Scott Flaig 54 Executive Vice President, Operations
Edward D. Briscoe 35 President, Personal Storage Division
Fred Forsyth 54 President, Professional Products Division
Laurie B. Keating 44 Senior Vice President, General Counsel and Secretary
Anton J. Radman, Jr. 45 Senior Vice President, Strategic Business Development
Douglas M. Clifford 54 Vice President, Research and Development
James Kelly 40 Vice President/General Manager, Mobile Storage Division
Kevin O'Connor 39 Vice President, Human Resources
Robert J. Simmons 35 Vice President and Treasurer
Dan E. Strong 39 Vice President and Corporate Controller
* Effective March 24, 1998, Mr. Edwards resigned as President and Chief
Executive Officer of the Company. James E. Sierk, a member of the Company's
Board of Directors, has assumed the role of acting President and Chief Executive
Officer while the Company conducts a search for a new President and Chief
Executive Officer.
Kim B. Edwards joined the Company as President and Chief Executive Officer
on January 1, 1994. From March 1993 to December 1993, Mr. Edwards served as
President and Chief Executive Officer of Gates Energy Products, Inc., a
manufacturer of rechargeable batteries and the successor of General Electric
Battery Division. From January 1987 until March 1993, Mr. Edwards served in
various other executive positions for Gates Energy Products, Inc., including
Vice President and General Manager of its Consumer Business Unit and Vice
President of Marketing and Sales. Prior to that, Mr. Edwards was employed for 18
years at General Electric Company in various marketing and sales positions.
Leonard C. Purkis joined the Company as Senior Vice President, Finance and
Chief Financial Officer in March 1995. Mr. Purkis also served as Treasurer of
the Company from March 1995 until January 1996. Mr. Purkis joined Iomega
following 12 years at General Electric Company, where his most recent assignment
was as Senior Vice President of Finance at GE Capital Fleet Services. He also
held positions in the Financial Services, Lighting and Plastics businesses, with
assignments in Europe and the U.S.
L. Scott Flaig joined the Company in November 1997. From 1996 to 1997, Mr.
Flaig was an adjunct professor at Northwestern University, lectured at top
business schools across the country and performed consulting services in the
area of supply chain management. From 1992 to 1995, Mr. Flaig was Senior Vice
President, Worldwide Operations for Dell Computer based in Austin, Texas. He has
also held senior operations management positions at Ernst & Young, Digital
Equipment Corporation and Xerox.
Edward D. Briscoe was appointed President, Personal Storage Division in
September 1997. Mr. Briscoe joined the Company as Vice President, Sales in
January 1995. From January 1997 to September 1997, Mr. Briscoe served as Vice
President and General Manager of the Personal Storage Division. From May 1993 to
January 1995, Mr. Briscoe was Director of Sales and Marketing for Apple
Computer's Personal Interactive Electronics Division. Prior to that, Mr. Briscoe
was Executive Assistant to the President of Apple USA. From July 1987 to April
1992, he held various sales management positions with Apple Computer, Inc.
Fred Forsyth joined the Company in August 1997. From July 1989 to March
1997, Mr. Forsyth was with Apple Computer where he was most recently Senior Vice
President and General Manager of the Power Macintosh group. Mr. Forsyth also
spent nine years at Digital Equipment Corporation where his experience included
global operational responsibility for procurement, manufacturing and logistics.
From 1968 to 1979, Mr. Forsyth was with General Electric in a variety of
leadership roles and is a graduate of GE's Manufacturing management program.
Laurie B. Keating joined the Company as Senior Vice President, General
Counsel and Secretary in January 1997. Previously, Ms. Keating served as Senior
Vice President, General Counsel and Secretary of Sybase, Inc., a software
company, which she joined in March 1989 as General Counsel and Secretary. Prior
to that, Ms. Keating, from May 1987 to March 1989, served as Group Counsel at
Tandem Computers Incorporated, a fault-tolerant computer maker and software
provider.
Anton J. Radman, Jr. has been Senior Vice President, Strategic Business
Development since April 1995. Mr. Radman joined the Company in April 1980 and
his previous positions with the Company have included Senior Vice President,
Sales and Marketing, Senior Vice President, Corporate Development, President of
the Bernoulli Optical Systems Co. (BOSCO) subsidiary of the Company, Vice
President, Research and Development, Vice President, OEM Products and Sales
Manager, and Senior Vice President, Micro Bernoulli Division.
Douglas M. Clifford joined the Company as Vice President, Research and
Development in October 1996. Prior to that, Mr. Clifford worked 28 years in
various research and development and general management positions for
Hewlett-Packard. His last assignment at Hewlett-Packard was the Information
Storage Group Research and Development Manager where he was responsible for
coordinating the research and development activities of five divisions and their
supporting laboratories.
James Kelly was appointed Vice President and General Manager of the Mobile
Storage Division in January 1997. Mr. Kelly joined the Company in June 1991 and
his previous positions with the Company have included Vice President of Tape
Engineering and Director of Tape Engineering.
Kevin O'Connor joined the Company as Vice President, Human Resources in
January 1997. Mr. O'Connor came to the Company from Dell Computer Corporation
where he held several senior human resource positions. While at Dell, from
October 1995 to December 1996, Mr. O'Connor was Vice President, Human Resources
Asia Pacific, from July 1994 to September 1995, he was Vice President, Human
Resources North America, and from May 1993 to June 1994, he was Director, Human
Resources Worldwide Operations. Prior to his employment with Dell, Mr. O'Connor
spent six years as a Senior Group Manager of Human Resources with the Frito Lay
Division of Pepsico.
Robert J. Simmons joined the Company as Treasurer in January 1996. In
January 1998, he was promoted to Vice President, Treasurer. He was Assistant
Treasurer of Oracle Corporation, a software company, from June 1989 to January
1996.
Dan E. Strong was promoted to Corporate Controller in January 1997, and
Vice President and Corporate Controller in January 1998. Mr. Strong held various
management positions within the finance and accounting organizations of the
Company from January 1985 to June 1994 and from September 1995 to December 1996.
From June 1994 through September 1995, Mr. Strong was Vice President and Chief
Financial Officer of Pro Image Inc., a retailer of licensed sports apparel.
Executive Officers are elected on an annual basis and serve at the
discretion of the Board of Directors.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS:
The information required by this item is found in the section entitled
"Securities" of the Company's 1997 Annual Report to Stockholders, which section
is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA:
The information required by this item is found in the tables entitled
"Trends in Operations" and "Financial Conditions and Trends" of the Company's
1997 Annual Report to Stockholders, which tables are incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
The information required by this item is found in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of the Company's 1997 Annual Report to Stockholders, which section
is incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
The information required by this item is contained in the section entitled
"Financial Highlights" of the Company's 1997 Annual Report to Stockholders,
which section is incorporated herein by reference, and in the financial
statements and schedule referred to in the Index to Consolidated Financial
Statements and Consolidated Financial Statement Schedule, filed as a part of
this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE:
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
The information required by this item appears in the sections of the
Company's Proxy Statement for its 1998 annual meeting of stockholders entitled
"ITEM ONE - ELECTION OF DIRECTORS" and "-- STOCK OWNERSHIP INFORMATION --
Section 16(a) Beneficial Ownership Reporting Compliance", which sections are
incorporated herein by reference and in Part I of this Annual Report on Form
10-K under the heading "Executive Officers of the Company."
ITEM 11. EXECUTIVE COMPENSATION:
The information required by this item appears in the sections of the
Company's Proxy Statement for its 1998 annual meeting of stockholders entitled
"ITEM ONE - ELECTION OF DIRECTORS - DIRECTOR COMPENSATION" and "-- EXECUTIVE
COMPENSATION", which sections are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
The information required by this item is contained in the section of the
Company's Proxy Statement for its 1998 annual meeting of stockholders entitled
"ITEM ONE - ELECTION OF DIRECTORS - STOCK OWNERSHIP INFORMATION -- Ownership by
Management and Principal Stockholders", which section is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
The information required by this item is contained in the sections of the
Company's Proxy Statement for its 1998 annual meeting of stockholders entitled
"ITEM ONE - ELECTION OF DIRECTORS - EXECUTIVE COMPENSATION -- Employment and
Severance Agreements", which section is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:
(a) The following documents are filed as part of or are included in this
Annual Report on Form 10-K:
1. The financial statements listed in the Index to Consolidated
Financial Statements and Consolidated Financial Statement
Schedule, filed as a part of this Annual Report on Form 10-K.
2. The financial statement schedule listed in the Index to
Consolidated Financial Statements and Consolidated Financial
Statement Schedule, filed as a part of this Annual Report on Form
10-K.
3. The exhibits listed in the Exhibit Index filed as a part of this
Annual Report on Form 10-K.
(b) Reports on Form 8-K: No reports on Form 8-K were filed by the Company
during the last quarter of the year ended December 31, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By: /s/ Leonard C. Purkis
Leonard C. Purkis
Senior Vice President-Finance and
Chief Financial Officer
Date: March 30, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Name Title Date
/s/ James E. Sierk Acting President and Chief Executive ) March 30, 1998
- ----------------------------- Officer and Director )
James E. Sierk (Acting Principal executive officer) )
)
/s/ Leonard C. Purkis Senior Vice President - Finance and ) March 30, 1998
- ----------------------------- Chief Financial Officer (Principal )
Leonard C. Purkis financial and accounting officer) )
)
/s/ David J. Dunn Chairman of the Board of Directors ) March 30, 1998
- ----------------------------- )
David J. Dunn )
)
/s/ Willem H.J. Andersen Director ) March 30, 1998
- ----------------------------- )
Willem H.J. Andersen )
)
/s/ Robert P. Berkowitz Director ) March 30, 1998
- ----------------------------- )
Robert P. Berkowitz )
)
/s/ David A. Duke Director ) March 30, 1998
- ----------------------------- )
David A. Duke )
)
/s/ Kim B. Edwards Director ) March 30, 1998
- ----------------------------- )
Kim B. Edwards )
)
/s/ Michael J. Kucha Director ) March 30, 1998
- ----------------------------- )
Michael J. Kucha )
)
- ----------------------------- Director )
John R. Myers )
)
/s/ John E. Nolan Director ) March 30, 1998
- ----------------------------- )
John E. Nolan )
)
/s/ John E. Sheehan Director ) March 30, 1998
- ----------------------------- )
The Honorable John E. Sheehan )
)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND CONSOLIDATED
FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements appear in the Company's
1997 Annual Report to Stockholders and are incorporated herein by reference:
Description
Report of Independent Public Accountants
Consolidated Balance Sheets at December 31, 1997 and 1996
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
The following schedule is included in this Annual Report on Form 10-K:
Description Page Reference
Report of Independent Public Accountants on Consolidated
Financial Statement Schedule..................................... 24
II - Valuation and Qualifying Accounts.................................... 25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
To Iomega Corporation:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in Iomega Corporation's annual
report to stockholders incorporated by reference in this Form 10-K, and have
issued our report thereon dated January 20, 1998 (except with respect to the
fourth paragraph of Note 4, as to which the date is February 10, 1998.) Our
audit was made for the purpose of forming an opinion on those statements taken
as a whole. The schedule listed in the index on page 23 is the responsibility of
the Company's management and is presented for the purpose of complying with
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
January 20, 1998
IOMEGA CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions
Balance at charged to Balance
beginning costs and at end
Description of period expenses Deductions of period
(in thousands)
ALLOWANCE FOR DOUBTFUL
ACCOUNTS:
Year ended December 31, 1997 $ 8,992 $ 3,598 $ (1,324)* $11,266
Year ended December 31, 1996 $ 1,861 $ 9,022 $ (1,891)* $ 8,992
Year ended December 31, 1995 $ 1,627 $ 799 $ (565)* $ 1,861
PRICE PROTECTION AND
VOLUME REBATES:
Year ended December 31, 1997 $17,041 $44,956 $(33,498)** $28,499
Year ended December 31, 1996 $ 1,633 $24,480 $ (9,072)** $17,041
Year ended December 31, 1995 $ 169 $ 7,103 $ (5,639)** $ 1,633
- ---------------
* Represents write-offs of Accounts Receivable
** Credits granted against Accounts Receivable