Form 10-K
Table of Contents

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, 2006

 

1-12333

(Commission file number)

 

LOGO

 


 

Iomega Corporation

(Exact name of registrant as specified in its charter)

 


 

Delaware   86-0385884
(State of Incorporation)   (IRS employer identification number)

 

10955 Vista Sorrento Parkway, San Diego, CA 92130

(Address of principal executive offices)

 

(858) 314-7000

(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 $0.03-1/3 per share

  New York Stock Exchange

Rights to Purchase Series A Junior Participating Preferred

Stock, $0.01 par value per share

  New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:

None

 


 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

 

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 check mark 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.  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)    Yes  ¨    No  x

 

The aggregate market value of Common Stock held by non-affiliates of the registrant at July 2, 2006 was $141,745,431 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 March 6, 2007 was 55,308,020.

 

Documents incorporated by reference:

 

   

Specifically identified portions of the Company’s Definitive Proxy Statement for its 2007 Annual Meeting of Stockholders into Part III of Form 10-K.

 



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Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

 

FORM 10-K

For The Fiscal Year Ended December 31, 2006

 

INDEX

 

          Page

     Note Regarding Forward-Looking Statements    3

PART I

         

Item 1.

   Business    5

Item 1A.

   Risk Factors    17

Item 1B.

   Unresolved Staff Comments    22

Item 2.

   Properties    22

Item 3.

   Legal Proceedings    22

Item 4.

   Submission of Matters to a Vote of Security Holders    22

PART II

         

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    24

Item 6.

   Selected Financial Data    25

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    27

Item 7A.

   Quantitative and Qualitative Disclosures about Market Risk    80

Item 8.

   Financial Statements and Supplementary Data    81

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    81

Item 9A.

   Controls and Procedures    82

Item 9B.

   Other Information    86

PART III

         

Item 10.

   Directors, Executive Officers and Corporate Governance    87

Item 11.

   Executive Compensation    87

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    87

Item 13.

   Certain Relationships and Related Transactions, and Director Independence    87

Item 14.

   Principal Accountant Fees and Services    88

PART IV

         

Item 15.

   Exhibits and Financial Statement Schedule    89
     Signatures    154

 

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IOMEGA CORPORATION AND SUBSIDIARIES

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K contains a number of forward-looking statements, including, without limitation, statements referring to:

 

   

All descriptions of what our future operating results will depend upon;

 

   

objectives of our marketing activities;

 

   

any and all references to our goals;

 

   

statements relating to our anticipated operations, including expectations to fill the order backlog existing at December 31, 2006;

 

   

expectations regarding Zip goodwill impairment and plans for taking these charges including the timing of recording such charges;

 

   

expectations that our distributors and resellers in the EU will continue to sell existing inventory of Zip drives and all other statements about future sales of Zip disks or drives;

 

   

plans to develop and introduce follow-on REV products including with our broadcast industry partner, Thomson;

 

   

statements relating to potential markets for REV products;

 

   

anticipated cost and expense savings from past restructuring actions;

 

   

statements that Zip sales will continue to decline and will be significantly less in 2007 as compared to 2006;

 

   

our continued goal to profitably grow our Network Storage Systems (“NSS”) business and our plans for how best to compete in the NSS business in the future;

 

   

statements relating to our potential receipt of any licensing, royalty or other future payments, including any funds promised in connection with our DCT agreement, or any other intellectual property agreement;

 

   

statement that we are positioned to obtain an adequate supply of our products in the future;

 

   

statements relating to our potential repatriation of cash from foreign subsidiaries;

 

   

the expectation of continuing to lower product procurement costs, reducing ongoing operational costs or differentiating our Consumer Storage Solution products;

 

   

statements about continued or future focus on our supply chain or potential future actions or changes related to logistics or distribution;

 

   

our expectations to reduce product prices or offer rebates in the future;

 

   

anticipated research and development, marketing or promotional activities by us;

 

   

statements that research and development levels will be similar in 2007 to 2006 or that such costs will be associated with network storage products, software enhancements, potential follow-on and next generation REV products, and sourcing, qualification and testing of Consumer Products and other products;

 

   

the impacts of expensing stock option grants;

 

   

the factors affecting future gross margins;

 

   

expected sales levels due to seasonal demand;

 

   

goals to enforce and protect our intellectual property rights;

 

   

the adequacy of any reserves established by us;

 

   

statement that changes in price protection and rebate accruals would not impact our liquidity;

 

   

the expectation that compliance with environmental protection laws will not have a material effect on us in 2007;

 

   

discussions of hedging strategies;

 

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IOMEGA CORPORATION AND SUBSIDIARIES

NOTE REGARDING FORWARD-LOOKING STATEMENTS (Continued)

 

   

expectations that in 2007, we will continue placing substantial focus on our supply chain and supply base;

 

   

expectations relating to revenue recognition, price protection and rebate reserves, inventory valuation reserves, accrued excess purchase commitments, tax valuation allowances and tax contingencies, and impairment of goodwill;

 

   

future disposal of assets;

 

   

the anticipated effects of accounting pronouncements;

 

   

the possible effects of an adverse outcome in any legal proceedings;

 

   

estimated warranty expenses;

 

 

 

our goal to achieve 2007 full year profitability and positive cash flow from operations through containing operating expense spending, HDD sales growth and maintaining or improving the gross margins, growing REV product sales, ramping OfficeScreen® services sales and managing the Zip products business for cash flow;

 

   

the lack of plans to pay any dividend;

 

   

all references to a potential new stock plan;

 

   

all references to those customers whose receivable balances would cause Iomega harm if rendered uncollectible and

 

   

the 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, funding of restructuring actions, capital expenditures and cash required for other activities for at least one year.

 

Any other statements that are not statements of historical fact may be deemed to be forward-looking statements. The words “believes,” “anticipates,” “plans,” “expects,” “intends,” “goals” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these words. 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 7 and 7A of Part II and “Risk Factors” included in Item 1A of Part I of this Annual Report on Form 10-K. In addition, any forward-looking statements represent our estimates only as of the day this Annual Report was first filed with the SEC and we specifically disclaim any obligation to update forward-looking statements, even if our estimates change.

 

___________________________________

Copyright © 2007 Iomega Corporation. All rights reserved. Iomega, Iomega’s stylized ‘I’ logo, Zip, Jaz, REV, OfficeScreen, StorCenter, iStorage, Micro Mini and Hotburn are either registered trademarks or trademarks of Iomega Corporation or its subsidiaries 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.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

 

PART I

 

ITEM 1.    BUSINESS:

 

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.

 

We were incorporated in Delaware in 1980. Our executive offices are located at 10955 Vista Sorrento Parkway, San Diego, CA 92130 and our telephone number is (858) 314-7000. The terms “Iomega”, “we” and “us” refer to Iomega Corporation and our wholly owned subsidiaries, unless the context otherwise specifies. We provide our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, free of charge, in the Investor Relations section of our website at www.iomega.com as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The Company’s Internet site and the information contained therein is not incorporated by reference into this Form 10-K.

 

Product Categories

 

Products are described in more detail below.

 

Our Consumer Products include the following:

 

 

 

Iomega® desktop hard disk drives (“HDD”)

 

   

Iomega portable HDD drives

 

   

Iomega MiniMax HDD drives

 

   

Zip® drives

 

   

Iomega ScreenPlay™ Multimedia drives

 

   

Iomega CD-RW drives

 

   

Iomega DVD rewritable drives

 

 

 

Iomega Micro MiniTM USB flash drives

 

   

Iomega Floppy USB drive and Floppy 7-in-1 card reader drive

 

Our Business Products include the following:

 

 

 

REV® drives

 

   

REV-based Autoloaders

 

   

Iomega Network Attached Storage (“NAS”) servers

 

   

Iomega StorCenter™ network hard drives

 

 

 

OfficeScreen® Managed Firewall and SSL VPN Services

 

 

 

iStorageTM offsite remote storage

 

   

Aftermarket service plans for certain Iomega NAS servers and the REV Autoloaders

 

Regarding all capacity references contained in this filing, one-megabyte (or “MB”) equals 1 million bytes, one gigabyte (or “GB”) equals 1 billion bytes and one terabyte (or “TB”) equals 1 trillion bytes.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

BUSINESS (Continued)

 

Availability

 

Iomega products are generally available worldwide from retailers, direct marketing resellers (“DMRs”) (formerly referred to as catalogs), distributors, original equipment manufacturers (“OEMs”), online vendors, value-added resellers (“VARs”) and system integrators. Iomega services are generally available from telecom resellers and distributors. We also sell our products and services through our www.iomega.com website.

 

Consumer Products

 

Consumer Storage Solutions Products

 

Iomega HDD Drives

 

Iomega Desktop HDD Drives. Iomega desktop HDD drives (3.5-inch form factor) include certain third-party backup software packages, are available in capacities ranging from 250GB to 1TB and are compatible with both PC and Mac® operating systems.

 

Iomega Portable HDD Drives. Iomega portable HDD drives (2.5-inch form factor) are available in capacities ranging from 60GB to 160GB, ship with certain third-party backup software packages, are host powered, so they can be used without requiring a separate power supply and are compatible with both PC and Mac® operating systems.

 

Iomega MiniMax Hard Drives. Iomega MiniMax Hard drives (3.5-inch form factor) are 6.5-inch square, compact external hard drives with capacities ranging from 250GB to 500GB, are also host powered, contain a interactive cooling system and are optimized for use with Mac® mini computers.

 

Iomega ScreenPlay™ Hard Drives. Iomega Screenplay hard drives are 60GB and 320GB Multimedia drives used for entertainment purposes. These small, compact drives allow the user to play stored video, movies or music and view photos directly on a television.

 

Optical Drives

 

Iomega CD-RW Drives. Iomega external CD-RW drives are used for creating customized music CDs, archiving and distributing photos and other digital data files. All current Iomega CD-RW drives are compatible with USB 2.0 interfaces, come with Iomega HotBurn® Pro CD/DVD writer software, Iomega Automatic Backup software and certain third-party software packages, and are compatible with both PC and Mac® operating systems.

 

Iomega DVD Rewritable Drives. Iomega DVD rewritable drives are used for the same purposes as CD-RW drives and for transferring and storing video content on DVD discs. Iomega Super DVD Writer supports all DVD formats (except for DVD-RAM); reads, writes and rewrites to CD-RW disks and is compatible with both PC and Mac® operating systems. All DVD drives support 4x dual layer formatted media and ship with lomega HotBurn Pro DVD burning software, Iomega Automatic Backup software and certain third-party software packages.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

BUSINESS (Continued)

 

Consumer Products (Continued)

 

Iomega Micro MiniTM USB Flash Drives

 

The Iomega Micro Mini USB flash drive is a portable, easy-to-use, secure device for transporting and sharing data. The drive plugs into any computer’s USB port, is compatible with both PC and Mac® operating systems and has a capacity of 1GB.

 

Iomega Floppy USB Drives

 

The Iomega Floppy USB drive is a host-powered external floppy drive that reads and writes to all formatted floppy disks and is compatible with both PC and Mac® operating systems. The Iomega Floppy Plus 7-in-1 card reader has these same features and allows users to read and retrieve data from a variety of flash media devices.

 

Zip Products

 

Zip Drives. We introduced the Zip drive in March of 1995. The Zip drive is an affordable portable storage product for personal computer users, which allow users to easily store, transport and secure data on removable disks. Zip drives are available in capacities of 100MB, 250MB and 750MB and are available in internal and external configurations with USB 2.0 and ATAPI. Zip drives are compatible with leading operating systems for personal computers and workstations (both PC and Mac®). We have ceased selling Zip drives to distributors or resellers in the European Union (“EU”) as of July 1, 2006, as a result of the Restriction of Hazardous Substances (“RoHS”) lead free initiative. Notwithstanding RoHS, our distributors and resellers are permitted and have continued to sell Zip drives from their inventories. Zip drives use our proprietary Zip disks.

 

Zip Disks. Zip disks are available in 100MB, 250MB and 750MB capacities. Sales of Zip disks will continue worldwide, including the EU.

 

Business Products

 

REV Products

 

REV Drives and Disks. In April of 2004, we began shipping our first generation REV products, a 35GB native capacity drive and disk. We began shipping the next generation REV 70GB products in July of 2006. The REV products consist of a drive and removable, rugged and portable disk available in native capacities of 35GB and 70GB. With data compression, the disks have capacities up to 70GB and 140GB, respectively. The REV 35GB drive is available in external USB 2.0, Firewire and internal ATAPI, SCSI and SATA interfaces while the REV 70GB drive is available in external USB 2.0 and internal ATAPI and SATA interfaces. REV products are designed for backup, archive and high-capacity portable storage for small- and medium-sized businesses and enterprise workgroups. Other potential markets include traditional tape backup/archiving, video surveillance, professional audio/video, medical imaging data storage and high-end workstation support applications. Compared to DDS/DAT and Travan-based tape systems, REV drives and disks are faster, more durable, easier to maintain, provide random access to data and the drives are less expensive.

 

REV-Based Autoloaders. During the fourth quarter of 2005, we launched a REV-based Autoloader, which is one REV 35GB drive and holds eight 35GB removable disks. The next generation Autoloader, based on the REV 70GB platform, was launched in September 2006, giving one drive access to 560GB on eight 70GB disks.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

BUSINESS (Continued)

 

Business Products (Continued)

 

Iomega Network Attached Storage Products

 

NAS Servers. We ship NAS servers with capacities ranging from 500GB to 2TB. We market our NAS products toward small- and medium-sized businesses and enterprise workgroups. Our NAS servers either use a Microsoft® Windows®-based operating system or an Iomega developed imbedded Linux operating system. Aftermarket service plans for Iomega NAS servers are available either separately or bundled with NAS servers depending upon the NAS server model.

 

Iomega StorCenter Network Hard Drives. Iomega StorCenter network hard drives are available in capacities ranging from 250GB to 1TB and are compatible with PC, Mac® and Linux operating systems. With the StorCenter network hard drive, multiple users can store and share files from any standard or wireless computer connected to that network. For backup applications, certain third party applications and other miscellaneous products are included along with password protection and data management.

 

Services

 

Services consists of the operations of CSCI, Inc., including OfficeScreen solutions and system integration, and Iomega services such as iStorage. We acquired CSCI, Inc. in August of 2006; CSCI’s OfficeScreen managed security services include managing firewalls, virtual private networks (“VPNs”) and providing secure 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® disks and Iomega software products such as Iomega Automatic Backup software and other miscellaneous products. iStorage and other services that were previously reflected in this segment have been reclassified to the Services segment under the Business Products category. The Other Products segment included the research and development of the Digital Capture Technology (“DCT”) development program, which was cancelled in the second half of 2004.

 

Product Development

 

Research and development expenses were $8.9 million, or 4% of sales, for 2006, $14.1 million, or 5% of sales, for 2005 and $24.4 million, or 7% of sales, for 2004. These expenses were incurred primarily for the research and development of REV products, DCT technology (incurred in 2004 only) and, to a lesser extent, network storage devices. Development expenses were also incurred for software enhancements as well as in the sourcing, qualification and testing of certain products, including external HDD products, CD-RW and DVD rewritable drives, and other products.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

BUSINESS (Continued)

 

Product Development (Continued)

 

Overall research and development amounts are anticipated to be similar in amount in 2007 as compared to 2006. Such costs will be associated with network storage products, software enhancements, potential follow-on and next generation REV products, and sourcing, qualification and testing of Consumer Products and other products.

 

Marketing

 

Our worldwide marketing objective is to build awareness of and generate demand for our products and services. Our marketing efforts are focused on the positioning and messaging of our products, software and services to enhance the value of the Iomega brand.

 

We deliver brand and product-specific messages to a variety of segments including consumers, business decision makers and Information Technology (“IT”) professionals through public relations efforts, tradeshows and events, direct marketing, internet marketing and our www.iomega.com website. These awareness-generating activities are enhanced with demand stimulus programs and promotions, such as in-store, direct mail or e-mail offers, through distribution, reseller, DMR, retail and service-provider channel partners.

 

In addition, to enhance our ability to serve the small- to medium-sized businesses segment, we continue to actively recruit qualified VAR partners to sell our REV and NSS products. These VAR partners are supported through our IPartner and IoClub online initiatives, which are company sponsored groups, with marketing programs, training and sales materials.

 

Sales

 

We sell our products primarily through computer product and consumer electronic distributors, retailers, DMRs, VARs and on our own website. We sell our services through telecom resellers, distributors and on our own website. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II and Note 14 of the notes to consolidated financial statements for financial information about our business segments as well as a description of the markets served by our respective products.

 

Our CSS business is typically strongest during the fourth quarter. Our European sales are typically weaker 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 period are not necessarily indicative of the sales to be expected in any future period.

 

Retail Sales

 

Retail outlets for our products include computer superstores, consumer electronic superstores, mail order DMRs, office supply superstores, specialty computer stores and other retail outlets. We sell our products to retail channels directly as well as indirectly through distributors. In Europe, Asia and Latin America, we primarily sell our products indirectly to the retail channel through distributors. Certain of our products are sold at a retail level by a number of the leading retailers of computer products.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

BUSINESS (Continued)

 

Sales (Continued)

 

Distributors

 

We sell our products through approximately fifty distributors throughout the world, the two largest customers being Ingram Micro, Inc., and Tech Data Corporation.

 

For the year ended December 31, 2006, sales to Ingram Micro, Inc. accounted for 23% of our consolidated sales and sales to Tech Data Corporation accounted for 13% of our consolidated sales. The loss of either of these customers would have a material adverse effect on us.

 

Company Website

 

We offer our products, including various promotional items, through our www.iomega.com website.

 

International Sales

 

We sell our products in Europe, Asia and South America through international and local distributors. In the third quarter of 2006, we began selling direct to certain retail customers in Europe. We have sales and marketing organizations in several locations in Western Europe and Asia. The majority of sales to European customers are denominated in Euros. All sales to customers in South America and Asia are denominated in U.S. dollars. In total, sales outside of the United States were 62% for 2006, 55% for 2005 and 50% for 2004. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II and Note 14 of the notes to consolidated financial statements for more information on international sales.

 

OEMs and Licensees

 

In addition to sales through retail and distribution channels, we have entered into a number of agreements with a variety of OEMs within the computer industry. We have entered into agreements with several OEMs regarding REV internal drives.

 

During the fourth quarter of 2004, we entered into a definitive license agreement regarding our DCT intellectual property. The license agreement terms included an upfront cash payment of $10.5 million to us and an additional fixed $3.5 million cash payment to us at a later date based upon the earlier of licensee’s commercialization date of the technology or November of 2007. Further, the license agreement calls for potential royalties to be paid on any future products utilizing the technology up to $11.0 million; however, we believe the licensee has suspended development on products they intended to utilize the DCT technology, so potential royalties from that transaction are unlikely. The $10.5 million was reflected as a benefit to operating expenses on the consolidated statement of operations under the caption, “license and patent fee income”. We will not recognize the $3.5 million in our consolidated financial statements until the related cash payment is received. There is no guarantee that we will receive any future payments from this transaction.

 

During 2004, we entered into a separate license agreement regarding certain disk controller technology. The license terms included the payment of $1.0 million to us. This license agreement calls for royalties to be paid on future products.

 

During 2005, we entered into a patent agreement, whereby we received $0.4 million and the possibility of future additional royalties related to specific patents. There is no guarantee of future payments.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

BUSINESS (Continued)

 

OEMs and Licensees (Continued)

 

During 2006, we entered into certain additional patent agreements, whereby we received a total of $1.1 million and the possibility of future additional royalties related to specific patents. There is no guarantee of future payments.

 

Supply Chain

 

We outsource all manufacturing and certain supply chain operations. In the first half of 2005, we transferred the distribution and logistics operations for Asia to the same logistics partner used in our other regions to consolidate logistic vendors. In 2006, we changed the supply chain and assembly process related to the high volume HDD drives to reduce costs. These changes resulted in several new suppliers and process changes at the logistic partner since they now do very little configuration of the high volume HDD drives.

 

In 2007, we will continue placing substantial focus on our supply chain and supply base to best support business objectives. These changes may include changes to the supply chain model and the supply base.

 

As the Zip product line reaches its expected end of life, we have been making last time purchases for many of the product components and are winding down component production operations at various suppliers. The third-party manufacturing of Zip drives is expected to continue into at least the first half of 2007 and disk production is expected to continue at least through the end of 2007. During 2005, we entered into a last-time-buy agreement with our supplier for the flexible magnetic media used to make Zip disks and the Zip magnetic media production line has since closed down.

 

Although we believe we are positioned to obtain an adequate supply of our products in the future, we may encounter future difficulties in achieving desired levels of product, in managing relationships with our suppliers or in locating suppliers able to meet our quality, quantity, pricing and other requirements for manufactured products.

 

Distribution

 

In recent years, we have outsourced our distribution and logistics centers to various suppliers. During 2004, we entered into separate agreements with a global provider of distribution and logistics services and a global provider of reverse logistics services to consolidate our distribution, logistics and reverse logistics requirements. These relationships remained in place during 2005. During 2006, we transferred our reverse logistics services to our distribution and logistics provider. The contract with our current distribution and logistics partner expires in mid-2007 and we are reviewing various options and proposals with the continuing goal to improve our operational efficiency and lower costs.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

BUSINESS (Continued)

 

Supply Chain (Continued)

 

Components and Sourced Products

 

Although we have outsourced our manufacturing capabilities, we have retained responsibility for the supply of certain key components for our Zip, REV and hard drive based products. See the caption entitled “Company Operations, Components Supplies and Inventory” in the section entitled “Risk Factors” in Item 1A of Part I of this Annual Report on Form 10-K for more details concerning components and sourced products.

 

Backlog

 

We had an order backlog of approximately $9 million at December 31, 2006 and an immaterial order backlog at December 31, 2005. The entire December 31, 2006 order backlog is expected to be filled early in 2007; however, the purchase agreements or purchase orders pursuant to which orders are made generally allow the customer to cancel orders without penalty.

 

Competition

 

Consumer Products

 

Our Consumer Products compete with a broad variety of data storage devices. In many cases, these competing devices are similar to our products. For example, we sell external hard disk drives (“HDD”), CD-RW drives, DVD rewritable drives, floppy drives and flash USB drives. A number of manufacturers (including our suppliers) and competitors make and sell products that are substantially similar to our products in these areas. We compete with these manufacturers and resellers on several factors such as price, performance, brand recognition, quality, customer support, channel presence, support and software/accessories included with the drives. Given these competitive factors, we are subject to significant supply risk and situations where the manufacturer under-prices us in the market. We attempt to differentiate our non-Zip Consumer Products with compelling software, interface, usability and other features, but can provide no assurance that we will be able to successfully do so.

 

By contrast, we are not aware of any product that shares the specific characteristics of our Zip drives and disks (affordable, removable, flexible, magnetic media with capacities ranging up to 750MB). Nevertheless, all of the substitute products identified above compete with our Zip products in areas identified above. Other products competing with our Consumer Products include internal hard drives, magnetic cartridge disk drives (that use either floppy or rigid media), magnetic tape drives and magneto optical drives. Given the wide variety of competing personal storage products in the market, we expect that Zip sales will continue to decline and will be significantly less in 2007 as compared to 2006.

 

To the extent that our Consumer Products are used for incremental primary storage capacity, they compete with non-removable media storage devices such as conventional hard disk drives, which continue to offer increasing capacity and reliability at reduced prices. In addition, one of the key features offered by our Consumer Products, the ability to transport electronic data, is increasingly fulfilled by various internet applications. Thus, our Consumer Products compete with a variety of internet applications with respect to moving and sharing files.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

BUSINESS (Continued)

 

Competition (Continued)

 

Business Products

 

REV products face significant competition from a variety of technologies, including the following: entry-level and low-end magnetic tape drives; optical-based products incorporating either recordable or rewritable CD or DVD technology, including new products based on Blu-Ray and similar high-capacity optical storage technologies; magneto-optical technologies and external hard disk drives.

 

Network Storage Solutions products compete with other NAS products as well as traditional methods for increasing storage on network servers, such as additional hard drives, tape drives/tapes, storage area network (“SAN”), general-purpose servers (“GPS”) and direct attached storage (“DAS”) that are connected to the system. We believe that NAS products offer a more compelling product solution than DAS or the purchase of an incremental server by being less costly per GB, more efficiently enabling workgroup file sharing, being fast and easy to deploy and having a lower total cost of ownership because there are no applications running on the device.

 

We compete primarily in the entry-level and low-end of the NAS market. The key competitors in these two categories include Dell, Snap Appliance, Buffalo Technology, LaCie and Hewlett-Packard (“HP”). We intend to compete by providing small- to medium-sized businesses relevant features, competitive pricing, brand recognition, strong relationships in the VAR and DMR channels, quality, customer support and strong sourcing relationships. Given that we are sourcing substantially complete products from a limited number of sources, some of whom sell products that compete with ours, we are subject to significant hardware supply risks.

 

Managed Services

 

Iomega OfficeScreen Managed Services compete with a variety of managed service providers, though no two service providers offer the same hardware, engineering and services. As our solution utilizes Juniper® Networks hardware, we also find ourselves in the position of competing with appliance manufacturers that offer managed services programs. Finally, the services we provide often replace legacy connectivity solutions, such as private line and frame relay, which can also be considered competition. Competitors include IBM, Sonicwall and Fortinet.

 

OfficeScreen Services differentiate themselves in a variety of ways, including the fact that they were designed for the small/medium business (“SMB”). With OfficeScreen Services, the services are easily scalable; the SMBs do not incur any capital expenditures or have any network security expertise, making this a solution that is feasible considering their limited resources. In addition, the OfficeScreen solution is built on industry-leading Juniper® Networks hardware, which in combination with our engineering expertise allows us to make advanced security solutions such as SSL VPN with VeriSign® Dual Factor Authentication available to smaller businesses. Finally, when compared to legacy connectivity options, OfficeScreen Services are just as secure, but much more affordable.

 

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BUSINESS (Continued)

 

Competition (Continued)

 

Conclusion

 

Since the majority of our current business relates to HDD products, we believe that in order to compete successfully, we must continually reduce our product costs and operating costs of doing business. As a result, we have undergone several restructuring actions in the past few years, including 2006, 2005, 2004, 2003 and 2001 with the intent of reducing ongoing operational costs. See the caption entitled “Restructuring Charges/Reversals” under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II of this Annual Report on Form 10-K or Note 6 of the notes to the consolidated financial statements in Part IV of this Annual Report on Form 10-K for more details concerning these restructuring actions. During 2006 and 2005, we continued our efforts to optimize the supply chain to gain cost efficiencies and better serve our customers. Through these and other actions, we are continuing to focus on reducing the costs of our products by reducing the cost of components used in our products through improved procurement processes and inventory management, product design modifications and by taking advantage of industry-wide reductions in costs and decreasing defect rates. We continually evaluate our prices and, based on continuous competition, expect to reduce product prices or offer rebates in the future. Reductions in the prices at which we sell our products or any rebates offered by us would adversely affect gross margins to the extent such reductions or rebates are not offset by reductions in the cost of such products.

 

We believe that in order to compete successfully, we will also need to differentiate our products from the competition through effective marketing and advertising portraying the benefits of our products and embedded software.

 

We believe 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 MB of storage capacity), performance (speed and capacity), functionality (reliability, product size, removability and transportability), broad market adoption and standardization of the technology across many devices, ease of installation and use, brand, perceived functionality and utility, and security of data. 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. The most common form factor for floppy drives is 3.5-inch. We currently offer 3.5-inch Zip drives and 2.5-inch REV drives.

 

The data storage industry is highly competitive and we expect that the industry will remain highly competitive in the future. In addition, the data storage industry is characterized by rapid technological development. We compete with many companies that have greater financial, manufacturing and marketing resources than we do. The availability of competitive products with superior performance, functionality, ease of use, security or substantially lower prices could adversely affect our business.

 

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BUSINESS (Continued)

 

Proprietary Rights

 

We rely on a combination of patents, copyrights, trademarks, trade secrets and contractual provisions to protect our technology. We have pending approximately 30 U.S. and foreign patent applications relating to our Zip and REV drives and disks, Optical drives, flexible media technology and various software applications, although there can be no assurance that such patents will be issued. We hold approximately 400 individually or jointly owned issued or pending U.S. and foreign patents relating to our Zip and REV drives and disks, Optical drives, flexible media technology, software applications and other technologies. Some of these patents and patent applications are subject to license agreements with third parties. Additionally, several of the patents have expired but could still be applicable for enforcing prior infringements. There can be no assurance that any patents or other intellectual property rights obtained or held by us will provide substantial value or protection to us, that they will prevent or impede a third party from developing competing products or that their validity will not be challenged or that affirmative defenses to infringement will not be asserted.

 

We have various registered trademarks in the United States, several of which are also registered trademarks in other countries.

 

Due to the rapid technological change that characterizes our industry, we believe that the success of our products will also depend on the technical competence and creative skill of our personnel in addition to legal protections afforded our existing drive and disk technology.

 

As is typical in the data storage industry, we are regularly notified of alleged claims that we may be infringing certain patents, trademarks and other intellectual property rights of third parties. It is not possible to predict the cost of litigation, potential damages or outcome of such claims and there can be no assurance that such claims will be resolved in our favor. An unfavorable resolution of one or more of such claims could have a material adverse effect on our business or financial results.

 

Certain technology used in, or software bundled with, our products is licensed on a royalty-bearing basis from third parties. The termination of a license arrangement could materially impact our business until a work arount or suitable substitute were found.

 

Employees

 

At December 31, 2006, we employed 253 individuals worldwide. Four of our employees in Italy are subject to a collective bargaining agreement.

 

Government Contracts

 

No material portion of our business is subject to renegotiation of profits or termination of contracts at the election of the United States government.

 

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BUSINESS (Continued)

 

Environmental Matters

 

Compliance with federal, state and local environmental protection laws had no material effect on us in 2006 and is not expected to have a material effect in 2007. We ceased selling Zip drives and certain other products containing lead to distributors or resellers in the EU starting July 1, 2006, in the wake of the Restriction of Hazardous Substances (“RoHS”) initiative. Notwithstanding RoHS, our distributors and resellers are permitted and have continued to sell Zip drives from their inventories after the July 1 date.

 

Certifications

 

Our Chief Executive Officer and Chief Financial Officer have provided the certifications required by Rule 13a-14(a) under the Exchange Act, copies of which are filed as exhibits to this Form 10-K. In addition, an annual Chief Executive Officer certification was submitted by our Chief Executive Officer to the New York Stock Exchange on May 24, 2006 in accordance with the New York Stock Exchange’s listing requirements.

 

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ITEM 1A.    RISK FACTORS:

 

Demand for Our Products and Services and Operating Efficiencies

 

Our future operating results will depend upon 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 improve and/or sustain satisfactory HDD gross margins;

 

   

Our ability to generate significant sales and profit margin from REV, NAS products and OfficeScreen services;

 

   

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;

 

   

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 avoid disruptions to our ongoing business as we evaluate strategic investments, including the evaluation of new opportunities related to services for small- and medium-sized businesses;

 

   

Our ability to utilize reliable outsource partners for certain critical functions at prices that keep us competitive and

 

   

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 profits in the past two quarters, we have been unable 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.

 

Zip Drives and Disks

 

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 for the past several years. 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 life cycle, 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 viable 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.

 

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RISK FACTORS (Continued)

 

REV Products

 

Future results of our REV products entail numerous risks relating to factors such as:

 

   

Inability to create product awareness or lack of market acceptance of the REV 70 Backup Drive;

 

   

Failure to maintain acceptable arrangements with product suppliers, particularly in light of lower than anticipated volumes;

 

   

Failure to achieve significant OEM adoption of the products;

 

   

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;

 

   

Intense competition;

 

   

The potential for further delays or other failures of our OEM partner in the broadcast industry, Thomson N.A., to introduce expected products utilizing REV drives and disks in 2007;

 

   

Potential declines in demand for REV 35GB products because of the launch of REV 70GB products and

 

   

Risks that third parties may assert intellectual property claims against REV products.

 

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. 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. Historically, we have failed to accomplish these objectives and this business has never achieved full year profitability. In light of these challenges, we can offer no assurance that we will achieve sustainable profitability on this segment.

 

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 and Introduction 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 most 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.

 

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RISK FACTORS (Continued)

 

Our acquisition of CSCI, Inc. introduces management and various personnel to new challenges, including the need to incorporate a private company into our public company processes and controls; the need for us to simultaneously launch additional sales of this newly acquired service while hiring and scaling up support for offering OfficeScreen services to more and more customers. Selling security and/or firewall services will require new contracts and the wide distribution of a service that is a new offering from us and potentially a new service for future customers. These efforts all involve execution and market risk and competition; and there is no assurance that we will be successful in this new endeavor.

 

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 and operate efficiently. 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, if any occur.

 

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 internal controls or the internal control 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 over the past year. We have many employees performing tasks they have not performed in the past, which could result in errors or lost knowledge. In addition, our new managed security services subsidiary will require development of new process controls, associated with integrating a small private company into our Company. 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 of internal control. 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 operational disruptions and have reported a material weakness (subsequently remediated) in internal control over financial reporting due to some of these factors.

 

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RISK FACTORS (Continued)

 

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 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 and resellers 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.

 

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.

 

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 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 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.

 

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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. Such 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.

 

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 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.

 

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 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. Our management is giving serious attention to possible strategic opportunities to build the business and find synergistic products or services. Potential strategic transactions always involve a heightened risk of legal claims, disruption and unexpected costs.

 

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ITEM 1B.    UNRESOLVED STAFF COMMENTS:

 

None.

 

ITEM 2.    PROPERTIES:

 

Our executive offices and corporate headquarters are located in leased offices in San Diego, California. The majority of our research and development, operations, facilities and other administrative functions are located in leased offices in Roy, Utah. In addition, we lease office space in various locations throughout North America for local sales, marketing and technical support.

 

Outside North America, we lease office space in Geneva, Switzerland for use as our International headquarters. We lease office space in Singapore for our Asia Pacific sales and marketing activities. There are market development organizations in several locations in Western Europe and Asia. We also lease office space in Taiwan for a portion of our procurement activities. We consider our properties to be in good operating condition and suitable for their intended purposes. We own substantially all equipment used in our facilities. See Note 7 of the notes to consolidated financial statements for the future lease payment amounts by year.

 

ITEM 3.    LEGAL PROCEEDINGS:

 

There are no 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 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, 2006.

 

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Executive Officers of the Company

 

The executive officers of the Company as of March 15, 2007 were as follows:

 

Jonathan S. Huberman    

   41      Vice Chairman and Chief Executive Officer

Thomas D. Kampfer

   43      President, Chief Operating Officer

Preston Romm

   53      Vice President and Chief Financial Officer
            (Principal financial and accounting officer)

 

Jonathan S. Huberman was appointed Vice Chairman and Chief Executive Officer in February 2006. Prior to joining the Company, he was managing director of aAd Capital Management, LP (that he co-founded) from January 2005 to February 2006. aAd Capital Management, LP is a long/short equity hedge fund that invests primarily in small- and mid-cap U.S. public equities. From August 1995 through September 2004, Mr. Huberman was a general partner at Idanta Partners, Ltd. (“Idanta”), a private venture capital partnership investing in public and private enterprises. Prior to Idanta, Mr. Huberman was a case leader with the Boston Consulting Group, a strategic management consulting firm, where he focused on the high technology and consumer products industries and advised clients on a range of issues, such as corporate and business unit strategy, marketing strategy, new product development and reengineering. Mr. Huberman served on Iomega’s Board of Directors from November 1999 to May 2004 and again from November 2004 to February 2006.

 

Thomas D. Kampfer joined the Company in July 2001 and served as Vice President, General Counsel and Secretary until October 2005. Mr. Kampfer also served as Executive Vice President, Business Solutions from November 2004 to October 2005. Mr. Kampfer also served as Interim Chief Financial Officer from June 2004 to February 2005 and November 2005 to March 2006. During February 2006, Mr. Kampfer was appointed Chief Operating Officer and then promoted to President, Chief Operating Officer. From February 2001 to July 2001, he served as General Counsel and Secretary and Vice President, Corporate Development of Entropia, Inc., a developer of distributed computing technology. From January 1995 to January 2001, Mr. Kampfer was with Proxima, a manufacturer of multimedia display projectors, where he served in several capacities including General Counsel and Secretary and Vice President, Business Development. Prior to Proxima, Mr. Kampfer spent ten years at IBM Corporation, a global manufacturer of computer products and services, where he held a variety of engineering and legal positions.

 

Preston Romm joined the Company in March 2006 as Vice President of Finance and Chief Financial Officer. Prior to joining the Company, Mr. Romm had nearly 30 years of finance and accounting experience, including extensive operational experience as a chief financial officer with multiple public and privately held high tech companies. Mr. Romm was most recently Vice President of Finance, CFO, Treasurer and Secretary at Dot Hill Systems Corporation (“Dot Hill”), a $250 million publicly traded storage systems company from 1999 to March 2006. From 1997 to 1999, Mr. Romm was Vice President of Finance, CFO and Secretary at Verteq, Inc., a privately held $60 million company in the front-end semiconductor capital equipment industry. Mr. Romm’s finance leadership experience in technology-related industries also includes assignments as Vice President, Controller and Chief Accounting Officer with MTI Technology Corporation from 1990 to 1994, followed by the role of Vice President of Finance and Administration and CFO at STM Wireless, Inc., from 1994 to 1997.

 

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PART II

 

ITEM 5.    MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER

                  PURCHASES OF EQUITY SECURITIES:

 

Securities

 

Iomega Common Stock is traded on the New York Stock Exchange under the symbol IOM. As of March 6, 2007, there were 3,447 holders of record of Common Stock. We have not historically paid regular recurring cash dividends on our Common Stock. We have no plan to pay cash dividends in the future. The following table reflects the high and low sales prices of our Common Stock as reported by the New York Stock Exchange for 2006 and 2005.

 

Price Range of Common Stock

 

     2006

   2005

     High

   Low

   High

   Low

1st Quarter

   $ 3.48    $ 2.36    $ 5.60    $ 4.22

2nd Quarter

     3.95      2.52      5.10      2.28

3rd Quarter

     3.00      2.16      3.60      2.50

4th Quarter

     4.25      2.81      3.20      2.41

 

Unregistered Sales of Equity Securities

 

We did not sell any equity securities during the fourth quarter of 2006 that were not registered under the Securities Act of 1933.

 

Issuer Purchases of Equity Securities

 

On August 11, 2006, we issued 2,857,722 shares of our Common Stock to certain shareholders and employees of CSCI, Inc. as partial consideration of our acquisition of CSCI, Inc. pursuant to a merger. There were no underwriters involved in this issuance of shares of our Common Stock. Pursuant to a permit issued by the California Department of Corporations on August 8, 2006, we issued such shares of Common Stock in reliance on the exemption from the registration requirements of the Securities Act of 1933, as amended, under section 3(a)(10) thereof.

 

During the fourth quarter of 2006, we did not repurchase any shares of our Common Stock. As of December 31, 2006, approximately $122.3 million remained available for future repurchases under the $150 million stock repurchase plan authorized by our Board of Directors on September 8, 2000. The repurchase plan does not have a fixed termination date.

 

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ITEM 6.    SELECTED FINANCIAL DATA:

 

The following tables indicate the trends in certain components of our consolidated statements of operations, balance sheets and other information for each of the last five years.

 

The following selected financial data should be read in conjunction with our consolidated financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this Annual Report on Form 10-K.

 

     Years Ended December 31,

 
     2006

    2005

    2004

    2003

    2002

 
     (In thousands, except per share data)  

Statement of Operations:

                                        

Sales

   $ 229,554     $ 264,505     $ 328,663     $ 391,344     $ 614,363  

Cost of sales

     183,342       208,670       255,951       281,068       378,239  
    


 


 


 


 


Gross margin

     46,212       55,835       72,712       110,276       236,124  
    


 


 


 


 


Operating expenses:

                                        

Selling, general and administrative(1)

     41,391       60,535       89,804       104,416       130,438  

Research and development

     8,905       14,054       24,444       31,555       36,249  

License and patent fee income

     (1,085 )     (1,301 )     (10,599 )     —         —    

Goodwill impairment charges

     8,728       —         —         —         —    

Restructuring charges (reversals)

     3,529       7,579       4,531       11,437       (2,423 )
    


 


 


 


 


Total operating expenses

     61,468       80,867       108,180       147,408       164,264  
    


 


 


 


 


Operating income (loss)

     (15,256 )     (25,032 )     (35,468 )     (37,132 )     71,860  

Interest and other income (expense), net

     3,865       404       3,754       4,536       4,029  
    


 


 


 


 


Income (loss) before income taxes

     (11,391 )     (24,628 )     (31,714 )     (32,596 )     75,889  

Benefit (provision) for income taxes

     2,276       945       (4,963 )     13,735       (41,170 )
    


 


 


 


 


Income (loss) from continuing operations

     (9,115 )     (23,683 )     (36,677 )     (18,861 )     34,719  
    


 


 


 


 


Discontinued Operations (see Note 3):

                                        

Gain on sale of ByteTaxi, Inc., net of taxes

     272       1,158       —         —         —    

Losses from discontinued operations, net of taxes

     —         (228 )     —         —         —    
    


 


 


 


 


Total discontinued operations

     272       930       —         —         —    
    


 


 


 


 


Net income (loss)

   $ (8,843 )   $ (22,753 )   $ (36,677 )   $ (18,861 )   $ 34,719  
    


 


 


 


 


Net income (loss) per basic and diluted share:

                                        

Continuing

   $ (0.17 )   $ (0.46 )   $ (0.71 )   $ (0.37 )   $ 0.68  

Discontinued

     —         0.02       —         —         —    
    


 


 


 


 


Net income (loss) per common share:

   $ (0.17 )   $ (0.44 )   $ (0.71 )   $ (0.37 )   $ 0.68  
    


 


 


 


 


Dividend paid per share

   $ —       $ —       $ —       $ 5.00     $ —    
    


 


 


 


 



(1) Includes bad debt expense/credit.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

SELECTED FINANCIAL DATA (Continued)

 

     December 31,

     2006

   2005

   2004

   2003

   2002

     (In thousands, except employee data)

Significant Balance Sheet Items:

                                  

Total Cash (1)

   $ 68,148    $ 95,999    $ 120,809    $ 168,931    $ 453,864

Trade receivables, net

     30,418      28,853      30,764      37,234      54,477

Inventories

     42,593      27,532      31,345      23,745      40,525

Deferred income taxes

     2,747      5,523      9,710      16,938      27,573

Current assets

     147,307      162,905      199,673      254,401      590,929

Property and equipment, net

     6,553      8,311      13,563      16,053      18,102

Intangible assets, net

     1,043      696      2,448      4,525      6,755

Goodwill

     12,451      11,691      11,691      11,691      11,691

Total assets

     167,414      183,669      227,502      286,741      627,599

Current liabilities

     68,034      85,561      101,437      122,870      164,080

Other long-term obligations

     —        —        721      1,471      2,244

Deferred income taxes

     9,573      17,152      22,537      24,512      50,236

Retained earnings

     33,988      33,295      56,048      92,725      135,292

Total stockholders’ equity

     89,807      80,956      102,807      137,888      411,039

Total liabilities and stockholders’ equity

     167,414      183,669      227,502      286,741      627,599

Other Metrics:

                                  

Cash for the U.S. entity (1)

   $ 2,293    $ 7,199    $ 14,307    $ 697    $ 168,641

Cash for non-U.S. entities (1)

     65,855      88,800      106,502      168,234      285,223
    

  

  

  

  

Total Cash (1)

   $ 68,148    $ 95,999    $ 120,809    $ 168,931    $ 453,864
    

  

  

  

  

Working capital

   $ 79,273    $ 77,344    $ 98,236    $ 131,531    $ 426,849

Total employees

     253      291      462      591      850

(1) “Cash” is defined as “Cash, Cash Equivalents, Restricted Cash and Temporary Investments”.

 

Significant changes for the years presented in the consolidated financial statements are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” following.

 

In 2003, the Board of Director’s declared and paid a $5 dividend per share which decreased total cash by $257 million.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

 

ITEM 7.    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, Micro Mini USB flash drives and external floppy disk drives. 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. Notwithstanding RoHS, our distributors and resellers are permitted and have continued to sell Zip drives from their inventories. Sales of Zip disks are continuing worldwide, including the EU. The REV Products segment involves the development, distribution and sale of REV products 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 iStorageTM (previously included in the Other Products segment). 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, including Jaz disks and software products such as Iomega Automatic Backup software and other miscellaneous products.

 

Since 1996, the Zip Products segment has been the largest contributor to our product operating income. As the Zip business has approached the end of its product lifecycle, we have been trying 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 and second generation REV products, which were launched in the second quarter of 2004 and July of 2006, respectively. Sales of REV products have exceeded Zip product sales for the past three quarters, however, REV products are not yet profitable; however, the REV products operating losses have declined for the past several quarters as a result of the cost reduction actions that we have taken in 2005 and 2006.

 

In other efforts to replace the declining Zip business, we have launched and attempted to expand our CSS and NSS businesses. Sales of the CSS business segment significantly exceeds Zip product sales. Our CSS business segment achieved operating profitability of $2.3 million in the fourth quarter of 2006. This was the first profitable quarter for CSS ever. The NSS segment has been only slightly profitable for the past several quarters.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Overview (Continued)

 

As part of an ongoing effort to return to profitability, we announced a restructuring plan on April 27, 2006, which was implemented in the second and third quarters of 2006. The restructuring plan was part of an effort to reduce costs and simplify our organizational structure. We anticipate $20 million to $25 million in annual savings from these restructuring actions compared to the first quarter 2006-run rates. In addition, in 2006, we released new HDD products and made changes to our HDD product supply chain to reduce the cost of these products to allow us to be more competitive in the market place. Although we still lost money on our CSS segment for the full year ended 2006, we experienced significant improvements to our CSS product operating losses, which decreased significantly due to the new products, supply chain changes and other cost reductions and made a profit in the fourth quarter.

 

During the first quarter of 2006, we established certain business goals to: (1) complete development of and launch the higher capacity, next generation REV products; (2) improve HDD product gross margins through sourcing changes, new products and other cost reductions; (3) focus on growing our REV product sales through system integrator programs to generate awareness, server OEM transactions and adoption in targeted vertical markets such as the professional audio/video market and (4) evaluate other strategic opportunities in the small business market segment to facilitate long term growth.

 

During 2006, we made significant steady progress toward these goals with the cost reductions associated with the April restructuring actions, the launch of our new REV 70 Backup Drive in July, the launch of newly designed lower cost external HDD products in August and the acquisition of CSCI, Inc., a provider of managed services to small businesses, in August.

 

At December 31, 2006, our total cash, cash equivalents, restricted cash and temporary investments were $68.1 million (see the “Liquidity and Capital Resources” discussion for more detail on the tax impacts of repatriating foreign cash). We believe our total cash is sufficient to operate the business for at least one year.

 

Our goals for 2007 are: (1) to continue to grow and deliver sustained profitability; (2) to further increase the size of our HDD business; (3) to continue to penetrate the high-growth NAS market; (4) to ramp REV 70GB products and push for broad market adoption; (5) to grow our managed services business domestically and abroad and (6) to continue to evaluate new opportunities where we can leverage our brand and channel assets. Notwithstanding our recent accomplishments, there can be no assurance that we will achieve these goals.

 

Application of Critical Accounting Policies

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting periods. Areas where significant judgments occur include, but are not limited to, revenue recognition, price protection and rebate reserves, inventory valuation reserves, accrued excess purchase commitments, tax valuation allowances and tax contingencies, and impairment of goodwill. Actual results could differ materially from these estimates.

 

We have discussed the development and selection of the following critical accounting policies with the Audit Committee of our Board of Directors (“Audit Committee”) and the Audit Committee has reviewed these disclosures.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Application of Critical Accounting Policies (Continued)

 

Revenue Recognition

 

We defer recognition of sales on estimated excess inventory in the distribution, retail and direct marketing reseller (“DMR”) (formerly referred to as catalog) channels. For this purpose, excess inventory is the amount of inventory that exceeds our channel’s four-week requirement as estimated by us. Original Equipment Manufacturers (“OEMs”) and value-added resellers (“VARs”) customers are not considered to have excess inventory, as they usually do not carry more than four weeks of inventory. We estimate the distribution, retail and DMR channel’s four-week requirement based on inventory and sell-through amounts reported to us by our key customers in each channel, who make up the substantial majority of our sales in these channels. No adjustment is made for those customers that do not report inventory and sell-through information. This inventory and sell-through information is reported to us at the stock keeping unit (“SKU”) level. However, for purposes of our excess inventory calculation, this information is accumulated at the major product level (i.e. Zip 100MB drive, Zip 250MB drive, etc.). We use the last 13 weeks of reported sell-through information to calculate a weekly average, which is then used to estimate the channel’s four-week requirement. This estimate may not be indicative of four weeks of future sell-through. We defer sales and cost of sales associated with estimated excess channel inventory in our consolidated statements of operations, with the resulting offset being reflected in our consolidated balance sheets in margin on deferred revenue.

 

The table below shows the deferred sales and related cost of sales associated with estimated excess channel inventory.

 

     December 31,

 
     2006

    2005

 
     (In thousands)  

Deferred revenue

   $ 7,890     $ 12,708  

Deferred cost of sales

     (5,080 )     (7,472 )
    


 


Margin on estimated channel inventory

   $ 2,810     $ 5,236  
    


 


 

The decrease in margin on estimated channel inventory during 2006 reflects lower levels of channel inventory and product mix changes away from high margin Zip products to lower margin products.

 

We believe that the accounting estimates related to excess channel inventory are “critical accounting estimates” because: (1) the reserve is highly susceptible to change from period to period due to the variability of the different inputs to the calculation of the reserve such as changes in the level of channel inventory and channel sell-through rates and (2) the material impact that changes in these inputs can have on sales, cost of sales and margin on deferred revenue. Excess channel inventory is a critical estimate for all segments of our business.

 

Since we have no material debt and adequate cash balances, we believe that changes in excess channel inventory accruals would not impact our liquidity.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Application of Critical Accounting Policies (Continued)

 

Price Protection and Rebate Reserves

 

We have agreements with some of our direct and indirect customers which, in the event of a price decrease, allow those customers (subject to certain limitations) a credit equal to the difference between the price originally paid and the new decreased price on units in the customer’s inventory on the date of the price decrease not to exceed the number of units shipped to the customer for a specified time period prior to the price decrease. When a price decrease is anticipated, we establish reserves against gross trade receivables with the corresponding reduction in sales for estimated amounts to be reimbursed to qualifying customers. In addition, we record reserves at the time of shipment for estimated volume rebates and other estimated rebates given to consumers at the time of purchase from channel partners for which sales have been recognized. Estimates for rebates are based on a number of variable factors that depend on the specific program or product. These variables include the anticipated redemption rate of rebates, anticipated sales volumes in the channel, the perceived consumer value of the rebate and historical experience. Changes in any of these variables would have a direct impact on the amount of the recorded reserves. We use price protection and rebate programs in all of our segments and record the charges in our consolidated statement of operations against their respective segment.

 

We believe that the accounting estimates related to price protection and rebate programs are “critical accounting estimates” because: (1) the reserve is highly susceptible to change from period to period due to the assumptions made concerning redemption rates and other variables and (2) changes in this reserve can have a material impact on sales and trade receivables.

 

Price protection and rebate reserves have fluctuated in the past. For example, during 2005, $3.0 million of price protection and rebate reserves that were recorded in prior periods were released, as they were not claimed as originally estimated.

 

Reserves for volume and other rebates and price protection totaled $9.2 million at December 31, 2006 and $11.4 million at December 31, 2005 and are netted against trade receivables in our consolidated balance sheets. The decrease in this reserve for 2006 was primarily a reflection of lower rebate and price protection programs during 2006 relative to the lower sales in 2006. We believe that the use of rebates will continue to be a significant part of our business strategy.

 

Since we have no material debt and adequate cash balances, we believe that changes in price protection and rebate accruals would not impact our liquidity.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Application of Critical Accounting Policies (Continued)

 

Inventory Valuation Reserves

 

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. 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.

 

We believe that the accounting estimates related to inventory valuation reserves are “critical accounting estimates” because: (1) the reserve is highly susceptible to change from period to period due primarily to estimating future sales volumes of products and future sales prices, (2) the competitive nature of the technology industry which can quickly change the price of our products in the market place or the overall demand for our products and (3) changes in the value of inventory can have a material impact on cost of sales and inventory valuation reserves.

 

Inventory valuation reserve adjustments are necessitated primarily from changes in estimating future sales volumes and from changes in the estimates made of future sales prices. Estimating future sales volumes is particularly difficult for new products and end-of-life (“EOL”) products. Estimating future sales price is particularly difficult on CSS products due to price competition and short product cycles.

 

Zip products have shown a long market life compared to our other products. In light of their high margins, its inventory carrying value has been recoverable at estimated selling prices. Consequently, Zip products have not, until recently, been as susceptible to inventory valuation reserve adjustments as some of our other products. Now, as Zip products reach the end of their product life cycle, Zip products and components have become susceptible to excess and obsolete inventory reserves. If Zip volumes decline at a quicker rate or in greater volumes than forecasted, the risk associated with inventory valuation reserves will increase.

 

During 2006, we recorded a net decrease in inventory valuation reserves of $5.0 million. The $5.0 million decrease was comprised of net additions of $0.1 million less utilization of $5.1 million as reserved products were scrapped or sold. The $0.1 million of net additions to inventory valuation reserves were comprised of $0.3 million of net additions for CSS products, partially offset by $0.1 million of net releases for Zip products and $0.1 million of net releases for REV products. The $0.3 million of CSS products charges related primarily to write downs of HDD inventory to market costs, partially offset by HDD products that we determined could be re-worked and sold that had previously been considered excess. The $5.1 million inventory reserve utilizations were comprised of $4.4 million for Zip products and $0.7 million for CSS products (primarily HDD) as products were sold or scrapped. The Zip products utilization related primarily to Zip product components scrapped in the first quarter of 2006.

 

During 2005, we recorded a net decrease in inventory valuation reserves of $1.1 million. The $1.1 million decrease was comprised of additions of $1.4 million less utilization of $2.5 million as reserved product was scrapped or sold. The $1.4 million of additions to inventory valuation reserves were comprised of $0.7 million for CSS products, $0.3 million for Zip products, $0.2 million for REV products, $0.1 million for NSS products, with the remaining $0.1 million for other various products. The $0.7 million of CSS products charges related primarily to write downs of inventory to market costs and excess inventory on certain HDD products that were not selling as originally expected. The $2.5 million inventory reserve utilizations were

 

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IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Application of Critical Accounting Policies (Continued)

 

comprised of $1.8 million for Zip products, $0.2 million for CSS products, $0.2 million for NSS products and $0.3 million for other various products as products were sold or scrapped. The Zip products utilization related primarily to Zip product assemblies scrapped in the second quarter of 2005.

 

At December 31, 2006, we had inventory valuation reserves of $1.2 million, which compares to inventory valuation reserves of $6.2 million at December 31, 2005. The decrease of $5.0 million in inventory valuation reserves during 2006 was primarily attributable to utilizations of reserves as described above.

 

Adjustments to inventory reserves are non-cash adjustments and would not affect our liquidity.

 

Accrued Excess Purchase Commitments

 

The purchase orders under which we buy many of our products generally extend one to three quarters in the future. The quantities on the purchase orders are based on forecasted future sales requirements. It is difficult to estimate future product demand for new products or products with declining sales. Such estimates may result in excess purchase commitments, where we make commitments for purchases that we do not ultimately utilize. The accrual for excess purchase commitments also includes liabilities such as cancellation charges or handling fees incurred because of excess supplier inventory or equipment.

 

With the continuing decline of Zip volumes, this has become an area of particular risk for us. Suppliers of certain critical components of both Zip drives and disks have stopped producing, or EOL’d, such components and other suppliers are planning to do so. In such cases, we attempt to make an EOL purchase of the required component(s) based on our estimates of all future requirements. With respect to estimating excess purchase commitments, we are at risk that we will order insufficient or excess quantities of key components or that certain suppliers may produce excess inventory of key components in the absence of firm orders from us, leading to potential disputes regarding payment obligations.

 

We believe that the accounting estimates related to accrued excess purchase commitments are “critical accounting estimates” because: (1) the reserve is highly susceptible to change from period to period due primarily to estimating future sales volumes of products, (2) the inherit difficulty of estimating future requirements or final build-out of components that have been EOL’d by the supplier and (3) decisions to discontinue projects with suppliers.

 

During 2006, we recorded a net increase in excess purchase commitment reserves of $0.7 million. This increase was comprised of $2.2 million of additions less utilizations of $1.5 million. The additions of $2.2 million resulted from $2.1 million for REV products and $0.1 million for CSS products. The $1.5 million of utilizations resulted primarily from $1.1 million for Zip products, $0.2 million for CSS products and $0.2 million for REV products.

 

During 2005, we recorded a net increase in excess purchase commitment reserves of $0.6 million. This increase was comprised of $2.4 million of additions less utilizations of $1.8 million. The additions of $2.4 million resulted from $1.1 million for CSS products (primarily HDD products), $0.7 million for Zip products and $0.6 million for REV products. The $1.8 million of utilizations resulted primarily from $0.6 million for Zip products, $0.5 million for CSS products, $0.3 million for REV products, and the remaining $0.4 million for other various products.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Application of Critical Accounting Policies (Continued)

 

Since we have no material debt and adequate cash balances, we believe that changes in accrued excess purchase commitments would not impact our liquidity.

 

Tax Valuation Allowances and Tax Contingencies

 

Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes” (“SFAS 109”) requires that a valuation allowance be established when management determines that it is more likely than not that all or a portion of a deferred tax asset will not be realized. We evaluate the realizability of our net deferred tax assets on a quarterly basis and valuation allowances are provided or released, as necessary. During this evaluation, we review our forecasts of income in conjunction with other positive and negative evidence surrounding the realizability of our deferred tax assets to determine if a valuation allowance is required. Adjustments to the valuation allowance will increase or decrease our tax provision or benefit.

 

We believe that the accounting estimates related to deferred tax valuation allowances are “critical accounting estimates” because: (1) the need for valuation allowance is highly susceptible to change from period to period due to changes in deferred tax asset and deferred tax liability balances, (2) the need for valuation allowance is susceptible to actual operating results and (3) changes in the tax valuation allowance can have a material impact on the tax provision/benefit in the consolidated statements of operations and on deferred income taxes in the consolidated balance sheets.

 

For example, during 2006, we recorded a $6.3 million decrease in the valuation allowance resulting primarily from decreases in deferred tax assets and partially offset by decreases in deferred tax liabilities. Included in the $6.3 million decrease in the valuation allowance was a $15.9 million decreased valuation allowance resulting from decreases in the NOL and credit carryforwards and deferred tax assets related to inventory and accrued expenses. We also released $9.5 million of foreign tax contingencies. See Note 15 of the notes to the consolidated financial statements.

 

Additionally during 2005, we recorded an $8.3 million increase in the valuation allowance resulting primarily from new foreign tax credits and decreases in deferred tax liabilities.

 

Adjustments to deferred tax valuation allowances are non-cash adjustments and do not affect our cash flows.

 

Impairment of Goodwill

 

We have $12.5 million of goodwill, of which $3.0 million is associated with the Zip Products segment. The remaining goodwill is associated with the CSCI, Inc. acquisition. We expect to experience additional non-cash, Zip goodwill impairment charges as Zip sales and profits continue to decline. We will be required to take these charges in 2007 and we expect that the charges most likely will be recorded in the first half of 2007. We perform our annual impairment test required under SFAS No. 142, “Accounting for Goodwill and Intangible Assets” (“SFAS 142”) in the first quarter of each year. This test compares our Zip specific assets to the estimated future, discounted cash flows to determine if these cash flows will cover the assets. Additionally, each quarter, we compare how actual quarterly Zip profits are tracking with the projected Zip profits/cash flows that were used in the annual impairment test to make sure that there has not been a significant adverse change in business climate or that an unforeseen trend has developed. As part of this quarterly review, we also look for any other indicators of impairment, such as any significant adverse changes in legal factors, adverse regulatory assessments or loss of key personnel.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Application of Critical Accounting Policies (Continued)

 

We believe that the accounting estimates related to assessing potential impairment of our goodwill are “critical accounting estimates” because: (1) the subjectivity inherent in determining the fair value of the Zip Products segment and (2) the impact that future impairment charges will have on the consolidated statements of operations and the consolidated balance sheets.

 

Future goodwill impairment charges will be non-cash charges and will not affect our cash flows.

 

Results of Operations

 

The following table sets forth certain financial data as a percentage of sales for the years ended December 31, 2006, 2005 and 2004.

 

     Years Ended December 31,

 
     2006

    2005

    2004

 

Sales

   100.0 %   100.0 %   100.0 %

Cost of sales (including charges)

   79.9     78.9     77.9  
    

 

 

Gross margin

   20.1     21.1     22.1  
    

 

 

Operating Expenses (Income):

                  

Selling, general and administrative (1)

   18.1     22.9     27.3  

Research and development

   3.9     5.3     7.4  

License and patent fee income

   (0.5 )   (0.5 )   (3.2 )

Goodwill impairment charges

   3.8     —       —    

Restructuring charges

   1.5     2.9     1.4  
    

 

 

Total operating expenses

   26.8     30.6     32.9  
    

 

 

Operating loss

   (6.7 )   (9.5 )   (10.8 )

Interest and other income and expense

   1.7     0.2     1.1  
    

 

 

Loss from continuing operations before income taxes

   (5.0 )   (9.3 )   (9.7 )

Benefit (provision) for income taxes

   1.0     0.4     (1.5 )
    

 

 

Loss from continuing operations

   (4.0 )   (8.9 )   (11.2 )

Discontinued Operations:

                  

Gain on disposal, net of taxes

   0.1     0.4     —    

Loss on discontinued operations, net of taxes

   —       (0.1 )   —    
    

 

 

Net loss

   (3.9 )%   (8.6 )%   (11.2 )%
    

 

 


(1) Includes bad debt expense/credit.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Results of Operations (Continued)

 

Our net loss for the year ended December 31, 2006 was $8.8 million, or $0.17 per share, compared with a net loss of $22.8 million, or $0.44 per share, for the year ended December 31, 2005. The 2006 net loss included:

 

   

Pre-tax goodwill impairment charges of $8.7 million;

 

   

Pre-tax restructuring charges of $3.5 million;

 

   

Pre-tax, non-restructuring severance and benefits charges of $1.0 million associated with our prior CEO;

 

   

A pre-tax benefit of $1.1 million associated with the release of various liabilities for a European subsidiary for which operations ceased in 1999 and was dissolved in 2006;

 

   

A net after tax gain of $0.3 million on the sale of ByteTaxi, Inc. (see the “ByteTaxi, Inc. Termination Agreement, Gain on Sale and Losses from Discontinued Operations” discussion for more details);

 

   

Tax benefits of $6.3 million from decreased valuation allowances;

 

   

Tax charges of $8.4 million related to the write off of foreign NOLs and

 

   

Tax benefits of $4.0 million related to the statutory benefit on pre-tax losses from continuous operations and changes in other deferred tax items (see the “Income Taxes” discussion for more details).

 

The 2005 net loss included:

 

   

Pre-tax restructuring charges of $7.6 million;

 

   

A net after tax gain of $0.9 million on the sale/discontinued operations loss of ByteTaxi, Inc. (see the “ByteTaxi, Inc. Termination Agreement, Gain on Sale and Losses from Discontinued Operations” discussion for more details);

 

   

Tax provisions of $8.3 million from increased valuation allowances and

 

   

Tax benefits of $9.2 million related to the statutory benefit on pre-tax losses from continuous operations and changes in other deferred tax items (see the “Income Taxes” discussion for more details).

 

Seasonality

 

Our CSS business is typically strongest during the fourth quarter. Our European sales are typically weaker 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 period are not necessarily indicative of the sales to be expected in any future period.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

ByteTaxi, Inc. Termination Agreement, Gain on Sale and Losses from Discontinued Operations

 

In the first quarter of 2005, we acquired a 10% ownership interest in ByteTaxi, Inc. (“ByteTaxi”), a start-up software development company, with an option to purchase up to 29% of the company. Under the agreement, we received exclusive license rights to certain products, including ByteTaxi’s FolderShareTM software. Because we were the primary beneficiary of ByteTaxi’s operations, we were required to consolidate ByteTaxi’s operations under FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”). While consolidated under FIN 46, ByteTaxi was reported under the CSS product segment.

 

During the fourth quarter of 2005, we reached an agreement to sell our investment in ByteTaxi. Specifically, on October 28, 2005, Iomega, ByteTaxi and certain major shareholders of ByteTaxi entered into a Termination Agreement, under which we would receive a total of $2.9 million (payable as described below) in return for the sale of our equity ownership of ByteTaxi and termination of our distribution rights to FolderShareTM software. This Agreement was part of a larger series of transactions whereby Microsoft Corporation purchased all of the stock of ByteTaxi. We received a cash payment of $2.4 million on October 28, 2005 and the remaining funds were to be paid during the fourth quarter of 2006, subject to the satisfaction of certain escrow and indemnity terms. The escrow and indemnity provisions related to customary representations and warranties by selling shareholders relating to title, intellectual property issues, tax liabilities or other post-closing adjustments.

 

During the fourth quarter 2006, we received the final payment of $0.4 million from an escrow account related to the sale of Iomega’s equity interest in ByteTaxi. This is presented on the income statement as income from discontinued operations, net of taxes, of $0.3 million.

 

Upon the sale of our ownership interest in ByteTaxi, we ceased to be the primary beneficiary of ByteTaxi’s operations. Consequently, ByteTaxi has been deconsolidated at December 31, 2005, as per FIN 46. Under FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“FASB 144”), the sale of ByteTaxi was treated as a discontinued operation. Therefore, the losses from discontinued operations of ByteTaxi for the nine months ended October 2, 2005 and the gain relating to the sale of ByteTaxi have been reported under the discontinued operations section of our consolidated statement of operations.

 

The ByteTaxi losses from discontinued operations during 2005 and related taxes are presented as follows:

 

Description


   Amount

   

Original Financial

Statement Line Item


     (In thousands)      

Sales

   $ 79     Sales

Sales and marketing costs

     (44 )   Selling, general, and administrative

Research and development costs

     (397 )   Research and development
    


   

Loss from operations

     (362 )    

Other income and expense

     (6 )    
    


   

Loss before taxes

     (368 )    

Tax benefit

     140     Income taxes
    


   

Net loss

   $ (228 )    
    


   

 

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Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

DCT Program License Agreement, Impairment Charges and Related Asset Sales

 

DCT technology was a small form factor flexible media technology previously developed by us. In 2004, we undertook an analysis and objective evaluation of the market environment in which the DCT technology would compete and decided not to proceed with the DCT development: rather, we would seek to license the technology. As part of the wind down activities during the third quarter of 2004, we determined that fixed assets related solely to the DCT technology were impaired and thus during 2004 recorded, as cost of sales, $4.5 million of impairment charges. These $4.5 million of charges were attributable entirely to the Other Products business segment. The fair value of the assets was determined based on industry knowledge and from the disposition of similar assets in the past. During 2004, we also recorded $0.5 million of other charges for cancelled commitments, comprised primarily of supplier claims, for equipment and parts that had been committed to by our suppliers as well as second tier suppliers.

 

During the fourth quarter of 2004, we entered into a definitive license agreement regarding our DCT intellectual property. The license agreement terms included an upfront cash payment of $10.5 million to us and an additional $3.5 million cash payment to us at a later date based upon the licensee’s commercialization date of the technology, but no later than November 2007. Further, the license agreement calls for potential royalties to be paid on any future products utilizing the technology up to $11.0 million; work on certain products has been suspended that would utilize the technology, so potential royalties from that transaction are unlikely. The $10.5 million was reflected as a benefit to operating expenses on the consolidated statement of operations under the caption, “license and patent fee income”, as the cash had been received and we have fulfilled all of our obligations related to that payment. We will not recognize the $3.5 million in our financial statements until the related cash payment is received. There is no guarantee that we will receive any future payments from this transaction.

 

During the license agreement negotiations, we also entered into other agreements, including the sale of various fixed assets, primarily testing equipment and miscellaneous engineering equipment that we had used as part of the DCT Program. We received $1.2 million of cash for these assets resulting in a gain of $1.1 million. The breakout of the gain between “cost of sales” and “research and development” was determined based upon where the initial expense to purchase the respective assets was recorded. All of these charges and gains were reflected in the Other Products business segment.

 

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Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

DCT Program License Agreement, Impairment Charges and Related Asset (Continued)

 

A breakdown of the DCT Program license fees, impairment and other charges incurred during 2004 is included in the table below.

 

Description


   Amount

   

Financial

Statement Line Item


     (In thousands)      

License fees

   $ 10,500     License and patent fee income

Fixed asset impairments

     (4,488 )   Cost of sales

Gain from sale of DCT assets

     613     Cost of sales

Gain from sale of DCT assets

     543     Research and development

Other charges (primarily supplier claims)

     (527 )   Cost of sales
    


   

Net DCT gain

   $ 6,641      
    


   

Statement of Operations Breakout:

            

Cost of sales

   $ (4,402 )    

Research and development

     543      

License and patent fee income

     10,500      
    


   

Net DCT gain

   $ 6,641      
    


   

 

Restructuring Charges/Reversals

 

We currently have restructuring reserves under five different restructuring actions: the 2006 restructuring actions, the 2005 restructuring actions, the 2004 restructuring actions, the 2003 restructuring actions and the third quarter 2001 restructuring actions. The following table summarizes the reserve balances related to each of these restructuring actions.

 

     December 31,

     2006

   2005

     (In thousands)

Other Current Liabilities:

             

Third quarter 2001 restructuring actions

   $ 1,366    $ 1,434

2003 restructuring actions

     6      887

2004 restructuring actions

     77      346

2005 restructuring actions

     219      1,738

2006 restructuring actions

     205      —  
    

  

Total

   $ 1,873    $ 4,405
    

  

Fixed Asset Reserves:

             

Third quarter 2001 restructuring actions

   $ —      $ 74

2003 restructuring actions

     114      117

2004 restructuring actions

     —        145

2005 restructuring actions

     131      259
    

  

Total

   $ 245    $ 595
    

  

 

38


Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Restructuring Charges/Reversals (Continued)

 

During 2001, we recorded $33.1 million (net of a $0.2 million fourth quarter 2001 reversal) related to restructuring actions initiated during the third quarter of 2001.

 

During 2002, we had a net reversal of $2.4 million of previously recorded restructuring reserves. This $2.4 million net reversal was comprised of $2.0 million related to charges recorded for the 1999 restructuring actions and $0.4 million related to charges recorded for the third quarter 2001 restructuring actions.

 

During 2003, we recorded restructuring charges of $16.5 million, ($11.5 million recorded as restructuring charges and $5.0 million as cost of sales) of which $14.5 million was for restructuring actions initiated during the third quarter of 2003 and $2.1 million was associated with restructuring actions initiated during the third quarter of 2001 related to lease expenses for facilities which we had been unable to sublease, partially offset by a $0.1 million release of severance and benefit reserves related to the third quarter 2001 restructuring actions due to original estimates being higher than what was utilized.

 

During 2004, we recorded net restructuring charges of $4.5 million, of which $3.7 million was for restructuring actions initiated during the third quarter of 2004, $0.1 million was for the 2003 restructuring actions and $0.7 million was for the third quarter 2001 restructuring actions.

 

During 2005, we recorded net restructuring charges of $7.6 million, of which $5.7 million was for restructuring actions initiated during the third quarter of 2005, $0.5 million was for the 2004 restructuring actions, $1.1 million was for the 2003 restructuring actions and $0.3 million was for the third quarter 2001 restructuring actions.

 

During 2006, we recorded net restructuring charges of $3.5 million which consisted of a $3.0 million net charge for restructuring actions initiated during the first and second quarters of 2006, a $0.1 million net release for the 2005 restructuring actions, a $0.2 million release for the 2004 restructuring actions and a $0.9 million net charge for the third quarter 2001 restructuring actions.

 

The detail of the third quarter 2001, 2003, 2004, 2005 and 2006 restructuring actions and an update of the current status of each of these actions as of December 31, 2006 follows below.

 

Third Quarter 2001 Restructuring Actions

 

During the third quarter of 2001, we recorded restructuring charges of $33.3 million. In the fourth quarter of 2001, we recorded a net reversal of $0.2 million with respect to the third quarter 2001 restructuring actions. The restructuring charges in the third quarter of 2001 included $17.4 million associated with exiting lease facilities - of which $9.8 million related to leasehold improvements, furniture and information technology asset write-downs and $7.6 million was associated with lease termination costs - and $15.9 million related to the reduction of 1,234 regular and temporary personnel worldwide, or approximately 37% of our worldwide workforce. During the fourth quarter of 2001, we reversed $0.5 million related to lease termination costs and recorded additional charges of $0.3 million related to severance and benefits with respect to employees that were identified as part of the third quarter 2001 restructuring actions but who were not notified of their termination until the fourth quarter of 2001.

 

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Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Restructuring Charges/Reversals (Continued)

 

Of the $33.3 million in total third quarter 2001 restructuring charges, $27.9 million related to restructuring activities within North America, $2.6 million for restructuring activities within the Asia Pacific region (excluding Malaysia), $2.3 million for restructuring activities within Europe and $0.5 million for restructuring activities within Malaysia. Of the $33.3 million of restructuring charges, $23.5 million was for cash charges and $9.8 million was for non-cash charges. The North America activities consisted of outsourcing our distribution center in North Carolina and terminating the related lease, closing several sales offices in the United States and consolidating operations at our North America facilities (primarily Roy, Utah), all of which resulted in a workforce reduction of 760 regular employees and temporary staff across all business functions and across all levels of the organization. At September 30, 2001, of the 760 individuals whose positions were identified for termination in the third quarter of 2001, 193 individuals were scheduled to continue to work on a transition basis through various identified dates ending no later than December 31, 2001. Transition pay was not a part of the restructuring charges but rather was reported in normal operations as incurred. In compliance with the WARN Act, affected employees were given pay in lieu of a 60-day advance notice. Pay in lieu of notice was paid on a continuous basis for a 60-day notice period and separation payments were paid in lump sum at the end of the 60-day period or after the last day of employment for transition employees. Separation pay was based on years of service, job level and transition time, and included health insurance continuance payments. This workforce reduction resulted in charges of $12.7 million for severance and outplacement costs. The North America restructuring actions also resulted in charges of $8.9 million related to asset write-downs (leasehold improvements, furniture and information technology assets) and $6.3 million related to lease termination costs. Lease termination costs are being paid on their regular monthly rent payment schedule.

 

The Asia Pacific region activities consisted of the closure of several sales offices and the transfer of certain inventory operations and finance activities from Singapore to Malaysia, which resulted in a workforce reduction of 85 regular employees and temporary staff across all business functions and across all levels of the organization. At September 30, 2001, of the 85 individuals whose positions were identified for termination in the third quarter, 12 individuals were scheduled to continue to work on a transition basis through various identified dates ending no later than December 31, 2001. This workforce reduction resulted in charges of $0.8 million for severance and outplacement costs. The Asia Pacific region restructuring actions also resulted in charges of $0.7 million related to asset write-downs and $1.1 million related to lease termination costs.

 

During the fourth quarter of 2001, the 12 transition employees in the Asia Pacific region were notified that their positions were being terminated, resulting in additional charges of $0.3 million in the fourth quarter of 2001. These employees were identified for termination at September 30, 2001. However, since the employees had not been notified, we did not accrue the severance and benefit costs associated with these individuals in the original third quarter 2001 restructuring charges. Additionally, in the fourth quarter of 2001, $0.7 million of lease termination accruals were reversed due to us unexpectedly locating a tenant for one of the vacated facilities and being released from future rent obligations. In light of prevailing poor economic conditions, we had originally assumed we would not be able to sublease the facility.

 

The Europe activities consisted of the outsourcing of call center activities, closure of several sales offices and consolidation of operations in Switzerland and the Netherlands, which resulted in a workforce reduction of 94 regular employees and temporary staff across all business functions and across all levels of the organization. At September 30, 2001, of the 94 individuals whose positions were identified for termination in the third quarter, 28 individuals were scheduled to continue to work on a transition basis through December 31, 2001 and 21 individuals were scheduled to work on a transition basis through March 31, 2002 to manage operations that would be outsourced effective April 1, 2002. This workforce reduction resulted in charges of $1.9 million for severance and outplacement costs. The Europe restructuring actions also resulted in charges of $0.2 million related to asset write-downs and $0.2 million related to lease termination costs.

 

40


Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Restructuring Charges/Reversals (Continued)

 

During the fourth quarter of 2001, we determined that an additional $0.2 million was required for Europe lease termination costs because of us not being able to locate a new tenant in Ireland in the timeframe originally estimated in the third quarter.

 

The Malaysia activities consisted of a workforce reduction of 295 regular employees across almost all business functions, the majority of which were direct labor employees. All of the 295 individuals whose positions were identified for termination were dismissed in the third quarter. This workforce reduction resulted in charges of $0.5 million for severance and outplacement costs, all of which were paid during the third quarter of 2001.

 

2001 Activity/Changes in Third Quarter 2001 Restructuring Reserves

 

Remaining restructuring reserves of $8.9 million were included in our accrued restructuring charges and $3.6 million were included in the fixed asset reserves as of December 31, 2001. The third quarter 2001 restructuring charges originally totaled $33.3 million.

 

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Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Restructuring Charges/Reversals (Continued)

 

Utilization of and other activity relating to the third quarter 2001 restructuring reserves during 2001 are summarized below.

 

Third Quarter 2001

Restructuring Actions


  

Original

Charges


   Utilized

   

Additions

(Reversals)


   

Balance

12/31/01


      Cash

    Non-Cash

     
     (In thousands)

North America Reorganization:

                                     

Severance and benefits (a)

   $ 12,697    $ (10,503 )   $ —       $ —       $ 2,194

Lease cancellations (a)

     6,251      (428 )     —         —         5,823

Leasehold improvements and furniture (b)

     7,227      —         (5,125 )     —         2,102

Information technology assets (b)

     1,693      —         (477 )     —         1,216
    

  


 


 


 

       27,868      (10,931 )     (5,602 )     —         11,335
    

  


 


 


 

Asia Pacific Reorganization:

                                     

Severance and benefits (a)

     850      (1,021 )     —         253       82

Lease cancellations (a)

     1,106      (347 )     —         (691 )     68

Leasehold improvements and furniture (b)

     636      —         (636 )     —         —  

Other (a)

     38      (38 )     —         —         —  
    

  


 


 


 

       2,630      (1,406 )     (636 )     (438 )     150
    

  


 


 


 

Europe Reorganization:

                                     

Severance and benefits (a)

     1,849      (1,517 )     —         —         332

Lease cancellations (a)

     182      (49 )     —         257       390

Leasehold improvements and furniture (b)

     239      —         (4 )     —         235

Information technology assets (b)

     28      —         (2 )     —         26
    

  


 


 


 

       2,298      (1,566 )     (6 )     257       983
    

  


 


 


 

Malaysia Workforce Reduction:

                                     

Severance and benefits (a)

     470      (470 )     —         —         —  
    

  


 


 


 

     $ 33,266    $ (14,373 )   $ (6,244 )   $ (181 )   $ 12,468
    

  


 


 


 

Balance Sheet Breakout:

                                     

Accrued restructuring charges (a)

   $ 23,443    $ (14,373 )   $ —       $ (181 )   $ 8,889

Fixed asset reserves (b)

     9,823      —         (6,244 )     —         3,579
    

  


 


 


 

     $ 33,266    $ (14,373 )   $ (6,244 )   $ (181 )   $ 12,468
    

  


 


 


 

 


(a) Amounts represent primarily cash charges.
(b) Amounts represent primarily non-cash charges.

 

At December 31, 2001, we had terminated the employment of all affected employees, except for those employees offered retention packages into 2002 and vacated all facilities in connection with the third quarter 2001 restructuring actions.

 

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Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Restructuring Charges/Reversals (Continued)

 

2002 Activity/Changes in Third Quarter 2001 Restructuring Reserves

 

During 2002, a net adjustment of $0.4 million to the third quarter 2001 restructuring actions was recorded ($1.2 million in releases and $0.8 million in additional accruals). During 2002, $1.0 million of fixed asset reserves were released comprised of $0.6 million relating to the North America restructuring actions that was reversed due to the furniture being utilized at another facility and another $0.4 million of fixed asset reserves were released primarily due to higher than expected proceeds from asset disposals relating primarily to the North America restructuring actions. Severance and benefit reserves of $0.2 million relating primarily to the North America and Asia Pacific restructuring actions were released due to outplacement services not being utilized as originally estimated. Additional charges of $0.8 million were recognized for Europe lease termination costs because of us not being able to locate a new tenant in Ireland in the timeframe previously estimated.

 

Remaining restructuring reserves of $4.0 million were included in our accrued restructuring charges and $0.4 million were included in our fixed asset reserves at December 31, 2002. Utilization of and other activity relating to the third quarter 2001 restructuring reserves during the year ended December 31, 2002 are summarized below.

 

Third Quarter 2001

Restructuring Actions


  

Balance

12/31/01


   Utilized

   

Additions

(Reversals)


   

Balance

12/31/02


      Cash

    Non-Cash

     
          (In thousands)      

North America Reorganization:

                                     

Severance and benefits (a)

   $ 2,194    $ (1,979 )   $ —       $ (137 )   $ 78

Lease cancellations (a)

     5,823      (2,629 )     —         —         3,194

Leasehold improvements and furniture (b)

     2,102      —         (777 )     (894 )     431

Information technology assets (b)

     1,216      —         (1,214 )     (2 )     —  
    

  


 


 


 

       11,335      (4,608 )     (1,991 )     (1,033 )     3,703
    

  


 


 


 

Asia Pacific Reorganization:

                                     

Severance and benefits (a)

     82      (24 )     —         (58 )     —  

Lease cancellations (a)

     68      (53 )     —         (15 )     —  
    

  


 


 


 

       150      (77 )     —         (73 )     —  
    

  


 


 


 

Europe Reorganization:

                                     

Severance and benefits (a)

     332      (316 )     —         (16 )     —  

Lease cancellations (a)

     390      (488 )     —         825       727

Leasehold improvements and furniture (b)

     235      —         (147 )     (88 )     —  

Information technology assets (b)

     26      —         (26 )     —         —  
    

  


 


 


 

       983      (804 )     (173 )     721       727
    

  


 


 


 

     $ 12,468    $ (5,489 )   $ (2,164 )   $ (385 )   $ 4,430
    

  


 


 


 

Balance Sheet Breakout:

                                     

Accrued restructuring charges (a)

   $ 8,889    $ (5,489 )   $ —       $ 599     $ 3,999

Fixed asset reserves (b)

     3,579      —         (2,164 )     (984 )     431
    

  


 


 


 

     $ 12,468    $ (5,489 )   $ (2,164 )   $ (385 )   $ 4,430
    

  


 


 


 

 


(a) Amounts represent primarily cash charges.
(b) Amounts represent primarily non-cash charges.

 

43


Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Restructuring Charges/Reversals (Continued)

 

As of December 31, 2002, we had terminated the employment of all affected employees.

 

2003 Activity/Changes in Third Quarter 2001 Restructuring Reserves

 

During 2003, severance and benefit reserves of $0.1 million were reversed due to the original estimates being higher than what was utilized. During 2003, we recorded an additional $0.9 million for Europe lease termination costs because of us not being able to locate a tenant for the Ireland facility. We also recorded an additional $1.2 million for North American lease termination costs as a result of us not being able to locate a tenant for a Utah facility.

 

Remaining restructuring reserves of $4.6 million were included in our accrued restructuring charges and $0.3 million were included in our fixed asset reserves at December 31, 2003. Utilization of and other activity relating to the third quarter 2001 restructuring reserves during the year ended December 31, 2003 are summarized below.

 

Third Quarter 2001

Restructuring Actions


  

Balance

12/31/02


   Utilized

   

Additions

(Reversals)


   

Balance

12/31/03


      Cash

    Non-Cash

     
          (In thousands)      

North America Reorganization:

                                     

Severance and benefits (a)

   $ 78    $ —       $ —       $ (78 )   $ —  

Lease cancellations (a)

     3,194      (1,041 )     —         1,121       3,274

Leasehold improvements and furniture (b)

     431      —         (132 )     —         299
    

  


 


 


 

       3,703      (1,041 )     (132 )     1,043       3,573
    

  


 


 


 

Europe Reorganization:

                                     

Lease cancellations (a)

     727      (333 )     —         930       1,324
    

  


 


 


 

     $ 4,430    $ (1,374 )   $ (132 )   $ 1,973     $ 4,897
    

  


 


 


 

Balance Sheet Breakout:

                                     

Accrued restructuring charges (a)

   $ 3,999    $ (1,374 )   $ —       $ 1,973     $ 4,598

Fixed asset reserves (b)

     431      —         (132 )     —         299
    

  


 


 


 

     $ 4,430    $ (1,374 )   $ (132 )   $ 1,973     $ 4,897
    

  


 


 


 

 


(a) Amounts represent primarily cash charges.
(b) Amounts represent primarily non-cash charges.

 

At December 31, 2003, the remaining leasehold improvements were associated with subleased facilities and cannot be disposed of until the subleases expire.

 

2004 Activity/Changes in Third Quarter 2001 Restructuring Reserves

 

During 2004, we recorded an additional $0.7 million for Europe lease termination costs as a result of us not being able to locate a tenant for the Ireland facility; however, we were successful in subleasing this facility in the fourth quarter of 2004.

 

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Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Restructuring Charges/Reversals (Continued)

 

Remaining restructuring reserves of $2.2 million were included in our accrued restructuring charges and $0.2 million were included in our fixed asset reserves at December 31, 2004. Utilization of and other activity relating to the third quarter 2001 restructuring reserves during the year ended December 31, 2004 are summarized below.

 

Third Quarter 2001

Restructuring Actions


  

Balance

12/31/03


   Utilized

    Additions

  

Foreign

Currency

Changes


   

Balance

12/31/04


      Cash

    Non-Cash

        
     (In thousands)

North America Reorganization:

                                            

Lease cancellations (a)

   $ 3,274    $ (1,071 )   $ —       $ —      $ —       $ 2,203

Leasehold improvements and furniture (b)

     299      —         (131 )     —        —         168
    

  


 


 

  


 

       3,573      (1,071 )     (131 )     —        —         2,371
    

  


 


 

  


 

Europe Reorganization:

                                            

Lease cancellations (a)

     1,324      (1,995 )     —         676      (3 )     2
    

  


 


 

  


 

     $ 4,897    $ (3,066 )   $ (131 )   $ 676    $ (3 )   $ 2,373
    

  


 


 

  


 

Balance Sheet Breakout:

                                            

Accrued restructuring charges (a)

   $ 4,598    $ (3,066 )   $ —       $ 676    $ (3 )   $ 2,205

Fixed asset reserves (b)

     299      —         (131 )     —        —         168
    

  


 


 

  


 

     $ 4,897    $ (3,066 )   $ (131 )   $ 676    $ (3 )   $ 2,373
    

  


 


 

  


 

 


(a) Amounts represent primarily cash charges.
(b) Amounts represent primarily non-cash charges.

 

At December 31, 2004, the remaining leasehold improvements were associated with subleased facilities and cannot be disposed of until the subleases expire.

 

2005 Activity/Changes in Third Quarter 2001 Restructuring Reserves

 

During 2005, we recorded an additional $0.3 million for U.S. lease termination costs because of us not being able to locate a subtenant as originally anticipated.

 

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Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Restructuring Charges/Reversals (Continued)

 

Remaining restructuring reserves of $1.4 million are included in our accrued restructuring charges and $0.1 million are included in our fixed asset reserves at December 31, 2005. Utilization of and other activity relating to the third quarter 2001 restructuring reserves during the year ended December 31, 2005 are summarized below.

 

Third Quarter 2001

Restructuring Actions


  

Balance

12/31/04


   Utilized

   

Additions

(Reversals)


   

Balance

12/31/05


      Cash

    Non-Cash

     
     (In thousands)

North America Reorganization:

                                     

Lease cancellations (a)

   $ 2,203    $ (1,030 )   $ —       $ 261     $ 1,434

Leasehold improvements and furniture (b)

     168      —         (94 )     —         74
    

  


 


 


 

       2,371      (1,030 )     (94 )     261       1,508
    

  


 


 


 

Europe Reorganization:

                                     

Lease cancellations (a)

     2      —         —         (2 )     —  
    

  


 


 


 

     $ 2,373    $ (1,030 )   $ (94 )   $ 259     $ 1,508
    

  


 


 


 

Balance Sheet Breakout:

                                     

Accrued restructuring charges (a)

   $ 2,205    $ (1,030 )   $ —       $ 259     $ 1,434

Fixed asset reserves (b)

     168      —         (94 )     —         74
    

  


 


 


 

     $ 2,373    $ (1,030 )   $ (94 )   $ 259     $ 1,508
    

  


 


 


 

 


(a) Amounts represent primarily cash charges.
(b) Amounts represent primarily non-cash charges.

 

At December 31, 2005, the remaining leasehold improvements are associated with subleased facilities and cannot be disposed of until the subleases expire.

 

2006 Activity/Changes in Third Quarter 2001 Restructuring Reserves

 

During 2006, we recorded an additional net $0.9 million for U.S. lease termination costs because of us not being able to locate a subtenant in the timeframe originally anticipated. In January of 2007, we finalized an agreement to assist a company to purchase the building we were leasing and they will occupy the building and release us from our remaining lease obligations. This resulted in an overall $0.6 million cash savings reflected in the release in the below table.

 

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Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Restructuring Charges/Reversals (Continued)

 

Remaining restructuring reserves of $1.4 million are included in our accrued restructuring charges at December 31, 2006. Utilization of and other activity relating to the third quarter 2001 restructuring reserves during the year ended December 31, 2006 are summarized below.

 

Third Quarter 2001

Restructuring Actions


  

Balance

12/31/05


   Utilized

   

Additions


  

Reversals


   

Balance

12/31/06


      Cash

    Non-Cash

        
     (In thousands)

North America Reorganization:

                                            

Lease cancellations (a)

   $ 1,434    $ (947 )   $ —       $ 1,500    $ (621 )   $ 1,366

Leasehold improvements and furniture (b)

     74      —         (72 )     —        (2 )     —  
    

  


 


 

  


 

     $ 1,508    $ (947 )   $ (72 )   $ 1,500    $ (623 )   $ 1,366
    

  


 


 

  


 

Balance Sheet Breakout:

                                            

Accrued restructuring charges (a)

   $ 1,434    $ (947 )   $ —       $ 1,500    $ (621 )   $ 1,366

Fixed asset reserves (b)

     74      —         (72 )     —        (2 )     —  
    

  


 


 

  


 

     $ 1,508    $ (947 )   $ (72 )   $ 1,500    $ (623 )   $ 1,366
    

  


 


 

  


 


(a) Amounts represent primarily cash charges.
(b) Amounts represent primarily non-cash charges.

 

At December 31, 2006, the remaining lease cancellation costs relate to estimated costs associated with subsidizing a buyer of the building and estimated repair costs.

 

2003 Restructuring Actions

 

The $14.5 million of charges for the 2003 restructuring actions included $6.5 million for severance and benefits for 198 regular and temporary personnel worldwide, or approximately 25% of our worldwide workforce, $3.0 million to exit contractual obligations, $2.6 million to reimburse a strategic supplier for its restructuring expenses (see below for more detail), $1.8 million for lease termination costs and $0.6 million related to excess furniture.

 

Of the $14.5 million recorded for the 2003 restructuring actions, $5.0 million was charged to cost of sales with the remaining $9.5 million being shown as restructuring expenses as a component of operating expenses. The $5.0 million charged to cost of sales included $2.6 million to reimburse a strategic supplier for its restructuring expenses and $2.4 million to exit a third-party Zip disk manufacturing agreement. This $5.0 million was charged to our Zip product segment and the remaining $9.5 million was not allocated to any of our business segments. Of the $14.5 million in restructuring charges, all but the $0.6 million related to excess furniture will be paid in cash. During 2003, we made cash payments of $10.3 million related to these restructuring actions.

 

Of the $6.5 million severance and benefits charges for the 198 regular and temporary personnel, $4.0 million related to 150 employees located in North American, $2.1 million related to 31 employees located in Europe and $0.4 million related to 17 employees located in Asia. The worldwide workforce reduction was across all business functions and across all levels of the Company and was in response to our continued sales decline. Of the 198 individuals worldwide whose positions were identified for elimination in the third quarter of 2003, 42 employees worked on a transition basis into the fourth quarter of 2003, 7 employees worked on a transition

 

47


Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Restructuring Charges/Reversals (Continued)

 

basis into the first quarter of 2004, 4 employees worked on a transition basis into the second quarter of 2004 and 3 employees worked on a transition basis into the third quarter of 2004. Transition pay was not a part of the restructuring charges but rather was reported in normal operations as incurred. Separation pay was based on years of service, job level and transition time, and included health insurance continuance payments. Separation payments were made after the last day of employment and after separation agreements were signed by the employees. The $6.5 million of severance and benefits costs recognized during 2003 included the costs associated with those employees whose positions were eliminated during 2003 and the ratable recognition of the severance and benefits costs to be paid to the 14 employees who remained on transition into 2004 as defined by SFAS 146.

 

The $3.0 million of charges to exit contractual obligations included $2.4 million to discontinue a third-party manufacturing relationship as part of our efforts to consolidate our Zip disk manufacturing. The manufacturing contract was terminated because of continued declining Zip disk volumes. The $2.4 million charge was a negotiated amount based upon the net book value of manufacturing equipment that the third-party contractor had purchased to manufacture Zip disks, for which we were under contract to reimburse in the event of terminating the manufacturing agreement. Also included in the $3.0 million charges to exit contractual obligations was $0.5 million to exit an information technologies contract related to the maintenance and hosting of our servers and $0.1 million for other miscellaneous contract cancellations. The information technology maintenance function and hosting began to be performed by our employees within our facilities beginning in the first quarter of 2004.

 

The $2.6 million charge to reimburse a strategic supplier for its restructuring expenses related to restructuring charges incurred by a strategic supplier of our products in an effort to reduce product costs charged to us. Due to the continuing decline in sales of Zip products, we had requested the supplier to reduce their overhead costs. In order to induce the supplier to reduce its overhead costs to a level commensurate with current Zip drive volumes and at an accelerated rate compared to the overhead cost reductions called for in the contract between the parties, we agreed to reimburse the restructuring costs incurred by the supplier. The $1.8 million in lease termination charges were primarily for facilities in the United States. We exited these facilities because of the lower headcounts. We also recorded $0.6 million for excess furniture from the exited facilities.

 

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Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Restructuring Charges/Reversals (Continued)

 

Remaining restructuring reserves of $3.6 million were included in our accrued restructuring charges and $0.6 million were included in our fixed asset reserves at December 31, 2003. Utilization of the 2003 restructuring reserves during the year ended December 31, 2003 is summarized below.

 

2003 Restructuring Actions


  

Original

Charges


   Utilized

   

Balance

12/31/03


      Cash

    Non-Cash

   
     (In thousands)

Severance and benefits (a)

   $ 6,519    $ (5,196 )   $ —       $ 1,323

Contract cancellations (a)

     2,945      (2,445 )     —         500

Supplier restructuring reimbursement (a)

     2,629      (2,629 )     —         —  

Lease termination costs (a)

     1,761      (20 )     —         1,741

Furniture (b)

     632      —         (35 )     597
    

  


 


 

     $ 14,486    $ (10,290 )   $ (35 )   $ 4,161
    

  


 


 

Balance Sheet Breakout:

                             

Accrued restructuring charges (a)

   $ 11,462    $ (7,898 )   $ —       $ 3,564

Accounts payable (a)

     2,392      (2,392 )     —         —  

Fixed asset reserves (b)

     632      —         (35 )     597
    

  


 


 

     $ 14,486    $ (10,290 )   $ (35 )   $ 4,161
    

  


 


 


  (a) Amounts represent primarily cash charges.
  (b) Amounts represent primarily non-cash charges.

 

At December 31, 2003, all of the 2003 restructuring actions were complete and no further charges were recorded except for the severance and benefits charges for those employees who remained on transition into 2004.

 

2004 Activity/Changes in 2003 Restructuring Reserves

 

The total separation payments or liability for the 198 employees notified under the 2003 restructuring actions was $6.7 million. During 2004, we recorded an additional $0.5 million of restructuring expense related to the ratable recognition of the severance and benefits costs to be paid to the employees who remained on transition into 2004. However, during the first quarter of 2004, we also released $0.3 million of outplacement reserves as employee usage of outplacement resources was less than originally estimated.

 

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Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Restructuring Charges/Reversals (Continued)

 

Remaining restructuring reserves of $0.7 million were included in our accrued restructuring charges and $0.2 million were included in our fixed asset reserves at December 31, 2004. Utilization of and other activity relating to the 2003 restructuring reserves during the year ended December 31, 2004 are summarized below.

 

2003 Restructuring Actions


  

Balance

12/31/03


   Utilized

    Additions

  

Reversals


   

Balance

12/31/04


      Cash

    Non-Cash

        
     (In thousands)

Severance and benefits (a)

   $ 1,323    $ (1,465 )   $ —       $ 452    $ (308 )   $ 2

Contract cancellations (a)

     500      (500 )     —         —        —         —  

Lease termination costs (a)

     1,741      (1,001 )     —         —        —         740

Furniture (b)

     597      —         (405 )     —        —         192
    

  


 


 

  


 

     $ 4,161    $ (2,966 )   $ (405 )   $ 452    $ (308 )   $ 934
    

  


 


 

  


 

Balance Sheet Breakout:

                                            

Accrued restructuring charges (a)

   $ 3,564    $ (2,966 )   $ —       $ 452    $ (308 )   $ 742

Fixed asset reserves (b)

     597      —         (405 )     —        —         192
    

  


 


 

  


 

     $ 4,161    $ (2,966 )   $ (405 )   $ 452    $ (308 )   $ 934
    

  


 


 

  


 


(a) Amounts represent primarily cash charges.
(b) Amounts represent primarily non-cash charges.

 

2005 Activity/Changes in 2003 Restructuring Reserves

 

During 2005, we recorded an additional $1.1 million in restructuring charges related to the 2003 restructuring actions for a lease due to our inability to sublease the facility because of the market conditions in Roy, Utah.

 

Remaining restructuring reserves of $0.9 million are included in our accrued restructuring charges and $0.1 million are included in our fixed asset reserves at December 31, 2005. Utilization of and other activity relating to the 2003 restructuring reserves during the year ended December 31, 2005 are summarized below.

 

2003 Restructuring Actions


  

Balance

12/31/04


   Utilized

   

Additions


  

Balance

12/31/05


      Cash

    Non-Cash

      
     (In thousands)

Severance and benefits (a)

   $ 2    $ —       $ —       $ —      $ 2

Lease termination costs (a)

     740      (945 )     —         1,090      885

Furniture (b)

     192      —         (75 )     —        117
    

  


 


 

  

     $ 934    $ (945 )   $ (75 )   $ 1,090    $ 1,004
    

  


 


 

  

Balance Sheet Breakout:

                                    

Accrued restructuring charges (a)

   $ 742    $ (945 )   $ —       $ 1,090    $ 887

Fixed asset reserves (b)

     192      —         (75 )     —        117
    

  


 


 

  

     $ 934    $ (945 )   $ (75 )   $ 1,090    $ 1,004
    

  


 


 

  


(a) Amounts represent primarily cash charges.
(b) Amounts represent primarily non-cash charges.

 

50


Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Restructuring Charges/Reversals (Continued)

 

2006 Activity/Changes in 2003 Restructuring Reserves

 

Remaining restructuring reserves of $0.1 million are included in our fixed asset reserves at December 31, 2006. Utilization of and other activity relating to the 2003 restructuring reserves during the year ended December 31, 2006 are summarized below.

 

    

Balance

12/31/05


   Utilized

   

Reversals


   

Balance

12/31/06


2003 Restructuring Actions


      Cash

    Non-Cash

     
     (In thousands)

Severance and benefits (a)

   $ 2    $ —       $ —       $ (2 )   $ —  

Lease termination costs (a)

     885      (879 )     —         —         6

Furniture (b)

     117      —         (3 )     —         114
    

  


 


 


 

     $ 1,004    $ (879 )   $ (3 )   $ (2 )   $ 120
    

  


 


 


 

Balance Sheet Breakout:

                                     

Accrued restructuring charges (a)

   $ 887    $ (879 )   $ —       $ (2 )   $ 6

Fixed asset reserves (b)

     117      —         (3 )     —         114
    

  


 


 


 

     $ 1,004    $ (879 )   $ (3 )   $ (2 )   $ 120
    

  


 


 


 


(a) Amounts represent primarily cash charges.
(b) Amounts represent primarily non-cash charges.

 

The remaining lease cancellation costs are the estimated costs to return the building to the property owner. We anticipate completing the disposal of the furniture in the first quarter of 2007.

 

2004 Restructuring Actions

 

During 2004, we recorded $3.7 million of restructuring charges for the 2004 restructuring actions, including $2.6 million of cash charges for severance and benefits for 108 regular and temporary personnel worldwide (approximately 19% of our worldwide workforce) who were notified by September 26, 2004 that their positions were being eliminated, $0.7 million of cash charges for lease termination costs and $0.4 million of non-cash charges related to excess furniture. All of the $3.7 million of restructuring charges recorded during 2004 were shown as restructuring expenses as a component of operating expenses. None of these restructuring charges was allocated to any of the business segments.

 

In conjunction with the DCT license agreement signed during the fourth quarter of 2004, we notified an additional 9 employees that their positions were being eliminated. Severance and benefits charges for these 9 employees were included in the $2.6 million above. Another 24 employees were hired by the licensee of the DCT technology. This additional reduction in force of 33 employees brought the total reduction of employees to 141 positions, or approximately 25% of our worldwide workforce at September 26, 2004.

 

We made $1.8 million of cash payments in 2004 for these restructuring charges, related entirely to severance and benefits. The restructuring actions were part of an effort to align our cost structure with our expected future revenue levels.

 

Of the $2.6 million in severance and benefits charges for the 117 regular and temporary personnel, $1.9 million was for 103 employees located in North American, $0.4 was for 9 employees located in Asia and $0.3

 

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Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Restructuring Charges/Reversals (Continued)

 

million was for 5 employees located in Europe. The worldwide workforce reduction was across all business functions and across all levels of the Company. At December 31, 2004, of the 117 individuals worldwide, all but 15 had been released. All but one of these remaining 15 employees was scheduled to work on a transition basis through the first quarter of 2005, with the one employee working into the second quarter of 2005. Transition pay was not a part of the restructuring charges but rather was reported in normal operations as incurred. Separation pay was based on years of service and job level, and included health insurance continuance payments. Separation payments, for most employees, was made after the last day of employment after separation agreements had been signed by the employees except for those where continuous payments were legally required and for two other employees. The $2.6 million in severance and benefits costs recognized during 2004 included the costs associated with those employees whose positions were eliminated during 2004 and the ratable recognition of the severance and benefits costs, which were paid or will be paid to those employees who were on transition beyond the minimum retention period (60 days) as defined by SFAS 146.

 

As part of the 2004 restructuring actions, we recorded a $0.4 million non-cash charge related to excess furniture that was no longer being utilized because of our continuing downsizing.

 

None of these charges was allocated to any of our business product segments. All but the $0.4 million of excess furniture charges are expected to be paid in cash.

 

Remaining restructuring reserves of $1.5 million were included in our accrued restructuring charges and $0.3 million were included in our fixed asset reserves at December 31, 2004. Utilization of and other activity related to the 2004 restructuring reserves during the year ended December 31, 2004 are summarized below.

 

    

Original

Charges


   Utilized

   

Foreign

Currency

Changes


  

Balance

12/31/04


2004 Restructuring Actions


      Cash

    Non-Cash

      
     (In thousands)

Severance and benefits (a)

   $ 2,559    $ (1,815 )   $ —       $ 22    $ 766

Lease termination costs (a)

     725      —         —         —        725

Furniture (b)

     427      —         (81 )     —        346
    

  


 


 

  

     $ 3,711    $ (1,815 )   $ (81 )   $ 22    $ 1,837
    

  


 


 

  

Balance Sheet Breakout:

                                    

Accrued restructuring charges (a)

   $ 3,284    $ (1,815 )   $ —       $ 22    $ 1,491

Fixed asset reserves (b)

     427      —         (81 )     —        346
    

  


 


 

  

     $ 3,711    $ (1,815 )   $ (81 )   $ 22    $ 1,837
    

  


 


 

  


(a) Amounts represent primarily cash charges.
(b) Amounts represent primarily non-cash charges.

 

At December 31, 2004, the remaining severance and benefits reserves related to the 15 employees who were on transition. Lease payments were being made on a continuous monthly basis, and of these facilities, the last lease expires in 2008.

 

52


Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Restructuring Charges/Reversals (Continued)

 

2005 Activity/Changes in 2004 Restructuring Reserves

 

During 2005, we recorded $0.6 million of additional restructuring charges for the 2004 restructuring actions, including $0.4 million of cash charges for severance and benefits for those employees on transition and $0.2 million of cash charges for lease termination costs. Additionally, we released $0.1 million of outplacement reserves because the utilization rate was less than originally expected.

 

We made an additional $1.7 million of cash payments in 2005 for these restructuring charges, related to severance and benefits and lease commitments, bringing total cash payments related to the 2004 restructuring actions to $3.5 million at December 31, 2005.

 

Remaining restructuring reserves of $0.4 million are included in our accrued restructuring charges and $0.1 million are included in our fixed asset reserves at December 31, 2005. Utilization of and other activity related to the 2004 restructuring reserves during the year ended December 31, 2005 are summarized below.

 

    

Balance

12/31/04


   Utilized

              

Foreign

Currency

Changes


   

Balance

12/31/05


2004 Restructuring Actions


      Cash

    Non-Cash

    Additions

   Reversals

     
     ( In thousands)

Severance and benefits (a)

   $ 766    $ (1,036 )   $ —       $ 375    $ (93 )   $ (12 )   $ —  

Lease termination costs (a)

     725      (647 )     —         268      —         —         346

Furniture (b)

     346      —         (201 )     —        —         —         145
    

  


 


 

  


 


 

     $ 1,837    $ (1,683 )   $ (201 )   $ 643    $ (93 )   $ (12 )   $ 491
    

  


 


 

  


 


 

Balance Sheet Breakout:

                                                    

Accrued restructuring charges (a)

   $ 1,491    $ (1,683 )   $ —       $ 643    $ (93 )   $ (12 )   $ 346

Fixed asset reserves (b)

     346      —         (201 )     —        —         —         145
    

  


 


 

  


 


 

     $ 1,837    $ (1,683 )   $ (201 )   $ 643    $ (93 )   $ (12 )   $ 491
    

  


 


 

  


 


 


(a) Amounts represent primarily cash charges.
(b) Amounts represent primarily non-cash charges.

 

Lease payments are being made on a continuous monthly basis, and of these facilities, the last lease expires in 2008.

 

2006 Activity/Changes in 2004 Restructuring Reserves

 

During 2006, we recorded $0.2 million of restructuring releases for the 2004 restructuring actions, including $0.1 million for lease termination costs and $0.1 million for furniture due to higher than estimated sales proceeds.

 

We made additional $0.2 million in cash payments in 2006 for these restructuring charges, related to severance and benefits and lease commitments bringing total cash payments related to the 2004 restructuring actions to $3.7 million at December 31, 2006.

 

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Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Restructuring Charges/Reversals (Continued)

 

Remaining restructuring reserves of $0.1 million are included in our accrued restructuring charges at December 31, 2006. Utilization of and other activity related to the 2004 restructuring reserves during the year ended December 31, 2006 are summarized below.

 

    

Balance

12/31/05


   Utilized

  

Additions


  

Reversals


   

Balance

12/31/06


2004 Restructuring Actions


      Cash

    Non-Cash

       
     ( In thousands)

Severance and benefits (a)

   $ —      $ (14 )   $ —      $ 14    $ —       $ —  

Lease termination costs (a)

     346      (194 )     —        —        (75 )     77

Furniture (b)

     145      —         —        —        (145 )     —  
    

  


 

  

  


 

     $ 491    $ (208 )   $ —      $ 14    $ (220 )   $ 77
    

  


 

  

  


 

Balance Sheet Breakout:

                                           

Accrued restructuring charges (a)

   $ 346    $ (208 )   $ —      $ 14    $ (75 )   $ 77

Fixed asset reserves (b)

     145      —         —        —        (145 )     —  
    

  


 

  

  


 

     $ 491    $ (208 )   $ —      $ 14    $ (220 )   $ 77
    

  


 

  

  


 


(a) Amounts represent primarily cash charges.
(b) Amounts represent primarily non-cash charges.

 

Lease payments are being made on a continuous monthly basis, and of these facilities, the last lease expires in 2008.

 

2005 Restructuring Actions

 

During 2005, we recorded $5.7 million of restructuring charges for the 2005 restructuring actions. These charges included $4.0 million of cash charges for severance and benefits for approximately 120 personnel worldwide who were notified during the third quarter of 2005 that their positions were being eliminated, $0.7 million of cash charges for miscellaneous contract cancellations, $0.5 million of cash charges for lease termination costs and $0.4 million of non-cash charges related to excess furniture, leasehold improvements and other miscellaneous assets. The $5.7 million was shown as restructuring expenses as a component of operating expenses. None of these restructuring charges were allocated to any of our business segments. The restructuring actions were part of an effort to align our cost structure with our expected future revenue levels.

 

The worldwide workforce reduction was across all business functions and levels within Iomega. Of the 120 impacted personnel worldwide, approximately 20 employees worked on a transition basis into the fourth quarter of 2005 and January of 2006.

 

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Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Restructuring Charges/Reversals (Continued)

 

The breakdown of the 2005 restructuring charges and utilization of and other activity related to the 2005 restructuring reserves during the year ended December 31, 2005 are summarized below.

 

2005 Restructuring Actions


  

Original

Charges


   Utilized

   

Foreign

Currency

Changes


   

Balance

12/31/05


      Cash

    Non-Cash

     
     (In thousands)

Severance and benefits (a)

   $ 4,039    $ (3,356 )   $ —       $ (2 )   $ 681

Contract termination costs (b)

     710      (40 )     —         —         670

Lease termination costs (a)

     500      (113 )     —         —         387

Lease related assets (b)

     317      —         (58 )     —         259

Other miscellaneous assets (b)

     121      —         (121 )     —         —  
    

  


 


 


 

     $ 5,687    $ (3,509 )   $ (179 )   $ (2 )   $ 1,997
    

  


 


 


 

Balance Sheet Breakout:

                                     

Other current liabilities (a)

   $ 5,249    $ (3,509 )   $ —       $ (2 )   $ 1,738

Fixed asset reserves (b)

     438      —         (179 )     —         259
    

  


 


 


 

     $ 5,687    $ (3,509 )   $ (179 )   $ (2 )   $ 1,997
    

  


 


 


 


(a) Amounts represent primarily cash charges.
(b) Amounts represent primarily non-cash charges.

 

At December 31, 2005, the remaining severance and benefits reserves are related to employees who were on transition and certain executives who receive their severance payments on a continuous pay basis. Lease payments are being made on a continuous monthly basis, and of these facilities, the last lease expires in July 2008.

 

2006 Activity/Changes in 2005 Restructuring Reserves

 

During 2006, we recorded $0.2 million of restructuring charges for the 2005 restructuring actions for lease cancellation due to our inability to sublease a facility in Texas. This was more than offset by a $0.3 million release of restructuring reserves associated with miscellaneous contract obligations due to negotiating lower settlement amounts and excess severance and benefits.

 

We made additional cash payments of $1.4 million in 2006 for these restructuring charges, related to severance and benefits and lease commitments. This brings total cash payments related to the 2005 restructuring actions to $4.9 million.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Restructuring Charges/Reversals (Continued)

 

Remaining restructuring reserves of $0.2 million are included in our accrued restructuring charges and $0.1 million are included in fixed asset reserves at December 31, 2006. Utilization of and other activity related to the 2005 restructuring reserves during the year ended December 31, 2006 are summarized below.

 

2005 Restructuring Actions


  

Balance

12/31/05


   Utilized

   

Additions


  

Reversals


   

Balance

12/31/06


      Cash

    Non-Cash

        
     (In thousands)

Severance and benefits (a)

   $ 681    $ (616 )   $ —       $ 4    $ (69 )   $ —  

Contract termination costs (b)

     670      (450 )     —         —        (220 )     —  

Lease termination costs (a)

     387      (318 )     —         150      —         219

Lease related assets (b)

     259      —         (130 )     2      —         131
    

  


 


 

  


 

     $ 1,997    $ (1,384 )   $ (130 )   $ 156    $ (289 )   $ 350
    

  


 


 

  


 

Balance Sheet Breakout:

                                            

Other current liabilities (a)

   $ 1,738    $ (1,384 )   $ —       $ 154    $ (289 )   $ 219

Fixed asset reserves (b)

     259      —         (130 )     2      —         131
    

  


 


 

  


 

     $ 1,997    $ (1,384 )   $ (130 )   $ 156    $ (289 )   $ 350
    

  


 


 

  


 


(a) Amounts represent primarily cash charges.
(b) Amounts represent primarily non-cash charges.

 

At December 31, 2006, lease payments are being made on a continuous monthly basis, and of these facilities, the last lease expires in July of 2008. We have entered into a sublease agreement on the leased facility that expires in 2008. The lease related assets are being utilized by the tenant who is subleasing the facility.

 

2006 Restructuring Actions

 

During 2006, we recorded $3.0 million of net restructuring charges for the 2006 restructuring actions. These charges included $2.7 million of cash charges for severance and benefits for approximately 90 personnel worldwide who were notified during the first and second quarters of 2006 that their positions were being eliminated, $0.2 million of cash charges for miscellaneous contract and lease cancellations and $0.1 million of non-cash charges related to excess furniture, leasehold improvements and other miscellaneous assets. The $3.0 million was shown as restructuring expenses as a component of operating expenses. None of these restructuring charges was allocated to any of our business segments. The restructuring actions were part of an effort to align our cost structure with our expected future revenue levels and to reorganize our Company from a focus on autonomous geographic regions and products to a simplified functional organization.

 

The worldwide workforce reduction was across all business functions and levels within Iomega. Of the 90 impacted personnel worldwide, approximately 20 employees worked on a transition basis into the third quarter of 2006, primarily in Europe due to legal notice requirements.

 

We have made $2.6 million in cumulative cash payments in 2006 related to the 2006 restructuring actions.

 

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Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Restructuring Charges/Reversals (Continued)

 

The breakdown of the 2006 restructuring charges and utilization of and other activity related to the 2006 restructuring reserves during the year ended December 31, 2006 are summarized below.

 

    

Original

Charges


   Utilized

   

Reversals


   

Foreign

Currency

Changes


   

Balance

12/31/06


2006 Restructuring Actions


      Cash

    Non-Cash

       
     (In thousands)

Severance and benefits (a)

   $ 2,969    $ (2,568 )   $ —       $ (259 )   $ (9 )   $ 133

Lease termination costs (a)

     119      (58 )     —         —         (3 )     58

Lease related assets (b)

     80      —         (80 )     —         —         —  

Miscellaneous assets (b)

     55      —         (55 )     —         —         —  

Miscellaneous liabilities (a)

     28      (14 )     —         —         —         14
    

  


 


 


 


 

     $ 3,251    $ (2,640 )   $ (135 )   $ (259 )   $ (12 )   $ 205
    

  


 


 


 


 

Balance Sheet Breakout:

                                             

Other current liabilities (a)

   $ 3,116    $ (2,640 )   $ —       $ (259 )   $ (12 )   $ 205

Fixed asset reserves (b)

     135      —         (135 )     —         —         —  
    

  


 


 


 


 

     $ 3,251    $ (2,640 )   $ (135 )   $ (259 )   $ (12 )   $ 205
    

  


 


 


 


 


(a) Amounts represent primarily cash charges.
(b) Amounts represent primarily non-cash charges.

 

At December 31, 2006, the remaining severance and benefits reserves relate to certain executives who receive their severance payments on a continuous pay basis. Lease payments are being made on a continuous monthly basis, and of this facility, the lease expires in December of 2007. We have entered into a sublease agreement on the leased facility.

 

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     

 

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Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Business Segment Information (Continued)

 

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, Micro Mini USB flash drives and external floppy disk drives. During the second half of 2005, we began to focus this segment primarily on HDD products.

 

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. Notwithstanding RoHS, our distributors and resellers are permitted and have continued to sell Zip drives from their inventories. Sales of Zip disks will continue worldwide, including the EU.

 

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 products to retailers, distributors, OEMs and resellers throughout the world. The first generation REV drives, which began shipping in April of 2004, are removable hard disk storage systems with a native capacity of 35 gigabytes (“GB” – where 1 gigabyte equals 1 billion bytes) and up to 90GB of compressed capacity. We began shipping the next generation REV 70GB products in July of 2006. The REV 70 Backup Drive doubles the capacity of our first generation REV products, resulting in 70GB of native capacity and up to 140GB of compressed capacity.

 

Our NSS segment consists primarily of the development, distribution and sale of Network Attached Storage servers and the 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, including OfficeScreen solutions and system integration, and Iomega services such as iStorage. We acquired CSCI in August of 2006; CSCI’s OfficeScreen managed security services include managing firewalls, VPNs and providing remote access for small businesses. The Iomega services were previously reflected in the Other Products segment.

 

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 and PocketZip disks, Peerless drive systems, Iomega software products such as Iomega Automatic Backup software and other miscellaneous products. iStorage and other services that were previously reflected in this segment have been reclassified to the Services segment under the Business Products category.

 

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Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Business Segment Information (Continued)

 

Product Operating Income (Loss)

 

We no longer measure our product segment performance based on product profit margin. Effective January 1, 2006, we began to evaluate such performance based on product operating income. 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 on a direct method or as a percentage of sales. 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 of the notes to consolidated financial statments. Intersegment sales, eliminated in consolidation, are not material. Non-allocated operating expenses include restructuring charges and certain extraordinary expenses.

 

The information in the following table was derived directly from our internal segments’ financial information used for corporate management purposes. All prior period amounts have been reclassified to match the 2006 Product Operating Income presentation and to reflect the Network HDD drives and Services classification changes.

 

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Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

2006 As Compared to 2005

 

Sales

 

As shown in the table below, total sales for 2006 declined primarily due to lower Zip products sales. All prior period amounts have been reclassified to reflect the Network HDD drives classification change from the CSS Products segment in the Consumer Products category to NSS Products segment in the Business Products category and the classification change of Iomega services from Other Products to the Services segment under the Business Products category.

 

     Years Ended December 31,

 
     2006

   2005

   $ Change

    % Change

 
     (In thousands, except %)  

Sales:

                            

Consumer Products:

                            

Consumer Storage Solutions Products

   $ 134,149    $ 133,482    $ 667     1 %

Zip Products

     31,153      64,101      (32,948 )   (51 )
    

  

  


     

Total Consumer Products

     165,302      197,583      (32,281 )   (16 )

Business Products:

                            

REV Products

     42,798      45,932      (3,134 )   (7 )

Network Storage Systems Products

     17,817      19,395      (1,578 )   (8 )

Services

     3,051      605      2,446     404  
    

  

  


     

Total Business Products

     63,666      65,932      (2,266 )   (3 )

Other Products

     586      990      (404 )   (41 )
    

  

  


     

Total Sales

   $ 229,554    $ 264,505    $ (34,951 )   (13 )%
    

  

  


     

 

Sales of CSS products represented 58% of total sales for 2006, compared to 51% of total sales for 2005. The percentage of total sales increased in 2006 due primarily to the lower total consolidated sales. Although total CSS products sales increased only $0.7 million from the previous year, our external hard drive business increased by $33.5 million, or 38%, over the prior year. This increase was primarily offset by a $15.6 million decrease in Optical sales, $14.2 million in Micro Mini USB flash drive sales and $3.0 million in floppy drive sales. The lower Optical and Micro Mini USB sales are a result of our decision in mid-2005 to eliminate unprofitable SKUs in the Optical and Micro Mini USB flash product lines.

 

Zip product sales continued to decline in 2006, both in terms of units and sales dollars. Sales of Zip products represented 14% of total sales for 2006, compared to 24% of total sales for 2005. We expect Zip drive and disk sales to continue to decrease as Zip products approach the end of their product life cycle. In addition, we have ceased selling Zip drives to distributors or resellers in the EU as of July 1, 2006, in the wake of the RoHS lead free initiative. Notwithstanding RoHS, our distributors and resellers are permitted and have continued to sell Zip drives from their inventories after July 1, 2006.

 

REV product sales represented 19% of total sales for 2006, compared to 17% of total sales for 2005. REV sales decreased by $3.1 million in 2006 from $45.9 million of sales in 2005.

 

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Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

2006 As Compared to 2005 (Continued)

 

NSS product sales represented 8% of total sales for 2006, compared to 7% of total sales for 2005. NSS product sales decreased slightly in 2006 when compared to the same period in 2005.

 

Services sales represented 1.3% of total sales for 2006 compared to 0.2% of total sales for 2005. This increase is primarily a result of our acquisition of CSCI, Inc. in August of 2006.

 

Our sales by region for the years ended December 31, 2006 and 2005 are shown in the table below.

 

     Years Ended December 31,

 
     2006

    2005

    $ Change

    % Change

 
     (In thousands, except %)  

Sales Dollars:

                              

Americas (includes Latin America)

   $ 93,439     $ 125,583     $ (32,144 )   (26 )%

Europe

     124,273       120,872       3,401     3  

Asia Pacific

     11,842       18,050       (6,208 )   (34 )
    


 


 


     

Total

   $ 229,554     $ 264,505     $ (34,951 )   (13 )%
    


 


 


     

Percent of Total Sales:

                              

Americas (includes Latin America)

     41 %     47 %              

Europe

     54       46                

Asia Pacific

     5       7                
    


 


             

Total

     100 %     100 %              
    


 


             

 

The decrease in sales dollars in the Americas was primarily due to lower Zip, REV and CSS (Optical and Micro Mini USB flash drive) product sales, offset by higher Services and NSS product sales. The increase in sales dollars in Europe was primarily due to higher CSS (HDD), REV and NSS product sales, partially offset by lower Zip, Optical and Micro Mini USB product sales. The decrease in sales dollars in the Asia Pacific region was primarily due to lower CSS, REV and Zip product sales.

 

Gross Margin

 

Our gross margin details for the years ended December 31, 2006 and 2005 are shown in the table below.

 

     Years Ended December 31,

 
     2006

    2005

    $ Change

    % Change

 
     (In thousands, except %)  

Total gross margin (dollars)

   $ 46,212     $ 55,835     $ (9,623 )   (17 )%

Total gross margin (%)

     20 %     21 %              

 

Total gross margin dollars in 2006 decreased primarily from a lower proportion of higher margin Zip product sales and from lower overall sales. The lower gross margin percentage was primarily due to a lower proportion of Zip product sales, partially offset by higher CSS product gross margins.

 

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Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

2006 As Compared to 2005 (Continued)

 

The Zip product gross margin percentage increased in 2006 primarily from the 2006 and 2005 restructuring actions and the fact that the 2005 gross margin contained higher EOL charges. Total Zip product gross margin dollars decreased due to significantly lower Zip product sales. Future Zip product gross margin percentage could fluctuate from quarter to quarter as Zip product sales continue to decline and depending on potential EOL or other charges.

 

CSS product gross margins increased in terms of both dollars and percentages during 2006. The increase in gross margin dollars was primarily due to the introduction of new cost competitive HDD products, lower material and overhead costs of the HDD products; lower Optical, Micro Mini USB flash and floppy sales and pricing and other programs related to HDD drives and higher overall CSS sales. All CSS products faced competitive pricing pressures during the year ended December 31, 2006 and we anticipate continued competitive pricing pressures on these products in the future.

 

REV product gross margins decreased in terms of both dollars and percentages during 2006, due to lower volumes and the manufacturing start-up costs associated with the launch of the REV 70GB products.

 

Future gross margin percentages will depend on a wide variety of factors, including those discussed in the section entitled, “Risk Factors” in Item 1A of Part I in this Form 10-K filing. We can provide no assurance that we will be able to improve or maintain gross margins in any subsequent quarter or year.

 

Product Segment Operating Income (Loss)

 

We no longer measure our product segment performance based on product profit margin. Effective January 1, 2006, we evaluate such performance based on product operating income. 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 on a direct basis or as a percentage of sales. 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 and certain extraordinary costs.

 

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Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

2006 As Compared to 2005 (Continued)

 

The information in the following table was derived directly from our internal segments’ financial information used for corporate management purposes. All prior period amounts have been reclassified to match the 2006 Product Operating Income presentation and to reflect the Network HDD drives and Services classification changes.

 

     Years Ended December 31,

 
     2006

    2005

    $ Change

    % Change

 
     (In thousands, except %)  

Product Operating Income (Loss):

                              

Consumer Products:

                              

Consumer Storage Solutions Products

   $ (9,335 )   $ (24,843 )   $ 15,508     62 %

Zip Products

     3,384       19,362       (15,978 )   (83 )
    


 


 


     

Total Consumer Products

     (5,951 )     (5,481 )     (470 )   (9 )

Business Products:

                              

REV Products

     (6,940 )     (12,163 )     5,223     43  

Network Storage Systems Products

     1,574       (1,491 )     3,065     206  

Services

     (290 )     227       (517 )   (228 )
    


 


 


     

Total Business Products

     (5,656 )     (13,427 )     7,771     58  

Other Products

     875       1,455       (580 )   (40 )
    


 


 


     

Non-restructuring charge

     (995 )     —         (995 )   (100 )
    


 


 


     

Restructuring charges

     (3,529 )     (7,579 )     4,050     53  
    


 


 


     

Operating Loss

   $ (15,256 )   $ (25,032 )   $ 9,776     39 %
    


 


 


     

 

CSS product operating loss as a percentage of CSS product sales improved to a negative 7% for the year ended December 31, 2006 from a negative product operating loss of 19% of product sales for the year ended December 31, 2005. The lower CSS product operating loss resulted primarily from improved gross margins, lower operating expenses and benefited from $0.7 million of releases of certain accruals, based on changes in estimates, relating to freight accruals and marketing program utilizations.

 

The decrease in Zip product operating income resulted primarily from lower Zip product sales and the $8.7 million of non-cash, goodwill impairment charges recorded in 2006. Zip product operating income as a percentage of Zip product sales decreased to 11% for the year ended December 31, 2006 from 30% for the year ended December 31, 2005 primarily due to the goodwill impairment charges, partially offset by improved gross margin percentage and lower costs as a result of the restructuring and other cost reductions.

 

The REV product operating loss as a percentage of REV product sales improved to a negative 16% for the year ended December 31, 2006 compared to a negative 26% for the year ended December 31, 2005. The lower REV product operating loss for the year ended December 31, 2006 resulted primarily from lower research and development expenses and selling and marketing expenses, partially offset by lower gross margins.

 

The NSS product operating income as a percentage of NSS product sales improved to a positive 9% for the year ended December 31, 2006, compared to a negative 8% of product sales for the year ended December 31, 2005. The NSS product operating income for the year ended December 31, 2006 resulted primarily from lower selling and marketing expenses and a higher gross margin percentage.

 

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Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

2006 As Compared to 2005 (Continued)

 

The Services operating loss was primarily a result of start-up and marketing costs associated with our new Managed Services business.

 

Other Products product operating income decreased for the year ended December 31, 2006 compared to the year ended December 31, 2005, primarily from lower license and patent fee income in the current year.

 

The non-restructuring charge, related to severance costs associated with our former Chief Executive Officer, was not allocated to the product lines.

 

See separate discussion above for details related to the restructuring charges.

 

Operating Expenses (Income)

 

The table below shows the details of and changes in operating expenses for years ended December 31, 2006 and 2005.

 

     Years Ended December 31,

 
     2006

    2005

    $ Change

    % Change

 
     (In thousands, except %)  

Operating Expenses (Income):

                              

Selling, general and administrative

   $ 41,124     $ 60,847     $ (19,723 )   (32 )%

Research and development

     8,905       14,054       (5,149 )   (37 )

License and patent fee income

     (1,085 )     (1,301 )     216     17  

Goodwill impairment charges

     8,728       —         8,728     100  

Restructuring charges

     3,529       7,579       (4,050 )   (53 )

Bad debt expense (credit)

     267       (312 )     579     186  
    


 


 


     

Total Operating Expenses

   $ 61,468     $ 80,867     $ (19,399 )   (24 )%