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, 2007

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, a non-accelerated filer, or a small reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule#12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨    Accelerated filer  x    Non-accelerated filer  ¨    Smaller reporting company  ¨

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 June 29, 2007 was $253,779,981 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 5, 2008 was 55,340,020.

Documents incorporated by reference:

 

   

Specifically identified portions of the Company’s Definitive Proxy Statement for its 2008 Annual Meeting of Stockholders into Part III of Form 10-K.

 

 

 


Table of Contents

IOMEGA CORPORATION AND SUBSIDIARIES

FORM 10-K

For The Fiscal Year Ended December 31, 2007

INDEX

 

          Page
   Note Regarding Forward-Looking Statements    3

PART I

  

Item 1.

  

Business

   4

Item 1A.

  

Risk Factors

   16

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

   84

Item 8.

  

Financial Statements and Supplementary Data

   85

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

   85

Item 9A.

  

Controls and Procedures

   86

Item 9B.

  

Other Information

   89

PART III

  

Item 10.

  

Directors, Executive Officers and Corporate Governance

   90

Item 11.

  

Executive Compensation

   90

Item 12.

  

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

   90

Item 13.

  

Certain Relationships and Related Transactions and Director Independence

   90

Item 14.

  

Principal Accountant Fees and Services

   91

PART IV

  

Item 15.

  

Exhibits and Financial Statement Schedule

   92
  

Signatures

   158

 

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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, within the meaning of the federal securities laws.    Any statements that do not relate to historical or current facts or matters are forward-looking statements.    You can identify some of the forward-looking statements by the use of forward-looking words, such as “may,” “will,” “could,” “project,” “believe,” “anticipate,” “expect,” “estimate,” “continue,” “potential,” “contingency(ies),” “plans,” “forecasts,” “reserves,” “goals,” “objectives” and other similar expressions, or the use of future tense.    Statements concerning current conditions may also be forward-looking if they imply a continuation of current conditions.    These forward-looking statements include, but are not limited to, statements concerning:

 

   

Our goals for 2008, including: (1) to continue to grow and deliver sustained profitability; (2) to further increase the size of our hard disk drive (“HDD”) business and excel in the high-growth network attached storage (“NAS”) market; (3) to launch and ramp the next generation of REV products and (4) to finalize the ExcelStor acquisition and begin to create a global consumer electronics company;

 

   

Our goals to maintain profitability in 2008 and to improve cash flow from operations through containing operating expense spending, growing HDD sales, maintaining or improving the gross margins of HDD products and growing REV product sales;

 

   

Ongoing efforts to complete our acquisition of ExcelStor Group;

 

   

Our fourth quarter being seasonally strong or our summer months being seasonally slow in Europe due to holidays;

 

   

Expected future taxes including taxes on repatriation of foreign cash to the U.S.;

 

   

Expected volatility, expected term and value of stock options;

 

   

Risk factors we face, including all discussions in the section below entitled “Risk Factors”, concerning things that could happen to Iomega, its products, employees, profits or other aspects of the business in the future;

 

   

Our focus or intended focus for our sales efforts and

 

   

Our belief that our balance of cash, cash equivalents and temporary investments, together with cash flows from future operations, will be sufficient to fund anticipated working capital requirements and capital expenditures related to our ongoing business for at least one year.

There are numerous factors that could cause actual events or our actual results to differ materially from those indicated by such forward-looking statements.    These factors include, without limitation, those set forth under the captions “Application of Critical Accounting Policies,” “Liquidity and Capital Resources” and “Quantitative and Qualitative Disclosures About Market Risk” included in Items 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 undue reliance should not be placed on these statements.    Our forward-looking statements do not include the potential impact of any mergers, acquisitions or divestitures that may be announced or closed after the date hereof.    We specifically disclaim any obligation to update forward-looking statements, even if our estimates change.

 

 

Copyright © 2008 Iomega Corporation.    All rights reserved.    Iomega, Zip, REV, OfficeScreen, eGo, ScreenPlay, Jaz, IoClub and iStorage are either registered trademarks or trademarks of Iomega Corporation 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 Securities and Exchange Commission (“SEC”).    The Company’s Internet site and the information contained therein is not incorporated by reference into this Form 10-K.

Product Categories

We group our products into 2 categories.    Our products are described in more detail below.

Our Consumer Products include the following:

 

 

 

Iomega® desktop hard disk drives (“HDD”)

 

   

Iomega portable and eGo™ HDD drives

 

   

Iomega MiniMax and Ultramax HDD drives

 

   

Iomega ScreenPlay™ Multimedia drives

 

   

Zip drives and disks

 

   

Iomega CD-RW drives

 

   

Iomega DVD rewritable drives

 

   

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

Our Business Products include the following:

 

 

 

REV drives and disks

 

   

REV-based Autoloaders

 

   

Iomega Network Attached Storage (“NAS”) servers

 

   

Iomega StorCenter™ network hard drives

 

 

 

OfficeScreen® Managed Firewall and resale of e-mail security from a third party

 

 

 

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”), 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 External 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 320GB to 1.5TB 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 120GB to 250GB and include our stylish, colorful and rugged eGo drives.    These drives 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 and Ultramax Hard Drives.    These single- and two-drive high performance units are designed for Mac® users with capacities ranging from 500GB to 1.5TB.    The MiniMax drives are host powered, contain an interactive cooling system and are optimized for use with Mac® mini computers.

Iomega ScreenPlay™ Hard Drives.    Iomega Screenplay hard drives are 360GB, 500GB and 750GB Multimedia drives used for consumer entertainment purposes.    These multimedia drives allow the user to play stored video, movies or music and view photos and other digital data 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 and ship 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 certain third-party software packages.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

BUSINESS (Continued)

Consumer Products (Continued)

 

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.    Zip drives are affordable portable storage products 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.    Zip drives use our proprietary Zip disks.

Zip Disks.    Zip disks are available in 100MB, 250MB and 750MB capacities.    Sales of Zip disks 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 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.    We have developed and announced in March of 2008, a next generation REV drive with 120GB native capacity per disk.

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 of 2006, giving one drive access to 560GB on eight 70GB disks.    Aftermarket service plans for REV-based Autoloader are available either separately or bundled with REV-based Autoloaders.

 

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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 3TB.    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 and Home Network Hard Drives.    Iomega StorCenter and Home network hard drives are available in capacities ranging from 320GB to 1TB and are compatible with PC, Mac® and Linux operating systems.    With our StorCenter and Home network hard drives, 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 consist of the operations of CSCI, Inc. (“CSCI”), including OfficeScreen solutions, resale of e-mail security from a third party and system integration and also Iomega services such as iStorage.    We acquired CSCI in August of 2006; CSCI’s OfficeScreen managed security services include managing firewalls, providing secure remote access for small businesses and reselling e-mail security.

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 but later licensed to a third party.

Product Development

Research and development expenses were $8.1 million, or 2% of sales, for 2007; $8.9 million, or 4% of sales, for 2006 and $14.1 million, or 5% of sales, for 2005.    These expenses were incurred primarily for the research and development of REV products, 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 dollar amount in 2008 as compared to 2007.    Such costs will be associated with network storage products, software enhancements, potential follow-on REV products, and sourcing, qualification and testing of Consumer Products and other products.

Marketing

Our worldwide marketing objective is to build Iomega brand and product awareness and to 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 12 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.    In the U.S. and Europe, we sell our products to retail channels directly, as well as indirectly through distributors.    In Asia and Latin America, we 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 largest customer being Ingram Micro, Inc.

For the year ended December 31, 2007, sales to Ingram Micro, Inc. accounted for 24% of our consolidated sales.    The loss of this customer 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 74% for 2007, 62% for 2006 and 55% for 2005.    See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of Part II and Note 12 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 small 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.    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” in 2004.    We recognized the $3.5 million in the fourth quarter of 2007 when the related cash payment was received.

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.

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.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

BUSINESS (Continued)

OEMs and Licensees (Continued)

 

During 2007, we entered into and also received payments under certain patent agreements, whereby we received a total of $0.5 million.    Additionally, we received a payment of $3.5 million under the 2004 DCT License Agreement.

Supply Chain

We outsource all manufacturing and certain supply chain operations.    In recent years, we have changed suppliers and focused significant efforts on distribution and logistics.    During 2005, we transferred the distribution and logistics operations for Asia to the same logistics partner used in our other regions to consolidate logistic vendors.    During 2006, we transferred our reverse logistics services to our distribution and logistics provider to consolidate with one worldwide provider.    The contract with that distribution and logistics partner expired in mid-2007.    In the second quarter of 2007, in an effort to further reduce operating costs, we changed to a different global distribution, logistics and reverse logistics partner.

In 2008, 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 through the first quarter of 2008 and disk production is expected to continue through the end of 2008.    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.

 

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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 $26 million at December 31, 2007 and approximately $9 million at December 31, 2006.    The entire December 31, 2007 order backlog is expected to be filled early in 2008; 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 HDD drives, CD-RW drives, DVD rewritable drives and floppy 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 can under-price us in the market.    We attempt to differentiate our non-Zip Consumer Products with our brand and software, interface, usability and other features, but can provide no assurance that we will be able to continue 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 2008 as compared to 2007.

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; external HDDs; 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 and magneto-optical technologies.

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, Netgear and Hewlett-Packard (“HP”).    We intend to compete by providing home users and small businesses relevant features; competitive pricing; brand recognition; strong relationships in the retail, 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 need any network security expertise, making this a solution that is feasible considering their limited resources.    Finally, when compared to legacy connectivity options, OfficeScreen Services are just as secure, but much more affordable.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

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.    During 2007 and 2006, we continued our efforts to optimize the supply chain to gain cost efficiencies, speed time to market 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 branding, speed to market, a wide-variety of attractive and unique designs, ease of use, and 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 or GB of storage capacity), performance (speed and capacity), functionality (reliability, product size, removability and transportability), brand, design, broad market adoption and standardization of the technology across many devices, ease of installation and use, 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 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 are also our suppliers and certain of these suppliers have greater financial, manufacturing and marketing resources than we do.    There are minimal barriers of entry to the external HDD and entry-level NAS markets and the availability of competitive products with superior performance, functionality, ease of use, security or substantially lower prices can have an immediate adverse affect on 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 14 U.S. and foreign patent applications relating to various technology including REV drives and disks, hard drives, optical drives 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 technologies.

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 around or suitable substitute were found.

Employees

At December 31, 2007, we employed 243 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.

Environmental Matters

Compliance with federal, state and local environmental protection laws had no material effect on us in 2007 and is not expected to have a material effect in 2008.    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 RoHS lead-free initiative.

 

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BUSINESS (Continued)

 

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 June 12, 2007 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 avoid disruptions to our ongoing business as we evaluate and implement strategic investments, including the completion and integration of our recently announced acquisition of ExcelStor Group;

 

   

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

 

   

Our ability to replace declining Zip revenues and profits with revenues and profits from other products;

 

   

Worldwide market conditions and demand for digital storage products and other products we continue to add as we move forward;

 

   

Our success in meeting targeted availability dates for new and enhanced products;

 

   

Our ability to develop and commercialize new intellectual property and to protect existing intellectual property;

 

   

Our ability to maintain profitable relationships with our distributors, retailers and other resellers;

 

   

Our ability to maintain an appropriate cost structure;

 

   

Our ability to attract and retain competent, motivated employees;

 

   

Our ability to comply with applicable legal requirements throughout the world;

 

   

Our ability to utilize reliable outsource partners for certain critical functions at prices that keep us competitive 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 six quarters, 2007 is the first year that we have been able to operate profitably on an annual basis since 2002 and we cannot provide any assurance that we will be able to sustain profits in the future.

Zip Products

Zip products have accounted for the majority of our product operating income since 1997 and provided our only meaningful source of product operating income until 2007.    However, Zip product sales have declined consistently and significantly on a year-over-year basis since peaking in 1999.    These declines are expected to continue through the end of the Zip product 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 profitable unless we consistently 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:

 

   

Our ability to launch the next generation of REV products on time;

 

   

Any lack of market acceptance of the next generation of REV products;

 

   

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

 

   

Manufacturing, technical, supplier, or quality-related delays, issues or concerns, including the loss of any key supplier or failure of any key supplier to deliver high quality products on time;

 

   

Intense competition;

 

   

The inability of our OEM partner in the broadcast industry, Thomson N.A., to achieve significant volumes of its recently launched products utilizing REV drives and disks;

 

   

Potential declines in demand for REV 35GB and 70GB products because of the launch of next generation REV 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, resulting in low gross margin percentages.    In order to compete successfully, we must accurately forecast demand, closely monitor inventory levels, secure quality products, continuously drive down costs, meet aggressive product price and performance targets, create market demand for our brand and hold sufficient, but not excess, inventory.    In light of these challenges, we can offer no assurance that we will achieve sustainable profitability on this segment.    Additionally, in order to reduce the product costs of our HDD drives, we have changed our supply chain.    We now have several low cost, manufacturers in Asia that assemble our drives.    The raw drives are consigned to these vendors which increases our cash conversion cycle on these products.    Due to a combination of the lower margins, the longer cash conversion cycle, and the growth of this business segment, there can be cash flow pressures.

Further, in their own effort to seek the highest margin possible, large retail customers seek levels of promotional funds or other consideration and benefits that may not be consistent with our profit goals; lower retail sales or higher selling expenses therefore can result from positions taken by large retailers.

Development, Introduction and Other Expansion of New Products and Services and New Revenue Streams

We believe that we must continually either develop or acquire the right to profitably sell new products or services in order to remain viable in the data storage industry.    However, our efforts in this regard have frequently been unsuccessful.    Since 1999, we have developed and/or acquired the right to market a variety of new products, but many initiatives have not delivered consistent, material profits.

 

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RISK FACTORS (Continued)

 

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.

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 in our 2004 Form 10-K, we reported a material weakness (subsequently remediated) in internal control over financial reporting due to some of these factors.

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, in finding a substitute or could purchase excess components.    In summary, we can offer no assurance that we will be able to obtain a sufficient (but not excess) 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)

 

ExcelStor Acquisition

Consummation of our proposed acquisition of ExcelStor will cause numerous and substantial changes at Iomega.    The transaction will introduce management and various personnel to new challenges, including the need to integrate a foreign company into our public company processes and controls in order to meet the requirements of the SEC and Sarbanes-Oxley Act; the need for us to simultaneously launch additional sales of products obtained through this proposed acquisition and its related sister companies; and the need to overcome language and cultural differences between the employee populations at Iomega and ExcelStor.    The two combining companies will be subject to various new or heightened duties that may apply as a result of the acquisition, including duties associated with ensuring that the new Chinese operations comply with those American laws that apply worldwide and duties of Iomega to comply with any applicable Chinese laws; numerous communications will have to be translated and communicated properly within the combined company so that policies and directives, or concerns and input, as well as recommendations and daily communications are all properly understood by teams of personnel speaking different languages, and IT systems will need to successfully communicate certain information (although the companies are expected to continue to maintain separate IT systems); various managers will have increased burdens as a result of their responsibilities spanning a larger international enterprise; and third parties may be more prone to raising legal claims against a bigger, higher profile target than if Iomega was a smaller company.    These efforts to integrate the companies and successfully address all of these needs will involve execution and market risk all while Iomega faces intense competition; and there is no assurance that we will be successful in this new proposed endeavor.    Additionally, there is no guarantee that the proposed acquisition will receive all of the required approvals necessary to allow the transaction to be completed.    Further all potential strategic transactions involve a heightened risk of legal claims, disruption and unexpected costs.

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, the controls of acquired companies 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 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 proposed acquisition of ExcelStor Group could require development of new process controls, and will require the documentation and testing of their process controls.    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.

 

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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 U.S. retail channel, we have less leverage with such retailers and increased exposure to payment delays or other collection issues with retailers.    Additionally, the retail market is very competitive and consolidating and, as a result, major retailers could reorganize, consolidate, go out of business, and any such events could impact our External HDD sales.

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 and trademarks, 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.

 

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RISK FACTORS (Continued)

 

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 North American, Asia and South American 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.

 

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ITEM 1B. UNRESOLVED STAFF COMMENTS:

None.

 

ITEM 2. PROPERTIES:

Our executive offices, corporate headquarters and managed services are located in leased office space in San Diego, California.    The majority of our research and development, operations, facilities and other administrative functions are located in leased office space 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 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 6 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, 2007.

 

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Executive Officers of the Company

The executive officers of the Company as of March 14, 2008 are as follows:

 

Jonathan S. Huberman

   42   

Vice Chairman and Chief Executive Officer

Thomas D. Kampfer

   44   

President, Chief Operating Officer

Preston Romm

   54   

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

Jonathan S. Huberman was appointed Vice Chairman and Chief Executive Officer in February of 2006.    Prior to joining the Company, he was co-founder and managing director of aAd Capital Management, LP from January of 2005 to February of 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 of 1995 through September of 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 of 1999 to May of 2004 and again from November of 2004 to February of 2006.

Thomas D. Kampfer joined the Company in July of 2001 and served as Vice President, General Counsel and Secretary until October of 2005.    Mr. Kampfer also served as Executive Vice President, Business Solutions from November of 2004 to October of 2005.    Mr. Kampfer also served as Interim Chief Financial Officer from June of 2004 to February of 2005 and November of 2005 to March of 2006.    During February of 2006, Mr. Kampfer was appointed Chief Operating Officer and then promoted to President, Chief Operating Officer.    From February of 2001 to July of 2001, he served as General Counsel and Secretary and Vice President, Corporate Development of Entropia, Inc., a developer of distributed computing technology. From January of 1995 to January of 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 of 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, a publicly traded storage systems company from 1999 to March of 2006.    From 1997 to 1999, Mr. Romm was Vice President of Finance, CFO and Secretary at Verteq, Inc., a privately held 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 5, 2008, there were 3,357 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 2007 and 2006.

Price Range of Common Stock

 

     2007    2006
     High    Low    High    Low

1st Quarter

   $ 4.10    $ 3.24    $ 3.48    $ 2.36

2nd Quarter

     4.75      3.55      3.95      2.52

3rd Quarter

     5.75      4.50      3.00      2.16

4th Quarter

     5.41      3.26      4.25      2.81

Unregistered Sales of Equity Securities

We did not sell any equity securities during the fourth quarter of 2007 that were not registered under the Securities Act of 1933.

Issuer Purchases of Equity Securities

During 2007, we did not repurchase any shares of our Common Stock.    As of December 31, 2007, 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,  
     2007     2006     2005     2004     2003  
     (In thousands, except per share data)  

Statement of Operations:

          

Sales

   $ 336,614     $ 229,554     $ 264,505     $ 328,663     $ 391,344  

Cost of sales

     276,358       183,342       208,670       255,951       281,068  
                                        

Gross margin

     60,256       46,212       55,835       72,712       110,276  
                                        

Operating expenses:

          

Selling, general and administrative (1)

     45,145       41,391       60,535       89,804       104,416  

Research and development

     8,106       8,905       14,054       24,444       31,555  

License and patent fee income

     (3,952 )     (1,085 )     (1,301 )     (10,599 )     —    

Goodwill impairment charges

     2,963       8,728       —         —         —    

Restructuring charges (reversals)

     (344 )     3,529       7,579       4,531       11,437  
                                        

Total operating expenses

     51,918       61,468       80,867       108,180       147,408  
                                        

Operating income (loss)

     8,338       (15,256 )     (25,032 )     (35,468 )     (37,132 )

Interest and other income (expense), net

     2,978       3,865       404       3,754       4,536  
                                        

Income (loss) before income taxes

     11,316       (11,391 )     (24,628 )     (31,714 )     (32,596 )

Benefit (provision) for income taxes

     (1,261 )     2,276       945       (4,963 )     13,735  
                                        

Income (loss) from continuing operations

     10,055       (9,115 )     (23,683 )     (36,677 )     (18,861 )
                                        

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)

   $ 10,055     $ (8,843 )   $ (22,753 )   $ (36,677 )   $ (18,861 )
                                        

Net income (loss) per basic and diluted share:

          

Continuing

   $ 0.18     $ (0.17 )   $ (0.46 )   $ (0.71 )   $ (0.37 )

Discontinued

     —         —         0.02       —         —    
                                        

Net income (loss) per common share

   $ 0.18     $ (0.17 )   $ (0.44 )   $ (0.71 )   $ (0.37 )
                                        

Dividend paid per share

   $ —       $ —       $ —       $ —       $ 5.00  
                                        

 

(1)

Includes bad debt expense/credit.

 

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SELECTED FINANCIAL DATA (Continued)

 

     December 31,
     2007    2006    2005    2004    2003
     (In thousands, except employee data)

Significant Balance Sheet Items:

              

Total Cash (1)

   $ 63,613    $ 68,148    $ 95,999    $ 120,809    $ 168,931

Trade receivables, net

     41,101      30,418      28,853      30,764      37,234

Inventories

     79,883      42,593      27,532      31,345      23,745

Deferred income taxes

     2,175      2,747      5,523      9,710      16,938

Current assets

     189,674      147,307      162,905      199,673      254,401

Property and equipment, net

     3,867      6,553      8,311      13,563      16,053

Intangible assets, net

     840      1,043      696      2,448      4,525

Goodwill

     9,818      12,451      11,691      11,691      11,691

Total assets

     205,208      167,414      183,669      227,502      286,741

Current liabilities

     93,181      68,034      85,561      101,437      122,870

Other long-term obligations

     2,652      —        —        721      1,471

Deferred income taxes

     8,220      9,573      17,152      22,537      24,512

Retained earnings

     44,043      33,988      33,295      56,048      92,725

Total stockholders’ equity

     101,155      89,807      80,956      102,807      137,888

Total liabilities and stockholders’ equity

     205,208      167,414      183,669      227,502      286,741

Other Metrics:

              

Cash for the U.S. entities (1)

   $ 7,285    $ 2,653    $ 7,199    $ 14,307    $ 697

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

     56,328      65,495      88,800      106,502      168,234
                                  

Total Cash (1)

   $ 63,613    $ 68,148    $ 95,999    $ 120,809    $ 168,931
                                  

Working capital

   $ 96,493    $ 79,273    $ 77,344    $ 98,236    $ 131,531

Total employees

     243      232      291      439      591

 

(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”.

 

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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 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.    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 (“NAS”) 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, resale of e-mail security from a third party and Iomega services such as iStorageTM (Iomega services were previously included in the Other Products segment).    We acquired CSCI in August of 2006.    CSCI’s OfficeScreen managed security services include managing firewalls 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 or a major contributor to our product operating income.    As the Zip business has approached the end of its product lifecycle, we have sought 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 April of 2004 and July of 2006, respectively.    Sales of REV products have exceeded Zip product sales for the past several quarters; however, REV products are not as profitable due to several factors, including lower volumes, and lower margins on REV disks as compared to Zip disks.

In other efforts to replace the declining Zip business, we have launched and attempted to expand our CSS and NSS businesses profitably.    Sales of the CSS business segment significantly exceeds Zip product sales.    Our CSS business segment achieved operating profitability, for the first time, of $2.3 million in the fourth quarter of 2006 and $2.5 million for the full year ended December 31, 2007.    The NSS segment’s profits have been up and down due to a shift in product mix towards the lower margin network HDD drives and desktop NAS servers and costs associated with launching new products.

We also acquired CSCI in August of 2006 and have signed a reseller agreement with a provider of e-mail security to expand our brand name into the services segment for small- to mid-sized companies.    Although this segment has lost money due to marketing and other start-up costs, we continue to look for opportunities to grow this segment profitably.    CSCI revenue increased during the fourth quarter of 2007.    We began to approach incremental positive cash flows from this segment.    We anticipate continued improvements in this segment due to the addition of new services.    Additionally, this business is an annuity business whereby income is earned on a monthly basis over the term of the contract and therefore, the impact on the results of operations in not fully reflected immediately.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Overview (Continued)

 

On December 12, 2007, we announced that we entered into a definitive share purchase agreement to acquire ExcelStor Great Wall Technology Limited, a Cayman Islands company and Shenzhen ExcelStor Technology Limited, a PRC company (collectively, with their subsidiaries, “ExcelStor”).    We will issue approximately 84 million shares of Iomega common stock in exchange for all outstanding ExcelStor common shares, representing in the aggregate 60% of the then fully diluted capitalization of Iomega, to be measured as of the closing date.    The Boards of Directors of both Iomega and ExcelStor have unanimously approved the share purchase agreement.    This share purchase agreement still needs to be approved by the Iomega shareholders, and prior to closing we will need approvals from U.S. government agencies and Chinese government agencies.

ExcelStor designs, develops, manufactures and provides advanced digital storage technologies.    Their principal product lines include hard disk drives (“HDD”), security storage and external storage.    ExcelStor markets its products primarily to OEMs as an electronics manufacturing services provider and also sells its own ExcelStor-branded products through distributors throughout the world.

ExcelStor was founded in 2001; and in seven years time, has become a profitable $800 million annual revenue entity that produces over 20 million single-platter hard drive products per year.    Upon completion of this acquisition, the profitability of ExcelStor’s revenue stream is expected to be accretive to the “new” Iomega, creating a $1 billion-plus (in sales) company.

ExcelStor is well-known to us, having manufactured our REV products for the last four years.    We are currently evaluating the opportunity to identify new product categories with ExcelStor sister companies, and to increase and diversify the kinds of products we bring to market.    Assuming we finalize this deal in the middle of 2008, our hope is to bring new Iomega branded consumer electronic products to the western market by the end of 2008.

During the past couple of years, we have taken several steps to return our Company to profitability such as restructuring actions to reduce costs and simplify our organizational structure, the release of new HDD products and changes to our HDD product supply chain to reduce the cost of these products to allow us to be more competitive in the market place.    Primarily as a result of the above actions, at December 31, 2007, we have recorded our sixth consecutive quarter of net income and fifth consecutive quarter of year-over-year revenue growth.    The revenue growth is primarily a result of the HDD business, which remains extremely competitive.    We made solid progress towards our previously stated goals for 2007 and set the stage for continued success in 2008.

At December 31, 2007, our total cash, cash equivalents, restricted cash and temporary investments were $63.6 million (see the “Liquidity and Capital Resources” discussion for more detail on the tax impacts of repatriating foreign cash).    We believe our total cash, cash equivalents and temporary investments are sufficient to operate our ongoing business for at least one year.    However, any material business acquisition would require funding through a stock offering and/or a loan; in the case of the ExcelStor transaction, we are using Iomega stock to buy ExcelStor.

Our goals for 2008 are: (1) to continue to grow and deliver sustained profitability; (2) to further increase the size of our HDD business and excel in the high-growth NAS market; (3) to launch and ramp the next generation of REV products and (4) to finalize the ExcelStor acquisition and begin to create a global consumer electronics company.    Notwithstanding our recent accomplishments, there can be no assurance that we will achieve these goals.

 

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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

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 and other intangibles.    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.

Revenue Recognition

We defer recognition of sales on estimated excess inventory in the distribution, retail and direct marketing reseller (“DMR”) 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. HDD 2.5 inch drives and HDD 3.5 inch drives, 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,  
     2007     2006  
     (In thousands)  

Deferred revenue

   $ 9,455     $ 7,890  

Deferred cost of sales

     (7,518 )     (5,080 )
                

Margin on estimated channel inventory

   $ 1,937     $ 2,810  
                

The decrease in margin on higher, estimated channel inventory at December 31, 2007 reflects product mix changes in the channels away from high margin Zip products to lower margin HDD 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)

 

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.

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 statements 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 $9.9 million at December 31, 2007 and $9.2 million at December 31, 2006 and are netted against trade receivables in our consolidated balance sheets.    The increase in this reserve for 2007 was primarily a reflection of the growth in our HDD business (particularly in Europe) which is very competitive and requires more programs and price drops.    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 prices 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 requirements 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 2007, we recorded a net increase in inventory valuation reserves of $1.5 million.    The $1.5 million increase was comprised of net additions of $2.0 million less utilizations of $0.5 million as described below.    The $2.0 million of net additions to inventory valuation reserves were comprised of $1.4 million of net additions for CSS products, $0.5 million of net additions for Zip products and $0.1 million of net additions for REV products.    The $0.5 million inventory reserve utilizations were comprised of $0.4 million for CSS products (primarily HDD) and $0.1 million for Zip as products were sold or scrapped.

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 utilizations 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.

 

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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)

 

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.

At December 31, 2007, we had inventory valuation reserves of $2.7 million, which compares to inventory valuation reserves of $1.2 million at December 31, 2006.    The increase of $1.5 million in inventory valuation reserves during 2007 was primarily attributable to net additions in the 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 and lower REV volumes than expected, 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.    We have also experienced supplier claims on our REV products related to non-recurring engineering charges incurred by our suppliers and components purchased by our supplier for volume growth that has not materialized.    With respect to estimating excess purchase commitments, we are at risk that we will order 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 inherent 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 2007, we recorded a net decrease in excess purchase commitment reserves of $2.7 million.    This decrease was comprised of $1.0 million of net releases and $1.7 million of utilizations.    The net releases of $1.0 million resulted primarily from $0.8 million in REV products, $0.1 million in Zip products and $0.2 million in CSS products that are partially offset by a $0.1 million addition for NSS products.    The $1.7 million of utilizations resulted primarily from $1.0 million for REV products, $0.6 million for CSS products and $0.1 million for Zip 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)

 

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.

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” (“FASB 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.    Additionally, the FASB Financial Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes—an interpretation of FASB 109 (“FIN 48”), requires us to evaluate potential tax exposures related to our federal, state and foreign tax positions and provide reserves if it is likely that we would receive an assessment during a tax examination.    Adjustments to the valuation allowance or tax contingencies will increase or decrease our tax provision or benefit.

We believe that the accounting estimates related to deferred tax valuation allowances and tax contingencies are “critical accounting estimates” because: (1) the need for valuation allowances 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 allowances is susceptible to actual operating results, (3) the need for tax contingencies is highly susceptible to changes in tax rules and complexity of tax rules and transactions and (4) changes in the tax valuation allowance and/or tax contingencies can have a material impact on the tax provision/benefit in the consolidated statements of operations and on deferred income taxes and tax contingencies in the consolidated balance sheets.

For example, during 2007, we recorded a $2.4 million increase in the valuation allowance resulting primarily from increases in deferred tax assets and partially offset by increases in deferred tax liabilities.    Included in the $2.4 million increase in the valuation allowance was a $5.6 million increased valuation allowance resulting from increases in the net operating loss (“NOL”) and credit carryforwards and deferred tax assets related to inventory and accrued expenses.    This increase was partially offset by a decrease in the valuation allowance as the result of increases in the deferred tax liabilities of $3.2 million related to an increase in the pool of unrepatriated foreign earnings.    In addition, we released $1.8 million of tax contingency reserves related to foreign tax exposures for which the statutes of limitations expired in the second and fourth quarters of 2007.

Additionally, 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.

 

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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)

 

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 4 of the notes to the consolidated financial statements.

Adjustments to deferred tax valuation allowances are non-cash adjustments and do not affect our cash flows.    Since we have no material debt and adequate cash, we believe that changes in tax contingencies would not impact our liquidity.

Impairment of Goodwill and Other Intangibles

We have $9.8 million of goodwill and $0.8 million of other intangibles associated with the CSCI acquisition.    We have determined that the appropriate reporting unit to evaluate the goodwill from the CSCI acquisition is our Services segment.    We perform our annual impairment test required under SFAS No. 142, “Accounting for Goodwill and Intangible Assets” (“FASB 142”) in the fourth quarter of each year.    We have performed the impairment test required under FASB 142 for the goodwill related to the CSCI acquisition and have determined that it was not impaired at December 31, 2007.    This test compared our Services segment specific assets to the estimated future, discounted cash flows to determine if these cash flows will cover the assets.    We will continue to test the CSCI goodwill for impairment annually.

Zip cash flows continued their expected decline in 2007.    As of July 1, 2007, there was no remaining goodwill related to Zip specific assets, as it had been fully written off.    During 2007 and 2006, we recorded goodwill impairment charges on our Zip-related goodwill of $3.0 million and $8.7 million, respectively.

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

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

 

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IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Results of Operations

The following table sets forth certain financial data as a percentage of sales for the years ended December 31, 2007, 2006 and 2005.

 

     Years Ended December 31,  
     2007     2006     2005  

Sales

   100.0 %   100.0 %   100.0 %

Cost of sales

   82.1     79.9     78.9  
                  

Gross margin

   17.9     20.1     21.1  
                  

Operating Expenses (Income):

      

Selling, general and administrative (1)

   13.4     18.1     22.9  

Research and development

   2.4     3.9     5.3  

License and patent fee income

   (1.2 )   (0.5 )   (0.5 )

Goodwill impairment charges

   0.9     3.8     —    

Restructuring (reversals) charges

   (0.1 )   1.5     2.9  
                  

Total operating expenses

   15.4     26.8     30.6  
                  

Operating income (loss)

   2.5     (6.7 )   (9.5 )

Interest and other income and expense, net

   0.9     1.7     0.2  
                  

Income (loss) from continuing operations before income taxes

   3.4     (5.0 )   (9.3 )

Benefit (provision) for income taxes

   (0.4 )   1.0     0.4  
                  

Income (loss) from continuing operations

   3.0     (4.0 )   (8.9 )

Discontinued Operations:

      

Gain on disposal, net of taxes

   —       0.1     0.4  

Loss on discontinued operations, net of taxes

   —       —       (0.1 )
                  

Net income (loss)

   3.0 %   (3.9 )%   (8.6 )%
                  
(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 income for the year ended December 31, 2007 was $10.1 million, or $0.18 per diluted share, compared with a net loss of $8.8 million, or $0.17 per share, for the year ended December 31, 2006.    The 2007 net income included:

 

   

Pre-tax, non-cash, goodwill impairment charges of $3.0 million;

 

   

Pre-tax, license fee income of $3.5 million related to a prior technology license agreement;

 

   

Pre-tax, expenses of $2.3 million for professional fees paid to third parties in connection with the proposed ExcelStor Group acquisition;

 

   

Pre-tax, restructuring reversals of $0.3 million;

 

   

Tax provision of $2.4 million from increased valuation allowances;

 

   

Tax contingency releases of $1.8 million due to the expiration of statutes of limitation and

 

   

Tax provision of $4.0 million related to the statutory provision on pre-tax income and changes in other deferred tax items (see the “Income Taxes” discussion for more details).

The 2006 net loss included:

 

   

Pre-tax, non-cash, 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 continuing 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 FIN 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 of 2006, we received the final payment of $0.4 million from the escrow account.    This was 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 was deconsolidated at December 31, 2005, as per FIN 46.    Under SFAS 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 statements 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 )  

Other income (expense), net

          

Loss before taxes

     (368 )  

Tax benefit

     140    

Benefit for 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)

 

Restructuring Charges/Reversals

At December 31, 2007, we have no restructuring reserves remaining.    Prior to that, we had 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,
     2007    2006
     (In thousands)

Other Current Liabilities:

     

Third quarter 2001 restructuring actions

   $ —      $ 1,366

2003 restructuring actions

     —        6

2004 restructuring actions

     —        77

2005 restructuring actions

     —        219

2006 restructuring actions

     —        205
             

Total

   $ —      $ 1,873
             

Fixed Asset Reserves:

     

2003 restructuring actions

   $ —      $ 114

2005 restructuring actions

     —        131
             

Total

   $ —      $ 245
             

During 2001, we recorded $33.1 million (net of a $0.2 million reversal in the fourth quarter of 2001) 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.

 

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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)

 

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.

During 2007, we recorded a net restructuring release of $0.3 million which consisted of less than a $0.1 million net release for the 2006 restructuring actions, a $0.2 million net release for the 2005 restructuring actions, less than a $0.1 million release for the 2004 restructuring actions, less than a $0.1 million release for the 2003 restructuring actions and less than a $0.1 million release 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, 2007 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.

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 restructuring 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.

 

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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)

 

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 were paid on their regular monthly rent payment schedule.

The Asia Pacific region restructuring 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 of 2001, 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 restructuring activities consisted of the outsourcing of call center activities, closure of several market development 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 of 2001, 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.

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 of 2001.

 

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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)

 

The Malaysia restructuring 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 of 2001.    This workforce reduction resulted in a charge 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)

 

The breakdown of the 2001 restructuring charges and utilization of and other activity relating to the third quarter 2001 restructuring reserves during the period ended December 31, 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.

 

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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 recorded 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.

 

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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)

 

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.

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.

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.

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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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.

 

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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)

 

2007 Activity/Changes in Third Quarter 2001 Restructuring Reserves

As of December 31, 2007, we no longer have any restructuring reserves under the third quarter 2001 restructuring actions.    Utilization of and other activity relating to the third quarter 2001 restructuring reserves during the year ended December 31, 2007 are summarized below.

 

Third Quarter 2001

Restructuring Actions

   Balance
12/31/06
   Utilized    Reversals     Balance
12/31/07
      Cash     Non-Cash     
     (In thousands)

North America Reorganization:

            

Lease cancellations (a)

   $ 1,366    $ (1,354 )   $ —      $ (12 )   $ —  
                                    

Balance Sheet Breakout:

            

Accrued restructuring charges (a)

   $ 1,366    $ (1,354 )   $ —      $ (12 )   $ —  
                                    
(a)

Amounts represent primarily cash charges.

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 America, $2.1 million related to 31 employees located in Europe and $0.4 million related to 17 employees located in Asia.    Our worldwide workforce reduction was across all business functions and across all levels 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 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.

 

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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)

 

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 No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“FASB 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.    The breakdown of the 2003 restructuring charges and utilization of the 2003 restructuring reserves during the year ended December 31, 2003 are summarized below.

 

    Original
Charges
   Utilized     Balance
12/31/03

2003 Restructuring Actions

     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.

2004 Activity/Changes in 2003 Restructuring Reserves

The total separation payment 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.

 

    Balance
12/31/03
  Utilized     Additions   Reversals     Balance
12/31/04

2003 Restructuring Actions

    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          Balance
12/31/05
      Cash     Non-Cash     Additions   
     (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.

 

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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)

 

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.

 

2003 Restructuring Actions

   Balance
12/31/05
   Utilized     Reversals     Balance
12/31/06
      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.

2007 Activity/Changes in 2003 Restructuring Reserves

As of December 31, 2007, we no longer have any restructuring reserves under the 2003 restructuring actions.    Utilization of and other activity relating to the 2003 restructuring reserves during the year ended December 31, 2007 are summarized below.

 

2003 Restructuring Actions

   Balance
12/31/06
   Utilized     Reversals     Balance
12/31/07
      Cash     Non-Cash      
     (In thousands)

Lease termination costs (a)

   $ 6    $ (1 )   $ —       $ (5 )   $  —  

Furniture (b)

     114      —         (114 )     —         —  
                                     
   $ 120    $ (1 )   $ (114 )   $ (5 )   $ —  
                                     

Balance Sheet Breakout:

           

Accrued restructuring charges (a)

   $ 6    $ (1 )   $ —       $ (5 )   $ —  

Fixed asset reserves (b)

     114      —         (114 )     —         —  
                                     
   $ 120    $ (1 )   $ (114 )   $ (5 )   $ —  
                                     
(a)

Amounts represent primarily cash charges.

(b)

Amounts represent primarily non-cash charges.

 

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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)

 

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.    The restructuring actions were part of an effort to align our cost structure with our expected future revenue levels.

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.

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 America, $0.4 was for 9 employees located in Asia and $0.3 million was for 5 employees located in Europe.    Our worldwide workforce reduction was across all business functions and across all levels.    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 FASB 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.

 

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

 

2004 Restructuring Actions

   Original
Charges
   Utilized     Foreign
Currency
Changes
   Balance
12/31/04
      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.

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.

 

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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 $0.4 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.

 

2004 Restructuring
Actions

   Balance
12/31/04
   Utilized     Additions    Reversals     Foreign
Currency
Changes
    Balance
12/31/05
      Cash     Non-Cash           
     ( 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.

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.

 

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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.

 

2004 Restructuring Actions

   Balance
12/31/05
   Utilized    Additions    Reversals     Balance
12/31/06
      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.

2007 Activity/Changes in 2004 Restructuring Reserves

As of December 31, 2007, we no longer have any restructuring reserves under the 2004 restructuring actions.    Utilization of and other activity related to the 2004 restructuring reserves during the year ended December 31, 2007 are summarized below.

 

2004 Restructuring Actions

   Balance
12/31/06
   Utilized    Additions    Reversals     Balance
12/31/07
      Cash     Non-Cash        
     ( In thousands)

Lease termination costs (a)

   $ 77    $ (32 )   $  —      $ 81    $ (126 )   $  —  
                                           

Balance Sheet Breakout:

               

Accrued restructuring charges (a)

   $ 77    $ (32 )   $ —      $ 81    $ (126 )   $ —  
                                           
(a)

Amounts represent primarily cash charges.

 

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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)

 

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.

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.

 

     Original
Charges
   Utilized     Foreign
Currency
Changes
    Balance
12/31/05

2005 Restructuring Actions

      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.

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.

 

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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.

 

     Balance
12/31/05
   Utilized     Additions    Reversals     Balance
12/31/06

2005 Restructuring Actions

      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.

2007 Activity/Changes in 2005 Restructuring Reserves

As of December 31, 2007, we no longer have any restructuring reserves under the 2005 restructuring actions.    Utilization of and other activity related to the 2005 restructuring reserves during the year ended December 31, 2007 are summarized below.

 

     Balance
12/31/06
   Utilized     Additions    Reversals     Balance
12/31/07

2005 Restructuring Actions

      Cash     Non-Cash         
     (In thousands)

Lease termination costs (a)

   $ 219    $ (8 )   $ —       $  —      $ (211 )   $  —  

Lease related assets (b)

     131      —         (131 )     —        —         —  
                                            
   $ 350    $ (8 )   $ (131 )   $ —      $ (211 )   $ —  
                                            

Balance Sheet Breakout:

              

Other current liabilities (a)

   $ 219    $ (8 )   $ —       $ —      $ (211 )   $ —  

Fixed asset reserves (b)

     131      —         (131 )     —        —         —  
                                            
   $ 350    $ (8 )   $ (131 )   $ —      $ (211 )   $ —  
                                            
(a)

Amounts represent primarily cash charges.

(b)

Amounts represent primarily non-cash charges.

 

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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)

 

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.

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.

 

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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)

 

2007 Activity/Changes in 2006 Restructuring Reserves

As of December 31, 2007, we no longer have any restructuring reserves under the 2006 restructuring actions.    Utilization of and other activity related to the 2006 restructuring reserves during the year ended December 31, 2007 are summarized below.

 

2006 Restructuring Actions

   Balance
12/31/06
   Utilized    Reversals     Foreign
Currency
Changes
   Balance
12/31/07
      Cash     Non-Cash        
     (In thousands)

Severance and benefits (a)

   $ 133    $ (95 )   $  —      $ (39 )   $ 1    $  —  

Lease termination costs (a)

     58      (39 )     —        (19 )     —        —  

Miscellaneous liabilities (a)

     14      (1 )     —        (13 )     —        —  
                                           
   $ 205    $ (135 )   $ —      $ (71 )   $ 1    $ —  
                                           

Balance Sheet Breakout:

               

Other current liabilities (a)

   $ 205    $ (135 )   $ —      $ (71 )   $ 1    $ —  
                                           
(a)

Amounts represent primarily cash charges.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Business Segment Information

We have six reportable segments, which are organized into three business categories as follows:

 

Business Categories

  

Reportable Segments

Consumer Products

  

1. Consumer Storage Solutions

  

2. Zip Products

Business Products

  

3. REV Products

  

4. Network Storage Systems

  

5. Services

Other Products

  

6. Other Products

Consumer Products

Our Consumer Products category is comprised of the Consumer Storage Solutions (“CSS”) segment and the Zip Products segment.

Our CSS segment involves the worldwide distribution and sale of various storage devices including external hard disk drives (“HDD”), CD-RW drives, DVD rewritable drives and external floppy disk drives.    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 EU as of July 1, 2006, in the wake of the RoHS lead free initiative.    Sales of Zip disks 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 and up to 90GB of compressed capacity.    We began shipping the 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.    We have developed and announced, in March of 2008, a next generation REV drive with 120GB native capacity per disk.

Our NSS segment consists primarily of the development, distribution and sale of NAS servers and Network HDD drives (which were previously reported under the CSS segment in the Consumer Products category) in the entry-level and low-end NAS market.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Business Segment Information (Continued)

 

Our Services segment consists of the operations of CSCI, including OfficeScreen solutions and system integration, resale of e-mail security from a third party and Iomega services such as iStorage.    We acquired CSCI in August of 2006; CSCI’s OfficeScreen managed security services include managing firewalls 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 disks, 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.

Product Operating Income (Loss)

Product operating income is defined as sales and other income related to a segment’s operations, less both fixed and variable product costs, and direct and allocated operating expenses.    Operating expenses are charged to the product segments 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 statements.    Intersegment sales, eliminated in consolidation, are not material.    Non-allocated operating expenses include restructuring charges and certain extraordinary expenses.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

2007 As Compared to 2006

 

Sales

As shown in the table below, total sales for 2007 increased primarily due to higher CSS and NSS products sales.

 

     Years Ended December 31,  
     2007    2006    $ Change     % Change  
     (In thousands, except %)  

Sales:

          

Consumer Products:

          

Consumer Storage Solutions Products

   $ 250,125    $ 134,149    $ 115,976     86 %

Zip Products

     15,950      31,153      (15,203 )   (49 )
                        

Total Consumer Products

     266,075      165,302      100,773     61  

Business Products:

          

REV Products

     38,574      42,798      (4,224 )   (10 )

Network Storage Systems Products

     24,026      17,817      6,209     35  

Services

     7,661      3,051      4,610     151  
                        

Total Business Products

     70,261      63,666      6,595     10  

Other Products

     278      586      (308 )   (53 )
                        

Total Sales

   $ 336,614    $ 229,554    $ 107,060     47 %
                        

Sales of CSS products represented 74% of total sales for 2007, compared to 58% of total sales for 2006.    The percentage of total sales increased in 2007 due primarily to the addition of new HDD products and our ability to maintain a competitive cost structure on these products.    Our external hard drive business increased by $123.4 million, or 102%, over the prior year.    This increase was partially offset by a $3.8 million decrease in Optical sales, a $2.8 million decrease in Micro Mini USB flash drive sales and a $0.9 million decrease 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 2007, both in terms of units and sales dollars.    Sales of Zip products represented 5% of total sales for 2007, compared to 14% of total sales for 2006.    We expect Zip drive and disk sales to continue to decrease as Zip products approach the end of their product lifecycle.    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.

REV product sales represented 12% of total sales for 2007, compared to 19% of total sales for 2006.    REV sales decreased by $4.2 million in 2007 from $42.8 million of sales in 2006.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

2007 As Compared to 2006 (Continued)

 

NSS product sales represented 7% of total sales for 2007, compared to 8% of total sales for 2006.    NSS product sales increased by $6.2 million in 2007, or 35%, when compared to the same period in 2006 due to the introduction of new products and growth of network HDD drives.

Services sales represented 2% of total sales for 2007, compared to 1% of total sales for 2006.    This increase is primarily a result of our acquisition of CSCI in August of 2006, with 2007 representing a full calendar year of revenue.

Our sales by region for the years ended December 31, 2007 and 2006 are shown in the table below.

 

     Years Ended December 31,  
     2007     2006     $ Change     % Change  
     (In thousands, except %)  

Sales Dollars:

        

Europe

   $ 230,988     $ 124,273     $ 106,715     86 %

Americas (includes Latin America)

     95,844       93,439       2,405     3  

Asia Pacific

     9,782       11,842       (2,060 )   (17 )
                          

Total

   $ 336,614     $ 229,554     $ 107,060     47 %
                          

Percent of Total Sales:

        

Europe

     69 %     54 %    

Americas (includes Latin America)

     28       41      

Asia Pacific

     3       5      
                    

Total

     100 %     100 %    
                    

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

Gross Margin

Our gross margin details for the years ended December 31, 2007 and 2006 are shown in the table below.

 

     Years Ended December 31,  
     2007     2006     $ Change    % Change  
     (In thousands, except %)  

Total gross margin (dollars)

   $ 60,256     $ 46,212     $ 14,044    30 %

Total gross margin (%)

     18 %     20 %     

Total gross margin dollars increased and the gross margin percentage decreased in 2007 primarily due to the growth in HDD drive product sales, offset by an expected decrease in Zip revenue, which carries a higher gross margin percentage than HDD drive products.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

2007 As Compared to 2006 (Continued)

 

CSS product gross margins increased in terms of both dollars and percentage during 2007.    The increase in gross margin dollars was primarily due to higher sales volumes due to the introduction of new cost competitive HDD products and lower material and overhead costs of the HDD products.    All CSS products faced competitive pricing pressures during the year ended December 31, 2007 and we anticipate continued competitive pricing pressures on these products in the future.

The Zip product gross margins decreased in terms of both dollars and percentage during 2007 primarily due to the expected ongoing decline of Zip product sales.    Additionally, 2007 included charges for inventory reserves; whereas, 2006 included a small benefit from the release of inventory reserves.    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.

REV product gross margins increased in terms of both dollars and percentages during 2007 due to a higher mix of REV 70GB product sales in 2007 which have higher gross margins.    Additionally, 2006 included start-up costs for the launch of the REV 70GB products.

NSS product gross margins decreased in terms of both dollars and percentage during 2007 primarily due to a shift in mix to lower margin network HDD products and low-end NAS drives.

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)

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.    Intersegment sales, eliminated in consolidation, are not material.    Non-allocated operating expenses include restructuring charges and certain extraordinary costs.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

2007 As Compared to 2006 (Continued)

 

The information in the following table was derived directly from our internal segments’ financial information used for corporate management purposes.

 

     Years Ended December 31,  
     2007     2006     $ Change     % Change  
     (In thousands, except %)  

Product Operating Income (Loss):

        

Consumer Products:

        

Consumer Storage Solutions Products

   $ 2,500     $ (9,335 )   $ 11,835     127 %

Zip Products

     2,860       3,384       (524 )   (15 )
                          

Total Consumer Products

     5,360       (5,951 )     11,311     190  

Business Products:

        

REV Products

     486       (6,940 )     7,426     107  

Network Storage Systems Products

     5       1,574       (1,569 )   (100 )

Services

     (1,455 )     (290 )     (1,165 )   (402 )
                          

Total Business Products

     (964 )     (5,656 )     4,692     83  

Other Products

     3,598       875       2,723     311  
                          

Non-Restructuring Charge

     —         (995 )     995     100  
                          

Restructuring Reversals (Charges)

     344       (3,529 )     3,873     110  
                          

Operating Income (Loss)

   $ 8,338     $ (15,256 )   $ 23,594     155 %
                          

CSS product operating income as a percentage of CSS product sales improved to 1% for the year ended December 31, 2007 from a negative product operating loss of 7% of product sales for the year ended December 31, 2006.    The CSS product operating income resulted primarily from improved gross margins as described above.    Although operating expenses in total were higher in 2007, they were lower as a percent of sales when compared to 2006.

Zip product operating income as a percentage of Zip product sales increased to 18% for the year ended December 31, 2007 from 11% for the year ended December 31, 2006 due to lower operating expenses in 2007 and larger impairment charges taken in 2006, partially offset by the lower gross margins described above.    We anticipate future volatility in Zip product operating income as the segment reaches the end of its life cycle.    There is no remaining goodwill related to the Zip product line on the balance sheet as of December 31, 2007, as the last impairment charges were taken in the second quarter of 2007.

The REV product operating income as a percentage of REV product sales improved to 1% for the year ended December 31, 2007 compared to a negative 16% for the year ended December 31, 2006.    The REV product operating income for the year ended December 31, 2007 resulted primarily from improved gross margins as described above, lower selling and marketing expenses, and lower research and development expenses.

The NSS product operating income as a percentage of NSS product sales decreased to less than 1% for the year ended December 31, 2007, compared to 9% of product sales for the year ended December 31, 2006.    The lower NSS product operating income for the year ended December 31, 2007 resulted primarily from charges associated with the launch of the StorCenter Pro NAS 150d products, combined with the lower gross margins described above.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

2007 As Compared to 2006 (Continued)

 

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

Other Products product operating income increased for the year ended December 31, 2007 compared to the year ended December 31, 2006, primarily due to increased license and patent fee income in the current year.

There were no non-restructuring charges in 2007.    In 2006, 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/reversals.

Operating Expenses (Income)

The table below shows the details of and changes in operating expenses for years ended December 31, 2007 and 2006.

 

     Years Ended December 31,  
     2007     2006     $ Change     % Change  
     (In thousands, except %)  

Operating Expenses (Income):

        

Selling, general and administrative

   $ 43,856     $ 41,124     $ 2,732     7 %

Research and development

     8,106       8,905       (799 )   (9 )

License and patent fee income

     (3,952 )     (1,085 )     (2,867 )   (264 )

Goodwill impairment charges

     2,963       8,728       (5,765 )   (66 )

Restructuring charges (reversals)

     (344 )     3,529       (3,873 )   (110 )

Bad debt expense

     1,289       267       1,022     383  
                              

Total Operating Expenses

   $ 51,918     $ 61,468     $ (9,550 )   (16 )%
                              

Selling, General and Administrative Expenses

The increase in selling, general and administrative expenses in 2007 compared to 2006 was primarily a result of $2.3 million in external professional fees associated with the announced proposed acquisition of ExcelStor Group.    Selling, general and administrative expenses decreased as a percentage of sales to 13% in 2007 from 18% in 2006.

Research and Development Expenses

The decrease in research and development expenses in 2007 compared to 2006 reflected lower development expenses on HDD and REV products, partially offset by higher spending on NSS products due to the launch of new products.    Research and development expenses decreased as a percentage of sales to 2% in 2007, compared to 4% in 2006 as a result of higher revenue and lower product development costs.    We anticipate research and development dollars in 2008 to be comparable in amount with 2007.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

2007 As Compared to 2006 (Continued)

 

License and Patent Fee Income

For the year ended December 31, 2007, license and patent fee income of $4.0 million was comprised of $3.5 million for a payment received on a 2004 license agreement and $0.5 million for the sale of certain patents.    For the year ended December 31, 2006, license and patent fee income of $1.1 million was recognized from the sale of certain patents.

Goodwill Impairment Charges

For the year ended December 31, 2007, operating expenses included non-cash, impairment charges totaling $3.0 million relating to Zip goodwill.    For the year ended December 31, 2006, operating expenses included non-cash, impairment charges totaling $8.7 million relating to Zip goodwill.

These charges were recorded as a result of quarterly impairment tests due to declining Zip sales, profits and estimated future cash flows as Zip products reach the end of their lifecycles.    There was no remaining goodwill related to the Zip product line as of July 1, 2007.

Bad Debt

We increased our bad debt expense in 2007 by $1.3 million primarily to accrue for potential bad debt given the financial problems with one of our large U.S. retail customers, and to a lesser extent, higher overall trade receivables.    This compares to a bad debt expense of $0.3 million in 2006 primarily as a result of a specific bad debt and a deterioration of customer accounts receivable agings in Europe.

At December 31, 2007, we had $3.2 million in trade receivables in excess of 180 days past due compared to $3.6 million at December 31, 2006.    The decrease is primarily a result of reconciling and matching off approved credits against deductions taken by customers for returns, programs and other reasons.

Interest Income

Interest income of $2.6 million during 2007 decreased by $0.2 million, or 7%, as compared to the $2.8 million for 2006.    The $0.2 million decrease in 2007 was due to lower average cash balances in 2007 as compared to 2006.

Interest Expense

Interest expense was immaterial for both the years ended December 31, 2007 and December 31, 2006.

Other Income (Expense), Net

Net other income of $0.3 million in 2007 decreased $0.8 million compared to other net income of $1.1 million in 2006.    Included in the 2007 net other income was foreign currency gains of $0.9 million compared to foreign currency gains of $0.5 million in 2006.    The 2006 net other income included a $1.1 million gain associated with the release of various liabilities for a European subsidiary for which operations ceased in 1999 and was dissolved in 2006.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

2007 As Compared to 2006 (Continued)

 

Income Taxes

In June of 2006, the FASB issued FIN 48 which clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with FASB 109.    The interpretation was effective for fiscal years beginning after December 15, 2006.    There was no material impact upon adoption of FIN 48 to our financial results.

For 2007, we recorded a net income tax provision of $1.3 million, on pre-tax income of $11.3 million.    The net income tax provision was primarily comprised of a $2.4 million increase in the valuation allowance, tax provisions of $4.0 million related to the statutory provision on pre-tax income and tax provisions of $3.0 million related to increases in permanently invested earnings and changes in other deferred tax items, partially offset by tax benefits of $3.5 million related to the foreign income tax rate differential and $3.7 million related changes in tax contingency reserves and other deferred tax items.    Included in the $2.4 million increase in the valuation allowance was a $5.6 million increased valuation allowance resulting from increases in the NOL and credit carryforwards and deferred tax assets related to inventory and accrued expenses.    This increase was partially offset by a decrease in the valuation allowance as the result of increases in the deferred tax liabilities of $3.2 million related to an increase in the pool of unrepatriated foreign earnings.

For 2006, we recorded a net income tax benefit of $2.3 million, on a pre-tax loss from continuing operations of $11.4 million.    The net income tax benefit was primarily comprised of a $6.3 million decrease in the valuation allowance and tax benefits of $4.0 million related to the statutory benefit on pre-tax losses from continuing operations and changes in other deferred tax items, partially offset by tax charges of $8.4 million related to the write off of foreign NOLs.    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.    This decrease was partially offset by an increase in the valuation allowance as the result of decreases in the deferred tax liabilities of $9.6 million related to a decrease in the pool of unrepatriated foreign earnings.

The realizability of the net deferred tax assets is evaluated quarterly in accordance with FASB 109, which requires that a valuation allowance be established when we determine that it is more likely than not that all or a portion of a deferred tax asset will not be realized.

Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities.    They are measured by applying the enacted tax rates and laws in effect for the years in which such differences are expected to reverse.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

2007 As Compared to 2006 (Continued)

 

The following table summarizes U.S. and foreign loss and tax credit carryforwards at December 31, 2007.

 

     Amount    Expiration Dates
     (In thousands)     

U.S. and Foreign Loss Deferred Tax Assets:

     

Federal NOLs

   $ 2,103    2027

State NOLs

     10,548    2008 to 2027

Foreign NOLs

     7    Indefinite
         
   $ 12,658   
         

Tax Credit Deferred Tax Assets:

     

Foreign tax credits

   $ 29,631    2009 to indefinite

Research credits

     10,448    2008 to 2026

Alternative minimum tax credits

     1,604    Indefinite
         
   $ 41,683   
         

At December 31, 2007, we had $2.1 million of deferred tax assets related to U.S. federal NOLs, which reflect a tax benefit of approximately $6.0 million in future U.S. federal tax deductions.    At December 31, 2007, we had $10.5 million of deferred tax assets related to state NOLs, which reflect a tax benefit of approximately $264 million in future state tax deductions.    The difference in the amount of future federal and state tax deductions related to the NOLs is primarily attributable to two factors: 1) the difference between federal and state NOL carryback rules which have allowed the use of federal NOLs in instances where state NOLs could not be utilized and 2) the difference in the taxable portion for federal and state purposes of dividends received from our foreign subsidiary for federal and state purposes.

 

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IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

2007 As Compared to 2006 (Continued)

 

Quarterly Information

The following table is a summary of the unaudited, quarterly financial information for the years ended December 31, 2007 and 2006.

 

     First
Quarter
    Second
Quarter
    Third
Quarter
   Fourth
Quarter
   Total
Year
 
            
     (In thousands, except per share data)  

Year Ended December 31, 2007

            

Sales

   $ 75,984     $ 59,319     $ 80,667    $ 120,644    $ 336,614  

Gross margin

     14,303       12,139       12,953      20,861      60,256  

Pre-tax income (loss)

     1,377       (135 )     1,842      8,232      11,316  

Net income

     1,149       1,091       1,293      6,522      10,055  

Net income per common share:

            

Basic and Diluted EPS

   $ 0.02     $ 0.02     $ 0.02    $ 0.12    $ 0.18  

Year Ended December 31, 2006

            

Sales

   $ 59,081     $ 40,652     $ 53,595    $ 76,226    $ 229,554  

Gross margin

     11,801       6,793       12,216      15,402      46,212  

Pre-tax income (loss) from continuing operations

     (5,571 )     (11,196 )     1,062      4,314      (11,391 )

Discontinued operations, net of taxes

     —         —         —        272      272  

Net income (loss)

     (4,169 )     (10,399 )     853      4,872      (8,843 )

Net income (loss) per common share:

            

Basic and Diluted EPS

   $ (0.08 )