UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

                              

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED JULY 2, 2006

 

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the Transition Period from ............ to...............

 

COMMISSION FILE NUMBER 1-12333

 


Iomega Corporation

(Exact name of registrant as specified in its charter)

Delaware                                                                                                                                  86-0385884

(State or other jurisdiction                                                                                                 (IRS employer identification number)

of incorporation or organization)

 

                                                               10955 Vista Sorrento Parkway, San Diego, CA 92130

(Address of principal executive offices)

 

                                   (858) 314-7000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes x         No o?

 

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

 

Large accelerated filer o

Accelerated filer x 

Non-accelerated filer o 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes o  

No x

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of August 1, 2006.

 

Common Stock, par value $0.03 1/3

(Title of each class)

51,661723(Number of shares)


 



 

 

IOMEGA CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

                                                                                                                                                                                                

Page

 

Note Regarding Forward-Looking Statements                                                                                                       2

 

PART I - FINANCIAL STATEMENTS

 

Item 1.   Financial Statements (Unaudited)

 

Condensed Consolidated Balance Sheets at July 2, 2006

and December 31, 2005                                                                                                                         4

 

Condensed Consolidated Statements of Operations for the Quarter

Ended July 2, 2006 and July 3, 2005                                                                                                    5

 

Condensed Consolidated Statements of Operations for the Six Months

Ended July 2, 2006 and July 3, 2005                                                                                                    6

 

Condensed Consolidated Statements of Cash Flows for the Six months

Ended July 2, 2006 and July 3, 2005                                                                                                    7

 

Notes to Condensed Consolidated Financial Statements                                                                    8

 

Item 2.   Management’s Discussion and Analysis of Financial

Condition and Results of Operations                                                                                                29

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk                                                               44

 

Item 4. Controls and Procedures                                                                                                                              44

 

PART II - OTHER INFORMATION

 

Item 1.   Legal Proceedings                                                                                                                                       45

 

Item 1A. Risk Factors                                                                                                                                                45

 

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds                                                            51

 

Item 4.   Submission of Matters to a Vote of Security Holders                                                                          51

 

Item 6.   Exhibits                                                                                                                                                         51

 

Signatures                                                                                                                        52                                    

 

Exhibit Index                                                                                                                                                               53

 

 

 

__________________________________

Copyright © 2006 Iomega Corporation. All rights reserved. Iomega, Zip, Jaz, REV, StorCenter, Micro Mini, iStorage, and Hotburn are either registered trademarks or trademarks of Iomega Corporation in the United States and/or other countries. Certain other product names, brand names, and company names may be trademarks or designations of their respective owners.

1

 



 

 

                                                                                     IOMEGA CORPORATION AND SUBSIDIARIES

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

 

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

 

The ongoing or carrying value of inventory;

•           

The anticipated purchase of CSCI by Iomega, with CSCI to become a wholly owned subsidiary of Iomega, as well as all references to the future impact on Iomega or benefits to Iomega, as well as any future products or services Iomega might offer in connection with that acquisition;

All references to expected challenges associated with the CSCI acquisition;

All references to plans to develop new products or data protection services;

•          

The expectation that Iomega will be implementing its April 27, 2006 restructuring plan through the third quarter of 2006;

Anticipated or predicted future warranty costs;

 

All accruals and reserves and all references to bad debt;

•          

The future impact of accounting changes including the impacts of SFAS 156, SFAS 155, and FIN 48;

Predictions about our cost structure being aligned with future revenue levels;

 

Anticipated asset disposition including furniture disposition and future lease terminations;

The useful life of assets;

 

•          

Statements that we may grant up to 4,100,000 shares of Common Stock to our officers, key employees, directors, consultants and advisors, and that our options generally become exercisable in four or five equal annual installments;

All references to goals, including goals for the hard drive business, goals concerning profitability, future growth in REV® sales, and predicted annual savings as a result of our restructuring (discussed, for example, in the Overview within Item 2 below), and our specific statements that we anticipate that (a) the 2006 restructuring actions will result in annual cost savings of approximately $20 million to $25 million as compared to first quarter 2006 run rates, when fully implemented by the end of the third quarter 2006; (b) all references to goals to : (1) complete further REV products; (2) improve HDD product gross margins through sourcing changes, new products and other cost reductions; (3) focus on growing our REV product sales through system integrator programs to generate awareness, server OEM transactions and adoption in targeted vertical markets such as the professional audio/video market and (4) evaluate other strategic opportunities in the small business market segment to facilitate long term growth;

Statements that our goals are to reverse negative cash flows from operations through implementation of the 2006 restructuring and other cost reductions, improving the financial results of the CSS business, in particular HDD, improving REV product sales and margins and managing the Zip Products business for cash flow;

Predictions of future volatility in Zip drive sales, and predictions that sales of Zip disks will continue in the future, worldwide, including the European Union;

References to the launch of lower cost hard drives in August 2006;

•          

References to the fourth quarter normally being a seasonally strong quarter for our Consumer Storage Solutions business and our European sales are typically weakest during the third quarter due to summer holidays;

Expected declines in Zip product sales, and statements concerning future impairment of Zip goodwill including the prediction that goodwill associated with the Zip product segment will become impaired, and the impact of such impairment;

The estimates concerning repatriation of foreign earnings;

•          

The adequacy of our internal controls to allow proper functioning of the business or timely disclosure;

All references to consideration of potential future business opportunities or strategic acquisition opportunities;

 

 

2

 



IOMEGA CORPORATION AND SUBSIDIARIES

NOTE REGARDING FORWARD-LOOKING STATEMENTS (Continued)

 

 

 

References that no litigation or claims are expected to have a material impact on our results of operations, business or financial condition;

References to the value of options, their expected term, expected volatility, expected dividend value, total unrecognized compensation costs of ours that will be adjusted for future changes in estimated forfeitures, and all expectations that we will recognize certain compensation costs over a weighted average period of 3.5 years and

Our belief that our balance of total unrestricted cash, cash equivalents, and temporary investments will be sufficient to fund anticipated working capital requirements for at least one year, as well as statements that should we be unable to meet our cash needs from our current balance of total unrestricted cash, cash equivalents and temporary investments and future cash flows from operations, we would most likely incur additional restructuring charges to adjust our expenditures to a level that our cash flows could support and/or seek financing from other sources.

 

Any other statements that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects,” “intends,” “goal,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these words.

 

Numerous factors could cause actual events or results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth under the captions “Application of Critical Accounting Policies,” “Liquidity and Capital Resources,” and “Quantitative and Qualitative Disclosures About Market Risk” included in Items 2 and 3 of Part I and “Risk Factors” in Item 1A of Part II of this Quarterly Report on Form 10-Q. Any forward-looking statements represent our estimates only as of the date of this report and we specifically disclaim any obligation to update forward-looking statements, even if our estimates change.

 

3

 



 

 

IOMEGA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

 

July 2, 2006

 

         Dec. 31, 2005

 

(Unaudited)

 

 

 

Current Assets:

 

 

 

Cash and cash equivalents

$   58,642

 

$    70,943

Restricted cash

87

 

256

Temporary investments

18,908

 

24,800

Trade receivables, less allowance for doubtful accounts of

 

 

 

$1,671 at July 2, 2006 and $2,165 at December 31, 2005

14,731

 

28,853

Inventories

29,428

 

27,532

Deferred income taxes

5,523

 

5,523

Income taxes receivable

289

 

-

Other current assets

4,719

 

4,998

Total Current Assets

132,327

 

162,905

 

 

 

 

Property and Equipment, at Cost

84,594

 

87,629

Accumulated Depreciation

(77,818)

 

(79,318)

Net Property and Equipment

6,776

 

8,311

 

 

 

 

Goodwill

6,269

 

11,691

Other Intangibles, Net

-

 

696

Other Assets

60

 

66

Total Assets

$ 145,432

 

$  183,669

 

 

 

 

 

Current Liabilities:

 

 

 

Accounts payable

$   17,274

 

               $    35,500

Other current liabilities

46,535

 

49,751

Income taxes payable

-

 

310

Total Current Liabilities

63,809

 

85,561

 

 

 

 

Deferred Income Taxes

15,030

 

17,152

Commitments and Contingencies (Notes 4 and 5)

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

Common Stock, $0.03 1/3 par value - authorized 400,000,000

1,839

 

1,839

shares, issued 55,094,245 shares at July 2, 2006

 

and 55,081,120 shares at December 31, 2005

 

Additional paid-in capital

79,818

 

79,613

Less: 3,432,922 Common Stock treasury shares, at cost

(33,791)

 

(33,791)

Retained earnings

18,727

 

33,295

Total Stockholders’ Equity

66,593

 

80,956

 

Total Liabilities and Stockholders’ Equity

$   145,432

 

$   183,669

 

 

The accompanying notes to condensed consolidated financial statements are an

integral part of these statements.

 

 

4

 



 

IOMEGA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

 

                     For the Quarter Ended  

 

          July 2,

 

           July 3,

          2006  

2005  

 

                             (Unaudited)

Sales

$    40,652

 

$   65,712

Cost of sales

33,859

 

52,209

Gross Margin

6,793

 

13,503

 

 

 

 

Operating Expenses:

 

 

 

Selling, general and administrative

10,510

 

16,116

Research and development

2,475

 

3,959

Restructuring charges (reversals)

4,291

 

(41)

Goodwill impairment charge

2,341

 

-

License and patent fee income

(1,085)

 

(405)

Bad debt credit

(153)

 

(5)

Total Operating Expenses

18,379

 

19,624

Operating loss

(11,586)

 

(6,121)

 

 

 

 

Interest income

776

 

532

Interest expense and other income and (expense), net

(386)

 

(837)

Loss from continuing operations before income taxes

(11,196)

 

(6,426)

 

 

 

 

Benefit for income taxes

797

 

121

Loss from continuing operations

(10,399)

 

(6,305)

 

 

 

 

Discontinued Operations:

 

 

 

Loss from discontinued operations, net of taxes

-

 

(95)

Total discontinued operations

-

 

(95)

Net Loss

$       (10,399)

 

$        (6,400)

 

 

 

 

Discontinued Operations Per Basic and Diluted Share

                       $                 -

 

        $          (0.00)

 

 

 

 

Net Loss Per Basic and Diluted Common Share

                      $            (0.20)

 

        $          (0.12)

 

 

 

 

Weighted Average Common Shares Outstanding   

                        51,658

 

51,612

 

 

The accompanying notes to condensed consolidated financial statements are an

integral part of these statements.

 

 

5

 



 

 

IOMEGA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

 

 

                  For the Six Months Ended  

 

July 2,

 

      July 3,

2006  

        2005  

 

                 (Unaudited)

Sales

$ 99,733

 

$ 138,624

Cost of sales

81,139

 

108,594

Gross Margin

18,594

 

30,030

 

 

 

 

Operating Expenses:

 

 

 

Selling, general and administrative

23,092

 

34,611

Research and development

5,042

 

7,958

Restructuring charges

4,569

 

194

Goodwill impairment charges

5,422

 

-

License and patent fee income

(1,085)

 

(412)

Bad debt credit

(275)

 

(292)

Total Operating Expenses

36,765

 

42,059

Operating loss

(18,171)

 

(12,029)

 

 

 

 

Interest income

1,539

 

967

Interest expense and other income and (expense), net

(135)

 

(1,723)

Loss from continuing operations before income taxes

(16,767)

 

(12,785)

 

 

 

 

Benefit for income taxes

2,199

 

615

Loss from continuing operations

(14,568)

 

(12,170)

 

 

 

 

Discontinued Operations:

 

 

 

Loss from discontinued operations,

-

 

(155)

net of taxes

Total discontinued operations

-

 

(155)

Net Loss

$ (14,568)

 

$ (12,325)

 

 

 

 

Discontinued Operations Per Basic and Diluted Share

              $            -

 

              $    (0.00)

 

 

 

 

Net Loss Per Basic and Diluted Common Share

             $     (0.28)

 

              $    (0.24)

 

 

 

 

Weighted Average Common Shares Outstanding

51,653

 

51,611

 

The accompanying notes to condensed consolidated financial statements are an

integral part of these statements.

 

 

 

6

 



 

 

IOMEGA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

        

 

For the Six Months Ended  

 

July 2,

 

July 3,

2006  

2005  

 

(Unaudited)

Cash Flows from Operating Activities:

 

 

 

Net Loss

                 $   (14,568)

 

                 $   (12,325)

Adjustments to Reconcile Net Loss to Net Cash Used In Operations:

 

 

 

Depreciation and amortization

2,675

 

3,945

Deferred income tax benefit

(2,122)

 

(328)

Stock-related compensation expense

171

 

438

Goodwill impairment charges

5,422

 

-

Non-cash inventory write-offs

(742)

 

980

Bad debt credit

(275)

 

(292)

Other

(372)

 

87

 

 

 

 

Changes in Assets and Liabilities (net of effects of disposition):

 

 

 

Restricted cash

169

 

(259)

Trade receivables

14,397

 

12,893

Inventories

(1,154)

 

8,766

Other current assets

279

 

2,122

Accounts payable

(18,226)

 

(11,472)

Other current liabilities

294

 

(12,285)

Accrued restructuring charges

(3,510)

 

(2,194)

Income taxes

(599)

 

(373)

Net cash used in operating activities

(18,161)

 

(10,297)

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

Purchases of property and equipment

(403)

 

(829)

Proceeds from sale of assets

82

 

641

Purchases of temporary investments

(11,280)

 

(33,174)

Sales of temporary investments

17,420

 

27,464

Initial investment in ByteTaxi (net of $171 of cash)

-

 

(44)

Net change in other assets and other liabilities

7

 

(663)

Net cash provided by (used in) investing activities

5,826

 

(6,605)

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

Payments on long-term debt

-

 

(40)

Proceeds from sales of Common Stock

34

 

6

Net cash provided by (used in) financing activities

34

 

(34)

Net Decrease in Total Cash and Cash Equivalents

(12,301)

 

(16,936)

Total Cash and Cash Equivalents at Beginning of Period

70,943

 

103,403

 

Total Cash and Cash Equivalents at End of Period

$     58,642

 

$   86,467

 

The accompanying notes to condensed consolidated financial statements are an

integral part of these statements

 

7

 



IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(1) Significant Accounting Policies

 

In management’s opinion, the accompanying condensed consolidated financial statements reflect all adjustments of a normal recurring nature which are necessary to present fairly our financial position as of July 2, 2006 and December 31, 2005, the results of operations for the quarter and six month periods ended July 2, 2006 and July 3, 2005 and cash flows for the six months ended July 2, 2006 and July 3, 2005.

 

The results of operations for the quarter and six month periods ended July 2, 2006 are not necessarily indicative of the results to be expected for the entire year or for any future period.

 

These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in our latest Annual Report on Form 10-K.

 

Reclassifications

 

Certain reclassifications have been made to the prior period’s condensed consolidated financial statements and notes to condensed consolidated financial statements to conform to the current period’s presentation. All prior period business segment information has been restated to be consistent with the current period presentation.

 

Inventories

 

Inventories include material costs and inventory related overhead costs and are recorded at the lower of cost (first-in, first-out) or market and consist of the following:

 

   July 2,

 

Dec. 31,

 

           2006        

 

                2005     

 

            (In thousands)

 

 

 

 

Raw materials

$ 2,207

 

$ 1,942

Finished goods

27,221

 

25,590

 

$ 29,428

 

$ 27,532

 

We evaluate the carrying value of inventory on a quarterly basis to determine if the carrying value is recoverable at estimated selling prices (including known future price decreases). We include product costs and direct selling expenses in our analysis of inventory realization. To the extent that estimated selling prices do not exceed such costs and expenses, valuation reserves are established against inventories through a charge to cost of sales. In addition, we generally consider inventory which 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.

 

Net Income (Loss) Per Common Share  

 

Basic net income (loss) per common share (“Basic EPS”) excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income per common share (“Diluted EPS”) reflects the potential dilution that could occur if stock options or other contracts to issue common stock were exercised or converted into common stock. The computation of Diluted EPS assumes no exercise or conversion of securities that would have an anti-dilutive effect on net income per common share. In periods where losses are recorded, common stock equivalents would decrease the loss per share and therefore are not added to the weighted average shares outstanding. Losses have been recorded for the quarters and six month periods ending July 2, 2006 and July 3, 2005, thus there was no dilution as all outstanding options were considered anti-dilutive.

 

8


 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(1) Significant Accounting Policies (Continued)

 

The table below shows the number of outstanding options that had an exercise price greater than the average market price of the common shares (out of the money options) for the respective period. The average market price of our common stock was $3.22 for the quarter ended July 2, 2006 and $3.03 for the quarter ended July 3, 2005. The average market price of our common stock was $2.98 for the six months ended July 2, 2006 and $3.85 for the six months ended July 3, 2005.

 

  For the Quarter Ended  

 

           For the Six Months Ended

 

July 2,

 

July 3,

 

July 2,

 

July 3,

 

2006

 

2005

 

2006

 

2005

 

 

 

 

 

 

 

 

Out of the money options

1,180,621

 

2,087,531

 

1,507,955

 

1,978,117

 

Stock Compensation Expense  

 

Prior to January 1, 2006, we accounted for our share-based employee compensation plans under the measurement and recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”). We selected the prospective method, which was one of the three transition methods allowed by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”, to transition to the fair value method of measuring stock-based compensation expense. Under the prospective method, only those employee stock options that were granted or modified after January 1, 2003 were expensed as compensation.

 

Effective January 1, 2006, we adopted SFAS No. 123r, “Share-Based Payment”, (“SFAS 123r”) using the modified prospective transition method. Because we elected to use the modified prospective transition method, results for prior periods have not been restated.

 

Our condensed consolidated statements of operations included $0.2 million of compensation expense related to stock-based compensation plans for the quarter ended July 2, 2006 and $0.2 million for the quarter ended July 3, 2005.

 

Our condensed consolidated statements of operations included $0.2 million of compensation expense related to stock-based compensation plans for the six months ended July 2, 2006 and $0.4 million for the six months ended July 3, 2005.

 

Under the modified prospective method, compensation expense that we recognized for the quarter and six months ended July 2, 2006 included: (a) compensation expense for all share-based payments granted prior to, but not yet vested, as of January 1, 2006 based on the grant date fair value in accordance with the original provisions of SFAS 123 and (b) compensation expense for all share-based payments granted on or after January 1, 2006 based on the grant date fair value in accordance with the provisions of SFAS 123r. In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 107 (“SAB 107”), which provides supplemental implementation guidance for SFAS 123r. We have applied the provisions of SAB 107 in our adoption of SFAS 123r. See Note 6 for information about our various stock-based compensation plans, the impact of our adoption of SFAS 123r and the assumptions we use to calculate the fair value of share-based employee compensation.

 

9

 



IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(1) Significant Accounting Policies (Continued)

 

Accrued Warranty  

 

We accrue for warranty costs based on estimated warranty return rates and estimated costs to repair. We use a statistical-based model to estimate warranty accrual requirements. The statistical model, used to project future returns, is based upon a rolling monthly calculation that computes the number of units required in the warranty reserve and is based upon monthly sales, actual returns and projected return rates. Actual warranty costs are charged against the warranty reserve. Factors that affect our warranty liability include the number of units sold, historical and anticipated rates of warranty returns and repair cost. We review the adequacy of our recorded warranty liability on a quarterly basis and record the necessary adjustments to the warranty liability.

 

Changes in our warranty liability during all periods presented were as follows:

 

 

For the Quarter Ended  

 

For the Six Months Ended

 

July 2,

 

July 3,

 

July 2,

 

July 3,

 

2006

 

2005

 

2006

 

2005

 

(In thousands)

 

 

 

 

 

 

 

 

Balance at beginning of period

 $             4,455

 

 $             5,462

 

$             4,973

 

  $            5,537

Accruals/additions

942

 

1,261

 

1,637

 

3,370

Claims

(1,320)

 

(1,597)

 

(2,533)

 

(3,781)

Balance at end of period

$             4,077

 

$             5,126

 

$             4,077

 

$            5,126

 

 

Recent Accounting Pronouncements

 

On February 16, 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS 155, “Accounting for Certain Hybrid Instruments,” which amends SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”, and SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. SFAS 155 allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. This statement is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. We do not expect our adoption of this new standard to have a material impact on our financial position, results of operations or cash flows.

 

On March 17, 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets—an amendment of FAS Statement No. 140” (“SFAS 156”). This statement was issued to simplify the accounting for servicing assets and liabilities, such as those common with mortgage securitization activities. This statement addresses the recognition and measurement of separately recognized servicing assets and liabilities and provides an approach to simplify hedge-like (offset) accounting. SFAS 156 clarifies when an obligation to service financial assets should be separately recognized (as a servicing asset or liability), requires initial measurement at fair value and permits an entity to select either the Amortization Method or the Fair Value Method. This statement is effective for fiscal years beginning after September 15, 2006. We do not expect our adoption of this new standard to have a material impact on our financial position, results of operations or cash flows.

 

10

 



IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(1) Significant Accounting Policies (Continued)

 

In June 2006, the FASB issued Financial Interpretation (“FIN”) 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements in accordance with Financial Accounting Statement No. 109, “Accounting for Income Taxes”. The interpretation is effective for fiscal years beginning after December 15, 2006. We do not expect FIN 48 to have a material impact on our financial statements.

 

(2) Income Taxes

 

For the quarter ended July 2, 2006, we recorded a net income tax benefit of $0.8 million on a pre-tax loss of $11.2 million. This tax benefit is primarily comprised of a release of the deferred tax liability resulting from the goodwill impairment charge recognized.

 

For the quarter ended July 3, 2005, we recorded an income tax benefit of $0.1 million on a pre-tax loss from continuing operations of $6.4 million. The statutory tax benefit of $2.5 million, resulting from operating losses, was entirely offset by a tax charge to increase the valuation allowance. The net tax benefit of $0.1 million was comprised of small adjustments related to deferred taxes.

 

For the six months ended July 2, 2006, we recorded an income tax benefit of $2.2 million on a pre-tax loss of $16.8 million. This tax benefit is primarily comprised of a release of the deferred tax liability resulting from the goodwill impairment charges recognized, minor adjustments to the estimated foreign income taxes due to the filing of actual tax returns and the accrual of foreign income and capital taxes.

 

For the six months ended July 3, 2005, we recorded an income tax benefit of $0.6 million on a pre-tax loss from continuing operations of $12.8 million. The statutory tax benefit of $5.0 million, resulting from operating losses, was entirely offset by tax charges to increase the valuation allowance. The net tax benefit of $0.6 million was comprised of $0.4 million of various foreign tax accrual releases due to a change in the estimate and the likely outcome of selected tax issues and $0.2 million of various adjustments related to deferred taxes.

 

We have recorded foreign tax contingencies related to items in various countries, which are included in “other accrued liabilities” and in “deferred income taxes” in the condensed consolidated balance sheets. These reserve balances will be adjusted to the extent that these items are settled for amounts different than the amounts recorded. The amount included in “other accrued liabilities” at July 2, 2006 related to such foreign tax contingencies and related interest accruals was $13.7 million.

 

 

11

 



IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

(3) Business Segment Information

 

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

 

Business Categories  

 

Reportable Segments  

 

 

 

Consumer Products

 

1. Zip Products

 

 

2. Consumer Storage Solutions

 

 

 

Business Products

 

3. REV Products

 

 

4. Network Storage Systems

 

 

 

Other Products

 

5. Other Products

 

 

Consumer Products

 

The Consumer Products category is comprised of the Zip Products segment and the Consumer Storage Solutions segment.

 

The Zip Products segment involves the distribution and sale of Zip drives and disks to retailers, distributors, resellers and OEMs throughout the world until June 30, 2006. As of July 1, 2006, due to the European Union Restriction of Hazardous Substances (“RoHS”), Zip drives can only be sold in countries outside of the European Union. Zip disks continue to be sold worldwide.

 

Our Consumer Storage Solutions (“CSS”) segment involves the worldwide distribution and sale of various storage devices including external hard disk drives (“HDD”), CD-RW drives, DVD rewritable drives, Mini USB flash drives and external floppy disk drives. During the second half of 2005, we began to focus this segment primarily on HDD products.

 

Business Products

 

The Business Products category is comprised of the REV Products and the Network Storage Systems segments.

 

The 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 are removable hard disk storage systems with a native capacity of 35 gigabytes (“GB” – where 1 gigabyte equals 1 billion bytes) and up to 90GB of compressed capacity. The first generation REV products began shipping in April 2004. During July 2006, we announced the availability of the next generation REV 70 products. 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.

 

The Network Storage Systems (“NSS”) segment consists primarily of the development, distribution and sale of Network Attached Storage servers and the Network HDD Drives (which were previously reported under the CSS segment in the Consumer Products category) in the entry-level and low-end Network Attached Storage market.

 

12

 



 

 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(3) Business Segment Information (Continued)

 

 

Other Products

 

The Other Products segment consists of license and patent fee income 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.

 

Product Operating Income (Loss)

 

We no longer measure our product segment performance based on product profit margin. Effective January 1, 2006, we evaluate such performance based on product operating income. Product operating income is defined as sales and other income related to a segment’s operations, less both fixed and variable product costs, and direct and allocated operating expenses. Operating expenses are charged to the product lines on a direct approach or as a percentage of sales. When such costs and expenses exceed sales and other income, this is referred to as product operating loss. The accounting policies of the product segments are the same as those described in Note 1. Intersegment sales, eliminated in consolidation, are not material. Non-allocated operating expenses include restructuring charges and certain extraordinary costs.

 

 

13

 



IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(3) Business Segment Information (Continued)

 

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

 

Reportable Operating Segment Information:

 

For the Quarter Ended  

 

       For the Six Months Ended

 

July 2,

 

July 3,

 

July 2,

 

July 3,

2006

2005

2006

2005

 

(In thousands)

Sales:

 

 

 

 

 

 

 

Consumer Products:

 

 

 

 

 

 

 

Zip Products

$ 7,793

 

$ 16,778

 

$ 19,436

 

$ 36,923

Consumer Storage Solutions

20,150

 

32,288

 

51,682

 

67,164

Total Consumer Products

27,943

 

49,066

 

71,118

 

104,087

Business Products:

 

 

 

 

 

 

 

REV Products

8,889

 

11,141

 

19,668

 

23,234

Network Storage Systems

3,395

 

4,989

 

8,251

 

10,329

Total Business Products

12,284

 

16,130

 

27,919

 

33,563

Other Products

425

 

516

 

696

 

974

Total Sales

$ 40,652

 

$ 65,712

 

$ 99,733

 

$ 138,624

 

 

 

 

 

 

 

 

Product Operating Income (Loss):

 

 

 

 

 

 

 

Consumer Products:

 

 

 

 

 

 

 

Zip Products

$ 48

 

$ 4,939

 

$ 1,107

 

$ 11,430

Consumer Storage Solutions

(4,723)

 

(7,611)

 

(9,922)

 

(15,276)

Total Consumer Products

(4,675)

 

(2,672)

 

(8,815)

 

(3,846)

Business Products:

 

 

 

 

 

 

 

REV Products

(3,759)

 

(3,429)

 

(5,375)

 

(7,391)

Network Storage Systems

33

 

(538)

 

420

 

(1,088)

Total Business Products

(3,726)

 

(3,967)

 

(4,955)

 

(8,479)

Other Products

1,106

 

477

 

1,163

 

490

Non-Restructuring charges

-

 

-

 

(995)

 

-

Restructuring (charges) reversals

(4,291)

 

41

 

(4,569)

 

(194)

Total Operating Loss

$ (11,586)

 

$ (6,121)

 

$ (18,171)

 

$ (12,029)

 

 

14

 



IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

(4) Restructuring Charges

 

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

 

 

July 2,

 

Dec. 31,

 

2006

 

2005

 

                           (In thousands)

 

 

 

 

Other Current Liabilities:

 

 

 

Third Quarter 2001 restructuring actions

$ 2,455

 

$ 1,434

2003 restructuring actions

448

 

887

2004 restructuring actions

179

 

346

2005 restructuring actions

387

 

1,738

2006 restructuring actions

2,092

 

-

Total

$ 5,561

 

$ 4,405

 

 

 

 

Fixed Asset Reserves:

 

 

 

Third Quarter 2001 restructuring actions

$        2

 

$      74

2003 restructuring actions

116

 

117

2004 restructuring actions

-

 

145

2005 restructuring actions

193

 

259

2006 restructuring actions

77

 

-

Total

$ 388

 

$ 595

 

During the second quarter of 2006, we recorded net restructuring charges of $4.3 million of which $1.5 million related to the 2001 restructuring actions; a $0.1 million release related to the 2004 restructuring actions and $2.9 million related to the 2006 restructuring actions.

 

During the first quarter of 2006, we recorded restructuring charges of $0.3 million related to the 2006 restructuring actions.

 

These charges are described below under their respective caption.

 

2006 Restructuring Actions

 

During the first quarter of 2006, we recorded restructuring charges of $0.3 million for severance and benefits associated with the termination of management employees as we began reorganizing our Company from a focus on autonomous geographic regions and products to a simplified functional organization. This organization resulted in the elimination of some management positions and material changes in responsibilities in other management positions.

 

During the second quarter of 2006, we recorded additional restructuring charges of $2.9 million as follows: a cash charge of $2.7 million for severance and benefits for approximately 90 personnel worldwide who were notified during the second quarter of 2006 that their positions were being eliminated; $0.1 million for miscellaneous IT contracts and licenses; and $0.1 million for excess building assets associated with the shutdown of the Toronto, Canada facility.

 

15

 



IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(4) Restructuring Charges (Continued)

 

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

 

As of July 2, 2006, we have made $ 1.0 million in cumulative cash payments related to the 2006 restructuring charges.

 

The breakdown of the 2006 restructuring charges and utilization of and other activity related to the 2006 restructuring reserves during the quarter ended July 2, 2006 are summarized below:

 

 

 

Balance

 

 

 

 

 

Foreign

 

Balance

 

 

 

Utilization

 

Currency

 

2006 Restructuring Actions

 

4/2/2006

 

Additions

 

Cash

 

Non-Cash

 

Changes

 

7/2/2006

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance and benefits (a)

 

$ 327

 

$ 2,752

 

$ (1,000)

 

$      -

 

$ (15)

 

$ 2,064

Miscellaneous items (a) (b)

 

-

 

83

 

-

 

(55)

 

-

 

28

Lease termination costs (a)

 

-

 

9

 

(9)

 

-

 

-

 

-

Lease related assets (b)

 

-

 

80

 

-

 

(3)

 

-

 

77

 

 

$ 327

 

$ 2,924

 

$ (1,009)

 

$ (58)

 

$ (15)

 

$ 2,169

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Breakout:

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities (a)

 

$ 327

 

$ 2,789

 

$ (1,009)

 

$      -

 

$ (15)

 

$ 2,092

Fixed asset and other asset reserves (b)

 

-

 

135

 

-

 

(58)

 

-

 

77

 

 

$ 327

 

$ 2,924

 

$ (1,009)

 

$ (58)

 

$ (15)

 

$ 2,169

 

(a)

Amounts represent primarily cash charges.

 

(b)

Amounts represent primarily non-cash charges.

 

Utilization of and other activity related to the 2006 restructuring reserves during the six months ended July 2, 2006 are summarized below:

 

 

 

Balance

 

 

 

 

 

Foreign

 

Balance

 

 

 

Utilization

 

Currency

 

2006 Restructuring Actions

 

12/31/2005

 

Additions

 

Cash

 

Non-Cash

 

Changes

 

7/2/2006

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance and benefits (a)

 

$ -

 

$ 3,079

 

$ (1,000)

 

$      -

 

$ (15)

 

$ 2,064

Miscellaneous items (a) (b)

 

-

 

83

 

-

 

(55)

 

-

 

28

Lease termination costs (a)

 

-

 

9

 

(9)

 

-

 

-

 

-

Lease related assets (b)

 

-

 

80

 

-

 

(3)

 

-

 

77

 

 

$ -

 

$ 3,251

 

$ (1,009)

 

$ (58)

 

$ (15)

 

$ 2,169

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Breakout:

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities (a)

 

$ -

 

$ 3,116

 

$ (1,009)

 

$      -

 

$ (15)

 

$ 2,092

Fixed asset and other asset reserves (b)

 

-

 

135

 

-

 

(58)

 

-

 

77

 

 

$ -

 

$ 3,251

 

$ (1,009)

 

$ (58)

 

$ (15)

 

$ 2,169

 

 

(a)

Amounts represent primarily cash charges.

 

(b)

Amounts represent primarily non-cash charges.

 

 

16

 



IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(4) Restructuring Charges (Continued)

 

The majority of the remaining severance and benefits reserved at July 2, 2006 is anticipated to be paid in the third quarter of 2006 with the exception of the Vice President level employees for which severance is generally paid on a continuous payroll basis.

 

2005 Restructuring Actions

 

During 2005, we recorded $5.7 million of restructuring charges for the 2005 restructuring actions. This 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.

 

During the second quarter of 2006, we recorded an additional charge of $0.2 million for a change in sublease estimates on a building vacated last fall. This charge was basically offset by a release of excess reserves associated with negotiating lower contract cancellation payments.

 

We have made $4.8 million in cumulative cash payments in 2005 and 2006 related to the 2005 restructuring actions, of which $0.8 million was disbursed during the first quarter of 2006 and $0.5 million was disbursed in the second quarter of 2006.

 

Remaining restructuring reserves of $0.4 million are included in our accrued restructuring charges and $0.2 million are included in our fixed asset reserves at July 2, 2006. Utilization of and other activity related to the 2005 restructuring reserves during the quarter ended July 2, 2006 are summarized below:

 

2005 Restructuring Actions

 

         Balance

 

Utilized  

 

 

 

Reversals

 

Balance

 

                 4/2/2006

 

              Cash

 

Non-Cash

 

Additions

 

 

7/2/06

 

 

                                              (In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance and benefits (a)

 

$    152

 

$ (137)

 

$      -

 

$      -

 

$     (2)

 

$   13

Contract termination costs (b)

 

413

 

(193)

 

-

 

-

 

(137)

 

83

Lease termination costs (a)

 

287

 

(146)

 

-

 

150

 

-

 

291

Lease related assets (b)

 

227

 

-

 

(34)

 

-

 

-

 

193

 

 

$ 1,079

 

$ (476)

 

$ (34)

 

$ 150

 

$ (139)

 

$ 580

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Breakout:

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities (a)

 

$    852

 

$ (476)

 

$      -

 

$ 150

 

$ (139)

 

$ 387

Fixed asset reserves (b)

 

227

 

-

 

(34)

 

-

 

-

 

193

 

 

$ 1,079

 

$ (476)

 

$ (34)

 

$ 150

 

$ (139)

 

$ 580

 

    (a)    

Amounts represent primarily cash charges.

 

 

(b) Amounts represent primarily non-cash charges.

 

17

 



IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(4) Restructuring Charges (Continued)

 

 

 

 

 

Utilization of and other activity related to the 2005 restructuring reserves during the six months ended July 2, 2006 are summarized below:

 

2005 Restructuring Actions

 

Balance

 

Utilized  

 

 

 

Reversals

 

Balance

 

12/31/2005

 

Cash

 

Non-Cash

 

Additions

 

 

7/2/06

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance and benefits (a)

 

$    681

 

$    (603)

 

$                 -

 

$     4

 

$   (69)

 

$   13

Contract termination costs (b)

 

670

 

(450)

 

-

 

-

 

(137)

 

83

Lease termination costs (a)

 

387

 

(246)

 

-

 

150

 

-

 

291

Lease related assets (b)

 

259

 

-

 

(66)

 

-

 

-

 

193

 

 

$ 1,997

 

$ (1,299)

 

$           (66)

 

$ 154

 

$ (206)

 

$ 580

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Breakout:

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities (a)

 

               $ 1,738

 

               $ (1,299)

 

        $               -

 

                  $ 154

 

             $ (206)

 

                     $ 387

Fixed asset reserves (b)

 

259

 

-

 

(66)

 

-

 

-

 

193

 

 

$ 1,997

 

$  (1,299)

 

$           (66)

 

$ 154

 

$ (206)

 

$ 580

 

(a)

Amounts represent primarily cash charges.

 

(b)

Amounts represent primarily non-cash charges.

 

Lease payments are being made on a continuous monthly basis, and of these facilities, the last lease expires in July 2008. We have entered into a sublease agreement on the leased facility that expires in 2008. The majority of the lease-related assets will be utilized by the tenant who is subleasing the facility. The remaining assets are anticipated to be disposed of during the second half of 2006. The remaining contract cancellation payments are being made on their regular payment installments.

 

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 were allocated to any of the business segments.

 

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

During the second quarter of 2006, we released an excess reserve for $0.1 million associated with higher than expected proceeds from the sale of furniture.

As of July 2, 2006, we have made $3.6 million in cumulative cash payments related to the 2004 restructuring actions, of which $0.2 million was disbursed during the first quarter of 2006.

18

 



IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(4) Restructuring Charges (Continued)

 

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 million was for 9 employees located in Asia and $0.3 million was for 5 employees located in Europe. The worldwide workforce reduction was across all business functions and across all levels of the Company. Of the 117 individuals worldwide, 14 employees worked on a transition basis into the first quarter of 2005 and one additional employee worked 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, were made after the last day of employment and 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 paid to those employees who were on transition beyond the minimum retention period (60 days) as defined by SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”).

As part of the 2004 restructuring actions, we recorded a $0.4 million non-cash charge related to excess furniture that was no longer being utilized because of our downsizing. None of these charges were allocated to any of the business product segments. All but the $0.4 million of excess furniture charges was paid in cash.

 

Remaining restructuring reserves of $0.2 million are included in our other current liabilities as of July 2, 2006. Utilization of and other activity related to the 2004 restructuring reserves during the quarter ended July 2, 2006 are summarized below:

 

 

 

Balance

 

                        Utilized                              

 

 

 

Foreign

 

          Balance

 

 

 

Addition

 

Currency

 

2004 Restructuring Actions

 

4/2/2006

 

Cash  

 

Non-Cash

 

(Reversal)

 

Changes

 

7/2/2006

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance and benefits (a)

 

$      -

 

$      -

 

$ -

 

$        -

 

$ -

 

$      -

Lease termination costs (a)

 

205

 

(26)

 

-

 

-

 

-

 

179

Furniture (b)

 

145

 

-

 

-

 

(145)

 

-

 

-

 

 

$ 350

 

$ (26)

 

$ -

 

$ (145)

 

$ -

 

$ 179

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Breakout:

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities (a)

 

$ 205

 

$ (26)

 

$ -

 

$        -

 

$ -

 

$ 179

Fixed asset reserves (b)

 

145

 

-

 

-

 

(145)

 

-

 

-

 

 

$ 350

 

$ (26)

 

$ -

 

$ (145)

 

$ -

 

$ 179

 

(a)

Amounts represent primarily cash charges.

 

(b)

Amounts represent primarily non-cash charges.

 

 

19

 



IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(4) Restructuring Charges (Continued)

 

 

Utilization of and other activity relating to the 2004 restructuring charges during the six months ended July 2, 2006 are summarized below:

 

 

 

Balance

 

Utilized  

 

 

 

Foreign

 

Balance

 

 

 

Addition

 

Currency

 

2004 Restructuring Actions

 

12/31/2005

 

Cash  

 

Non-Cash

 

(Reversal)

 

Changes

 

7/2/2006

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

Severance and benefits (a)

 

$      -

 

$   (14)

 

$ -

 

$      14

 

$ -

 

$      -

Lease termination costs (a)

 

346

 

(167)

 

-

 

-

 

-

 

179

Furniture (b)

 

145

 

-

 

-

 

(145)

 

-

 

-

 

 

$ 491

 

$ (181)

 

$ -

 

$ (131)

 

$ -

 

$ 179

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Breakout:

 

 

 

 

 

 

 

 

 

 

 

 

Other current liabilities (a)

 

$ 346

 

$ (181)

 

$ -

 

$      14

 

$ -

 

$ 179

Fixed asset reserves (b)

 

145

 

-

 

-

 

 (145)

 

-

 

-

 

 

$ 491

 

$ (181)

 

$ -

 

$ (131)

 

$ -

 

$ 179

 

(a)

Amounts represent primarily cash charges.

 

(b)

Amounts represent primarily non-cash charges.

 

Lease payments are being made on a continuous monthly basis, and, of these facilities, the last sublease expires in 2008. We have subleased the facility for which our lease expires in 2008.

 

2003 Restructuring Actions

 

The $14.5 million of charges for the 2003 restructuring actions including $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, $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 the Zip segment and the remaining $9.5 million was not allocated to any of the business segments.

 

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. The total amount of separation payments or liability for the 198 employees notified during 2003 was $6.7 million.

 

During 2004, we recorded $0.5 million of restructuring charges related to the ratable recognition of the severance and benefits costs to be paid to the employees who remained in transition into 2004. However, during the first quarter of 2004, we also released $0.3 million of estimated outplacement liabilities as employee usage of outplacement resources was less than originally estimated.

 

20

 



IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(4) Restructuring Charges (Continued)

 

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

 

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 July 2, 2006. Utilization of and other activity relating to the 2003 restructuring reserves during the quarter ended July 2, 2006 are summarized below:

 

 

 

Balance

 

Utilized  

 

 

 

Balance

2003 Restructuring Actions

 

4/2/2006

 

Cash  

 

Non-Cash

 

Additions

 

7/2/2006

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Severance and benefits (a)

 

$     2

 

$        -

 

$     -

 

$ -

 

$     2

Lease termination costs (a)

 

668

 

(222)

 

-

 

-

 

446

Furniture (b)

 

117

 

-

 

(1)

 

-

 

116

 

 

$ 787

 

$ (222)

 

$ (1)

 

$ -

 

$ 564

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Breakout:

 

 

 

 

 

 

 

 

 

 

Accrued restructuring charges (a)

 

$ 670

 

$ (222)

 

$    -

 

$ -

 

$ 448

Fixed asset reserves (b)

 

117

 

-

 

(1)

 

-

 

116

 

 

$ 787

 

$ (222)

 

$ (1)

 

$ -

 

$ 564

 

(a)

Amounts represent primarily cash charges.

 

(b)

Amounts represent primarily non-cash charges.

 

Utilization of and other activity relating to the 2003 restructuring reserves during the six months ended July 2, 2006 are summarized below:

 

 

 

Balance

 

Utilized  

 

 

 

Balance

2003 Restructuring Actions

 

12/31/2005

 

Cash  

 

Non-Cash

 

Additions

 

7/2/2006

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Severance and benefits (a)

 

$        2

 

$        -

 

$    -

 

$ -

 

$     2

Lease termination costs (a)

 

885

 

(439)

 

-

 

-

 

446

Furniture (b)

 

117

 

-

 

(1)

 

-

 

116

 

 

$ 1,004

 

$ (439)

 

$ (1)

 

$ -

 

$ 564

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Breakout:

 

 

 

 

 

 

 

 

 

 

Accrued restructuring charges (a)

 

$    887

 

$ (439)

 

$    -

 

$ -

 

$ 448

Fixed asset reserves (b)

 

117

 

-

 

(1)

 

-

 

116

 

 

$ 1,004

 

$ (439)

 

$ (1)

 

$ -

 

$ 564

 

(a)

Amounts represent primarily cash charges.

 

(b)

Amounts represent primarily non-cash charges.

 

 

21

 



IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(4) Restructuring Charges (Continued)

 

Lease payments are being made on a continuous monthly basis, and of these facilities, the last lease expires at the end of 2006. We anticipate completing the disposal of the furniture by the end of 2006.

 

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 $33.3 million of restructuring charges recorded 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 2004, we recorded an additional $0.7 million in restructuring charges for our Ireland facility due to continuing depressed real estate market conditions in Ireland. We were able to sublease this facility in the fourth quarter of 2004.

 

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.

 

During the second quarter of 2006, we recorded an additional charge of $1.5 million for a change in sublease estimates due to poor market conditions in the Roy, Utah area for this type of facility.

 

Remaining restructuring reserves of $2.5 million are included in our other current liabilities as of July 2, 2006. Utilization of and other activity related to the 2001 restructuring reserves during the quarter ended July 2, 2006 is summarized below:

 

 

 

Balance

 

Utilized  

 

 

 

Balance

2001 Restructuring Actions

 

4/2/2006

 

Cash  

 

Non-Cash

 

Additions

 

7/2/2006

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Lease cancellations (a)

 

$ 1,174

 

$ (219)

 

$      -

 

$ 1,500

 

$ 2,455

Leasehold improvements and furniture (b)

 

64

 

-

 

(62)

 

-

 

2

 

 

$ 1,238

 

$ (219)

 

$ (62)

 

$ 1,500

 

$ 2,457

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Breakout:

 

 

 

 

 

 

 

 

 

 

Other current liabilities (a)

 

$ 1,174

 

$ (219)

 

$      -

 

$ 1,500

 

$ 2,455

Fixed asset reserves (b)

 

64

 

-

 

(62)

 

-

 

2

 

 

$ 1,238

 

$ (219)

 

$ (62)

 

$ 1,500

 

$ 2,457

 

(a)

Amounts represent primarily cash charges.

 

(b)

Amounts represent primarily non-cash charges.

 

 

 

 

22

 



IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(4) Restructuring Charges (Continued)

 

Utilization of and other activity related to the 2001 restructuring reserves during the six months ended July 2, 2006 is summarized below:

 

 

 

Balance

 

Utilized  

 

 

 

Balance

2001 Restructuring Actions

 

12/31/2005

 

Cash  

 

Non-Cash

 

Additions

 

7/2/2006

 

 

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Lease cancellations (a)

 

$ 1,434

 

$ (479)

 

$      -

 

$ 1,500

 

$ 2,455

Leasehold improvements and furniture (b)

 

74

 

-

 

(72)

 

-

 

2

 

 

$ 1,508

 

$ (479)

 

$ (72)

 

$ 1,500

 

$ 2,457

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet Breakout:

 

 

 

 

 

 

 

 

 

 

Other current liabilities (a)

 

$ 1,434

 

$ (479)

 

$      -

 

$ 1,500

 

$ 2,455

Fixed asset reserves (b)

 

74

 

-

 

(72)

 

-

 

2

 

 

$ 1,508

 

$ (479)

 

$ (72)

 

$ 1,500

 

$ 2,457

 

(a)

Amounts represent primarily cash charges.

 

(b)

Amounts represent primarily non-cash charges.

 

Lease payments are being made on a continuous monthly basis which our lease expires in 2009.

 

(5) Commitments and Contingencies

 

Litigation

 

There are no material legal proceedings to which we are a party. We are involved in lawsuits and claims generally incidental to our business, none of which are expected to have a material impact on our results of operations, business or financial condition. 

 

(6) Stockholders’ Equity

 

Share-Based Compensation Plan  

 

Stock Incentive Plan

 

Our 1997 Stock Incentive Plan (the “1997 Plan”) provides for the grant of incentive stock options (“ISOs”) intended to qualify under Section 422 of the Internal Revenue Code, nonstatutory stock options (“NSOs”) and restricted stock awards. Under the 1997 Plan, we may grant options for up to 4,100,000 shares of Common Stock to our officers, key employees, directors, consultants and advisors. The exercise price of ISOs granted under the 1997 Plan may not be less than 100% of the fair market value at the date of grant; NSOs may be granted with exercise prices below the fair market value of our Common Stock as of the date of grant, subject to certain limitations. Options generally become exercisable in four or five equal annual installments, commencing approximately one year from the date of grant. The duration of options awarded under these plans may not exceed ten years from the date of grant, except for those options granted in non-U.S. jurisdictions which can be granted with a term of up to eleven years.

 

 

23

 



IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(6) Stockholders’ Equity (Continued)

 

Director Stock Option Plans

 

We have a 1995 Director Stock Option Plan (the “1995 Director Plan”) and a 2005 Director Stock Option Plan (the “2005 Director Plan”). The 1995 Director Plan expired on April 25, 2005 and no further options may be granted under this plan; however, all outstanding options under the 1995 Director Plan remain in effect. The 2005 Director Plan was approved by our shareholders to replace the 1995 Director Plan. Under the 2005 Director Plan, we may grant options for up to 500,000 shares of Common Stock. The 2005 Director Plan provides for the grant to each non-employee Director of our Company, upon his or her initial election as a Director, an option to purchase 20,000 shares of Common Stock. In addition to the initial option grant, each non-employee Director is granted an option to purchase 5,000 shares of Common Stock on the date of each Annual Meeting beginning with the 2006 Annual Meeting provided such optionee has been a Director for the preceding six months. All options granted under these plans are NSOs. All options generally become exercisable in four or five equal annual installments, commencing approximately one year from the date of grant, provided the holder continues to serve as a Director of our Company. Under these plans, the exercise price per share of the option is equal to the fair market value of our Common Stock on the date of grant of the option. Any options granted under these plans must be exercised no later than ten years from the date of grant. All plans are described more fully in our 2005 Annual Report on Form 10-K.

 

Impact of the Adoption of SFAS 123r

 

See Note 1 for a description of our adoption of SFAS 123r on January 1, 2006. During the first quarter of 2006, we reduced our stock based compensation by $0.1 million due to a change in the estimated forfeiture rate as required by SFAS 123r. The $0.1 million reduction of the stock based compensation cost did not have a material impact upon the basic and diluted earnings per share calculation.

 

Determining Fair Value

 

Valuation and Amortization Method. We use the Black-Scholes option-pricing-model to estimate the fair value of each option grant on the date of grant or modification. We amortize the fair value on an accelerated method for recognizing stock compensation expense over the vesting period of the option.

 

Expected Term. The expected term is the period of time that granted options are expected to be outstanding. We estimate the expected term based on historical patterns of option exercises, which we believe reflect future exercise behavior. We examined patterns in our historical data in order to ascertain if there were any discernable patterns of exercises for demographic characteristics (such as geographic, job level, plan and significantly out of the money exercise prices). Due to the current level of stock prices, we have excluded historical data that was significantly out of the money in determining our expected term.

 

Expected Volatility. We calculate volatility by using the historical stock prices going back over the estimated life of the option.

 

Risk-Free Interest Rate. We base the risk-free interest rate used in the Black-Scholes option-valuation model on the market yield in effect at the time of option grant provided from the Federal Reserve Board’s Statistical Releases and Historical Publications from the Treasury constant maturities rates for the equivalent remaining terms.

 

 

24

 



IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(6) Stockholders’ Equity (Continued)

 

Dividends. We do not have plans to pay cash dividends in the future. Therefore, we use an expected dividend yield of zero in the Black-Scholes option-valuation model.

 

Forfeitures. SFAS 123r requires us to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. In calculating the forfeiture rates used in the Black-Scholes option-valuation model, we have excluded options that were significantly out of the money, primarily because they relate to older, fully vested awards.

 

We used the following assumptions to estimate the fair value of options granted for the quarter and six months ended July 2, 2006 and July 3, 2005:

 

 

 

For the Quarter Ended

 

For the Six Months Ended

 

 

July 2,

 

July 3,

 

July 2,

 

July 3,

 

 

2006

 

2005

 

2006

 

2005

Assumption  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average expected term (in years)

 

3.9

 

3.4

 

3.9

 

3.4

Expected stock price volatility

 

55%

 

  45%

 

59%

 

48%

Risk-free interest rate (range)

 

4.5-5.1%

 

  3.8%

 

4.3-5.1%

 

3.3-3.8%

Expected dividends

 

zero

 

zero

 

zero

 

zero

Forfeiture rate

 

27%

 

18%

 

27%

 

18%

 

Stock Option Activity and Share-Based Compensation Expense

 

The following table presents the aggregate options granted, exercised and forfeited under all stock option plans at July 2, 2006 and their respective weighted average exercise prices and certain weighted average fair values:

 

 

 

 

 

Weighted

 

 

Shares

 

Average

 

 

(000’s)

 

Exercise Price

 

 

 

 

 

Outstanding at beginning of year

 

3,028

 

$ 4.63

Granted (1)

 

1,088

 

2.98

Exercised

 

(13)

 

2.56

Forfeited / Cancelled / Expired (2)

 

(902)

 

4.28

Outstanding at end of quarter (3)

 

3,201

 

4.18

Options exercisable at quarter-end

 

1,106

 

6.20

        

(1)

The weighted average fair value of options granted was $1.60 for the quarter ended July 2, 2006 and $1.45 for the six months ended July 2, 2006.

 

(2)

The weighted average fair value of options forfeited / cancelled / expired during the six months ended July 2, 2006 was $1.58.

(3)

The weighted average exercise prices of all stock options outstanding include the effects of the $5.00 per share adjustment to stock options that were outstanding under the 1997 Plan and the 1995 Director Plan.

 

25

 



IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

(6) Stockholders’ Equity (Continued)

 

 

The following table summarizes information about awards outstanding under all stock option plans at July 2, 2006:

 

 

 

Outstanding

 

Exercisable

 

 

 

 

Weighted

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

Average

 

Weighted

 

Aggregate

 

 

 

Average

 

Weighted

 

Aggregate

 

 

Number

 

Remaining

 

Average

 

Intrinsic

 

Number

 

Remaining

 

Average

 

Intrinsic

 

 

(000’s)

 

Contractual

 

Exercise

 

Value

 

(000’s)

 

Contractual

 

Exercise

 

Value

Range of Exercise Prices

 

Outstanding

 

Life

 

Price

 

(000’s)

 

Outstanding

 

Life

 

Price

 

(000’s)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$0.03 to $2.48

 

609

 

7.7 years

 

$ 2.20

 

$ 349

 

316

 

6.6 years

 

$ 2.01

 

$ 243

$2.62 to $3.87

 

1,709

 

9.4 years

 

2.99

 

148

 

159

 

7.0 years

 

3.11

 

1

$4.42 to $6.00

 

565

 

8.0 years

 

4.68

 

-

 

327

 

8.0 years

 

4.69

 

-

$6.26 to $9.30

 

107

 

5.6 years

 

8.52

 

-

 

93

 

5.3 years

 

8.85

 

-

$9.50 to $14.22

 

118

 

4.2 years

 

13.47

 

-

 

118

 

4.2 years

 

13.47

 

-

$14.38 to $41.25

 

93

 

2.7 years

 

19.22

 

-

 

93

 

2.7 years

 

19.22

 

-

 

 

3,201

 

8.3 years

 

4.18

 

$ 497

 

1,106

 

6.4 years

 

6.20

 

$ 244

 

We defined “in-the-money” options at July 2, 2006 as options that had exercise prices that were lower than the $2.98 average close market price of our common stock for the six months ended July 2, 2006. The aggregate intrinsic value of options outstanding at July 2, 2006 is calculated by taking the difference between the exercise price of the underlying options and the market price of our common stock for the 1,692,943 shares that were in-the-money at that date. There were 366,568 in-the-money options exercisable at July 2, 2006. The total intrinsic value of options exercised during the quarter and the six months ended July 2, 2006 was immaterial.

 

At July 2, 2006, our non-vested stock awards totaled 2,094,424 and had a weighted average grant date fair value of $1.30. At December 31, 2005, our non-vested stock awards totaled 2,133,677 and had a weighted average grant date fair value of $1.01. At July 2, 2006, options that vested during the last six months totaled 334,603 and had a weighted average fair value of $1.40.

 

Our total net share-based compensation expense for stock options was $0.2 million for the quarter and the six months ended July 2, 2006. The total tax benefit related to this share-based compensation was immaterial for the quarter and six months ended July 2, 2006. The total net share-based compensation expense for the quarter and six months ended July 2, 2006 was recorded in selling, general and administrative expenses in the statement of operations.

 

As of July 2, 2006, there was $2.0 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all equity compensation plans. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We expect to recognize that cost over a weighted average period of 3.5 years.

 

Cash received from option exercises under all share-based payment arrangements was less than $0.1 million for the quarter and six months ended July 2, 2006. The actual tax benefits that we realized related to tax deductions for non-qualified option exercises and disqualifying dispositions under all share-based payment arrangements were immaterial for the quarter and six months ended July 2, 2006.

 

26

 



IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

(7) Other Matters

 

Other Intangible Assets  

 

At July 2, 2006, our intangible asset was fully amortized.

 

The following table presents the other intangible assets and associated accumulated amortization for all periods presented:

 

 

 

July 2,

 

Dec. 31,

 

2006

 

2005

 

 

(In thousands)

Other Intangible Assets:

 

 

 

 

Gross value (1)

 

$ -

 

$ 8,791

Accumulated amortization

 

-

 

(8,095)

Net intangible assets

 

$ -

 

$    696

 

 

(1) During the second quarter of 2006, a technology license expired and was retired.

 

Goodwill Impairment

 

We have performed the interim impairment test due to indications of impairment as required under FASB Statement No. 142, “Goodwill and Other Intangible Assets” and have determined that our goodwill, all of which is associated with the Zip product line, was impaired at July 2, 2006. This test compares our Zip specific assets (inventory) to the estimated future, discounted cash flows to determine if these cash flows will cover the assets. The estimated discounted, future cash flows were not adequate to cover the carrying value of Zip goodwill as of July 2, 2006. As a result, impairment charges of $2.3 million and $5.4 million were recorded as a separate component of operating expenses for the quarter and six month period ended July 2, 2006, respectively. We also anticipate additional non-cash goodwill impairment charges as the expected future Zip cash flows continue to decline.

 

 

27

 



IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

 

 

(8) Subsequent Event

 

On July 10, 2006, we entered into a definitive agreement with CSCI, Inc. (“CSCI”), a California corporation, and its shareholders, to acquire CSCI by merging a newly formed subsidiary of Iomega with and into CSCI. As a result, CSCI will become a wholly owned subsidiary of Iomega. CSCI is engaged