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 OCTOBER 1, 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 October 31, 2006.

 

 

Common Stock, par value $0.03 1/3                                                                                

54,726,195


(Title of each class)                                                                                                            (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 October 1, 2006

                 and December 31, 2005................................................................................................               4

 

          Condensed Consolidated Statements of Operations for the Quarter

                 Ended October 1, 2006 and October 2, 2005.............................................................               5

 

          Condensed Consolidated Statements of Operations for the Nine Months

                 Ended October 1, 2006 and October 2, 2005.............................................................               6

 

           Condensed Consolidated Statements of Cash Flows for the Nine Months

                 Ended October 1, 2006 and October 2, 2005.............................................................               7

 

          Notes to Condensed Consolidated Financial Statements...........................................               8

 

Item 2. Management’s Discussion and Analysis of Financial

              Condition and Results of Operations..........................................................................              33

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk...................................              50

 

Item 4. Controls and Procedures..................................................................................................              50

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.............................................................................................................               51

 

Item 1A. Risk Factors....................................................................................................................               51

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...................................              57

 

Item 6. Exhibits................................................................................................................................              57

 

Signatures........................................................................................................................................             58

 

Exhibit Index....................................................................................................................................              59

 

 

 

 

__________________________________

Copyright © 2006 Iomega Corporation. All rights reserved. Iomega, Zip, Jaz, REV, OfficeScreen, StorCenter, iStorage, Micro Mini 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;

 

All references to expected challenges associated with the CSCI acquisition or entry into the managed services market;

 

All references to expectations and estimates, such as the estimated value of options or expected stock volatility;

 

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

 

Anticipated or predicted future warranty costs;

 

All accruals and reserves and all references to bad debt, foreign tax contingencies, or allowances for doubtful accounts;

 

The future impact of accounting changes including the impacts of SFAS 156, SFAS 155, SFAS 157, 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 fourth quarter normally being a seasonally strong quarter for our Consumer Storage Solutions business and our European sales are typically weaker during the summer months due to 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 3.2 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)

 

 

Oct. 1, 2006

Dec. 31, 2005

 



 

(Unaudited)

 

Current Assets:

 

 

    Cash and cash equivalents

$ 55,315

$ 70,943

    Restricted cash

87

256

    Temporary investments

14,414

24,800

    Trade receivables, less allowance for doubtful accounts of

       $1,396 at October 1, 2006 and $2,165 at December 31, 2005

29,881

28,853

    Inventories

34,803

27,532

    Deferred income taxes

5,523

5,523

    Other current assets

3,881

4,998

 



         Total Current Assets

143,904

162,905

 



Property and Equipment, at Cost

84,648

87,629

Accumulated Depreciation

(77,489)

(79,318)

 



     Net Property and Equipment

7,159

8,311

 



Goodwill

13,244

11,691

Other Intangibles, Net

1,093

696

Other Assets

60

66

 



    Total Assets

$165,460

$183,669

 



 

 

 

Current Liabilities:

 

 

    Accounts payable

$ 31,579

$ 35,500

    Other current liabilities

44,715

49,751

    Income taxes payable

832

310

 



        Total Current Liabilities

77,126

85,561

 



Deferred Income Taxes

13,174

17,152

Commitments and Contingencies (Notes 5 and 6)

 

 

 

Stockholders’ Equity:

 

 

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

       shares, issued 55,301,395 shares at October 1, 2006

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

1,846

1,839

    Additional paid-in capital

59,396

79,613

    Less: 575,200 Common Stock treasury shares, at cost, at

       October 1, 2006 and 3,432,922 at December 31, 2005

(5,662)

(33,791)

    Retained earnings

19,580

33,295

 



       Total Stockholders’ Equity

75,160

80,956

 



Total Liabilities and Stockholders’ Equity

$165,460

$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  

 

 


 

Oct. 1,

2006

 

Oct. 2,

2005  

 


 


 

(Unaudited)

Sales

$53,595

 

$55,852

Cost of sales

41,379

 

44,890

 


 


    Gross Margin

12,216

 

10,962

 


 


Operating Expenses:

 

 

 

    Selling, general and administrative

8,216

 

14,173

    Research and development

1,904

 

3,195

    Restructuring charges (reversals)

(211)

 

6,579

    Goodwill impairment charge

2,513

 

    License and patent fee income

 

(889)

    Bad debt expense

441

 

356

 


 


        Total Operating Expenses

12,863

 

23,414

 


 


Operating loss

(647)

 

(12,452)

Interest income

722

 

692

Interest expense and other income (expense), net

987

 

(93)

 


 


    Income (loss) from continuing operations before income taxes

1,062

 

(11,853)

Benefit (provision) for income taxes

(209)

 

(399)

 


 


Net income (loss) from continuing operations

853

 

(12,252)

Discontinued Operations:

 

 

 

    Loss from discontinued operations, net of taxes

 

(73)

 


 


        Total discontinued operations

 

(73)

Net Income (Loss)

$  853

 

$(12,325)

 


 


Discontinued Operations Per Basic and Diluted Share

$      –

 

$           –

 


 


Net Income (Loss) Per Basic Share

$  0.02

 

$    (0.24)

 


 


Net Income (Loss) Per Diluted Common Share

$  0.02

 

$    (0.24)

 


 


Weighted Average Common Shares Outstanding

53,382

 

51,627

 


 


Weighted Average Common Shares Outstanding Assuming Dilution

53,389

 

51,627

 


 


 

 

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 Nine Months Ended  

 

 


 

Oct. 1,

2006  

 

Oct. 2,

2005  

 


 


 

(Unaudited)

Sales

$153,328

 

$194,476

Cost of sales

122,518

 

153,484

 


 


    Gross Margin

30,810

 

40,992

 


 


Operating Expenses:

 

 

 

    Selling, general and administrative

31,308

 

48,784

    Research and development

6,946

 

11,153

    Restructuring charges

4,358

 

6,773

    Goodwill impairment charges

7,935

 

    License and patent fee income

(1,085)

 

(1,301)

    Bad debt expense

166

 

64

 


 


        Total Operating Expenses

49,628

 

65,473

 


 


Operating loss

(18,818)

 

(24,481)

Interest income

2,261

 

1,659

Interest expense and other income (expense), net

852

 

(1,816)

 


 


        Loss from continuing operations before income taxes

(15,705)

 

(24,638)

Benefit for income taxes

1,990

 

216

 


 


Loss from continuing operations

(13,715)

 

(24,422)

Discontinued Operations:

 

 

 

    Loss from discontinued operations, net of taxes

 

(228)

 


 


        Total discontinued operations

 

(228)

Net Loss

$(13,715)

 

$(24,650)

 


 


Discontinued Operations Per Basic and Diluted Share

$–

 

$–

 


 


Net Loss Per Basic and Diluted Common Share

$   (0.26)

 

$   (0.48)

 


 


Weighted Average Common Shares Outstanding

52,230

 

51,617

 


 


 

 

 

 

 

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 Nine Months Ended  

 


 

Oct. 1,

2006  

 

Oct. 2,

2005  

 


 


 

(Unaudited)

Cash Flows from Operating Activities:

 

 

 

    Net Loss

$(13,715)

 

$(24,650)

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

 

 

 

            Depreciation and amortization

3,538

 

5,681

            Deferred income tax provision

(3,978)

 

(1,280)

            Loss on disposal and impairment of fixed assets

 

169

            Stock-related compensation expense

503

 

559

Goodwill impairment charges

7,935

 

            Non-cash inventory write-offs (reversals)

(780)

 

530

            Non-cash restructuring charges

 

438

            Bad debt expense

166

 

64

            Other

(541)

 

36

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

 

 

 

            Restricted cash

169

 

(261)

            Trade receivables

359

 

3,960

            Inventories

(6,405)

 

6,673

            Other current assets

1,124

 

1,768

            Accounts payable

(4,119)

 

(3,376)

            Other current liabilities

(4,967)

 

(13,599)

            Accrued restructuring

(874)

 

742

            Income taxes

522

 

852

 


 


               Net cash used in operating activities

(21,063)

 

(21,694)

 


 


Cash Flows from Investing Activities:

 

 

 

    Purchases of property and equipment

(1,558)

 

(970)

    Proceeds from sales of assets

173

 

745

    Purchases of temporary investments

(13,425)

 

(35,571)

    Sales of temporary investments

24,161

 

27,464

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

 

(44)

    Purchase of CSCI, Inc. (net of $183 of cash)

(4,339)

 

    Net change in other assets and other liabilities

7

 

(678)

 


 


           Net cash provided by (used in) investing activities

5,019

 

(9,054)

 


 


Cash Flows from Financing Activities:

 

 

 

    Payments on long-term debt

 

(139)

    Proceeds from sales of Common Stock

416

 

56

 


 

 

           Net cash provided by (used in) financing activities

416

 

(83)

 


 


Net Decrease in Total Cash and Cash Equivalents

(15,628)

 

(30,831)

Total Cash and Cash Equivalents at Beginning of Period

70,943

 

103,403

 


 


Total Cash and Cash Equivalents at End of Period

$ 55,315

 

$ 72,572

 


 


Non–Cash Investing and Financing Activities:

 

 

 

    Issuance of treasury stock in CSCI, Inc. acquisition

$   7,000

 

$         –

 

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 October 1, 2006 and December 31, 2005, the results of operations for the quarter and nine months ended October 1, 2006 and October 2, 2005 and cash flows for the nine months ended October 1, 2006 and October 2, 2005.

 

The results of operations for the quarter and nine months ended October 1, 2006 are not necessarily indicative of the results to be expected for the entire year or for any future period.

 

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

 

Reclassifications

 

Certain reclassifications have been made to the prior period’s condensed consolidated financial statements 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’s presentation.

 

Inventories

 

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

 

Oct. 1,

Dec. 31,

 

2006  

2005  

 



 

(In thousands)

 

 

 

Raw materials

$  2,263

$  1,942

Finished goods

32,540

25,590

 



 

$34,803

$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 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.

 

8

 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(1) Significant Accounting Policies (continued)

 

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 quarter ended October 2, 2005 and nine month periods ending October 1, 2006 and October 2, 2005, thus there was no dilution as all outstanding options were considered anti-dilutive.

 

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 $2.67 for the quarter ended October 1, 2006 and $3.05 for the quarter ended October 2, 2005. The average market price of our Common Stock was $2.88 for the nine months ended October 1, 2006 and $3.59 for the nine months ended October 2, 2005.

 

 

For the Quarter Ended  

For the Nine

Months Ended  

 



 

Oct. 1,

Oct. 2,

Oct. 1,

Oct. 2,

 

2006  

2005  

2006  

2005  

 





 

(In thousands)

 

 

 

 

 

Out of the money options

        2,675

        1,783

        1,765

        1,680

 

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 $0.3 million of compensation expense related to stock-based compensation plans for the quarter ended October 1, 2006 and $0.2 million for the quarter ended October 2, 2005.

 

9

 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(1) Significant Accounting Policies (continued)

 

Stock Compensation Expense (continued)

 

Our condensed consolidated statements of operations included $0.5 million of compensation expense related to stock-based compensation plans for the nine months ended October 1, 2006 and $0.6 million for the nine months ended October 2, 2005.

 

Under the modified prospective method, compensation expense that we recognized for the quarter and nine months ended October 1, 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 applied the provisions of SAB 107 in our adoption of SFAS 123r. See Note 7 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.

 

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 Nine Months Ended

 



 

Oct. 1,

Oct. 2,

Oct. 1,

Oct. 2,

 

2006  

2005  

2006  

2005  

 





 

(In thousands)

 

 

 

 

 

Balance at beginning of period

$4,077

$5,126

$4,973

$5,537

     Accruals/additions

1,372

1,703

3,009

5,073

     Claims

(1,261)

(1,723)

(3,794)

(5,504)

 





Balance at end of period

$4,188

$5,106

$4,188

$5,106

 





 

 

10

 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(1) Significant Accounting Policies (continued)

 

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 SFAS 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.

 

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 are still evaluating the impact of FIN 48 on our financial statements.

 

On September 13, 2006, the SEC staff published SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB 108”). SAB 108 addresses quantifying the financial statement effects of misstatements, specifically, how the effects of prior year uncorrected errors must be considered in quantifying misstatements in the current year financial statements. This statement is effective for fiscal years ending after November 15, 2006. We are still evaluating the potential impact on our financial position, results of operations or cash flows from adoption of this statement.

 

11

 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(1) Significant Accounting Policies (continued)

 

Recent Accounting Pronouncements (continued)

 

On September 15, 2006, the FASB issued, SFAS No. 157 “Fair Value Measurements” (“SFAS 157”). This statement provides enhanced guidance for using fair value to measure assets and liabilities. This statement also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. SFAS 157 does not expand the use of fair value in any new circumstances. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007. 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.

 

(2) Acquisition

 

On August 11, 2006, we acquired all of the outstanding shares of CSCI, Inc. in exchange for $4.5 million in cash (less certain closing costs paid by CSCI, Inc.) and a total of 2,857,722 shares of Iomega Common Stock (treasury stock) equivalent to $7.0 million. The fair value of our shares was based upon the actual number of shares issued using the average closing trading price of our Common Stock on the New York Stock Exchange during the proceeding 20 days prior to the closing date.

 

The acquisition was recorded by allocating the cost of the assets acquired, including intangible assets and liabilities assumed, based on their fair values at the acquisition date. The excess of the cost of the acquisition over the net amounts assigned to the fair value of the assets acquired and the liabilities assumed was recorded as goodwill. The valuation of assets and liabilities has been determined and the purchase price was allocated as follows:

 

 

(In thousands)

 


Trade receivables

                            $     964

Other receivables

589

Inventory

86

Other current assets

7

Property and equipment

81

Amortizable intangible assets

1,127

Goodwill

9,488

Accounts payable

(198)

Other liabilities

(805)

 


Total purchase price – net of cash acquired

$11,339

 


 

 

12

 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(2) Acquisition (continued)

 

Pro Forma Results

 

The following unaudited pro forma financial information presents the combined results of operations of the Company and CSCI, Inc. as if the acquisition had occurred at January 1, 2006 and January 1, 2005. Our results for the third quarter of 2006 include the results of CSCI, Inc. from the acquisition date. Our pro forma results presented below for the quarters and nine months ended October 1, 2006 and October 2, 2005 include our historical results and the historical results of CSCI, Inc. for the comparable periods prior to the acquisition on August 11, 2006. The unaudited pro forma financial information below is not intended to represent or be indicative of our consolidated results of operations or financial condition that would have been reported had the acquisition been completed as of the beginning of the periods presented and should not be taken as indicative of our future consolidated results of operations or financial condition. Pro forma adjustments are tax-effected at our statutory tax rate.

 

 

 

For the Quarter Ended

 

For the Nine

Months Ended

 


 


 

Oct. 1, 2006

Oct.2, 2005

 

Oct. 1, 2006

Oct. 2, 2005

 



 



 

(In thousands)

 

Sales

$53,938

$57,734

 

$158,836

$199,722

 



 



Net income (loss) from continuing

operations, net of tax

 

$  1,083

 

$(11,788)

 

 

$(15,791)

 

$(24,559)

 



 



Net income (loss)

$     866

$(12,285)

 

$(13,767)

$(24,602)

 



 



 

 

 

 

 

 

Net income (loss) per basic share

$    0.02

$   (0.24)

 

$   (0.26)

$   (0.48)

 



 



Net income (loss) per diluted share

$    0.02

$   (0.24)

 

$   (0.26)

$   (0.48)

 



 



 

(3) Income Taxes

 

For the quarter ended October 1, 2006, we recorded a net income tax provision of $0.2 million on pre-tax income of $1.1 million. This tax provision is primarily comprised of taxes provided on foreign earnings and foreign capital taxes, partially offset by a release of the deferred tax liability resulting from the goodwill impairment charge recognized.

 

For the quarter ended October 2, 2005, we recorded an income tax benefit of $0.4 million on a pre-tax loss from continuing operations of $11.9 million. The statutory tax benefit of $4.2 million, resulting from operating losses, was entirely offset by a tax charge to increase the valuation allowance. The net tax provision of $0.4 million was comprised primarily of foreign taxes.

 

For the nine months ended October 1, 2006, we recorded an income tax benefit of $2.0 million on a pre-tax loss of $15.7 million. This tax benefit is primarily comprised of a release of the deferred tax liability resulting from the goodwill impairment charges recognized and minor adjustments to the estimated foreign income taxes due to the filing of actual tax returns, offset by the accrual of taxes on foreign income and capital taxes.

 

13

 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(3) Income Taxes (continued)

 

For the nine months ended October 2, 2005, we recorded an income tax benefit of $0.2 million on a pre-tax loss from continuing operations of $24.6 million. The statutory tax benefit of $8.6 million, resulting from operating losses, was entirely offset by tax charges to increase the valuation allowance. The net tax benefit of $0.2 million was comprised of a $0.8 million provision of foreign taxes, primarily Swiss withholding taxes, and more than offset by a $1.0 million benefit 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 accompanying condensed consolidated balance sheets. These reserve balances will be adjusted to the extent that these items are settled for amounts different from the amounts recorded. The amount included in “other accrued liabilities” at October 1, 2006 related to such foreign tax contingencies and related interest accruals was $13.7 million.

 

(4) 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 segment and the Zip Products segment.

 

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.

 

Our 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”) initiative. Notwithstanding RoHS, our distributors and resellers are permitted and expected to continue to sell Zip products from their inventories. Sales of Zip disks will continue worldwide, including the European Union.

 

14

 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(4) Business Segment Information (continued)

 

Business Products

 

Our Business Products category is comprised of our REV Products, Network Storage Systems and 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 2004, are removable hard disk storage systems with a native capacity of 35 gigabytes (“GB” – where 1 gigabyte equals 1 billion bytes) and up to 90GB of compressed capacity. We began shipping the next generation REV 70 products in July of 2006. The REV 70 Backup Drive doubles the capacity of our first generation REV products, resulting in 70GB of native capacity and up to 140GB of compressed capacity.

 

Our 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.

 

Our Services segment consists of the operations of CSCI, Inc., including OfficeScreen solutions, system integration and Iomega services such as iStorage. We acquired CSCI, Inc. in August of 2006; CSCI’s OfficeScreen managed security services include managing firewalls, VPNs and providing remote access for small businesses. The Iomega services were previously reflected in the Other Products segment.

 

Other Products

 

Our Other Products segment consists of license and patent fee income (when not assigned to specific products) and products that have been discontinued or are otherwise immaterial, including Jaz 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.

 

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

 

15

 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(4) Business Segment Information (continued)

 

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

 

Reportable Operating Segment Information:

 

For the Quarter Ended  

 

For the Nine Months Ended

 


 


 

Oct. 1,

2006  

 

Oct. 2,

2005  

 

Oct. 1,

2006  

 

Oct. 2,

2005  

 


 


 


 


 

(In thousands)

Sales:

 

 

 

 

 

 

 

Consumer Products:

 

 

 

 

 

 

 

    Consumer Storage Solutions

$30,317

 

$26,049

 

$81,999

 

$93,213

    Zip Products

6,245

 

14,868

 

25,681

 

51,791

 


 


 


 


        Total Consumer Products

36,562

 

40,917

 

107,680

 

145,004

Business Products:

 

 

 

 

 

 

 

    REV Products

11,201

 

10,255

 

30,869

 

33,489

    Network Storage Systems

4,473

 

4,336

 

12,724

 

14,665

 Services

1,254

 

124

 

1,515

 

456

 


 


 


 


        Total Business Products

16,928

 

14,715

 

45,108

 

48,610

 


 


 


 


Other Products

105

 

220

 

540

 

862

 


 


 


 


        Total Sales

$53,595

 

$55,852

 

$153,328

 

$194,476

 


 


 


 


Product Operating Income (Loss):

 

 

 

 

 

 

 

Consumer Products:

 

 

 

 

 

 

 

    Consumer Storage Solutions

$(1,744)

 

$(6,173)

 

$(11,666)

 

$(21,449)

    Zip Products

767

 

3,320

 

1,874

 

14,750

 


 


 


 


        Total Consumer Products

(977)

 

(2,853)

 

(9,792)

 

(6,699)

Business Products:

 

 

 

 

 

 

 

    REV Products

(367)

 

(3,165)

 

(5,742)

 

(10,556)

    Network Storage Systems

464

 

(889)

 

884

 

(1,977)

 Services

(53)

 

33

 

174

 

96

 


 


 


 


        Total Business Products

44

 

(4,021)

 

(4,684)

 

(12,437)

 


 


 


 


Other Products

75

 

1,001

 

1,011

 

1,428

 


 


 


 


Non-Restructuring charge

 

 

(995)

 

 


 


 


 


Restructuring (charges) reversals

211

 

(6,579)

 

(4,358)

 

(6,773)

 


 


 


 


        Total Operating Loss

$  (647)

 

$(12,452)

 

$(18,818)

 

$(24,481)

 


 


 


 


 

 

 

 

 

 

 

 

 

 

16

 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(5) 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:

 

 

Oct. 1,

Dec. 31,

 

2006  

2005  

 



 

(In thousands)

Other Current Liabilities:

 

 

Third Quarter 2001 restructuring actions

$2,224

$1,434

2003 restructuring actions

224

887

2004 restructuring actions

108

346

2005 restructuring actions

265

1,738

2006 restructuring actions

710

 



        Total

$3,531

$4,405

 



Fixed Asset Reserves:

 

 

     Third Quarter 2001 restructuring actions

$      2

$    74

     2003 restructuring actions

115

117

     2004 restructuring actions

145

     2005 restructuring actions

161

259

 



        Total

$  278

$  595

 



 

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

 

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 third quarter of 2006, we recorded a restructuring benefit of $0.2 million primarily related to the 2006 and 2005 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.

 

17

 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(5) Restructuring Charges (continued)

 

2006 Restructuring Actions (continued)

 

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.

 

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

 

The total $3.3 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.

 

During the third quarter of 2006, we recorded a restructuring benefit of $0.1 million related to severance and benefits because of a combination of lower than expected benefits for certain transitional employees and re-hiring an individual who was on transition and had previously been notified that his position was eliminated.

 

As of October 1, 2006, we have made $2.3 million in cumulative cash payments related to the 2006 restructuring charges.

 

Remaining restructuring reserves of $0.7 million are included in our accrued restructuring charges at October 1, 2006. Utilization of and other activity related to the 2006 restructuring reserves during the quarter ended October 1, 2006 are summarized below:

 

 

Balance

 

 

Utilization

Foreign

Currency

Balance

 

7/2/06  

Reversals

Cash  

Non-Cash

Changes

10/1/06

 







 

(In thousands)

2006 Restructuring Actions:

 

 

 

 

 

 

Severance and benefits (a)

$1,954

$(116)

$(1,209)

$    –

$3

$632

Miscellaneous items (a) (b)

28

(14)

14

Lease termination costs (a)

110

(45)

(1)

64

Lease related assets (b)

77

(77)

 







 

$2,169

$(116)

$(1,268)

$(77)

$2

$710

 







 

 

 

 

 

 

 

Balance Sheet Breakout:

 

 

 

 

 

 

Accrued restructuring

    charges (a)

$2,092

$(116)

 

$(1,268)

 

$    –

 

$2

$710

Fixed asset reserves (b)

77

(77)

 







 

$2,169

$(116)

$(1,268)

$(77)

$2

$710

 







 

 

(a)

Amounts represent primarily cash charges.

 

(b)

Amounts represent primarily non-cash charges.

 

18

 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(5) Restructuring Charges (continued)

 

2006 Restructuring Actions (continued)

 

Utilization of and other activity related to the 2006 restructuring reserves during the nine months ended October 1, 2006 are summarized below:

 

 

Balance

 

 

 

Utilization

Foreign

Currency

Balance

 

12/31/05

Additions

Reversals

Cash  

Non–Cash

Changes

10/1/06

 








 

(In thousands)

2006 Restructuring Actions:

 

 

 

 

 

 

 

Severance and benefits (a)

$–

$2,969

$(116)

$(2,209)

$      –

$(12)

$632

Miscellaneous items (a) (b)

83

(14)

(55)

14

Lease termination costs (a)

119

(54)

(1)

64

Lease related assets (b)

80

(80)

 








 

$–

$3,251

$(116)

$(2,277)

$(135)

$(13)

$710

 








 

 

 

 

 

 

 

 

Balance Sheet Breakout:

 

 

 

 

 

 

 

Accrued restructuring

   charges (a)

$–

$3,116

 

$(116)

 

$(2,277)

 

$      –

 

$(13)

$710

Fixed asset and other asset

   reserves (b)

135

 

(135)

 








 

$–

$3,251

$(116)

$(2,277)

$(135)

$(13)

$710

 








 

 

(a)

Amounts represent primarily cash charges.

 

(b)

Amounts represent primarily non-cash charges.

 

The majority of the remaining severance and benefits reserved at October 1, 2006 relates to 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. 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 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.

 

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.

 

19

 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(5) Restructuring Charges (continued)

 

2005 Restructuring Actions (continued)

 

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 certain contract cancellation payments.

 

During the third quarter of 2006, we recorded a restructuring benefit of $0.1 million due to negotiating lower cancellations than we were contractually obligated to pay on certain contracts.

 

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. There were less than $0.1 million of disbursements made in the third quarter of 2006. The only remaining payments are for leases, which are made on a monthly basis.

 

Remaining restructuring reserves of $0.3 million are included in our accrued restructuring charges and approximately $0.1 million are included in our fixed asset reserves at October 1, 2006. Utilization of and other activity related to the 2005 restructuring reserves during the quarter ended October 1, 2006 are summarized below:

 

 

Balance

 

 

Utilized

Balance

 

7/2/06 

Additions

Reversals

Cash  

Non-Cash

10/1/06

 







 

(In thousands)

2005 Restructuring Actions:

 

 

 

 

 

 

Severance and benefits (a)

$13

$–

$    –

$(13)

$    –

$    –

Contract termination costs (b)

83

(83)

Lease termination costs (a)

291

(26)

265

Lease related assets (b)

193

(32)

161

 







 

$580

$–

$(83)

$(39)

$(32)

$426

 







 

 

 

 

 

 

 

Balance Sheet Breakout:

 

 

 

 

 

 

Accrued restructuring charges (a)

$387

$–

$(83)

$(39)

$     –

$265

Fixed asset reserves (b)

193

(32)

161

 







 

$580

$–

$(83)

$(39)

$(32)

$426

 







 

 

(a)

Amounts represent primarily cash charges.

 

(b)

Amounts represent primarily non-cash charges.

 

20

 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(5) Restructuring Charges (continued)

 

2005 Restructuring Actions (continued)

 

Utilization of and other activity related to the 2005 restructuring reserves during the nine months ended October 1, 2006 are summarized below:

 

 

Balance

 

 

Utilized

Balance

 

12/31/05

Additions

Reversals

Cash  

Non-Cash

10/1/06

 







 

(In thousands)

2005 Restructuring Actions:

 

 

 

 

 

 

Severance and benefits (a)

$   681

$    4

$ (69)

$   (616)

$    –

$    –

Contract termination costs (b)

670

(220)

(450)

Lease termination costs (a)

387

150

(272)

265

Lease related assets (b)

259

(98)

161

 







 

$1,997

$154

$(289)

$(1,338)

$(98)

$426

 







 

 

 

 

 

 

 

Balance Sheet Breakout:

 

 

 

 

 

 

Accrued restructuring charges (a)

$1,738

$154

$(289)

$(1,338)

$     –

$265

Fixed asset reserves (b)

259

(98)

161

 







 

$1,997

$154

$(289)

$(1,338)

$(98)

$426

 







 

 

(c)

Amounts represent primarily cash charges.

 

(d)

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 of 2008. We have entered into a sublease agreement on the leased facility that expires in 2008. The majority of the lease-related assets are being utilized by the tenant who is subleasing the facility.

 

2004 Restructuring Actions  

 

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

 

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

 

21

 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(5) Restructuring Charges (continued)

 

2004 Restructuring Actions (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 was allocated to any of the business product segments. All but the $0.4 million of excess furniture charges was paid in cash.

 

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

 

During the third quarter of 2006, we released a minimal reserve, less than $0.1 million, due to adjustments of reserves for leases that have expired.

 

As of October 1, 2006, we have made $3.7 million in cumulative cash payments related to the 2004 restructuring actions, of which $0.2 million was disbursed during 2006.

 

Remaining restructuring reserves of $0.1 million are included in our accrued restructuring charges as of October 1, 2006. Utilization of and other activity related to the 2004 restructuring reserves during the quarter ended October 1, 2006 are summarized below:

 

 

 

Balance

 

 

Utilized

Foreign

Currency

Balance

 

7/2/06 

Reversals

Cash 

Non-Cash

Changes

10/1/06

 







 

(In thousands)

2004 Restructuring Actions:

 

 

 

 

 

 

Lease termination costs (a)

$ 179

$ (10)

$ (61)

$ –

$ –

$ 108

 

 

 

 

 

 

 

Balance Sheet Breakout:

 

 

 

 

 

 

Accrued restructuring charges (a)

$ 179

$ (10)

$ (61)

$ –

$ –

$ 108

 

 

(a)

Amounts represent cash charges.

 

22

 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(5) Restructuring Charges (continued)

 

2004 Restructuring Actions (continued)

 

Utilization of and other activity relating to the 2004 restructuring charges during the nine months ended October 1, 2006 are summarized below:

 

 

Balance

 

 

Utilized

Balance

 

12/31/05

Addition

Reversals

Cash 

Non-Cash

10/1/06

 







 

(In thousands)

2004 Restructuring Actions:

 

 

 

 

 

 

Severance and benefits (a)

$   –

$14

$      –

$  (14)

$–

$    –

Lease termination costs (a)

346

(10)

(228)

108

Furniture (b)

145

(145)

 







 

$491

$14

$(155)

$(242)

$–

$108

 







 

 

 

 

 

 

 

Balance Sheet Breakout:

 

 

 

 

 

 

Accrued restructuring charges (a)

$346

$14

$  (10)

$(242)

$–

$108

Fixed asset reserves (b)

145

(145)

 







 

$491

$14

$(155)

$(242)

$–

$108

 







 

 

(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.

Lease

 

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, $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 Products 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.

 

23

 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(5) Restructuring Charges (continued)

 

2003 Restructuring Actions (continued)

 

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.

 

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 $0.2 million are included in our accrued restructuring charges and $0.1 million are included in our fixed asset reserves at October 1, 2006. Utilization of and other activity relating to the 2003 restructuring reserves during the quarter ended October 1, 2006 are summarized below:

 

 

Balance

 

Utilized

Balance

 

7/2/06  

Reversals

Cash  

Non-Cash

10/1/06

 






 

(In thousands)

2003 Restructuring Actions:

 

 

 

 

 

Severance and benefits (a)

$   2

$(2)

$      –

$  –

$   –

Lease termination costs (a)

446

(222)

224

Furniture (b)

116

(1)

115

 






 

$564

$(2)

$(222)

$(1)

$339

 






 

 

 

 

 

 

Balance Sheet Breakout:

 

 

 

 

 

Accrued restructuring charges (a)

$448

$(2)

$(222)

$  –

$224

Fixed asset reserves (b)

116

(1)

115

 






 

$564

$(2)

$(222)

$(1)

$339

 






 

 

(a)

Amounts represent primarily cash charges.

 

(b)

Amounts represent primarily non-cash charges.

 

24

 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(5) Restructuring Charges (continued)

 

2003 Restructuring Actions (continued)

 

Utilization of and other activity relating to the 2003 restructuring reserves during the nine months ended October l, 2006 are summarized below:

 

 

Balance

 

Utilized

Balance

 

12/31/05

Reversals

Cash  

Non-Cash

10/1/06

 






 

(In thousands)

2003 Restructuring Actions:

 

 

 

 

 

Severance and benefits (a)

$      2

$(2)

$      –

$  –

$    –

Lease termination costs (a)

885

(661)

224

Furniture (b)

117

(2)

115

 






 

$1,004

$(2)

$(661)

$(2)

$339

 






 

 

 

 

 

 

Balance Sheet Breakout:

 

 

 

 

 

Accrued restructuring charges (a)

$  887

$(2)

$(661)

$  –

$224

Fixed asset reserves (b)

117

(2)

115

 






 

$1,004

$(2)

$(661)

$(2)

$339

 






 

 

(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 at 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.

 

25

 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(5) Restructuring Charges (continued)

 

2001 Restructuring Actions (continued)

 

Remaining restructuring reserves of $2.2 million are included in our accrued restructuring charges as of October 1, 2006. Utilization of the 2001 restructuring reserves during the quarter ended October 1, 2006 is summarized below:

 

 

Balance

 

Utilized

Balance

 

7/2/06  

Additions

Cash  

Non-Cash

10/1/06

 






 

(In thousands)

2001 Restructuring Actions:

 

 

 

 

 

Lease cancellations (a)

$2,455

$–

$(231)

$–

$2,224

Leasehold improvements and

furniture (b)

2

2

 






 

$2,457

$–

$(231)

$–

$2,226

 






 

 

 

 

 

 

Balance Sheet Breakout:

 

 

 

 

 

Accrued restructuring charges (a)

$2,455

$–

$(231)

$–

$2,224

Fixed asset reserves (b)

2

2

 






 

$2,457

$–

$(231)

$–

$2,226

 






 

 

(a)

Amounts represent primarily cash charges.

 

(b)

Amounts represent primarily non-cash charges.

 

Utilization of and other activity related to the 2001 restructuring reserves during the nine months ended October l, 2006 are summarized below:

 

 

Balance

 

Utilized

Balance

 

12/31/05

Additions

Cash  

Non-Cash

10/1/06

 






 

(In thousands)

2001 Restructuring Actions:

 

 

 

 

 

Lease cancellations (a)

$1,434

$1,500

$(710)

$    –

$2,224

Leasehold improvements and

furniture (b)

74

(72)

2

 






 

$1,508

$1,500

$(710)

$(72)

$2,226

 






 

 

 

 

 

 

Balance Sheet Breakout:

 

 

 

 

 

Accrued restructuring charges (a)

$1,434

$1,500

$(710)

$    –

$2,224

Fixed asset reserves (b)

74

(72)

2

 






 

$1,508

$1,500

$(710)

$(72)

$2,226

 






 

 

(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.

 

26

 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(6) 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. 

 

(7) Stockholders’ Equity

 

Share-Based Compensation Plans  

 

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.

 

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.

 

27

 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(7) Stockholders’ Equity (continued)

 

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.

 

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.

 

28

 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(7) Stockholders’ Equity (continued)

 

Determining Fair Value (Continued)

 

We used the following assumptions to estimate the fair value of options granted for the quarter and nine months ended October 1, 2006 and October 2, 2005:

 

 

For the Quarter Ended

For the Nine Months Ended

 



 

Assumption  

Oct. 1,

2006  

Oct. 2,

2005  

Oct. 1,

2006  

Oct. 2,

2005  






 

 

 

 

 

Average expected term (in years)

3.9

3.4

3.9

3.4

Expected stock price volatility

47%

44%

56%

45%

Risk-free interest rate (range)

4.6-4.9%

3.7-4.0%

4.3-5.1%

3.6-4.0%

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 October 1, 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)

1,455

2.94

Exercised

(220)

1.89

Forfeited / Cancelled / Expired (2)

(1,178)

4.95

 


 

Outstanding at end of quarter (3)

3,085

3.91

 


 

Options exercisable at quarter-end

697

6.79

 


 

 

 

(1)

The weighted average fair value of options granted was $1.16 for the quarter ended October 1, 2006 and $1.40 for the nine months ended October 1, 2006.

 

(2)

The weighted average fair value of options forfeited / cancelled / expired during the nine months ended October 1, 2006 was $1.55.

 

(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 in fiscal 2003.

 

29

 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(7) Stockholders’ Equity (continued)

 

Stock Option Activity and Share-Based Compensation Expense (continued)

 

The following table summarizes information about awards outstanding under all stock option plans October 1, 2006:

 

 

Outstanding

 

Exercisable

 


 


 

 

Weighted

 

 

 

 

Weighted

 

 

 

 

Average

Weighted

Aggregate

 

 

Average

Weighted

Aggregate

 

Number

Remaining

Average

Intrinsic

 

Number

Remaining

Average

Intrinsic

Range of

(000’s)

Contractual

Exercise

Value

 

(000’s)

Contractual

Exercise

Value

Exercise Prices

Outstanding

Life  

Price  

(000’s)

 

Outstanding

Life  

Price  

(000’s)






 





 

 

 

 

 

 

 

 

 

 

$0.03 to $2.48

394

8.6 years

$ 2.38

$113

 

100

8.2 years

$ 2.31

$36

$2.62 to $3.87

1,985

9.4 years

2.95

1

 

141

7.3 years

3.08

$4.42 to $6.00

458

7.7 years

4.67

 

223

7.7 years

4.68

$6.26 to $9.30

99

5.4 years

8.46

 

85

5.1 years

8.80

$9.50 to $14.22

85

3.8 years

13.74

 

84

3.8 years

13.74

$14.38 to $41.25

64

2.5 years

17.47

 

64

2.5 years

17.47

 


 

 


 


 

 


 

3,085

8.6 years

3.91

$114

 

697

6.4 years

6.79

$36

 


 

 


 


 

 


 

We defined “in-the-money” options at October 1, 2006 as options that had exercise prices that were lower than the $2.67 average closing market price of our Common Stock for the nine months ended October 1, 2006. The aggregate intrinsic value of options outstanding at October 1, 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 410,168 shares that were in-the-money at that date. There were 151,668 in-the-money options exercisable at October 1, 2006. The total intrinsic value of options exercised during the quarter and the nine months ended October 1, 2006 was immaterial.

 

At October 1, 2006, our non-vested stock awards totaled 2,387,450 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 October 1, 2006, options that vested during the last nine months totaled 296,102 and had a weighted average fair value of $1.45.

 

Our total net share-based compensation expense for stock options was $0.3 million and $0.5 million for the quarter and the nine months ended October 1, 2006, respectively. The total tax benefit related to this share-based compensation was immaterial for the quarter and nine months ended October 1, 2006. The total net share-based compensation expense for the quarter and nine months ended October 1, 2006 was recorded in selling, general and administrative expenses in the condensed consolidated statement of operations.

 

As of October 1, 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 3.2 years.

 

30

 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(7) Stockholders’ Equity (continued)

 

Stock Option Activity and Share-Based Compensation Expense (continued)

 

Cash received from option exercises under all share-based payment arrangements was approximately $0.4 million for the quarter and nine months ended October 1, 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 nine months ended October 1, 2006.

 

(8) Other Matters

 

Other Intangible Assets  

 

At October 1, 2006, we had $1.1 million in net intangible assets, all of which are subject to amortization. Our intangible assets include the OfficeScreen Trade name and technology, and customer and vendor relationships obtained through the CSCI, Inc. acquisition. Intangible assets are amortized using the straight-line method over the estimated useful life of the asset, subject to periodic review for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Amortization expense was less than $0.1 million for quarter ended October 1, 2006 and $0.5 million for the quarter ended October 2, 2005. Amortization expense was $0.7 million for the nine months ended October 1, 2006 and $1.6 million for the nine months ended October 2, 2005. Amortization expense for each of the next five fiscal years is anticipated to be less than $0.1 million for the remainder of 2006, approximately $0.2 million each year from 2007 through 2010, $0.1 million in 2011 and $0.1 million thereafter. As of October 1, 2006, the weighted average useful life of our intangible assets is approximately 5.9 years.

 

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

 

Oct. 1,

2006  

Dec. 31,

2005  

 



 

(In thousands)

Other Intangible Assets:

 

 

      Gross value (1)

           $1,127

          $8,791

      Accumulated amortization (1)

                (34)

           (8,095)

 



            Net intangible assets

           $1,093

          $  696

 



 

 

 

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

 

31

 


IOMEGA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

(8) Other Matters (continued)

 

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 associated with the Zip product line, was impaired at October 1, 2006. This test compares our Zip specific assets 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 October 1, 2006. As a result, impairment charges of $2.5 million and $7.9 million were recorded as a separate component of operating expenses for the quarter and nine months ended October 1, 2006, respectively. We also anticipate additional non-cash, goodwill impairment charges as the expected future Zip cash flows continue to decline.

 

 

32

 


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

 

AND RESULTS OF OPERATIONS:

 

Overview

 

We design and market products and provide services that help our customers store and protect their valuable digital information. Our 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 drives (“HDD”), CD-RW drives, DVD rewritable drives, Mini USB flash drives and external floppy disk drives. The Zip Products segment involves the distribution and sale of Zip drives and disks to retailers, distributors, resellers and OEMs. We have ceased selling Zip drives to distributors or resellers in the European Union (“EU”) as of July 1, 2006, in the wake of the Restriction of Hazardous Substances (“RoHS”) initiative. Notwithstanding RoHS, our distributors and resellers are permitted and expected to continue to sell Zip products from their inventories. Sales of Zip disks will continue worldwide, including the European Union. The REV Products segment involves the development, distribution and sale of REV products to retailers, distributors, OEMs and resellers throughout the world. The NSS Products segment consists primarily of the development, distribution and sale of network attached storage servers and Network HDD drives in the entry-level and low-end network attached storage market. The Services segment consists of the operations of CSCI, Inc., including OfficeScreen solutions, systems integration and Iomega services such as iStorage. We acquired CSCI, Inc. in August of 2006. CSCI’s OfficeScreen managed security services include managing firewalls, VPNs and providing remote access for small businesses. The Other Products segment consists of license and patent fee income (not assigned to specific products) and products that have been discontinued or are otherwise immaterial, including Jaz disks and Iomega software products such as Iomega Automatic Backup software and other miscellaneous products.

 

Since 1996, the Zip Products segment has been the largest contributor to our product operating income. As the Zip business has approached the end of its product life cycle, we have been trying to find other profitable sources of revenue to replace the declining high gross margin Zip revenue. In recent years, we have invested significant efforts and dollars on the development of the first and second generation REV products, which were launched in the second quarter of 2004 and July of 2006, respectively. In the second and third quarters of 2006, sales of REV products exceeded Zip product sales, however, REV products have continued to lose money. However, the REV products only lost $0.4 million in the third quarter 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.

 

In other efforts to replace the declining Zip business, we have launched and attempted to expand our CSS and NSS businesses. Sales of the CSS business segment exceeds Zip product sales. However, our CSS business segment has not been profitable at the product operating income level. The NSS segment was only slightly profitable for the quarters ended July 2, 2006 and October 1, 2006.

 

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

 

33

 


IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Overview (Continued)

 

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

 

During 2006, we have made steady progress toward these goals with the cost reductions associated with the April restructuring actions, the launch of our new REV 70 Backup Drive in July, the launch of newly designed lower cost external HDD products in August and the acquisition of CSCI, Inc., a provider of managed services to small businesses, in August. Notwithstanding these accomplishments, there can be no assurance that we will achieve or be able to sustain these results.

 

Application of Critical Accounting Policies

 

Areas where significant judgments occur include, but are not limited to: revenue recognition, price protection and rebate reserves, inventory valuation reserves, tax valuation allowances and impairment of goodwill. Actual results could differ materially from these estimates. For a more detailed explanation of the judgments included in these areas, refer to our Annual Report on Form 10-K for the year ended December 31, 2005. Our critical accounting policies have not changed materially since December 31, 2005.

 

Seasonality

 

Our CSS business is typically strongest during the fourth quarter. Our European sales are typically weakest during the summer months due to holidays. There can be no assurance that any historic sales patterns will continue and, as a result, sales for any prior quarter are not necessarily indicative of the sales to be expected in any future periods.

 

Results of Operations

 

Our net income for the quarter ended October 1, 2006 was $0.9 million, or $0.02 per diluted share, compared with a net loss of $12.3 million, or ($0.24) per share, for the quarter ended October 2, 2005.

 

Our net loss for the nine months ended October 1, 2006 was $13.7 million, or ($0.26) per share, compared with a net loss of $24.6 million, or ($0.48) per share, for the nine months ended October 2, 2005.

 

34

 

 


IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Sales

 

As shown in the table below, total sales for the quarter ended October 1, 2006 declined over the prior year due to lower Zip product sales, partially offset by higher CSS and Business Products sales. All prior period amounts have been reclassified to reflect the Network HDD drives classification change from the CSS segment in the Consumer Products category to NSS segment and the classification change of Iomega services from Other Products to the Services segment under the Business Products category.

 

 

 

For the Quarter Ended  

 


 

Oct. 1,

Oct. 2,

 

 

 

2006  

2005  

$ Change

% Change

 





 

(In thousands, except %)

Sales:

 

 

 

 

Consumer Products:

 

 

 

 

    Consumer Storage Solutions

$30,317

$26,049

$ 4,268

16%

    Zip Products

6,245

14,868

 (8,623)

(58)

 




 

        Total Consumer Products

36,562

40,917

(4,355)

(11)

 




 

Business Products:

 

 

 

 

    REV Products

11,201

10,255

946

9

    Network Storage Systems

4,473

4,336

137

3

    Services

1,254

124

1,130

 911

 




 

        Total Business Products

16,928

14,715

2,213

15

 




 

Other Products

105

220

(115)

(52)

 




 

         Total Sales

$53,595

$55,852

$(2,257)

(4)%

 




 

 

 

 

Zip product sales continued their expected decline for the quarter ended October 1, 2006, both in terms of units and sales dollars. The $4.3 million higher CSS sales resulted from $10.3 million of higher HDD drives partially offset by $2.8 million of lower Optical products, $2.7 million of lower Mini USB flash drive and $0.5 million of lower floppy external drive sales. The sales decreases for Optical, Mini USB flash and floppy external drives were primarily as a result of our third quarter 2005 decision to discontinue certain unprofitable SKUs in these product lines and to focus our efforts on HDD products.

 

35

 


IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Sales (continued)

 

Our sales by region for the quarters ended October 1, 2006 and October 2, 2005 are shown in the table below:

 

 

For the Quarter Ended  

 


 

Oct. 1,

Oct. 2,

 

 

 

2006

2005

$ Change

% Change

 





 

(In thousands, except %)

Sales Dollars:

 

 

 

 

Americas (includes Latin America)

$24,282

$30,094

$(5,812)

(19)%

Europe

26,697

21,247

5,450

26

Asia Pacific

2,616

4,511

(1,895)

(42)

 




 

    Total

$53,595

$55,852

$(2,257)

(4)%

 




 

 

 

 

 

 

Percent of Total Sales:

 

 

 

 

Americas (includes Latin America)

45%

54%

 

 

Europe

50

38

 

 

Asia Pacific

               5

               8

 

 

 



 

 

    Total

          100%

          100%

 

 

 



 

 

 

 

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

 

As shown in the table below, total sales for the nine months ended October 1, 2006 declined primarily due to lower Zip and CSS product sales, and to a lesser extent, Business Products sales. All prior period amounts have been reclassified to reflect the Network HDD drives classification change from the CSS segment in the Consumer Products category to the NSS segment and the classification change of Iomega services from Other Products to the Services segment under the Business Products category.

 

 

For the Nine Months Ended  

 


 

Oct. 1,

Oct. 2,

 

 

 

2006  

2005  

$ Change

% Change

 





 

(In thousands, except %)

Sales:

 

 

 

 

Consumer Products:

 

 

 

 

    Consumer Storage Solutions

$81,999

$93,213

$(11,214)

(12)%

    Zip Products

25,681

51,791

(26,110)

(50)

 




 

        Total Consumer Products

107,680

145,004

(37,324)

(26)

Business Products:

 

 

 

 

    REV Products

30,869

33,489

(2,620)

(8)

    Network Storage Systems

12,724

14,665

(1,941)

(13)

    Services

1,515

456

1,059

232

 




 

        Total Business Products

45,108

48,610

(3,502)

(7)

 




 

Other Products

540

862

(322)

(37)

 




 

        Total Sales

$153,328

$194,476

$(41,148)

(21)%

 




 

 

 

 

 

 

 

36

 


IOMEGA CORPORATION AND SUBSIDIARIES

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

Sales (continued)

 

Zip product sales continued their expected decline for the nine months ended October 1, 2006, in terms of both units and sales dollars. The $11.2 million lower CSS product sales resulted from $13.9 million of lower Optical product, $11.6 million of lower Mini USB flash drive and $2.4 million of lower floppy external drive sales, partially offset by $16.7 million of higher HDD product sales. The sales decreases for Optical, Mini USB flash and floppy external drives were primarily a result of our third quarter 2005 decision to discontinue certain unprofitable SKUs in these product lines and to focus our efforts on HDD products.

 

Our sales by region for the nine months ended October 1, 2006 and October 2, 2005 are shown in the table below:

 

 

For the Nine Months Ended  

 


 

Oct. 1,

Oct. 2,

 

 

 

2006  

2005  

$ Change

% Change

 





 

(In thousands, except %)

Sales Dollars:

 

 

 

 

Americas (includes Latin America)

$ 68,329

$ 96,744

$(28,415)

(29)%

Europe

75,713

83,550

(7,837)

(9)

Asia Pacific

9,286

14,182

(4,896)

(35)

 




 

    Total

$153,328

$194,476

$(41,148)

(21)%