Iomega Corporation
(Exact name of registrant as specified in its charter)
|
Delaware (State or other jurisdiction of incorporation or organization |
86-0385884 (IRS employer identification number) |
4435 Eastgate Mall, 3rd Floor, San Diego, CA 92121
(Address of principal executive offices)
(858) 795-7000
(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
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of August 4, 2002.
|
Common Stock, par value $.03 1/3 (Title of each class) |
54,612,144 (Number of shares) |
Page
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Special Note Regarding Forward-Looking Statements.................................................. 2
PART I - FINANCIAL STATEMENTS
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2002
and December 31, 2001................................................................. 3
Condensed Consolidated Statements of Operations for the Quarters
ended June 30, 2002 and July 1, 2001.................................................. 5
Condensed Consolidated Statements of Operations for the Six Months
ended June 30, 2002 and July 1, 2001.................................................. 6
Condensed Consolidated Statements of Cash Flows for the Six Months
ended June 30, 2002 and July 1, 2001.................................................. 7
Notes to Condensed Consolidated Financial Statements...................................... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................... 34
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................ 73
PART II - OTHER INFORMATION
Item 1. Legal Proceedings......................................................................... 74
Item 2. Changes in Securities and Use of Proceeds................................................. 74
Item 4. Submission of Matters to a Vote of Security Holders....................................... 74
Item 6. Exhibits and Reports on Form 8-K.......................................................... 74
Signatures......................................................................................... 75
Exhibit Index...................................................................................... 76
Copyright(C)2002 Iomega Corporation. All rights reserved. Iomega, Zip, Jaz, Peerless, Predator, PocketZip, HipZip, FotoShow, QuikSync, HotBurn, LifeWorks, and ioLink are either registered trademarks or trademarks of Iomega Corporation in the United States and/or other countries.
IBM and Microdrive are trademarks or registered trademarks of International Business Machines Corporation in the United States, other countries or both. Microdrive is used under license by Iomega Corporation. Certain other product names, brand names and company names may be trademarks or designations of their respective owners.
This Quarterly Report on Form 10-Q contains a number of forward-looking statements, including, without limitation, statements referring to: the Company's goal of continuing to reduce operational expenses; expected savings from prior restructuring and non-restructuring activities; future utilization of prior restructuring and non-restructuring charges; plans to introduce new and enhanced products; plans to stabilize and improve the Company's core Zip business; the need for additional restructuring or other charges in the future; the expected profitability or lack of profitability on certain product lines; the expected sales volume or lack of sales volume on certain product lines; plans concerning PocketZip and Jaz disks during 2002 and other plans concerning product lines; the expectation of continuing to lower product costs; the possible divestment and outsourcing of the Company's Penang, Malaysia manufacturing facility; the expected sufficiency of unrestricted cash, cash equivalents and temporary investment balances and cash flows from future operations; the factors affecting future gross margins; expected sales levels due to seasonal demand; the expectation that the Company can obtain sufficient product and components thereof to meet business requirements; anticipated hedging strategies; the possible effects of an adverse outcome in the review of the Company's SEC filings described under the caption "Other Matters" in Management's Discussion and Analysis of Financial Condition and Results of Operations; the expected impact of the adoption of accounting pronouncements; the generation of future taxable income to realize net deferred tax assets; and the possible effects of an adverse outcome in the legal proceedings described in Note 5 of the notes to condensed consolidated financial statements in Part I. Any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," "intends" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these words.
There are a number of important factors that could cause actual events or the Company's actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth under the captions "Critical Accounting Policies," "Liquidity and Capital Resources," "Factors Affecting Future Operating Results" and "Disclosures About Market Risk" included under "Management's Discussion and Analysis of Financial Condition and Results of Operations" and " Quantitative and Qualitative Disclosures about Market Risk" in Items 2 and 3 of Part I of this Quarterly Report on Form 10-Q and those set forth in Note 5 of the notes to condensed consolidated financial statements in Part I of this Quarterly Report on Form 10-Q. The factors discussed herein do not reflect the potential future impact of any mergers, acquisitions or divestments. In addition, any forward-looking statements represent the Company's estimates only as of the day this quarterly report was first filed with the Securities and Exchange Commission and should not be relied upon as representing the Company's estimates as of any subsequent date. While the Company may elect to update forward-looking statements at some point in the future, the Company specifically disclaims any obligation to do so, even if its estimates change.
June 30, December 31,
2002 2001
----------- ----------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 271,146 $ 219,949
Restricted cash 1,921 4,144
Temporary investments 99,046 104,953
Trade receivables, less allowance for doubtful accounts of
$9,464 and $11,559, respectively 53,897 89,396
Inventories 36,103 56,336
Deferred income taxes 30,771 39,978
Income taxes receivable 15,426 4,025
Other current assets 16,415 15,742
--------- ---------
Total Current Assets 524,725 534,523
--------- ---------
Property, plant and equipment, at cost 243,924 266,634
Accumulated depreciation and amortization (194,665) (211,437)
--------- ---------
Net property, plant and equipment 49,259 55,197
--------- ---------
Goodwill 11,691 11,691
--------- ---------
Other intangibles, net 8,116 9,744
--------- ---------
Other assets 173 2,820
--------- ---------
Total Assets $ 593,964 $ 613,975
========= =========
The
accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
June 30, December 31,
2002 2001
---------- ------------
(Unaudited)
Current Liabilities:
Accounts payable $ 35,353 $ 68,550
Other current liabilities (Note 1) 120,805 151,095
--------- ---------
Total Current Liabilities 156,158 219,645
--------- ---------
Other long-term liabilities 2,131 3,018
--------- ---------
Deferred income taxes 16,863 12,374
--------- ---------
Commitments and contingencies (Notes 4 and 5)
Stockholders' Equity:
Preferred Stock, $0.01 par value; authorized 4,600,000
shares, none issued - -
Series A Junior Participating Preferred Stock; authorized
400,000 shares, none issued - -
Common Stock, $0.03 1/3 par value; authorized 400,000,000
shares; issued 54,600,513 and 54,572,019 shares,
respectively 1,821 1,819
Additional paid-in capital 307,543 307,413
Less: 3,426,288 and 3,085,888 Common Stock treasury
shares, respectively, at cost (33,791) (30,867)
Retained earnings 143,239 100,573
--------- ---------
Total Stockholders' Equity 418,812 378,938
--------- ---------
Total Liabilities and Stockholders' Equity $ 593,964 $ 613,975
========= =========
The
accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
For the Quarter Ended
----------------------------------
June 30, July 1,
2002 2001
--------- ---------
(Unaudited)
Sales $ 145,208 $ 183,689
Cost of sales 90,262 176,733
--------- ---------
Gross margin 54,946 6,956
--------- ---------
Operating Expenses:
Selling, general and administrative 33,073 54,002
Research and development 8,885 13,241
Restructuring charges (reversals) (2,181) 1,086
Bad debt expense (credit) (1,235) 869
--------- ---------
Total Operating Expenses 38,542 69,198
--------- ---------
Operating income (loss) 16,404 (62,242)
Interest income 2,406 4,323
Interest and other expense (1,041) (255)
--------- ---------
Income (loss) before income taxes 17,769 (58,174)
Benefit (provision) for income taxes (6,312) 22,319
---------- ---------
Net income (loss) $ 11,457 $ (35,855)
========= =========
Net income (loss) per common share:
Basic and Diluted $ 0.22 $ (0.66)
========= =========
Weighted average common shares outstanding 51,170 54,042
========= =========
Weighted average common shares outstanding -
assuming dilution 51,429 54,042
========= =========
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
For the Six Months Ended
----------------------------------
June 30, July 1,
2002 2001
--------- ---------
(Unaudited)
Sales $ 324,105 $ 460,699
Cost of sales 196,633 369,223
--------- ---------
Gross margin 127,472 91,476
--------- ---------
Operating Expenses:
Selling, general and administrative 71,269 113,794
Research and development 17,529 27,317
Restructuring charges (reversals) (2,181) 1,086
Bad debt expense (credit) (1,931) 593
--------- ---------
Total Operating Expenses 84,686 142,790
--------- ---------
Operating income (loss) 42,786 (51,314)
Interest income 4,726 9,648
Interest and other expense (3,145) (319)
--------- ---------
Income (loss) before income taxes 44,367 (41,985)
Benefit (provision) for income taxes (1,701) 15,962
--------- ---------
Net income (loss) $ 42,666 $ (26,023)
========= =========
Net income (loss) per common share:
Basic and Diluted $ 0.83 $ (0.48)
========= =========
Weighted average common shares outstanding 51,226 54,037
========= =========
Weighted average common shares outstanding -
assuming dilution 51,407 54,037
========= =========
The
accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
For the Six Months Ended
--------------------------------
June 30, July 1,
2002 2001
--------- ---------
(Unaudited)
Cash Flows from Operating Activities:
Net income (loss) $ 42,666 $ (26,023)
Non-cash revenue and expense adjustments:
Depreciation and amortization 12,411 27,421
Deferred income taxes 13,696 (16,170)
Non-cash inventory write-offs 3,752 14,268
Loss on fixed assets 720 7,046
Bad debt expense (credit) (1,931) 593
Other 1,541 79
--------- ---------
72,855 7,214
Changes in Assets and Liabilities:
Trade receivables 37,430 29,890
Inventories 18,058 1,347
Other current assets (2,250) 3,490
Accounts payable (33,197) (29,964)
Other current liabilities (20,372) (14,947)
Accrued restructuring (9,355) 318
Restricted cash 2,223 -
Income taxes (11,401) (699)
--------- ---------
Net cash provided by (used in) operating activities 53,991 (3,351)
--------- ---------
Cash Flows from Investing Activities:
Purchase of property, plant and equipment (5,575) (13,007)
Purchase of temporary investments (92,401) (91,310)
Sale of temporary investments 98,308 125,175
Net change in other assets/liabilities 270 (1,394)
--------- ---------
Net cash provided by investing activities 602 19,464
--------- ---------
Cash Flows from Financing Activities:
Proceeds from sales of Common Stock 91 634
Purchases of Common Stock (2,924) (295)
Payments on capitalized lease and other obligations (563) (603)
--------- ---------
Net cash used in financing activities (3,396) (264)
--------- ---------
Net increase in cash and cash equivalents 51,197 15,849
Cash and cash equivalents at beginning of period 219,949 255,572
--------- ---------
Cash and cash equivalents at end of period $ 271,146 $ 271,421
========= =========
The
accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
In the opinion of the Company’s management, the accompanying unaudited, condensed consolidated financial statements reflect all adjustments which are necessary to present fairly the financial position of the Company as of June 30, 2002 and December 31, 2001, the results of operations for the quarters and six months ended June 30, 2002 and July 1, 2001 and cash flows for the six months ended June 30, 2002 and July 1, 2001.
The results of operations for the quarter and six months ended June 30, 2002 are not necessarily indicative of the results to be expected for the entire year or for any future period.
These unaudited, condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes included in the Company’s latest Annual Report on Form 10-K.
Reverse Stock Split
On September 28, 2001, the Company’s shareholders approved a one-for-five reverse stock split (“reverse stock split”) of the Company’s outstanding Common Stock. The reverse stock split was effected after the market close on September 28, 2001. All per share amounts and outstanding shares have been retroactively restated in the accompanying condensed consolidated statements of operations and notes to condensed consolidated financial statements for all periods presented to reflect the reverse stock split.
Principles of Consolidation
These unaudited, condensed consolidated financial statements include the accounts of Iomega Corporation and its wholly-owned subsidiaries after elimination of all material intercompany accounts and transactions. All entities of the Company have been consolidated and there are no special purpose entities.
Pervasiveness of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ materially from these estimates.
Revenue Recognition
The Company’s customers include original equipment manufacturers (“OEMs”), retailers, distributors and end users. Some retail and distribution customer agreements have provisions that allow the customer to return product under certain conditions within specified time periods. Sales, less reserves for estimated returns, are generally recognized upon shipment to the customer. The Company has established reserves for estimated returns, which are reflected as a reduction in trade receivables and sales in the accompanying condensed consolidated financial statements. The reserve for estimated returns totaled $7.2 million and $6.2 million at June 30, 2002 and December 31, 2001, respectively.
In addition to reserves for estimated returns, the Company defers recognition of revenue on estimated excess inventory in the distribution and retail channels. For this purpose, excess inventory is the amount of inventory that exceeds the channels’ 30-day requirements as estimated by management. The channel’s 30-day requirements are estimated based on inventory and sell-through amounts reported to the Company by the Company’s key customers. The Company defers estimated sales and cost of sales associated with excess channel inventory in its condensed consolidated financial statements. The gross margin associated with deferral of sales for estimated excess channel inventory totaled $10.3 million and $12.8 million at June 30, 2002 and December 31, 2001, respectively and is included in “other current liabilities” in the accompanying condensed consolidated balance sheets.
The Company sells software that is embedded or bundled with some of its drive products, as well as some software titles that are downloaded from the Company’s website. Sales from the software embedded or bundled with drive products, less reserves for estimated returns, are recognized upon shipment to the customer. Sales from software that is downloaded from the Company’s website is recognized at the time of download. The software sold by the Company does not contain multiple elements. The Company’s software sales are immaterial.
Price Protection and Volume Rebates
The Company has agreements with certain of its customers which, in the event of a price decrease, allow those customers (subject to limitations) credit equal to the difference between the price originally paid and the new decreased price on units either in the customers’ inventories on the date of the price decrease or on the number of units shipped to the customer for a specified time period prior to the price decrease. When a price decrease is anticipated, the Company establishes reserves against gross trade receivables with the corresponding reduction in sales for estimated amounts to be reimbursed to qualifying customers. In addition, the Company records reserves at the time of shipment for estimated volume rebates and estimated rebates given to consumers at time of purchase from channel partners for which sales have been recognized.
Reserves for volume rebates and price protection credits totaled $36.2 million and $45.8 million at June 30, 2002 and December 31, 2001, respectively and are netted against trade receivables in the accompanying condensed consolidated balance sheets.
Restricted Cash
In connection with the class action lawsuit, Rinaldi, et al. v. Iomega Corporation, as part of the Court approved settlement, the Company agreed to an award of $4.1 million for plaintiffs’ attorneys’ fees (For more information about the lawsuit, see Note 5 “Commitments and Contingencies”). Accordingly, the Company funded $4.1 million into an escrow account. During June 2002, this escrow account was paid to the plaintiffs’ attorneys.
During the first quarter of 2002, the Company classified $1.8 million of cash as restricted cash to secure a bank agreement associated with an outstanding letter of credit. Per the bank agreement, this cash has been set aside in a certificate of deposit and cannot be utilized by the Company until after the letter of credit expires in July 2002. Restricted cash could increase in the future as the Company enters into new letters of credit. The Company also has $0.1 million of restricted cash to cover foreign bank guarantees for value added taxes (“VAT”). This cash is reported separately as “restricted cash” in the accompanying condensed consolidated balance sheets.
Inventories
Inventories include direct materials, direct labor and manufacturing overhead costs and are recorded at the lower of cost (first-in, first-out) or market and consist of the following:
June 30, December 31,
2002 2001
-------- ------------
(In thousands)
Raw materials $ 6,739 $ 15,836
Work-in-process 897 3,739
Finished goods 24,700 32,256
Inventory associated with estimated returns 3,767 4,505
-------- --------
$ 36,103 $ 56,336
======== ========
The Company evaluates the carrying value of inventory on a quarterly basis to determine if the carrying value is recoverable at estimated selling prices. The Company includes material costs, manufacturing costs and direct selling expenses in its analysis of inventory realization. To the extent that estimated selling prices do not exceed such costs and expenses, valuation reserves are established against inventories. In addition, the Company generally considers that inventory on hand or committed with suppliers which is not expected to be sold within the next nine months is excess and thus appropriate reserves are established through a charge to cost of sales.
Fixed Asset Impairment
The carrying amounts of fixed assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Impairment is recognized when estimated expected future cash flows (undiscounted and without interest charges) are less than the carrying amount of the asset.
Fixed asset reserves are established for those fixed assets that are considered impaired or if a commitment has been made for the removal of a fixed asset. These reserves are included with accumulated depreciation and amortization in the accompanying condensed consolidated balance sheets.
Although the Company has consolidated its manufacturing operations into its Penang, Malaysia facility with the goal to increase manufacturing efficiencies, this facility is still significantly underutilized. The Company is evaluating various alternatives to resolve this underutilization and transition to a variable cost manufacturing model, including divestment and outsourcing of its manufacturing operations. The Company is currently in negotiations with a third party concerning the possible sale of this facility, however, management has not committed to a plan. The implementation of any strategy other than the current utilization of the facility would likely result in charges associated with asset impairments and other transaction related costs. The net book value of the Penang, Malaysia building and land as of June 30, 2002 was $21.4 million.
Other Current Liabilities
Other current liabilities consist of the following:
June 30, December 31,
2002 2001
--------- ------------
(In thousands)
Accrued marketing (a) $ 26,365 $ 36,608
Accrued payroll, vacation and bonus 13,354 10,197
Margin on deferred sales 11,687 13,813
Accrued warranty 8,995 10,856
Accrued restructuring 6,415 15,770
Accrued litigation 6,376 5,937
Purchase commitments 5,355 13,555
Other accrued liabilities (b) 42,258 44,359
--------- ---------
$ 120,805 $ 151,095
========= =========
| (a) Includes accruals for marketing development funds committed to the Company’s various channel partners, promotional accruals and advertising accruals. |
| (b) Includes accruals for royalties, professional fees, self-insurance liabilities, employee relocation costs, capital lease obligations, VAT, sales and other taxes and other miscellaneous liabilities. |
Net Income Per Common Share
Basic net income per common share (“Basic EPS”) excludes dilution and is computed by dividing net income 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 does not assume exercise or conversion of securities that would have an anti-dilutive effect on net income (loss) 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.
Following is a reconciliation of the numerator and denominator of Basic EPS to the numerator and denominator of Diluted EPS for all periods presented:
Net
Income (Loss) Shares Per Share
(Numerator) (Denominator) Amount
------------- ------------- --------
(In thousands, except per share data)
For the Quarter Ended:
June 30, 2002:
Basic EPS $ 11,457 51,170 $ 0.22
Effect of options - 259 -
--------- ------ -------
Diluted EPS $ 11,457 51,429 $ 0.22
========= ====== =======
July 1, 2001:
Basic EPS $ (35,855) 54,042 $ (0.66)
Effect of options - - -
--------- ------ -------
Diluted EPS $ (35,855) 54,042 $ (0.66)
========= ====== =======
For the Six Months Ended:
June 30, 2002:
Basic EPS $ 42,666 51,226 $ 0.83
Effect of options - 181 -
--------- ------ -------
Diluted EPS $ 42,666 51,407 $ 0.83
========= ====== =======
July 1, 2001:
Basic EPS $ (26,023) 54,037 $ (0.48)
Effect of options - - -
--------- ------ -------
Diluted EPS $ (26,023) 54,037 $ (0.48)
========= ====== =======
For the quarters ended June 30, 2002 and July 1, 2001, there were outstanding options to purchase 1,648,838 and 2,159,483 shares, respectively, that had an exercise price greater than the average market price of the common shares for the respective quarters. Therefore, these shares would have had an anti-dilutive effect on EPS.
For the six months ended June 30, 2002 and July 1, 2001, there were outstanding options to purchase 1,650,506 and 2,036,336 shares, respectively, that had an exercise price greater than the average market price of the common shares for the respective six months. Therefore, these shares would have had an anti-dilutive effect on EPS.
Venture Investment
During the first quarter of 2002, the Company wrote off $0.5 million of a venture investment and during the second quarter, the Company wrote off the remaining $1.0 million carrying value related to this venture investment based on the continued deterioration of its financial position. These write-offs are included in “interest and other expense” in the accompanying condensed consolidated statements of operations. This asset was included in “other assets” in the accompanying condensed consolidated balance sheets and was accounted for under the cost method as the Company does not have the ability to exercise significant influence over operations. The objective of this venture investment was the potential collaboration in the development of optical technologies.
Recent Accounting Pronouncements
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 applies to all entities. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company plans on adopting SFAS 143 beginning on January 1, 2003. The Company believes that SFAS 143 will not have a material effect on the Company’s results of operations, financial position or liquidity.
In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit and Activity (including Certain Costs Incurred in a Restructuring)” (“EITF 94-3”). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF 94-3, a liability for an exit cost was recognized at the date of an entity’s commitment to an exit plan. A fundamental conclusion reached by the FASB in SFAS 146 is that an entity’s commitment to a plan, by itself, does not create an obligation that meets the definition of a liability. Therefore, SFAS 146 eliminates the definition and requirements for recognition of exit costs in EITF 94-3. SFAS 146 also establishes that fair value is the objective for initial measurement of the liability. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption encouraged. The Company believes that SFAS 146 will not have a material effect on the Company’s results of operations, financial position or liquidity.
Reclassifications
Certain reclassifications were made to the prior periods' unaudited, condensed consolidated financial statements and notes to condensed consolidated financial statements to conform to the current period presentation.
For the quarter ended June 30, 2002, the Company recorded an income tax provision of $6.3 million on pre-tax income of $17.8 million which reflected an income tax provision of $7.0 million partially offset by a $0.7 million decrease in the valuation allowance for net deferred tax assets. Excluding the $0.7 million decrease in the valuation allowance, the effective tax rate for the second quarter of 2002 was 39.3%. This compares to an income tax benefit of $22.3 million on a pre-tax loss of $58.2 million, or a 38.3% effective tax rate, for the second quarter of 2001.
Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities. They are measured by applying the enacted tax rates and laws in effect for the years in which such differences are expected to reverse. The significant components of the Company’s deferred tax assets and liabilities are as follows:
June 30, December 31,
2002 2001
--------- ------------
(In thousands)
Deferred Tax Assets:
Current Deferred Tax Assets:
Trade receivable reserves $ 15,417 $ 19,099
Inventory reserves 3,235 6,498
Accrued expense reserves 17,064 28,043
Other 108 191
--------- ---------
Total current deferred tax assets 35,824 53,831
--------- ---------
Non-Current Deferred Tax Assets:
Fixed asset reserves 2,296 4,729
Tax credit carryforwards 17,667 13,100
Accelerated depreciation/amortization 2,318 2,307
Foreign net operating loss carryforwards 15,171 15,956
U.S. net operating loss carryforwards 33,188 37,233
Other 789 250
--------- ---------
Total non-current deferred tax assets 71,429 73,575
--------- ---------
Total deferred tax assets 107,253 127,406
--------- ---------
Non-Current Deferred Tax Liabilities:
Tax on unremitted foreign earnings (60,111) (50,006)
Nomai goodwill and intangible asset (5,075) (5,159)
--------- ---------
Total non-current deferred tax liabilities (65,186) (55,165)
--------- ---------
Current valuation allowance (5,053) (13,853)
Non-current valuation allowance (23,106) (30,784)
--------- ---------
Net deferred tax assets $ 13,908 $ 27,604
========= =========
As Reported on the Balance Sheet:
Current deferred tax assets $ 30,771 $ 39,978
========= =========
Non-current deferred tax liabilities $ (16,863) $ (12,374)
========= =========
The realizability of the deferred tax assets is evaluated quarterly in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes”, which requires that a valuation allowance be established when there is significant uncertainty as to the realizability of the deferred tax assets.
At June 30, 2002, the Company had $33.2 million of deferred tax assets related to U.S. federal and state net operating loss carryforwards, which reflected a tax benefit of approximately $85 million in future U.S. tax deductions. The U.S. federal net operating loss carryforwards expire at various dates beginning in 2022 and the state net operating loss carryforwards expire at various dates beginning in 2004.
The Company continues to maintain a full valuation allowance of $15.2 million for deferred tax assets related to foreign net operating loss carryforwards, which reflected the tax benefit of approximately $35 million in future foreign tax deductions. These carryforwards expire at various dates beginning in 2004. These deferred tax assets remain fully reserved because their realization is dependent on earning future foreign taxable income in the tax jurisdictions to which the net operating loss carryforwards related. The largest of these foreign net operating loss carryforwards relates to the Company’s French subsidiary, Nomai S.A. This subsidiary’s operations have been shut down and therefore, the foreign net operating loss carryforward related to Nomai S.A. is not likely to be realized in the future.
Net deferred tax assets for the Company at June 30, 2002 were $13.9 million. The minimum amount of future taxable income that would have to be generated to realize the net deferred tax assets is approximately $36 million. Management believes that the Company’s continued efforts to reduce costs to be more in line with expected sales will allow the Company to generate sufficient future taxable income to realize its net deferred tax assets. As such, management believes that it is more likely than not that the net deferred tax assets will be realized. However, actual results could differ from those estimates in the near future and therefore, realization of the net deferred tax assets is not assured.
As of June 30, 2002, deferred tax liabilities for estimated U.S. federal and state taxes of $60.1 million have been accrued on unremitted foreign earnings of $154.1 million. U.S. taxes have not been provided for unremitted foreign earnings of $112.3 million. These earnings are considered to be permanently invested in non-U.S. operations, primarily in the Company's manufacturing operations in Penang, Malaysia.
Although the Company has consolidated its manufacturing operations into its Penang, Malaysia facility to increase manufacturing efficiencies, this facility is still significantly underutilized. The Company is evaluating various alternatives to resolve this underutilization, including divestment and outsourcing of its manufacturing operations. The Company is currently in negotiations with a third party concerning the possible sale of this facility, however, management has not committed to a plan. If a decision is made to divest of the manufacturing operations in Penang, it is likely to result in future charges and could affect the status of the Company’s $112.3 million of permanently invested foreign earnings. The additional unrecorded deferred U.S. tax liability and increased tax provision, if such amounts were no longer considered permanently invested, would be approximately $44 million. No cash impact would be incurred unless the cash was repatriated.
For the six months ended June 30, 2002, the Company recorded an income tax provision of $1.7 million on pre-tax income of $44.4 million which reflected an income tax provision of $18.2 million partially offset by a $16.5 million decrease in the valuation allowance for net deferred tax assets. Excluding the $16.5 million decrease in the valuation allowance, the effective tax rate for the six months ended June 30, 2002 was 41.0%. This compares to an income tax benefit of $16.0 million on a pre-tax loss of $42.0 million which reflected an income tax benefit of $16.4 million partially offset by a $0.4 million increase in the valuation allowance for foreign net deferred tax assets for the six months ended July 1, 2001. Excluding the $0.4 million increase in the valuation allowance for foreign net deferred tax assets, the effective tax benefit for the six months ended July 1, 2001 was 39.0%. The increase in the effective tax rate, excluding adjustments to the valuation allowances, from 39.0% in the first six months of 2001 to 41.0% in the first six months of 2002 resulted primarily from the expiration of foreign tax credits due to the carryback of the 2001 net operating loss to 1996, allowed by the Job Creation and Worker Assistance Act of 2002.
The $16.5 million decrease in the valuation allowance for net deferred tax assets during the six months ended June 30, 2002, resulted primarily from a reduction in net deferred tax assets associated with net operating loss carryforwards. This reduction was primarily in response to the passage of the Job Creation and Worker Assistance Act of 2002, which allows for a 5-year carryback and utilization of a portion of the Company’s 2001 tax net operating loss.
The accounting policies of the segments are the same as those described in Note 1 “Significant Accounting Policies”. Intersegment sales, eliminated in consolidation, are not material. The Company evaluates performance based on product profit margin (“PPM”) for each segment. PPM is defined as sales and other income directly related to a segment’s operations, less both fixed and variable manufacturing costs, research and development expenses, selling, general and administrative expenses and amortization of intangibles directly related to a segment’s operations. When such costs and expenses exceed sales and other income, PPM is referred to as product loss. The expenses attributable to corporate activity are not allocated to the operating segments.
The Company has five reportable segments based primarily on the nature of the Company’s customers and products: Zip, CD-RW, Jaz, PocketZip and Other (Jaz, PocketZip and some of the Other products have been discontinued, see below for more information). The Zip segment involves the development, manufacture, distribution and sales of personal storage products and applications, including Zip disk and drive systems to retailers, distributors, resellers and OEMs throughout the world. The Company’s CD-RW segment involves the distribution and sales of CD-RW drives to retailers, distributors and resellers throughout the world. The Jaz segment involved the development, manufacture, distribution and sales of professional storage products and applications, including Jaz disk and drive systems to resellers, distributors and retailers throughout the world. The PocketZip segment involved the development, manufacture, distribution and sales of PocketZip drives and disks for use with portable digital products such as digital cameras, audio players, handheld personal computers and notebook computers to retailers, distributors and resellers throughout the world.
The “Other” segment includes: Peerless drive systems, which began shipping during the second quarter of 2001; FotoShow digital image centers (previously shown in the second quarter and the first six months of 2001 as a part of the Zip segment); sourced products such as portable and external Hard Disk Drives (“HDD”), which began shipping during the second quarter of 2002, network attached storage (“NAS”), Iomega Microdrive miniature hard drives, Iomega CompactFlash and Iomega SmartMedia memory cards; Iomega software products such as Lifeworks, Hotburn and Iomega QuikSync software; and other miscellaneous items.
During 2002, the Company discontinued the Jaz drive and PocketZip product line, including HipZip, which was being reported in the PocketZip segment. Under the “Other” category, the Company discontinued FotoShow, Microdrive, CompactFlash and SmartMedia. During 2002, the Company plans to continue to sell disks for Jaz and PocketZip products to support the installed drive base of these products.
The information in the following table was derived directly from the segments’ internal financial information used for corporate management purposes (all Zip and Other segment amounts have been restated to show the current classification of FotoShow in Other). The information for the second quarter and first six months of 2001 have been restated to show the effects of EITF 00-25 which requires, retroactively, certain consumer and trade sales promotion expenses to be shown as a reduction of sales. The amount of this reclassification resulted in a reduction to sales and a corresponding decrease in selling, general and administrative expenses of $0.4 million and $1.5 million for the second quarter of 2001 and the first six months of 2001, respectively, with no impact on PPM.
For the Quarter Ended For the Six Months Ended
--------------------------- ---------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
--------- --------- --------- ---------
(In thousands) (In thousands)
Sales:
Zip $ 114,281 $ 143,434 $ 257,347 $ 346,508
CD-RW 20,277 18,158 42,874 62,307
Jaz 3,239 13,275 9,112 39,784
PocketZip (107) 2,311 (88) 3,582
Other 7,518 6,511 14,860 8,518
--------- --------- --------- ---------
Total sales $ 145,208 $ 183,689 $ 324,105 $ 460,699
========= ========= ========= =========
PPM (Product Loss) Before Charges/Reversals:
Zip $ 40,484 $ 34,809 $ 97,796 $ 90,094
CD-RW (1,106) (11,006) (1,037) (16,910)
Jaz 1,007 2,502 2,951 12,165
PocketZip (415) (5,098) 322 (13,151)
Other (2,594) (7,664) (7,494) (14,435)
--------- --------- --------- ---------
Total PPM 37,376 13,543 92,538 57,763
Common Operating Expenses Without
(Charges)/Reversals Allocated to PPM:
General corporate expenses (23,153) (28,713) (51,933) (62,005)
Non-restructuring charges - (45,986) - (45,986)
Restructuring (charges) reversals 2,181 (1,086) 2,181 (1,086)
Interest and other income, net 1,365 4,068 1,581 9,329
--------- --------- --------- ---------
Income (loss) before income taxes $ 17,769 $ (58,174) $ 44,367 $ (41,985)
========= ========= ========= =========
For the Quarter Ended For the Six Months Ended
--------------------------- ---------------------------
June 30, July 1, June 30, July 1,
2002 2001 2002 2001
--------- --------- --------- ----------
(In thousands) (In thousands)
Non-Restructuring Charges:
Zip $ - $ (4,468) $ - $ (4,468)
CD-RW - (9,977) - (9,977)
PocketZip - (17,926) - (17,926)
Other - (12,565) - (12,565)
Common - (1,050) - (1,050)
--------- --------- --------- ---------
$ - $ (45,986) $ - $ (45,986)
========= ========= ========= =========
Restructuring (Charges)/Reversals:
Common $ 2,181 $ (1,086) $ 2,181 $ (1,086)
--------- --------- --------- ---------
$ 2,181 $ (1,086) $ 2,181 $ (1,086)
========= ========= ========= =========
PPM (Product Loss) After Charges/Reversals:
Zip $ 40,484 $ 30,341 $ 97,796 $ 85,626
CD-RW (1,106) (20,983) (1,037) (26,887)
Jaz 1,007 2,502 2,951 12,165
PocketZip (415) (23,024) 322 (31,077)
Other (2,594) (20,229) (7,494) (27,000)
--------- --------- --------- ---------
Total PPM (Product Loss) 37,376 (31,393) 92,538 12,827
Common Operating Expenses With (Charges)/Reversals
Allocated to PPM (Product Loss):
General corporate expenses (23,153) (28,713) (51,933) (62,005)
Non-restructuring charges - (1,050) - (1,050)
Restructuring (charges)reversals 2,181 (1,086) 2,181 (1,086)
Interest and other income, net 1,365 4,068 1,581 9,329
--------- --------- --------- ---------
Income (loss) before income taxes $ 17,769 $ (58,174) $ 44,367 $ (41,985)
========= ========= ========= =========
During 2001, the Company recorded approximately $39.0 million in net pre-tax restructuring charges. These charges were comprised of approximately $1.1 million related to restructuring actions initiated during the second quarter of 2001, $33.1 million (net of a $0.2 million fourth quarter reversal) related to restructuring actions initiated during the third quarter of 2001 and $4.8 million related to restructuring actions initiated during the fourth quarter of 2001. These restructuring charges consisted of cash and non-cash charges of approximately $28 million and $11 million, respectively.
During the second quarter of 2002, $0.6 million of fixed asset reserves associated with the third quarter 2001 restructuring actions were reversed and $1.6 million of contract obligations associated with the 1999 restructuring actions were reversed. The second quarter 2001 restructuring actions were completed at March 31, 2002. The detail of each of these restructuring actions follows along with an update on the current status of each of these actions as of June 30, 2002.
2001 Restructuring Actions
Third Quarter 2001
During the third quarter of 2001, the Company recorded pre-tax restructuring charges of $33.3 million. In the fourth quarter of 2001, the Company recorded a net reversal of $0.2 million with respect to the third quarter restructuring actions. The restructuring charges in the third quarter of 2001 included $17.4 million associated with exiting lease facilities, of which $9.8 million related to leasehold improvements, furniture and information technology asset write-downs and $7.6 million was associated with lease termination costs, and $15.9 million related to the reduction of 1,234 regular and temporary personnel worldwide, or approximately 37% of the Company’s worldwide workforce. During the fourth quarter of 2001, the Company reversed $0.5 million related to lease termination costs and recorded additional charges of $0.3 million related to severance and benefits with respect to employees that were identified as part of the third quarter 2001 restructuring actions but who were not notified of their termination of employment until the fourth quarter of 2001. During the second quarter of 2002, $0.6 million of furniture reserves associated with the consolidation of the Company’s North America facilities were reversed as a result of the furniture being utilized in another facility.
Of the $33.3 million in total third quarter 2001 restructuring charges, $27.9 million related to restructuring activities within North America, $2.6 million for restructuring activities within the Asia Pacific region (excluding Malaysia), $2.3 million for restructuring activities within Europe and $0.5 million for restructuring activities within Malaysia.
The North America restructuring activities consisted of outsourcing the Company’s distribution center in North Carolina and terminating the related lease, closing several sales offices in the United States and consolidating operations at the Company’s North America facilities (primarily Roy, Utah), all of which resulted in a workforce reduction of 760 regular employees and temporary staff across all business functions and across all levels of the organization. At September 30, 2001, of the 760 individuals whose positions were identified for termination in the third quarter, 193 individuals were scheduled to continue to work on a transition basis through various identified dates ending no later than December 31, 2001. Transition pay was not a part of the restructuring charges but rather was reported in normal operations as incurred. In compliance with the WARN Act, affected employees were given pay in lieu of a 60-day advance notice. Pay in lieu of notice was paid on a continuous basis for a 60-day notice period and separation payments were paid in lump sum at the end of the 60-day period or after the last day of employment for transition employees. Separation pay was based on years of service, job level and transition time, and included health insurance continuance payments. This workforce reduction resulted in charges of $12.7 million for severance and benefit costs. The North America restructuring actions also resulted in charges of $8.9 million related to asset write-downs (leasehold improvements, furniture and information technology assets) and $6.3 million related to lease termination costs. Lease termination costs are being paid on their regular monthly rent payment schedule.
The Asia Pacific restructuring activities consisted of the closure of several sales offices and the transfer of certain inventory operations and finance activities from Singapore to Malaysia, which resulted in a workforce reduction of 85 regular employees and temporary staff across all business functions and across all levels of the organization. At September 30, 2001, of the 85 individuals whose positions were identified for termination in the third quarter, 12 individuals were scheduled to continue to work on a transition basis through various identified dates ending no later than December 31, 2001. This workforce reduction resulted in charges of $0.8 million for severance and benefit costs. The Asia Pacific restructuring actions also resulted in charges of $0.7 million related to asset write-downs and $1.1 million related to lease termination costs.
During the fourth quarter of 2001, the 12 transition employees in the Asia Pacific region were notified that their positions were being terminated, resulting in additional charges of $0.3 million in the fourth quarter of 2001. These employees had been identified for termination of employment at September 30, 2001. However, since the employees had not been notified, the Company did not accrue the severance and benefit costs associated with these individuals in the original third quarter 2001 restructuring charges. Additionally, in the fourth quarter of 2001, $0.7 million of lease termination accruals were reversed due to the Company unexpectedly locating a tenant for one of the vacated facilities and being released from future rent obligations. In light of prevailing poor economic conditions, the Company had originally assumed it would not be able to locate another tenant for the facility.
The Europe restructuring activities consisted of the outsourcing of call center activities, closure of several sales offices and consolidation of operations in Switzerland and the Netherlands, which resulted in a workforce reduction of 94 regular employees and temporary staff across all business functions and across all levels of the organization. At September 30, 2001, of the 94 individuals whose positions were identified for termination in the third quarter, 28 individuals continued to work on a transition basis through June 30, 2002 to manage operations that were outsourced effective July 1, 2002. This workforce reduction resulted in charges of $1.9 million for severance and benefit costs. The Europe restructuring actions also resulted in charges of $0.2 million related to asset write-downs and $0.2 million related to lease termination costs.
During the fourth quarter of 2001, it was determined that an additional $0.2 million was required for Europe lease termination costs as a result of the Company not being able to locate a new tenant in Ireland in the timeframe originally estimated in the third quarter of 2001.
The Malaysia restructuring activities consisted of a workforce reduction of 295 regular employees across almost all business functions (the majority of which were direct labor employees) at almost all levels of the organization. All of the 295 individuals whose positions were identified for termination were dismissed in the third quarter of 2001. This workforce reduction resulted in charges of $0.5 million for severance and benefit costs, all of which were paid during the third quarter of 2001.
As of June 30, 2002, the Company had terminated the employment of all affected employees, except for one employee offered a retention package through the fourth quarter of 2002 and vacated all facilities in connection with the third quarter 2001 restructuring actions. Since some other affected employees were offered retention packages that extended into the second quarter of 2002, not all outplacement payments were paid as of June 30, 2002. The remaining outplacement costs are expected to be paid in the third quarter of 2002. The remaining severance and benefits are expected to be paid in January 2003 for the one remaining employee. The information technology assets and furniture included in the restructuring activities have not been utilized since early in the fourth quarter of 2001 and are expected to be completely disposed during the third quarter of 2002. As previously disclosed, lease payments are being made on a continuous monthly basis.
The third quarter 2001 restructuring charges originally totaled $33.3 million. Third quarter 2001 restructuring reserves in the amount of $4.7 million and $1.0 million were included in the Company’s other current liabilities and fixed asset reserves, respectively, as of June 30, 2002. Utilization of the third quarter 2001 restructuring reserves during the quarter ended June 30, 2002 is summarized below:
Utilized
------------------------------------
Third Quarter 2001 Balance Balance
Restructuring Actions 3/31/02 Cash Non-Cash Reversals 6/30/02
- ---------------------- ------- ---------- -------- --------- -------
(In thousands)
North America Reorganization:
Severance and benefits (a) $ 349 $ (133) $ - $ - $ 216
Lease cancellations (a) 4,992 (800) - - 4,192
Leasehold improvements and
furniture (b) 1,862 - (421) (600) 841
Information technology assets (b) 469 - (414) - 55
------- -------- ------ ------ -------
7,672 (933) (835) (600) 5,304
------- -------- ------ ------ -------
Asia Pacific Reorganization:
Severance and benefits (a) 73 (15) - - 58
Lease cancellations (a) 15 - - - 15
------- -------- ------ ------ -------
88 (15) - - 73
------- -------- ------ ------ -------
Europe Reorganization:
Severance and benefits (a) 54 - - - 54
Lease cancellations (a) 209 (93) - - 116
Leasehold improvements and
furniture (b) 132 - - - 132
------- -------- ------ ------ -------
395 (93) - - 302
------- -------- ------ ------ -------
$ 8,155 $ (1,041) $ (835) $ (600) $ 5,679
======= ======== ====== ====== =======
Balance Sheet Breakout:
Other current liabilities (a) $ 5,692 $ (1,041) $ - $ - $ 4,651
Fixed asset reserves (b) 2,463 - (835) (600) 1,028
------- -------- ------ ------ -------
$ 8,155 $ (1,041) $ (835) $ (600) $ 5,679
======= ======== ====== ====== =======
(a) Amounts represent primarily cash charges.
(b) Amounts represent primarily non-cash charges.
Utilization of the third quarter 2001 restructuring reserves during the six months ended June 30, 2002 is summarized below:
Utilized
------------------------------------
Third Quarter 2001 Balance Balance
Restructuring Actions 12/31/01 Cash Non-Cash Reversals 6/30/02
- ---------------------- -------- -------- -------- --------- -------
(In thousands)
North America Reorganization:
Severance and benefits (a) $ 2,194 $ (1,978) $ - $ - $ 216
Lease cancellations (a) 5,823 (1,631) - - 4,192
Leasehold improvements and
furniture (b) 2,102 - (661) (600) 841
Information technology assets (b) 1,216 - (1,161) - 55
-------- -------- -------- ------ -------
11,335 (3,609) (1,822) (600) 5,304
-------- -------- -------- ------ -------
Asia Pacific Reorganization:
Severance and benefits (a) 82 (24) - - 58
Lease cancellations (a) 68 (53) - - 15
-------- --------- -------- ------ -------
150 (77) - - 73
-------- --------- -------- ------ -------
Europe Reorganization:
Severance and benefits (a) 332 (278) - - 54
Lease cancellations (a) 390 (274) - - 116
Leasehold improvements and
furniture (b) 235 - (103) - 132
Information technology assets (b) 26 - (26) - -
-------- -------- -------- ------ -------
983 (552) (129) - 302
-------- -------- -------- ------ -------
$ 12,468 $ (4,238) $ (1,951) $ (600) $ 5,679
======== ======== ======== ====== =======
Balance Sheet Breakout:
Other current liabilities (a) $ 8,889 $ (4,238) $ - $ - $ 4,651
Fixed asset reserves (b) 3,579 - (1,951) (600) 1,028
-------- -------- -------- ------ -------
$ 12,468 $ (4,238) $ (1,951) $ (600) $ 5,679
======== ======== ======== ====== =======
(a) Amounts represent primarily cash charges.
(b) Amounts represent primarily non-cash charges.
Fourth Quarter 2001
During the fourth quarter of 2001, the Company recorded net pre-tax restructuring charges of $4.6 million, comprised of $4.8 million in charges for restructuring actions initiated in the fourth quarter of 2001 and a net reversal of $0.2 million in adjustments to the third quarter restructuring charges (see section above entitled “Third Quarter 2001”).
The fourth quarter 2001 restructuring charges of $4.8 million included $2.7 million associated with exiting lease facilities, of which $1.7 million was for lease cancellation costs and $1.0 million was for leasehold improvements, furniture and equipment, and $2.1 million for severance and benefit costs associated with the reduction of 105 regular and temporary personnel in North America and Europe.
Of the $4.8 million in fourth quarter 2001 charges, $1.5 million related to restructuring activities in North America and $3.3 million related to restructuring activities in Europe.
The North America restructuring activities consisted primarily of a workforce reduction of 79 individuals, primarily in the operations, and research and development functions. The majority of the affected employees were located in Roy, Utah. The employees were notified of the termination of their employment on December 18, 2001. Although the Company was not required to give notice under the WARN Act, the employees whose employment was terminated were given pay in lieu of notice through December 31, 2001. At December 31, 2001, of the 79 individuals whose positions were identified for termination in the fourth quarter, 24 individuals were to continue to work on a transition basis through various identified dates ending no later than June 30, 2002, with one individual being extended into the third quarter of 2002. Transition pay was not a part of the restructuring charges but rather was reported in normal operations as incurred. Pay in lieu of notice was paid on a continuous basis and separation payments were/or will be paid in lump sum after the December 31, 2001 notice date or after the last day of employment for transition employees. Separation pay was based on years of service, job level and transition time, and included health insurance continuance payments. This workforce reduction resulted in charges of $1.5 million for severance and benefit costs.
The restructuring activities in Europe consisted of outsourcing its distribution and logistics, resulting in severance and benefits costs of $0.6 million, lease cancellation costs of $1.7 million and impaired leasehold improvements, excess furniture and equipment of $1.0 million. The workforce reduction consisted of 26 employees, primarily in operations. The affected employees were primarily located in the Netherlands. The majority of the employees continued to work on transition until March 31, 2002, when the outsourcing project was substantially completed. Two individuals will work into the third quarter. Transition pay was not a part of the restructuring charges but rather was reported in normal operations as incurred. The lease was vacated in the second quarter of 2002. In addition, leasehold improvements, furniture and equipment are anticipated to be completely disposed of in the third quarter of 2002.
At June 30, 2002, the Company had terminated the employment of all affected employees, except for the three employees offered retention packages into the third quarter of 2002. The severance and benefits reserves associated with the employees who were provided retention packages are expected to be paid in the third quarter of 2002. Remaining leasehold improvements, furniture and equipment are expected to be disposed of in the third quarter of 2002. As previously disclosed, lease payments are being made on a continuous monthly basis.
The fourth quarter 2001 restructuring charges originally totaled $4.8 million. Fourth quarter 2001 restructuring reserves in the amount of $0.3 million were included in the Company’s other current liabilities as of June 30, 2002. Utilization of the fourth quarter 2001 restructuring reserves during the quarter ended June 30, 2002 is summarized below:
Fourth Quarter 2001 Balance Utilized Balance
--------------------
Restructuring Actions 3/31/02 Cash Non-Cash 6/30/02
- ---------------------- ------- ------ -------- -------
(in thousands)
North America Reorganization:
Severance and benefits (a) $ 400 $ (124) $ - $ 276
------- ------ ------ -----
Europe Reorganization:
Severance and benefits (a) 105 (72) - 33
Lease cancellations (a) 67 (39) - 28
Leasehold improvements, furniture and
equipment (b) 983 - (967) 16
------- ------ ------- -----
1,155 (111) (967) 77
------- ------ ------ -----
$ 1,555 $ (235) $ (967) $ 353
======= ====== ====== =====
Balance Sheet Breakout:
Other current liabilities (a) $ 572 $ (235) $ - $ 337
Fixed asset reserves (b) 983 - (967) 16
------- ------ ------ -----
$ 1,555 $ (235) $ (967) $ 353
======= ====== ====== =====
(a) Amounts represent primarily cash charges.
(b) Amounts represent primarily non-cash charges.
Utilization of the fourth quarter 2001 restructuring reserves during the six months ended June 30, 2002 is summarized below:
Fourth Quarter 2001 Balance Utilized Balance
----------------------
Restructuring Actions 12/31/01 Cash Non-Cash 6/30/02
- ---------------------- -------- -------- -------- -------
(in thousands)
North America Reorganization:
Severance and benefits (a) $ 1,503 $ (1,227) $ - $ 276
------- -------- ------ -----
Europe Reorganization:
Severance and benefits (a) 591 (558) - 33
Lease cancellations (a) 1,698 (1,670) - 28
Leasehold improvements, furniture and
equipment (b) 983 - (967) 16
------- -------- ------ -----
3,272 (2,228) (967) 77
------- -------- ------ -----
$ 4,775 $ (3,455) $ (967) $ 353
======= ======== ====== =====
Balance Sheet Breakout:
Other current liabilities (a) $ 3,792 $ (3,455) $ - $ 337
Fixed asset reserves (b) 983 - (967) 16
------- -------- ------- -----
$ 4,775 $ (3,455) $ (967) $ 353
======= ======== ====== =====
(a) Amounts represent primarily cash charges.
(b) Amounts represent primarily non-cash charges.
1999 Restructuring Actions
The Company recorded pre-tax restructuring charges of $65.8 million (net of a $2.0 million reversal) during 1999. As disclosed in the Annual Report on Form 10-K filed for the year ended December 31, 2001, all reserves associated with the 1999 restructuring actions have been utilized except for $3.0 million associated with Company’s cessation of manufacturing operations in France. This remaining $3.0 million related to contract obligations that were being litigated. During the second quarter of 2002, $1.6 million of these litigated contract obligations were dismissed by the court and therefore were reversed. The Company is unable to predict when the litigation relating to the remaining obligations will be resolved. There can be no assurance that the settlement of these contract obligations will not result in significant legal or other costs that have not been accrued for in these restructuring charges.
Remaining 1999 restructuring reserves in the amount of $1.4 million were included in the Company’s balance sheet as of June 30, 2002 in other current liabilities. There was no utilization of the reserves during the first quarter of 2002, thus the second quarter and year-to-date utilizations are the same.
Balance Utilized Balance
------------------------------------
1999 Restructuring Actions 3/31/02 Cash Non-Cash (Reversals) 6/30/02
--------------------------------- ------- ---- -------- ----------- --------
(In thousands)
France/Scotland Consolidation:
Contract obligations (a)(b) $ 1,414 $ - $ - $ - $ 1,414
------- ---- ------ -------- -------
Manufacturing Cessation -
Avranches, France:
Other commitments (a) 16 (3) - - 13
Contract obligations (a) 1,581 - - (1,581) -
------- ---- ------ -------- -------
1,597 (3) - (1,581) 13
------- ----- ------ -------- -------
$ 3,011 $ (3) $ - $ (1,581) $ 1,427
======= ==== ====== ======== =======
Balance Sheet Breakout:
Other current liabilities (a) $ 3,011 $ (3) $ - $ (1,581) $ 1,427
======= ==== ====== ======== =======
(a) Amounts represent primarily cash charges.
(b) Amounts relate to commitments associated with manufacturing of floppy drives.
Except as set forth below, in management’s opinion, there are no significant legal proceedings to which the Company or any of its subsidiaries is a party or to which any of their property is subject. The Company is involved in other lawsuits and claims generally incidental to its business. It is the opinion of management, after discussions with legal counsel, that the ultimate dispositions of the lawsuits and claims discussed below will not have a material adverse effect on the Company’s financial position or results of operations, except that, as indicated below, the settlement of, or adverse judgment with respect, to certain of these lawsuits could have a material adverse effect on the operating results reported by the Company for the period in which any such adverse judgment occurs or settlement occurs or is implemented.
As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 and in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, on September 10, 1998, a purported class action lawsuit, Rinaldi, et al. v. Iomega Corporation, was filed against the Company in the Superior Court of Delaware, New Castle County. Effective June 10, 2002, this Delaware lawsuit was fully settled. The Delaware lawsuit alleged that a defect in the Company’s Zip drives caused an abnormal clicking noise that may have indicated damage to the Zip drive or disks. The plaintiffs sought relief pursuant to claims of breach of warranty, violation of the Delaware Consumer Fraud Act, negligent design and manufacture and failure to warn. On September 3, 1999, the Court dismissed the claims of breach of warranty and violation of the Consumer Fraud Act, granting the plaintiffs the opportunity to amend the latter claim. On January 31, 2000, the plaintiffs filed an amended complaint, reasserting their claim under the Delaware Consumer Fraud Act and; on February 28, 2000, the Company moved to dismiss this amended claim. In connection with the same matter, on February 28, 2000, two of the plaintiffs served the Company with a “Notice of Claim” under Section 17.46(b) of the Texas Deceptive Trade Practices Act, asserting allegations similar to those made in connection with the plaintiffs’ Delaware Consumer Fraud Act claim (the “Texas Claim”). The Texas Claim purported to be on behalf of the two plaintiffs and a class of other consumers similarly situated in the State of Texas. It demanded relief of $150 for each Zip drive purchased by a class member, $100 for mental anguish damages to each class member and attorneys’ fees and costs. Formal litigation in connection with the Texas Claim was never commenced and was resolved as part of the final settlement. On March 19, 2001, the parties in the Delaware lawsuit submitted to the Delaware Superior Court a request for certification of the class and approval of a settlement of the class action. On June 29, 2001, the Court issued an order approving the settlement. However, an objector to the settlement appealed the settlement to the Supreme Court of the State of Delaware. On January 15, 2002, that Court remanded the matter for further proceedings in the Delaware Superior Court, so that the Superior Court could make additional findings and address additional questions concerning the proposed settlement. Subsequently, the Company, the lawyers for the plaintiffs’ and the objector reached agreement on a modified settlement; and as a result of this revised settlement agreement, the objector requested the termination of his appeal. The Delaware Supreme Court granted that request, dismissing the appeal on April 16, 2002. On May 8, 2002, the Superior Court issued an order approving the settlement and that approval became final on June 10, 2002.
The settlement, the material terms of which are described in this paragraph, will take months to fully implement. Under the settlement, class members who have not opted out of the settlement will release the Company from all claims that were or which could have been raised in the litigation. For its part, the Company will issue rebates ranging between $5 and $40 to class members who submit a proof of claim. The rebates will remain available for six months and will be valid for the purchase of certain Zip, Peerless, CD-RW and PocketZip products. The level of the rebate will depend on whether the class member’s Zip drive manifested a clicking problem. In addition, the Company may offer a secondary rebate of $4 to $15 on Zip disks to those class members who make a qualified purchase under the initial rebate program; this would be available if certain conditions in the settlement are met. In addition, the Company may offer an additional discount for a 60-day period for purchases of packs of five or more Zip disks. The exact amount of this additional discount will be computed based upon the number of class members submitting proofs of claims. The Company agreed, in the proposed settlement, to allow class members an additional 30-day period to submit proof of claim forms; that period began on June 19, 2002. The Company is also providing dedicated technical assistance personnel to address, free of charge, customer inquiries regarding alleged clicking Zip drives. It will also make a charitable donation of Zip drives and related software, disks and services, with a total retail value of $1.0 million. Finally, the Company agreed to pay $4.1 million for the plaintiffs’ attorneys’ fees and will reimburse certain costs of notifying class members about the settlement. The Company funded $4.1 million into an escrow account in 2001 and these funds have been transferred to the plaintiffs. The accompanying financial statements reflect accruals for the charitable donations. The settlement is not to be construed as a finding of any liability on the Company’s part.
As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 and in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, on June 15, 1999, a patent infringement lawsuit, Valitek, Inc. v. Iomega Corporation, was filed against the Company in the United States District Court for the Eastern District of Pennsylvania; subsequently, upon Iomega’s motion, the case was transferred to U.S. District Court for the District of Utah, Northern Division. Valitek alleged that the Company’s sale of the parallel port version of the Zip and Jaz drives infringed a Valitek patent. The complaint requested injunctive relief against the Company, as well as monetary damages. The plaintiff had asserted damages of approximately $40 million and further asserted willful infringement in order to seek treble damages. In May 2002, a confidential settlement of this matter was negotiated. Iomega received an assignment of the patent at issue and the allegations of infringement were denied. Litigation settlement expenses recorded in the first and second quarters of 2002, adequately covered this settlement.
As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 and in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, on March 23, 2001, the Company initiated litigation against Advanced Mass Memories, formerly named Albi Media Manufacturing, SARL (“AMM”) in the Tribunal de Grande Instance de Paris for infringing certain Iomega patents and patent applications in connection with AMM’s production and sale of the Swap 100MB disk, a cartridge that AMM claims can be used with certain of the Company’s Zip drives. The complaint requests monetary damages and other relief against further infringement by AMM. On May 10, 2001, the Company filed a motion for a preliminary injunction against AMM, which was granted on July 24, 2001, thus restraining AMM from further manufacturing or commercialization of the Swap 100MB disk. In August 2001, AMM appealed against the injunction and moved to stay enforcement of the injunction. On September 17, 2001, AMM filed for bankruptcy protection, while continuing its appeal. On October 31, 2001, the Paris Appeals Court denied AMM’s appeal and ruled that the injunction shall remain in effect while the underlying infringement case continues on the merits. The Company intends to vigorously pursue these claims and to continue the protection of the Company’s intellectual property.
Nomai/AMM Litigation
Nomai S.A. (“Nomai”) is a French subsidiary of the Company that was acquired during the third quarter of 1998. As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 and in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, Nomai is currently engaged in several litigation matters that revolve around (1) Nomai’s acquisition of certain assets of RPS Media S.A. in bankruptcy in 1997 and its organization of AMM as a subsidiary to operate such assets and (2) Nomai’s subsequent disposition of AMM in September 1999.
On February 18, 2000, the bankruptcy trustee for RPS Media, S.A. filed a complaint against Nomai. The trustee claimed that Nomai has not complied with the alleged investment and employment related commitments made by Nomai’s former management before the Commercial Court of Albi, France in connection with Nomai’s acquisition during 1997 of certain assets of RPS Media, S.A. in bankruptcy. The action sought a daily penalty against Nomai of FF 100,000 (approximately $15,100) until Nomai invests FF 48 million (approximately $7.3 million) and hires 100 people. On April 18, 2000, the Commercial Court declined, on jurisdictional grounds, to issue a summary judgment ruling in favor of the trustee. On February 16, 2001, the trustee filed a new complaint with the Commercial Court, again asking that the Court order AMM and Nomai to comply with the alleged employment and investment commitments set forth in the bankruptcy plan or to fine AMM and Nomai FF 100,000 (approximately $15,100) for each day of noncompliance. On November 23, 2001, the Court ordered Nomai to proceed with the required investments and to put in place the technical and human means to which it is engaged, subject to a daily penalty of FF 50,000 (approximately $7,600) for non-compliance. The Toulouse Court of Appeals issued its ruling on May 2, 2002, upholding the Albi Court ruling. Nomai filed a notice of appeal of the Toulouse Court of Appeals ruling to the French Cour de Cassation on June 10, 2002. The trustee has not yet acted to enforce the daily penalty and it is therefore not yet accumulating, although this could be enforced in the future and could be made retroactive back to December 2001.
On May 30, 2001, AMM filed a lawsuit against Iomega International and Iomega Corporation, before the Tribunal de Commerce of Albi, claiming that Iomega International and Iomega Corporation jointly committed fraudulent acts against AMM and that, as a result, AMM suffered damages of FRF 129 million (approximately USD $ 19.5 million). This case was subsequently consolidated with the case by the AMM trustee mentioned immediately above. Iomega International and Iomega Corporation intend to vigorously defend against these allegations.
On May 18, 2000, Conseil & Technique, Soterem and IDCC (“the plaintiffs”) (parties involved with AMM in a research project called “Magic”) filed a lawsuit before the Tribunal de Commerce of Toulouse, France against AMM. Nomai is obligated to indemnify for and defend against the lawsuit under the agreement whereby Nomai divested its ownership of AMM to Alain Bouttier. The plaintiffs allege breach of contract and other claims relating to the Magic project and were seeking damages of approximately FF 75 million (approximately $11.3 million). On May 15, 2001, the Court consolidated this lawsuit with the second Magic project lawsuit referenced immediately below. On June 17, 2002, the Court dismissed the entire, consolidated lawsuit, without prejudice, due to the failure of the plaintiffs to diligently pursue the case. The plaintiffs may re-file the case during the following two years.
In addition, on March 29, 2001, Conseil & Technique filed a second lawsuit before the same court relating to the Magic project. This second lawsuit was against Iomega International and Nomai. Conseil & Technique claims that Nomai and Iomega International sabotaged the Magic project and interfered with AMM’s performance of the agreements underlying the Magic project. The lawsuit asked the court to recognize Conseil & Technique as the owner of the intellectual property rights in the Magic project and asked for damages against Nomai and/or Iomega International totaling approximately FF 8 million (approximately $1.2 million). This action, since it was consolidated with the other Magic action, was also dismissed, without prejudice, on June 17, 2002, but could be re-filed during the next two years. Nomai and Iomega International deny liability and intend to vigorously defend, if the Magic cases are ever re-filed.
Although the Company does not expect the Nomai/AMM litigation described above to have a material adverse effect on the Company’s ongoing business, results of operations or financial condition, an adverse judgment or settlement of these claims could have a material adverse effect on the operating results reported by the Company for the period in which any such adverse judgment or settlement occurs (or is implemented).
Goodwill and Other Intangible Assets
The Company adopted Statement of Financial Accounting Standards No. 142, “Accounting for Goodwill and Intangible Assets” (“SFAS 142”), on January 1, 2002. Under SFAS 142, goodwill is no longer amortized but rather is tested for impairment at least annually at the reporting unit level. The Company performed the impairment test required under SFAS 142 in the first quarter of 2002 and determined that the Company’s goodwill, all of which is associated with the Zip product line, was not impaired.
As a result of the implementation of SFAS 142, the Company did not record goodwill amortization expense in the second quarter of 2002, whereas the Company had recorded pre-tax goodwill amortization expense of $0.9 million in the second quarter of 2001. Without this goodwill amortization, pro forma net loss for the second quarter of 2001 would have been $35.3 million, an increase of $0.6 million over the reported net loss of $35.9 million and pro forma earnings per share would have been a loss of $0.65 per share, an increase of $0.01 per share over the reported loss of $0.66 per share.
For the first six months of 2001, the Company recorded pre-tax goodwill amortization expense of $1.9 million. Without this goodwill amortization, pro forma net loss for the first six months of 2001 would have been $24.9 million, an increase of $1.1 million over the reported net loss of $26.0 million and pro forma earnings per share would have been a loss of $0.46 per share, an increase of $0.02 per share over the reported loss of $0.48 per share.
At June 30, 2002, the Company had $8.1 million in net intangible assets, all of which are subject to amortization. The Company’s intangible assets all relate to intellectual property. 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. During the quarter ended June 30, 2002, amortization expense was $0.7 million. Amortization expense for the first six months of 2002 was $1.6 million. Amortization expense for each of the next five fiscal years is anticipated to be approximately $3 million in 2002, $2 million in 2003, $2 million in 2004, $2 million in 2005 and $0.5 million in 2006. As of June 30, 2002, the weighted average useful live of the Company’s intangible assets is approximately 4 1/4 years. At June 30, 2002, the gross value and accumulated amortization of the Company’s intangible assets were $13.0 million and $4.8 million, respectively. At December 31, 2001, the gross value and accumulated amortization of the Company’s intangible assets were $20.5 million and $10.7 million, respectively. The change in gross values of intangible assets between December 31, 2001 and June 30, 2002, resulted from $7.5 million in intellectual property that was fully amortized and removed from the books during the first quarter of 2002.
Significant Customers
During the quarter ended June 30, 2002, sales to Ingram Micro, Inc. accounted for 16.1% of consolidated sales. Ingram Micro, Inc. and Dell Computer Corporation accounted for 16.3% and 10.3% of consolidated sales, respectively, for the quar