| IOMEGA CORP ITEM 1A RISK FACTORS: Demand for Our Products and Operating Efficiencies Our future operating results will depend upon our ability to develop or acquire new products and to operate profitably in an industry characterized by intense competition, rapid technological advances and low margins |
| This, in turn, will depend on a number of factors, including: • Worldwide market conditions and demand for digital storage products; • Our ability to replace rapidly declining Zip revenues and profits with revenues and profits from other products, particularly our REV products; • Our ability to generate significant sales and profit margin from REV products; • OEM adoption of REV product; • Our ability to significantly improve HDD gross margins; • Our success in meeting targeted availability dates for new and enhanced products; • Our ability to develop and commercialize new intellectual property and to protect existing intellectual property; • Our ability to maintain profitable relationships with our distributors, retailers, and other resellers; • Our ability to maintain an appropriate cost structure; • Our ability to attract and retain competent, motivated employees; • Our ability to comply with applicable legal requirements throughout the world and • Our ability to successfully manage litigation, including enforcing our rights, protecting our interests, and defending claims made against us |
| These factors are difficult to manage, satisfy, and influence |
| In spite of considerable efforts, we have been unable to operate profitably on an annual basis since 2002, and we cannot provide any assurance that we will be able to operate profitably in the future |
| Zip Drives and Disks Zip products have accounted for the vast majority of our sales and PPM since 1997 and have provided our only meaningful source of PPM for the past several years |
| However, Zip product sales have declined consistently and significantly on a year-over-year basis since peaking in 1999 |
| These declines are expected to continue through the end of the Zip product life cycle, due to the general obsolescence of Zip technology and the emergence of alternate storage solutions |
| Given this continuing decline, we can offer no assurance that we will be able to maintain profitable operations on our Zip business in any subsequent quarter or year |
| Further, we will not be viable unless we generate significant PPM from products other than Zip products |
| We have been unable to do this for several years and can provide no assurance that we will be able to do so in the future |
| As Zip product segment sales and profits continue to decline, dlra11dtta7 million of goodwill associated with the Zip product segment will become impaired and those non-cash impairment charges will become necessary starting in the first half of 2006, potentially the first quarter |
| This will not impact cash flow, but will have a significant adverse impact on Zip operating profitability |
| Additionally, we expect to cease selling Zip drives to distributors or resellers in the European Union starting 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 after the July 1 date |
| 15 ______________________________________________________________________ [44]Table of Contents IOMEGA CORPORATION AND SUBSIDIARIES RISK FACTORS (Continued) REV Products Future results of our REV products entail numerous risks relating to factors such as: • Inability to create product awareness or lack of market acceptance; • Failure to maintain acceptable arrangements with product suppliers, particularly in light of lower than anticipated volumes; • Failure to achieve significant OEM adoption of the products; • Manufacturing, technical, supplier, or quality-related delays, issues, or concerns, including the loss of any key supplier or failure of any key supplier to deliver high quality products on time; • Intense competition from competing technologies and • Risks that third parties may assert intellectual property claims against REV products |
| It is unlikely that we will be able to operate profitably unless and until REV products generate significant revenue, including OEM adoption and positive PPM We can offer no assurance that we will be able to successfully resolve any of these challenges or that we will be able to generate significant PPM from our REV business |
| Consumer Storage Solutions Products (“CSS”) Through the second quarter of 2005, our CSS segment was comprised of optical (CD-RW and DVD rewritable) drives, external hard drives, USB flash drives, and external floppy drives |
| Virtually all of our CSS products are commodity-type products, which are functionally equivalent to many other widely available products |
| These competing products are marketed by both name-brand manufacturers and generic competitors |
| Moreover, besides our trademarks, we own limited intellectual property relating to our consumer products |
| Consequently, this segment is characterized by intense competition, the frequent introduction of new products and upgrades for existing products, supply fluctuations, and frequent end user price reductions |
| In order to successfully compete, we must accurately forecast demand, closely monitor inventory levels, secure quality products, meet aggressive product price and performance targets, create market demand for our brand and hold sufficient, but not excess, inventory |
| Historically, we have failed to accomplish these objectives and this business has never achieved full year profitability |
| In addition, the recently announced merger of our competitors, Seagate and Maxtor, could potentially reduce price competition among our hard drive suppliers, and could possibly drive up our inbound supply costs for hard drives |
| In light of these challenges, we can offer no assurance that we will achieve sustainable profitability on this segment |
| Network Storage Systems We focus on the entry-level and low-end Network Attached Storage markets, where we attempt to leverage our small- to medium-sized business customer base and channel customers, including existing resellers already focused on these customers |
| Notwithstanding, this advantage of existing channels, this business has never achieved full year profitability and we can offer no assurance that we will achieve sustainable profitability on this segment |
| 16 ______________________________________________________________________ [45]Table of Contents IOMEGA CORPORATION AND SUBSIDIARIES RISK FACTORS (Continued) Development and Introduction of New Products and New Revenue Streams We believe that we must continually either develop or acquire the right to profitably sell new products in order to remain viable in the data storage industry |
| However, our efforts in this regard have frequently been unsuccessful |
| Since 1999, we have developed and/or acquired the right to market a variety of new products, but we have been unable to maintain consistent materially profitable operations on any of them |
| We are spending significant resources attempting to develop new products, including next-generation REV products |
| We may spend additional resources attempting to acquire the rights to new technologies, to fund development of such technologies, or to otherwise differentiate existing products |
| We can provide no assurance that any of these expenditures will yield profits |
| Restructuring, Other Cost Reduction Activities and Retention of Key Personnel As discussed in Note 5 of the notes to consolidated financial statements, in the third quarter of 2005, we announced a restructuring plan in conjunction with our ongoing goals to simplify our business, align our cost structure with expected revenue streams and return to profitability |
| Other restructuring actions may be necessary in the future |
| As a result, we face risks of losing key institutional knowledge and internal controls as a result of workforce reductions and changes within the executive management team |
| In addition, our ability to retain key employees may be adversely affected because of restructuring activities, our recent financial performance, increased workloads resulting from the restructuring and recent improvements in the US and European economies |
| In addition, we recently hired a new Chief Executive Officer and are hiring a new a Chief Financial Officer |
| The changes in senior leadership could impact employee stability as well |
| We can offer no assurance that we will achieve projected cost savings or return to profitability because of our restructuring efforts, or that we will be able to retain key management, employees and know-how |
| Internal Control Reporting Compliance Efforts Under Section 404 of the Sarbanes-Oxley Act of 2002, we are required to include in each Annual Report a report on internal control over financial reporting |
| We are always at risk that any future failure of our own internal controls or the internal control at any of our outsourcing partners could result in additional reported material weaknesses |
| The 2005 restructuring actions and reduced headcount (see Note 5 of the notes to consolidated financial statements) increased the risk of a process breakdown and possible internal control deficiencies |
| We have many employees performing tasks they did not perform until recently, which could streamline operations or could result in errors or lost knowledge |
| Although we continue to invest resources in Section 404 compliance activities, we can provide no assurance that we will be successful in these efforts to avoid reporting a future material weakness of internal control |
| Any such reported material weakness could have a material impact on our market capitalization, financial statements or have other adverse consequences |
| Product Manufacturing and Procurement We have fully outsourced all manufacturing and have no direct control over the manufacturing processes of our products |
| This lack of control may increase quality or reliability risks and could limit our ability to quickly increase or decrease production rates |
| Zip and REV products are each manufactured by single manufacturers, which creates risks of disruption in the event of labor, quality or other problems at Zip or REV product manufacturers |
| In addition, product manufacturing costs may increase if we fail to achieve anticipated volumes |
| There can be no assurance that we will be able to successfully manage these risks |
| 17 ______________________________________________________________________ [46]Table of Contents IOMEGA CORPORATION AND SUBSIDIARIES RISK FACTORS (Continued) Outsourced Distribution and Logistics Because we have outsourced our distribution and logistics centers, we rely upon the computer systems, business processes, and internal controls of our distribution and logistics services providers |
| These systems may develop communication, compatibility, control or reliability problems |
| In addition, we face risks of operational interruptions, missed or delayed shipment, unexpected price increases and inventory management risks |
| Since the first quarter 2004 transition to the current distribution and logistics service providers, we have experienced operational disruptions and have reported a material weakness (subsequently remediated) in internal control over financial reporting due to some of these factors |
| We hope to realize cost savings and operational efficiencies as a result of outsourcing distribution and logistics, but success is uncertain |
| Reporting of Channel Inventory and Product Sales by Channel Partners We defer recognition of sales on estimated excess inventory in the distribution, retail and catalog channels |
| For this purpose, excess inventory is the amount of inventory that exceeds the channels’ four-week requirements as estimated by management |
| We rely on reports from our distributors and resellers to make these estimations |
| Although we have processes and systems checks in place to help reasonably ensure the accuracy of the reports, we cannot guarantee that the third-party data, as reported, will be accurate |
| Accordingly, as we grant credit to our customers, a substantial portion of outstanding trade receivables are due from computer product distributors, certain large retailers and OEMs |
| If any one or a group of these customers’ receivable balances should be deemed uncollectible, it would have a material adverse effect on our results of operations and financial condition |
| Company Operations, Component Supplies and Inventory In light of our declining revenues and recent operating losses, it is becoming increasingly difficult to negotiate or maintain favorable pricing, supply, business, or credit terms with our vendors, suppliers, and service providers; in some cases existing vendors, suppliers and service providers have begun imposing more stringent terms or even eliminating credit altogether |
| We anticipate continued challenges in this area for the foreseeable future |
| Although we have fully outsourced our manufacturing, we have retained responsibility for the supply of certain key components |
| It can be difficult to obtain a sufficient supply of key components on a timely and cost effective basis |
| Many components that we use are available only from “single source” or from a limited number of suppliers and are purchased without guaranteed supply arrangements |
| Should REV product volumes fail to ramp significantly, we may experience component cost increases and other component availability challenges |
| As suppliers upgrade their components, they regularly “end of life” older components |
| As we become aware of an end of life situation, we attempt to make purchases to cover all future requirements or find a suitable substitute component |
| In such cases, we may not be successful in obtaining sufficient numbers of components or in finding a substitute |
| In summary, we can offer no assurance that we will be able to obtain a sufficient supply of components on a timely and cost effective basis |
| Our failure to do so would lead to a material adverse impact on our business |
| 18 ______________________________________________________________________ [47]Table of Contents IOMEGA CORPORATION AND SUBSIDIARIES RISK FACTORS (Continued) Purchase orders for components or finished products are based on forecasted future sales requirements |
| It is difficult to estimate future product demand for new products or products with declining sales |
| Further, our customers frequently adjust their ordering patterns in response to factors such as inventory on hand, new product introductions; seasonal fluctuations; promotions; market demand; and other factors |
| As a result, our estimates, when inaccurate, can result in excess purchase commitments |
| We have recorded significant charges in the past relating to excess purchase commitments and inventory reserves and these charges can adversely affect our financial results |
| We may be required to take similar charges attributable to forecasting inaccuracies in the future |
| Intellectual Property Risks Patent, copyright, trademark or other intellectual property infringement claims have been and may continue to be asserted against us at any time |
| Such claims could have a number of adverse consequences, including an injunction against current or future product shipments, liability for damages and royalties, indemnification obligations and significant legal expenses |
| We try to protect our intellectual property rights through a variety of means, including seeking and obtaining patents, trademarks and copyrights, and through license, nondisclosure and other agreements |
| Any failure or inability to adequately protect our intellectual property rights could have material adverse consequences |
| Legal Risks We have entered into multiple agreements, including license, service, supply, resale, distribution, development and other agreements in multiple jurisdictions throughout the world |
| We are also subject to an array of regulatory and compliance requirements, including foreign legal requirements and a complex worldwide tax structure |
| In addition, we employ approximately three hundred individuals throughout the world |
| Although we attempt to fulfill all of our obligations, enforce all of our rights, and comply with all applicable laws and regulations under these agreements and relationships, our organization is complex and errors may occur |
| We have been sued and may be sued, under numerous legal theories, including breach of contract, tort, product liability, intellectual property infringement, and other theories |
| Such litigation, regardless of outcome, may have an adverse effect upon our profitability or public perception |
| In addition, although we seek to manage the credit granted to our customers, certain trade receivable balances from one or more customers could become uncollectible; this could adversely affect our financial results |
| Other Risk Factors We are subject to risks associated with general economic conditions and consumer confidence |
| Any disruption in consumer confidence or general economic conditions including those caused by acts of war, natural disasters affecting key suppliers or key facilities, terrorism or other factors could affect our operating results |
| Significant portions of our sales are generated in Europe and, to a lesser extent, Asia |
| Fluctuations in the value of foreign currencies relative to the US dollar that are not sufficiently hedged by international customers invoiced in US dollars could result in lower sales and have an adverse effect on future operating results |