Iomega Corporation 2003 Annual Report
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Message From the Chairman To Our Shareholders: The year 2003 was a difficult one for Iomega. Zip® Livermore National Laboratory, and Ernest O. Lawrence product sales and profits continued to decline. We Berkeley National Laboratory. The University supervises incurred substantial expenses through the development these labs for the United States Department of Energy of new products and restructuring charges to reduce and National Nuclear Security Administration. Previously, ongoing costs. The net result was a loss of $18.9 million Bruce had been with the University of California San for the year. Diego for 16 years where he was Vice Chancellor. Prior to that, he worked with the National Science Foundation, Those losses are, unfortunately, expected to carry over where he was Special Assistant to the Foundation into 2004, and future profitability will depend on the Director. Bruce is an experienced senior manager and successful completion of the development and should provide Iomega with valuable insights based on introduction of our new products which are discussed in his connections to organizations on the forefront of detail in Werner Heid’s letter and other places in this technology development in the United States. report. Margaret Hardin is presently the Chief Financial Officer of In my letter to you in last year’s annual report, I Munchkin, Inc., a Los Angeles based, rapidly growing discussed the fact that Iomega had substantial cash in designer and manufacturer of baby and children’s excess of its expected needs for the present businesses, products which are sold through major retail chains and that we were exploring several areas for possible throughout the United States. A graduate of New Mexico investment. We did not find investments which we were State University, Margaret has a MBA from the University comfortable with, and as a result, decided that our of Chicago. She worked for IBM for several years, and shareholders’ interests would best be served through the then worked at Procter & Gamble in the financial area for payment of a substantial cash dividend – $5 per share – four years before joining Munchkin as CFO. She is going which was paid in October 2003. to have an initial assignment as a member of the Audit There have been a number of changes to our Board of Committee, and should be an outstanding contributor in Directors since last year’s annual report. During 2003, we the years ahead. lost one of our newer Directors, Louis Caldera, through At this year’s annual meeting in May, three members of resignation. Mr. Caldera accepted an appointment as our existing Board will be retiring and not standing for President of the University of New Mexico, and in his new reelection. These individuals are Neal Martini, Jonathan position could not devote the necessary time to continue Huberman, and myself. We all feel that we are leaving to serve as an Iomega Director. We have recently elected behind a strong, confident Board of Directors, which will two outstanding individuals to serve on Iomega’s Board – provide independent oversight of Iomega in order to Bruce Darling and Margaret Hardin. ensure that the Company continues to operate in the Bruce Darling presently serves as Senior Vice President of shareholders’ best interests. the University of California, Office of the President, and As I retire from Iomega’s Board, I have to say that I share recently served for ten months as the interim Vice our stockholders’ disappointment in the continued President of Laboratory Management. In this role, he was decline of the Zip product line. the senior university official responsible for the University’s management oversight of three national We brought in new management several years ago who I laboratories – Los Alamos National Laboratory, Lawrence am absolutely convinced did the best job that could have i been done in the attempt to extend or revitalize the Zip In addition to our new Directors, we have several long- line of products. I wish in leaving I could congratulate term Directors who will continue to serve and who are them on success in these efforts, but I do congratulate everything that shareholders should look for in providing them on their zeal and competence in doing the best job oversight for the shareholders’ interests. Based on many that could have been done. years of Board service for a myriad of companies, I can honestly say that Bob Berkowitz is the most outstanding The Board has indicated its intention to elect Stephen Chairman of an audit committee I have worked with. John David as a non-executive Chairman of the Board effective Nolan is a wise and intelligent individual who has when I step down. I personally couldn’t be more pleased provided valuable direction and input on all important with this decision. Steve David is truly an outstanding issues. individual with enormous executive experience that allows him to participate effectively in all key areas that Iomega’s My thanks to our shareholders for their support over the Board makes decisions in. years. My best wishes to them, to our management, and to our ongoing Board for their future success. As I look back over my 23 years of association with Iomega, I am very proud of the fact that we took a start- Sincerely, up of less than 20 people and capital of $750,000 and grew it the way we have over the years. We have employed more than 10,000 people over the years, and achieved peak annual revenues in excess of $1.5 billion. I have had the pleasure and honor of association with many truly outstanding individuals who have made extraordinary David J. Dunn efforts to achieve success for Iomega. Chairman of the Board Again, I regret that our recent years have reflected a sales March 30, 2004 and earnings decline. I do leave feeling comfortable that we have an excellent management team, headed by Werner Heid, who give all that they have to achieve success for Iomega. ii Message From the President and CEO To Our Shareholders: Introduction After two years of transition in 2002 and 2003, Iomega enters 2004 with positive momentum toward several new product introductions. Iomega is emerging from a difficult year, and our financial results in 2003 were frankly disappointing. As a Company, we successfully confronted many challenges, including a major restructuring to ready ourselves for the greater opportunities of 2004. We also distributed a one-time cash dividend of $5 per share to our shareholders in October 2003. However, our financial results continued to be affected by the accelerated decline in Zip® product revenue. In 2004, our goal is to continue our history of innovation with the planned launch of two new storage platforms. One is our revolutionary new REV™ drive, which we think has the potential to redefine backup and archiving in thousands of small and medium sized-businesses around the world. The other is a small personal storage device, the DCT drive, which has the potential to transform the personal storage landscape for consumer electronics products. 2004 Overview and Goals: Zip Products We are focused on successfully implementing the Iomega’s Zip products have been our dominant following key strategies, which will be discussed in detail contributor to revenue and profits since their introduction later in this letter: nine years ago. We have shipped over 50 million Zip drives and over 300 million Zip disks during this time. ·Manage the late stage of the Zip product life cycle to maximize cash flow, while limiting the risk of Zip products have enjoyed a tremendous record of excess inventory; success and a remarkably long life cycle for the technology industry. Although Iomega has regularly ·Grow Sourced Branded business revenue and further improve our gross margin percentage; improved Zip performance and capacity for its customers in government, education, and in the broader business · Execute our revised Network Attached Storage market, the mature Zip platform is reaching the end of its (“NAS”) strategy and achieve a positive product life cycle. As such, in 2003, Zip products continued to profit margin during the second half of 2004; lose ground to optical drives, external hard drives, flash · Ensure a world class launch and ramp of our drives and other storage alternatives. Despite this, the Zip new REV products; and product line continues to generate positive cash flow to ·Design and successfully position DCT as a fund our other initiatives and it is expected to remain low-cost, high-performance removable storage profitable through 2004 and potentially beyond. solution for mobile consumer electronics and computer applications. iii Sourced Branded Business Restructuring Revenue from Sourced Branded products comprised of In 2004, we expect to benefit from the full impact of the optical drives, external hard drives, flash media and 2003 restructuring. The purpose of this restructuring was external floppy drives sold under the Iomega brand, grew to address declining gross margins by tackling our 27% during 2003 on new product introductions, the operating expense structure. This restructuring is strength of the Iomega brand and world-wide channel expected to reduce costs and expenses in 2004 by relationships. By fourth quarter 2003, the Sourced approximately $35 million to $40 million as compared to Branded business had grown to account for 44% of total first-half 2003 run rates. sales. This trend should continue in 2004 with new products like the Iomega Micro Mini™ USB drive and the Super DVD QuikTouch™ Video Burner. New Products and Markets A key goal in 2004 is to improve Iomega’s gross margins, REV Products price competitiveness and sales velocity for Sourced We plan to ship our new REV products under the Iomega Branded products.