Class Action Lawsuit Against Iomega

On May 8, 2008, a purported stockholder of Iomega filed a complaint seeking certification for a class action lawsuit in the Superior Court of the State of California, County of Vista — North County, docketed as  Fievel Gottlieb v. Stephen David, Jonathan Huberman, John Nolan, Margaret Hardin, Dan Maurer, Reynolds Bish, Iomega Corporation, Emerge Merger Corporation and EMC Corporation,  Case No. 37-2008-00054149 CUMCNC (the ‘Gottlieb Action’) against Iomega, each of its directors, EMC and Purchaser.

The Gottlieb Action purports to be brought individually and on behalf of all public stockholders of Iomega. The Gottlieb Action alleges that the Iomega director defendants breached their fiduciary duties to Iomega’s stockholders in connection with the Offer and that EMC aided and abetted such alleged breach of the Iomega director defendants’ fiduciary duties.

Based on these allegations, the Gottlieb Action seeks, among other relief, declaring the action to be a class action, injunctive relief enjoining preliminarily and permanently the Offer and the Merger, rescinding, to the extent already implemented, the Offer and the Merger or any of the terms thereof or awarding rescissory damages, directing that the defendants account to plaintiff and other members of the class for all damages as a result of a breach of their fiduciary duties to the purported stockholder and other members of the class, awarding plaintiff the costs, disbursements of the Gottlieb Action including a reasonable allowance for plaintiff’s attorneys and experts’ fees, and granting plaintiff and other members of the class such further relief as the court deems just and proper.

The purported stockholder also filed an expedited proceedings motion, seeking to proceed with discovery on an expedited basis. Iomega intends to vigorously defend against the lawsuit.

Abstracts of the complaint:
The Company failed to conduct a full and fair sales process. Although the Company did contact approximately 33 parties between April 2003 and July 2003 for the purpose of exploring a transaction, the Company at that time was unprofitable as a result of the technical obsolescence of its main product line. Faced with a severe business decline, the Company sought a transaction in order to improve the declining prospects of the Company.

In the beginning of 2006, however, a new management team was installed that revitalized the Company by revamping the Company’s product and supply chain and reworking the Company’s organizational structure. As a result of these efforts, by the third quarter of 2006 the Company was a growing and profitable enterprise. Yet, despite the Company’s drastic change in fortunes, in September 2006 management decided to sell the Company without ever conducting a legitimate sales process under these substantially more favorable conditions. Instead, management simply contacted a couple of potential partners, one of which was one of the almost three dozen potential partners the Company contacted back in 2003 at a time when the Company was unprofitable and struggling.

While the Company did contact potential partners in 2003 when it was unprofitable and struggling, the Individual Defendants’ failed to conduct a legitimate sales process three years later when the Company was a substantially more desirable and valuable entity.  The failure to adequately shop the company is further exacerbated by the fact that the Merger Agreement with EMC contains a strict post-merger agreement no-shop provision that all but prevents a superior proposal from emerging.

In addition, the sales process was driven by Defendant Huberman with no oversight from the Board of Directors or the Special Committee. It was Huberman that decided to contact Private Equity Firm C and Company D in September 2006 and it was Huberman, together with the Company’s president Thomas Kampfer, that initiated a dialogue with Shenzhen ExcelStor Technology Limited (‘ExcelStor’) in May 2006 to discuss a strategic alliance. It was only after extensive discussions with ExcelStor and after a term sheet was delivered to the Company did the Company’s board meet on February 13, 2007 to discuss a potential transaction with ExcelStor and to formulate a Special Committee to evaluate the proposed transaction. Thus, Defendant Huberman was trying to sell the Company for almost 10 months before the Board engaged in any oversight of the process and before a Special Committee was formed.

Furthermore, the sales process was tainted because Defendant Huberman negotiated for himself and his cronies in management lucrative compensation packages in the post-transaction entities. Specifically, in the proposed transaction with ExcelStor, Huberman was to be the president of the combined companies and was to receive $2 million over a period of three years after consummation of the proposed transaction. Likewise, Kampfer was to receive $931,875 and Romm was to receive $418,500 under similar terms as Huberman.

Huberman did even better for himself under the terms of the Proposed Transaction with EMC in which he will receive $508,750 in salary and $508,750 in a target bonus as well as payments of $3 million over 2 years. Likewise, Kampfer is to receive $384,213 in salary and $285,910 in a target bonus as well as payments of $1.1 million over 2 years.

Accordingly, the entire sales process was flawed because the Individual Defendants failed to conduct a legitimate sales process at the time when the Company was a substantially more desirable merger candidate and whatever merger discussions that did occur was driven by Huberman with little Board oversight who made sure that he and management secured lucrative compensation packages in any post-transaction entity.

The transaction price is grossly unfair. In the few months prior to the Proposed Transaction, Iomega stock had been trading well in excess of the consideration being offered in the Proposed Transaction. In fact, as recently as December 12, 2007, Iomega’s stock closed at $4.00 per share. The recent dip in Iomega’s stock price to $3.83 per share on May 7, 2008 does not appear to be the result of any fundamental change in the Company but likely reflects recent turmoil in the financial markets and the ceiling imposed by the Proposed Transaction.

Reputable Wall Streets analysts value Iomega’s shares well in excess of the price in the Proposed Transaction, In particular, Iomega stock was valued by Cantor Fitzgerald on September 24, 2007 at $7.50 per share. The offer price of $3.85 per share therefore represents a discount to the Company’s intrinsic value.

Most importantly, however, the Recommendation Statement fails to provide the Company’s shareholders with material information and/or provides them with materially misleading information, so they are unable to make a fully informed decision about whether or not to tender their shares in the Proposed Transaction. Specifically, the Recommendation Statement is deficient, inter alia, because it:

• (a) Fails to disclose why Company management approached Private Equity Firm C and Company D in September 2006 about a possible sale of the Company at a time when the Company was a profitable, growing enterprise.
• (b) Fails to disclose why the Company only contacted Private Equity Firm C and Company D in September 2006 and none of the other potential buyers it contacted over the previous three years given that as of September 2006, the Company was a growing and profitable enterprise.
• (c) Fails to disclose whether Company management was authorized by the Board of Directors to explore a sale of the Company in September 2006 to Private Equity Firm C and Company D.
• (d) Fails to disclose whether, in November 2006, the Company management was authorized by the Board of Directors to explore a merger with ExcelStor.
• (e) Fails to disclose why a Special Committee to evaluate a merger with ExcelStor was only first formed on February 13, 2007.
• (f) Fails to disclose why a meeting of the Special Committee was not convened to discuss the ExcelStor transaction from the time the Special Committee was formed on February 13, 2007 until the Board approved a transaction with ExcelStor on December 12, 2007.
• (g) Fails to disclose why a Special Committee was not formed on March 2008 to evaluate the EMC proposal.
• (h) Fails to disclose why the Board concluded on March 9, 2008 that the valuation of the proposed transaction with EMC was not superior to the transaction with ExcelStor.
• (i) Fails to disclose in why the Board concluded on March 9, 2008 that the due diligence contingencies of the EMC proposed transaction were overly broad.
• (j) Fails to disclose why after receiving the March 5, 2008 indication of interest from EMC, the Company was obligated to provide ExcelStor notice after receiving any acquisition proposal while after receiving the March 13, 2008 indication of interest (“March 13 Offer”), the Company was obligated to provide ExcelStor notice only after receiving an acquisition proposal that the Iomega Board determined in good faith would reasonably constitute a superior proposal.
• (k) Fails to disclose the basis the Board relied upon to conclude that the March 13 Offer was a superior proposal.
• (l)  Fails to disclose why the due diligence contingencies associated with the March 13 Offer were no longer overly broad.
• (m) Fails to disclose whether, at the March 14, 2008 Board meeting, Thomas Weisel Partners (‘TWP’) opined that the March 13 Offer was more favorable to Iomega shareholders from a financial point of view than the ExcelStor transaction.
• (n) Fails to disclose on what basis the Board concluded that the March 13 Offer was a superior proposal to the April 2, 2008 revised proposal from ExcelStor (‘Revised ExcelStor Proposal’).
• (o) Fails to disclose what the ‘difference’ was between the March 13 Offer and the Revised ExcelStor Proposal.
• (p) Fails to disclose whether EMC was notified of the Revised ExcelStor Proposal.
• (q) Fails to disclose on what basis the Board concluded that the April 4, 2008 offer from EMC (“April 4 Offer”) was a superior proposal to the Revised ExcelStor Proposal.
• (r) Fails to disclose why the Iomega board believed that the tender offer price of $3.85 per share is fair even though Iomega shares traded above $4 as recently as December 12, 2007 and above $5 per share as recently as October 19, 2007.
• (s) Fails to disclose the nature of the regulatory risks associated with the proposed transaction with ExcelStor.
• (t) Fails to disclose why the board believed that a transaction with EMC presents a higher certainty of prompt closing and less risk associated with regulatory approval than a transaction with ExcelStor.
• (u) Fails to disclose the Company’s Revenue for 2008 and 2009 that formed a basis of the Public Company Analysis created by TWP, the Company’s Financial Advisor.
• (v) Fails to disclose the implied trading multiples for the Precedent M&A Analysis created by TWP as otherwise disclosed in the Public Company Analysis.
• (w) Fails to disclose the precise date or benchmark relied upon to calculate the Premiums Paid Analysis created by TWP.
• (x) Fails to disclose why TWP selected discount rates ranging from 12% to 18% when performing its Discounted Cash Flow Analysis,
• (y) Fails to disclose the Company’s financial projections and free cash flows for years 2008 to 2014 relied on by TWP in performing a Discounted Cash Flow Analysis.