Iomega shares take a dive

Shares of Iomega (IOM), which traded as high as $16.75 in early December, closed the week at $8.75 as the storage maker got socked with another class action lawsuit Friday.

The lawsuit, filed on behalf of purchasers of Iomega's common stock, charges company officials with issuing false and misleading statements to inflate the price of the firm's stock. Iomega dismissed the allegations, but after enjoying the kind of 1997 that PR professionals can only dream about, the company now finds itself wrestling with the public relations year from hell.

"We have no comment on that. Iomega believes it has always acted with integrity," said Susan Stillings, the company's director of investor relations. "The nature of these class action lawsuits is that whoever gets there first, someone jumps in later."

That may be true but frivolous lawsuits are the least of Iomega's woes. The company's stock has sagged in response to warnings by some analysts of a slowdown in demand for Iomega's removable-storage products.

At the same time, Iomega faces stepped-up competition from Syquest Technology Inc. and Nomai, a French disk maker that recently convinced a U.S. district court to lift a temporary restraining order against sales of the company's Zip-compatible drives in this country.

What's more, analysts fret about the impact of a planned $100 million advertising campaign on earnings. In a conference call with analysts, Iomega officials went out of their way to explain that the spending would be spread out over the course of the year. But the company raised concern when it refused to speculate on how long it would take to see a payoff.

"We're not spending $100 million in one lump sum, and we expect to be able to comment on the results in April-May timeframe," Stillings said. "But the Street doesn't like to wait. They prefer certainty to uncertainty, but we thought we'd communicate by being up front and let them know."

Wall Street's nerves were particularly edgy because when it announced its results for the December quarter, Iomega came up short of expectations. Inventory levels had become high because of a delay in the release of a new product, Jaz 2Gb.

Iomega has been on the receiving end of user complaints about malfunctioning products and poor service. Last year, the company was forced to order a worldwide recall of its Jaz drives after problems turned up in some of the models. Earlier this month, Iomega settled a class-action lawsuit brought against the company by some users. The plaintiffs complained that they had been put on hold for excessive amounts of time after calling Iomega's support and technical service lines and got charged for the calls.

On top of everything, the company has been on the receiving end of complaints about the so-called "click of death" problem affecting certain Zip and Zip Plus drives.

Iomega said the failure rate on its Zip drives is less than 1 percent. But that has not prevented Iomega users from setting up Web sites to complain about the problem and swap advice.

"Folks, we have over 150 Zip drives with projects stored, and I am moving tonight to move data onto [hard drive] and tape and away from any Iomega product," one user left on a message board. "There is something radically wrong when a corporation denies any problems, but charges just to listen. No, I don't want to send four units back to Iomega, and wait. That's called 'No Service' in my book."

Yet the stock still remain popular with the cyber-faithful who embraced Iomega in online investment forums, particularly, the Motley Fool, where co-founder David Gardner continues to be a supporter of the company's stock. Gardner who downplayed the severity of the stock's near-term fluctuations, says that Iomega shares still make sense for long-term investors.

And indeed, this is hardly a company on the ropes. Iomega's products accounted for the majority of the nearly 9 million high-capacity drives shipped last year, according to Disk/Trend Inc., a market research firm. The company has sold more than 12 million Zip drives since the product's March 1995 introduction.

The Zip drive, initially sold as an add-on unit for PCs, is now built into computers made by IBM, Dell Computer Corp., Apple Computer Inc., and Hewlett-Packard Co.