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Heid’s Iomega Departure Shows Industry Woes

Anyone who knows much about the data storage industry knew the handwriting was on the wall long before Iomega Corp. dispatched former Chief Executive Officer Werner Heid this month.

The San Diego-based maker of Zip drives and other data storage devices bled red ink six of the past seven years, and sales continued to lose ground.

On Feb. 3, soon after Iomega released another report of annual net losses, it announced Heid resigned “following discussions with the board.”

Hired in 2001, Heid made a valiant effort to expand and diversify Iomega’s product mix but couldn’t find a replacement for the crux of its business, the Zip drive line.

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In 1998, about the time the Internet was exploding, Zip drives were flying off the shelves in record numbers. That year, Iomega racked up revenues of more than $1.7 billion.

Yet, technology moved on. In the past decade, the vastly improved memory banks of most computers combined with advances in data storage on much larger capacity compact discs gutted the market for the Zip drives.

Heid pinned Iomega’s future on developing new data storage products, including one called network attached storage systems that combined hardware and software. Yet sales of this and other new product lines have yet to take hold.

Last quarter, sales of network storage systems were $3.3 million, down by $600,000 from the prior year’s fourth quarter. Similarly, sales of removable storage devices, another new product, fell by about $500,000 during the year to $12.4 million.

Iomega made a profit in the fourth quarter of $1.9 million, yet its $70 million in revenue was off 22 percent, or $19.6 million from the fourth quarter of 2004. For the full year, Iomega reported a net loss of $22.8 million on revenue of $264.5 million compared with a net loss of $36.7 million on revenue of $328.7 million in 2004.

Since mid-2003, Iomega shares, traded on the New York Stock Exchange under IOM, have swooned from $12 down to as low as $2.28 early last year. It traded at $2.86 as of Feb. 15, which is actually up 17 cents from the date Heid took leave.

Iomega Chairman Stephen David was named interim CEO, but some speculate he’s merely a caretaker until he can arrange a sale. On the plus side, Iomega’s lack of debt and a cash balance of more than $98 million make it an attractive target.

Chris Mellor, who has a blog on TechWorld, a British trade magazine, said of David: “My reckoning is that Iomega’s investors desperately want him to get some, any shareholder value delivered to them. To get the shares up he needs an Iomega buyer or a really great product line.”

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Numbers Game:

Overland Storage Inc., a San Diego-based maker of data storage products, adjusted its financial results for the second quarter ended Dec. 31, and its first half, which reduced the net loss for the quarter by $200,000 to bring the loss to $2.7 million on revenues of $60.6 million. For the first half of its fiscal 2006, Overland’s adjusted net loss was $5.6 million compared with the previous reported net loss of $5.8 million on revenue of $119 million.

Overland said in a recent filing that it anticipates its 2006 fiscal year sales to run either about the same as fiscal 2005 or slightly below that level. For the prior fiscal year, Overland reported net income of $4.6 million on revenue of $235.7 million.

Overland’s goal looks ambitious given the fact that Hewlett-Packard Co., its largest customer, announced in August that it would no longer purchase Overland’s new storage products after its three-year contract expires in July. HP accounted for 52 percent of Overland’s sales last year. Overland said last month that it lined up two new manufacturing contracts that are expected to increase both revenues and profits into the following two fiscal years.

Traded on Nasdaq as OVRL, it closed at $8.60 Feb. 14, down from just below $10 earlier last month, and from its 52-week high of $15.39.

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Hot Home Market Aids Stock:

Accredited Home Lenders Holding Co., a mortgage bank specializing in non-prime home loans, reported 2005 net income of $155.4 million on revenue of $568.6 million, compared with 2004, when it reported net income of $130.8 million on revenue of $469.6 million.

Accredited’s profits increased nearly 19 percent, but its revenue jumped 21 percent. Both numbers hit records for the 16-year-old company.

Loan originations last year grew 33.5 percent to $16.6 billion, which is larger than any locally based commercial bank by a wide margin. For the fourth quarter alone, it did $4.7 billion in new loans, also a record for a single quarter.

Accredited said total loans on its balance sheet as of the end of last year were $9.6 billion, up by more than $3 billion or 46.6 percent from the prior year.

Chairman and CEO Jim Konrath said he expects another good year in 2006, and projected net earnings between $7.70 to $8 per share, above last year’s $7.07 per share.

Traded under LEND on Nasdaq, Accredited shares closed Feb. 14 at $49.14 and have ranged from $31.36 to $54.94 during the past 52 weeks. Since it went public in February 2003 at $7, LEND has gained more than 600 percent.

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Streaking:

San Diego-based e.Digital Corp., a developer of digital products such as digital audio players, continued one of the longest losing streaks among locally based public firms. For its third quarter ended Dec. 31, it reported a net loss of $699,000 compared with a net loss in the prior year’s third quarter of $997,000.

For the nine months, the aggregate net loss was $1.8 million compared with a net loss of $2.3 million in the same period of 2004.

According to a recent quarterly filing, as of September, e.Digital had an accumulated deficit of more than $73 million.

In fact, since its inception in 1988, e.Digital has never reported a net profit, and this fiscal year is shaping up to be another loser.

E.Digital’s revenues aren’t going in the right direction, either. For the quarter, it had a mere $115,000 in sales, compared with the prior year’s third-quarter revenue of $1.4 million. Sales for the nine months were $3.1 million vs. $3.5 million for the same period of 2004.

The company’s shareholders equity is in negative territory at minus $3.9 million, and it had only $8,000 in cash at the end of the year.

E.Digital attempted to put out some positive news, saying it had about $1.2 million in orders and received about $700,000 of that amount.

It also talked about new products with impressive-sounding technologies and of partnering with an intellectual property management firm to strike licensing agreements on its patent portfolio.

President and Chief Technology Officer Will Blakeley said he “believes we can grow our revenues and improve margins in future periods.”

There’s only one way to go.

Traded on the Over-the-Counter Bulletin Board as EDIG, it closed Feb. 14 at 8 cents and has traded between 2 and 25 cents during the past 52 weeks.

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Paying Dividends:

Despite the above evidence, some micro-stock companies can turn around. That appears to be the case with San Diego-based Patriot Scientific Corp., a firm that held a patent portfolio on microprocessors used extensively in a slew of electronic products.

In June, Patriot settled long-standing litigation with a group that had claims on the same patents and joined forces with the legal opponent to license the technology to some of the largest electronics manufacturers in the world.

The strategy is already showing dramatic results.

Since the settlement, a joint venture firm established with its former opponents has struck licensing deals with Intel, Hewlett-Packard and AMD, generating more than $24 million in revenue to Patriot.

For all of 2005, Patriot received licensing revenue of $13 million, but it obtained an additional $10 million in January. The cash infusion was such that Patriot’s board decided to pay out a 2-cent-per-share dividend this month to shareholders of record Feb. 24, payable March 22.

It also is buying back up to 20 million in stock warrants and converting and retiring outstanding debentures.

To finance the dividend payments, Patriot set aside about $7 million from its cash reserves of some $17 million.

Chairman and CEO David Pohl said more licensing deals and increased revenues are likely, “although none are assured.”

All this news propelled Patriot shares up to 42 cents as of Feb. 15, gaining about 67 percent in a single day and way up from the below-a-dime price it had traded earlier last month. The recent price gave the company that had a negative net worth about a year ago a market cap of $136 million.

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Ticker Takes:

Dot Hill Systems Corp. announced the retirement of CEO James Lambert and that he was succeeded by President Dana Kammersgard. Cytori Therapeutics Inc. began trading on Nasdaq under CYTX on Feb. 14. SYS Technologies reduced net earnings for its second quarter and first half ended Dec. 30 by 1 cent per share for each period. RF Industries reported net income of $444,660 for its fiscal year ended Oct. 31, on revenue of $13.1 million, down from net profits of $1.2 million on revenue of $11.2 million. World Waste Technologies Inc. said it closed a private placement of $2.25 million on debentures for use in constructing a power plant in Anaheim. Green Zap Inc. said it received commitments for second-round financing of $2 million.


Send any news of San Diego-based public companies to Mike Allen at mallen@sdbj.com. He can be reached at (858) 277-6359.

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