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Rule Breaker Portfolio

Kim Edwards Resigns
Wednesday, March 25, 1998
by David Gardner (DavidG@fool.com)

ALEXANDRIA, VA (March 25, 1998) -- If you click in to the Motley Fool one or more times during the day, you probably already know this, but for those who don't, Iomega's CEO Kim Edwards tendered his resignation today.

It was a surprise move. Or was it? Speculation on our message boards has continued for weeks now, and certainly the market didn't appear particularly stunned. The stock declined $3/8 to $7 on over 7 million shares traded. The trading range of 7 to 7 3/8 was uncharacteristically narrow and unvolatile.

We originally purchased this stock largely for two reasons. The first was the handiwork of Mr. Edwards; the second was the commentary and analysis of our readership back then, who knew a good thing when they saw it. I'd like therefore to talk about both of these in this report... thinking about Mr. Edwards, and doing so largely through the words of our readership reflecting on this move today.

Back in January of 1994, Kim Edwards came to a sleepy small-cap company that was selling uninteresting products mostly to the government. Within one year, he had turned it into a top-flight storage technology company with a hot product selling through to a large and growing consumer base. A brand name was being born. The stock followed suit, rising from a non-split-adjusted $2 to $330 at its peak, during the Great Short Squeeze of May '96.

And from the Fool Portfolio manager's point of view, even despite its bad performance during the past two years of a great bull market, Iomega has still made us pretty good money. We cashed in a profit of $18,000 last April when we sold half our position, and that, added to today's profit, shows that we've made $30,000 on a $5000 investment made less than three years ago.

So I want to make sure I say -- right here, in fact -- a genuine thank you to this intense, innovative, and driven man. Even after a precipitous decline that has led to today's greatly reduced share price, Iomega has created more than a billion dollars in market value at closing bell today. There simply aren't many people on planet Earth capable of growing a company from $147 million in unprofitable sales to $1.7 billion in profitable sales in four years.

If you know another one of these fellas, please put him/her in touch with us at Fool HQ, as we're always looking for world-class hires.

All that said, I now know many more people who've lost money on this stock than made money on it. For them, Kim Edwards was the CEO who couldn't do anything right. Reading our Web message boards today, I came across a totally reasonable post from Dukdla, who wrote, "KE led a company that has poor customer service, an expensive advertising campaign, consistently can't introduce products on time, and has very poor to non-existent relations with investors and the Street." That harsh assessment isn't particularly unfair when you consider that this stock has lost 75% of its value since May 1996.

HighReturn, also a Foolish contributor to our Web message boards, puts it a little more lightly, but still says, "We need a mid-cap person in charge, not the small-cap KE."

When we first bought this stock, we bought in because it fit our model of a consumer-oriented technology business that was effectively creating its own industry. That remains a great way to find and make money investing in stocks. But we didn't know when we were buying that the company would consistently exhibit a lack of ability to communicate to analysts and shareholders.

Both of those are important. You must communicate to analysts to lure the institutional investment that will ultimately drive your stock; that's the objective of most CEOs today, like it or not (I have mixed feelings). You must communicate to shareholders because, well, heck, that's WE! We care a great deal about hearing from our companies, and resent managers who either hide what they're doing or provide guidance to analysts only. That's the old world model. It won't work going forward, but some companies still get away with this today. Iomega has been one of them. I contrast Iomega with Microsoft, which does a better job of investor relations than virtually any company I know of. Case in point, Microsoft just had an open conference call yesterday simply to discuss its earnings pre-announcement.

(Maybe we can get one of their managers to take the Iomega reins.)

Thus, I agree with our own TMF 2Aruba, who simply sums it up this way, "Wouldn't it be refreshing to have a CEO that informs?"

I think that would be a powerful driver for Iomega stock. At present, the company remains in the hands of an interim CEO selected from the existing board of directors. His primary emphasis given in today's press release (Web link) is on "setting and achieving new standards for quality and customer service in our industry."

So the question becomes what do I, as a shareholder, do in the face of this news? And my answer is that I'm probably closer to selling Iomega than I have been in recent memory, but at the same time, I'm not going to do it. Yet. Perhaps we'll change our minds tomorrow, or next week, or next year, or never... who knows? Answer: You'll be the first to know, of course, as we always announce and communicate our decisions before we ever act on them.

I suppose I'm as curious as anyone to see whether a skilled big-cap manager can unlock the value I see in this company. It's that prospect that has me looking forward, not backward, at what Iomega is and can be. I'm as happy as the next guy that Iomega is only one of 10+ stocks in my portfolio, because it's been so harmful to investors lately; it's certainly not one of those core holdings that one builds a portfolio around. Iomega is now a speculative turnaround without a commander... but one that carries less risk, I think, than most of them. Each passing day, Iomega takes another step closer to making the Zip drive the standard removable storage device installed in home and business PCs by original equipment manufacturers. That is largely why we bought in the first place. So as of now, we're holding. If something better comes along, we'll move some or all of this money elsewhere.

I'll close with the apt words of another fellow Fool, Dan Dolan, who brought many of my own sentiments together in an e-mail received earlier today. It's a typical example of the dispassionate intelligence that has always been well in evidence among long-time contributors to the Iomega message board and many others at The Motley Fool:

"One of my questions is, does this still hold? Does the company tank without KE, or is it entering a new, more mature phase of its existence?

"I don't think anyone would disagree that Mr Edwards did wonders with the company. I'm sure there was more than a modicum of his skill and expertise involved in bringing Iomega from what was essentially a local techie company to a worldwide consumer products company. There too was the fortuitous juxtaposition of computer hardware improvements, Windows 95's larger files, and the Internet; there also might have been a fair share of luck and 'right place, right time' involved in the Iomega story. During KE's tenure, Iomega defined, and itself became the definition of, the high density removable media "niche." That in itself is remarkable.

"What we may have here is liken to the difference between a prospector and a miner. In the West's history of mining for precious metals, there are innumerable stories of prospectors who can find the mother lode yet are unable or unwilling to stay the course and reap the profits. It takes another type of mentality and personality to do this. Have we just seen the prospector move on?"

Fool on.

-- David Gardner, March 25, 1998

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TODAY'S NUMBERS
Stock Change Bid ---------------- AMZN -1 15/16 81.69 AOL - 15/16 66.94 T + 1/2 68.00 DD - 3/4 69.06 DJT - 3/16 9.44 XON - 5/8 67.75 INVX + 1/2 23.50 IP - 1/16 49.06 IOM - 3/8 7.00 KLAC +1 1/2 38.44 LU +1 3/16 124.31 COMS -1 3/4 35.50 TDFX - 3/16 27.56 SPY - 13/32 110.16

Day Month Year History FOOL -1.13% 5.04% 11.28% 273.45% S&P: -0.34% 5.01% 13.55% 140.38% NASDAQ: +0.67% 3.05% 16.18% 153.34% Rec'd # Security In At Now Change 8/5/94 710 AmOnline 3.64 66.94 1740.74% 5/17/95 1960 Iomega Cor 1.28 7.00 446.70% 10/1/96 42 LucentTech 47.62 124.31 161.07% 9/9/97 290 Amazon.com 38.22 81.69 113.72% 8/12/96 130 AT&T 39.58 68.00 71.81% 2/20/98 215 DuPont 59.83 69.06 15.42% 1/8/98 115 S&P Depos. 95.91 110.16 14.86% 1/8/98 425 3Dfx 25.67 27.56 7.38% 2/20/98 200 Exxon 64.09 67.75 5.71% 2/20/98 270 Int'l Pape 47.69 49.06 2.87% 4/30/97 -1170*Trump* 8.47 9.44 -11.44% 8/24/95 130 KLA-Tencor 44.71 38.44 -14.03% 6/26/97 325 Innovex 27.71 23.50 -15.19% 8/13/96 250 3Com Corp. 46.86 35.50 -24.25% Rec'd # Security In At Value Change 8/5/94 710 AmOnline 2581.87 47525.63 $44943.76 9/9/97 290 Amazon.com 11084.24 23689.38 $12605.14 5/17/95 1960 Iomega Cor 2509.60 13720.00 $11210.40 8/12/96 130 AT&T 5145.11 8840.00 $3694.89 10/1/96 42 LucentTech 1999.88 5221.13 $3221.25 2/20/98 215 DuPont 12864.25 14848.44 $1984.19 1/8/98 115 S&P Depos. 11029.25 12667.97 $1638.72 1/8/98 425 3Dfx 10908.63 11714.06 $805.44 2/20/98 200 Exxon 12818.00 13550.00 $732.00 2/20/98 270 Int'l Pape 12876.75 13246.88 $370.13 8/24/95 130 KLA-Tencor 5812.49 4996.88 -$815.62 4/30/97 -1170*Trump* -9908.50 -11041.88 -$1133.38 6/26/97 325 Innovex 9005.62 7637.50 -$1368.12 8/13/96 250 3Com Corp. 11715.99 8875.00 -$2840.99 CASH $11233.54 TOTAL $186724.51

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Note
The Fool Portfolio was launched on August 5, 1994, with $50,000. It was renamed the Rule Breaker Portfolio in October 1998. The investing strategy began with the first investments of the Fool Port and has evolved with time and experience. In July 2001, the portfolio began adding $12,500 each quarter (We missed Jan. 2002, so we added $25,000 in April 2002). We skip a quarter if we have enough uninvested cash or cash available in stocks we would prefer to sell to make new investments. All transactions are shared and explained publicly before being made, and returns are compared in each week's column to the S&P 500 (including dividends where noted) and the Nasdaq composite. For a history of all transactions, please click here.





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