Mounting Debt Chases Maker of Disk Drives Into Bankruptcy Court
Throughout its four-year history, Microcomputer Memories has been awash in red ink and beset with problems that have continued to grow every year.
The Chatsworth-based maker of disk drives for personal computers lost more than $13 million in all, more than twice its sales since opening for business, and never reported a quarterly profit. Earlier this month, it finally sought refuge in the bankruptcy courts.
“It simply ran out of money,” said Arnold Kupetz, the firm’s bankruptcy lawyer.
Microcomputer Memories had ambitious plans just five months ago when it moved from Van Nuys into a bigger and newer 45,000-square-foot plant in Chatsworth with hopes of landing big contracts to supply high-capacity disk drives. But severe price competition, difficulties in perfecting its technology and a lack of financing put it in a bind.
‘A Stack of Lawsuits’
The company, which filed for protection from creditors under Chapter 11 of the Federal Bankruptcy Code, took the action after what Kupetz termed “a stack of lawsuits” were filed by its creditors. The suits include one filed by the company’s landlord, an investment group that is seeking to evict the company for failing to pay rent on its new building.
Microcomputer Memories executives would not return calls from The Times after disclosing last week that they had made the Chapter 11 filing. Kupetz, however, said the firm is looking for a buyer and expects to leave its building for a smaller location within 45 days. The company, which employed 200 as of last October, now has fewer than 30 employes.
Kupetz said the company’s greatest potential asset, and one that could make it an attractive acquisition, is about $10 million in tax-loss carry-forwards it accumulated because of its huge losses. Tax-loss carry-forwards allow a company to reduce its taxes by deducting prior losses from taxable income. If specifications are met, the Internal Revenue Service allows companies to assume the tax-loss carry-forwards of their merger partners.
Kupetz said another possible attraction of Microcomputer Memories is its status as a public company. A private company, he said, could acquire it and become publicly traded without many of the expenses involved in making an initial public stock offering.
Founded in 1982
Microcomputer Memories was founded in March, 1982, in Van Nuys by D. Curtiss Johnson, who had been an executive with Alpha Data, a Chatsworth-based maker of computer equipment. Microcomputer Memories sought to develop 3.5-inch “Winchester” drives--which retrieve and store data on small, rigid disks--priced from $300 to $1,400. To help finance its plans, the firm raised $5.9 million in January, 1984, in an initial public offering of its securities.
The company’s problems, in part, can be traced to the troubles experienced the past two years by most makers of disk drives. Microcomputer Memories entered a highly competitive business at a time when computer sales slowed considerably and foreign competitors began cutting prices sharply.
James Porter, who follows the disk drive industry as editor of Disk / Trend Report, said Microcomputer Memories never landed a large contract with a major computer maker such as Apple or Wang, which would have provided it with steady revenue.
Instead, Porter said, it competed in the “after market,” in which customers buy the hard-disk drives to upgrade existing computer systems. Severe price cuts are common in that business, he said, because of intense competition.
High Costs Cited
One computer company executive familiar with Microcomputer Memories said the firm’s problems also stemmed from its decision to make its drives in the U. S. instead of the Far East where manufacturing costs are lower. In addition, he cited the technological difficulties the company had in developing its higher-capacity disk drives. Furthermore, he said, Microcomputer Memories spent too much for parts that could have been bought elsewhere more cheaply.
The company got off to a slow start. During its first two years, it worked only on research and development and had no revenue.
It was named in a $4-million lawsuit in 1984 filed by one of its early investors and executives, G. Roy Mulliner. The suit was settled last year, and Microcomputer Memories did not have to pay damages.
In his suit, Mulliner raised questions about the company’s spending habits. He claimed that he was fired after warning Johnson, the company’s president and chief executive, that the company was squandering money by hiring people, buying equipment and committing money to projects “far in excess of its needs.”
SEC filings show that the company has been continually short of money and, in the past few months, sold stock at only a few cents a share to raise funds. In January, it issued 3 million shares for $300,000, or 10 cents a share.
Risky Investment
In March, it submitted another filing with the SEC to sell 2.5 million more shares at 10 cents each. Although companies are always supposed to caution investors about potential risks, Microcomputer Memories made an unusually strong warning in its March filing.
Microcomputer Memories said an investment in the company “should be considered only by persons who can afford the loss of their entire investment.”
The filing also states that, because of its lack of money, the company couldn’t pay suppliers, was unable to meet many orders for its products and was forced to dismiss its second shift of workers.
In the nine months ended Nov. 30, Microcomputer Memories lost $4.5 million on revenue of $4.9 million. Assets as of Nov. 30 stood at $5.4 million and liabilities were $4.15 million. Since then, Kupetz said, the firm has lost another $1.5 million, and liabilities now exceed assets.
Secretive History
Microcomputer Memories always has been highly secretive about its business, shedding little light in public documents and announcements about the companies it was doing business with or getting money from.
Lenders were referred to as “a finance company” or “an unaffiliated British corporation” in documents. Its press releases boasted of new orders, but did not name customers, citing company policy.
But SEC records show one major customer was General Computer in Massachusetts, best known as the maker of “Hyperdrive,” an internal hard-disk drive for Apple’s Macintosh personal computer.
Microcomputer Memories did some puzzling things. For example, the company’s last annual report includes a sketch of the New York Stock Exchange with the firm’s “MCMI” initials carved into the side of the building. But the company’s stock was never listed on the exchange, always having been traded over the counter.
