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Orange County 1990 The Year in Review : 1990 Brought Tech Companies Their Share of Trouble : Performance: The sector was once the darling of local analysts, but this past year proved it was not immune to a degenerating economy.

TIMES STAFF WRITER

Gilbert P. Hyatt, the low-profile La Palma inventor who enjoyed a flash of fame in July when he won a patent for inventing the microprocessor 20 years ago, proved that small innovators can still make a mark in a world ruled by high-technology giants.

But for many of Orange County’s small- and mid-size technology companies, 1990 was the story of the little engines that couldn’t. The technology sector, once the darling of local analysts, proved it was not immune to a degenerating economy.

“Final demand just wasn’t there for the products,” said Russell R. Diehl, managing partner of Diehl & Co., an investment firm in Newport Beach. “Customers cut capital spending and that dragged down technology. In other cases, management made mistakes in execution.”

Retrenchment, restructuring, layoffs, downsizing, repositioning, Chapter 11-- the buzzwords of tough times--became associated with many of Orange County’s small high-tech companies.

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FileNet Corp., Emulex Corp. and Gradco Systems Inc. started the year with ambitious plans but ran into troubled waters later. Alpha Microsystems Inc., Diceon Electronics Inc., Distributed Logic Corp. and Microsemi Corp. entered the year with problems and bailed water to stay afloat for most of the year.

By year’s end, a number of companies--including the Phoenix Group International, Metropolitan Circuits and EECO Inc.--ended up in bankruptcy proceedings. Others became takeover candidates or put themselves up for sale.

Thomas E. Winter, head of the Costa Mesa office of the venture capital firm Burr, Egan, Deleage & Co., said 1990 was essentially two different years for technology companies: “In the first half, the markets were receptive to high-growth, high-margin technology companies. In the second half, any type of bad news at all generated a massive selloff in small capitalization companies.”

Here is a brief look at the problems that befell some local high-tech firms in 1990:

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* FileNet Corp. The maker of computerized document storage systems began the year with great optimism. The company had big plans to increase employment by more than 40%, from 650 employees to 920 by year-end. But its rose-colored view soon darkened. FileNet expected a number of prospective customers to place orders for its big-ticket products, but Iraq invaded Kuwait in August and the economic climate dampened.

On Sept. 25, the company announced that a number of customers it had been counting on had decided to delay their orders. FileNet laid off 4% of its employees and reported an unexpected third-quarter loss. Shocked investors immediately sent FileNet stock tumbling 43%.

James Reynolds, an analyst at Wedbush Morgan Securities in Los Angeles, said he expects FileNet to fare better in 1991, partly because of rising demand for its products and two new software licensing programs that should increase sales.

* Alpha Microsystems. The business computer manufacturer in Santa Ana was hobbled by the slowdown in the minicomputer industry as it started the year. In August, the company cut 9% of its work force and restructured its operations, cutting back on research and development and closing some Northern California offices.

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The company reported a second-quarter loss of $1.1 million. As it entered the fourth quarter, two of the company’s top executives, co-founder Richard Wilcox and chief executive officer John Cain, resigned.

The only bright spot for Alpha Micro appeared when the Aril Group, a New York holding company, announced plans to acquire the computer maker for $11 million. The deal is expected to close before April, 1991, barring any unforeseen obstacles.

* Diceon Electronics. The manufacturer of back-panel displays and circuit boards for computers became vulnerable to a takeover because of its poor financial performance during the year.

Calvary Partners LP, a San Diego investment firm, made an unsolicited $27.2-million buyout offer. Diceon rejected the $5.25-a-share offer as too low and has filed suit against Calvary to block the buyout bid.

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The takeover attempt came after restructuring efforts. Diceon laid off 225 of its 1,500 employees in September and announced that it would take a writeoff of $5 million in a restructuring of its manufacturing operations.

Diceon’s weak position was cast well before 1990. Lulled by eight years of success and weighed down with too much production capacity from past acquisitions, the company began to fall behind competitors.

Gerald Fleming, an analyst with Fahnestock & Co. in New York, said he thinks that the company is on the road to recovery. “The restructuring was good for the company in making it more competitive, but now they have to hope prices stabilize,” he said.

* CMS Enhancements. The Irvine-based manufacturer and distributor of storage products was hurt by tough competition and forced to write off slow moving product lines. But it was one of the few troubled companies that found light at the end of the tunnel this year.

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James Farooquee, CMS president, said recently that he believes that the recession will claim its victims selectively, with those companies that do not keep up with technological advances falling by the wayside first.

To see that CMS stays up, Farooquee looked outside the company and secured a strategic alliance agreement in November with TriGem Corp., South Korea’s largest computer maker, under which CMS will distribute and market TriGem’s line of computers in the United States.

The deal will give CMS its first opportunity to sell complete computer systems rather than just the disk drives and other components used in computers. Even so, some analysts are taking a wait-and-see attitude about CMS’s latest venture.

“It’s a difficult time to be entering the computer business,” said Mark Matheson, analyst at Cruttenden & Co. in Newport Beach.

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