CMS Enhancements Struggles to Recover From Series of Costly Blunders : Electronics: The maker of computer add-on products faltered in its bid to enter the cutthroat PC market. The result: $17 million in losses--so far.

Something went terribly wrong on the way to the computer systems market. Jamshed (Jim) Farooquee, chief executive of CMS Enhancements Inc., in Irvine knows that all too well.

A failed joint venture and other ills have cost his company $17 million in losses for the past two years and forced him to lay off more than 350 employees. Another year of such losses and Irvine-based CMS may have to seek bankruptcy protection, the company said last week in a filing with the Securities and Exchange Commission.

Once confident that he could parlay his success in selling computer enhancements, such as hard-disk drives, into marketing complete computers, Farooquee saw his strategy unravel during this year’s industry price war.

“I unfortunately made more than one mistake,” said Farooquee, 39. “We learned a few lessons, some very expensive lessons.”

The rise and fall of CMS Enhancements, which has annual revenues of $115 million, may sound familiar. Like many other computer peripheral companies, CMS rode the success of the personal computer revolution only to make an ill-fated expansion into the saturated marketplace of selling complete computer systems.

This setback has been difficult to swallow for Farooquee, who emigrated from Pakistan in 1975 with a civil engineering degree and $40 in his pocket. He became a success as the quintessential salesman of everything from insurance to computers.

“Farooquee was living on the riches that CMS made years ago,” said Ian Gilson, an analyst at L.H. Friend, Weinress & Co. in Irvine. “Now he is waking up.”

Today, the company is in full-scale retreat. In August, Farooquee confirmed that CMS’ joint venture with South Korea’s leading computer company to sell PCs in the United States had failed.

The company’s combined losses since 1990 are more than it has made in profit since going public in 1986. Arthur Andersen & Co., the company’s auditor, said in a filing last week that the losses raise “substantial doubt” about CMS ability to say in business.

“Most companies cannot survive this level of losses, but we believe we are in a turnaround,” Farooquee said. “The disclosure is a precautionary accounting requirement.”

Besides cutting employees, CMS is saving money any way it can. Idled manufacturing plants in Singapore and Pakistan are up for sale. A disk drive repair business was shuttered. And Farooquee hopes to sublease two-thirds of the company’s Spartan headquarters building.

Yet CMS has managed to stay afloat partly because the dramatic cuts in computer systems prices have not translated into a severe price war in the hard-disk drive industry. Disk drives account for 70% of CMS sales, and Farooquee said the company expects to report a profit in its first quarter, ended Sept. 30.

He also said CMS has a new technology that could help maximize the flow of data through all computers, regardless of future technical advances by industry components makers. CMS hopes to license it to other computer manufacturers.

Farooquee said his company’s woes often prompt him to reminisce on the early days of CMS, which originally stood for Complete Management Systems.

To Farooquee, selling computer equipment in the 1980s came as easy as his early ventures selling insurance, real estate and carpets. Farooquee and his partner Mason Tarkeshian created the company in July, 1983, with $12,000 in cash. They were joined later by owners of a computer store, Tom Ong and Jimmy D’Jen.

“Jim was a very good salesman,” said Ong, now retired. “His eyesight is very wide and his reaction very fast. He was like a wild horse, and he needed us to support him.”

Originally, the company dabbled in selling various components of PCs to retail businesses. In November, 1984, Farooquee found a way to ride on the spectacular growth of PCs by selling key enhancements known as hard-disk drives to small computer dealers.

Investors flocked to the company’s stock, sending CMS’ price to a record of $36 a share in early 1987, well above the a share close on Friday. By June, 1989, the company reported sales of $200 million, thanks largely to a deal to distribute and enhance disk drives made by Seagate Technology Inc., the world’s largest disk drive company.

But the dependence on Scotts Valley, Calif.-based Seagate also caused CMS to falter. During late 1988, the company began experiencing quality problems with Seagate drives. Several key officers left to start their own companies, partly because CMS wasn’t willing to invest more money in research and development.

“The spinoffs hurt us because they tapped into a lot of good customers and employees,” Farooquee said. “Once you lose a key group, you lose momentum and you get pockets of people who do their own thing.”

CMS expanded in June, 1988, by acquiring a tape-drive manufacturing business, but that business went sour and eventually led to several million dollars in write-offs. In January, 1989, co-founders Tarkeshian and Ong left.

“We let it get out of control,” Farooquee said. “All those problems happening at the same time collapsed our infrastructure. We tried to fix it by throwing more people at the problem, but it continued to spiral. And we kept losing market share.”

As prices fell and technology advanced, the company found that its once-unique, low-cost line of hard-disk drives no longer stood out from those of a host of other disk drive manufacturers, who engaged in a withering price war in 1990 and 1991.

The collapse of its tape-drive business led CMS to report its first loss--$8.5 million--for the fiscal year ended June 30, 1991.

Farooquee got desperate, and that led to what he calls CMS’ “second mistake.” Farooquee decided he could only make money by diversifying into the computer systems business. But he had trouble lining up the financing until he managed to cut the deal with TriGem Corp., the U.S. subsidiary of computer maker TriGem Korea of South Korea.

The joint venture seemed perfect. TriGem had been itching to enter the U.S. market, establishing its own U.S. subsidiary in Santa Clara the year before. TriGem was South Korea’s biggest computer manufacturer with $300 million in sales in 1990.

Farooquee, ever the salesman, was there to cut the deal. He figured that CMS’ marketing clout in the United States would fit well with TriGem’s ability to manufacture inexpensive computers and its technical wherewithal.

CMS originally targeted the segment of the computer industry that is under the heaviest pressure from a new group of computer retailers known as super-stores. It promised independent computer dealers who sold its ESP brand computers that it would be able to ship them supplies within 48 hours.

But confusion over pricing and slow deliveries from the South Korean manufacturer strained relations between the two partners, and it drove computer dealers away. Farooquee declines to say how many have left.

Stanley Jung, vice president and general manager of TriGem Corp. in San Jose, a subsidiary of TriGem Korea, also attributed the failure of the joint venture to cultural differences with CMS.

“It was a difference in management style between (Farooquee’s) company and our Korean style,” Jung said.

Farooquee said that not all the details of the venture had been ironed out at the time it was announced, such as when TriGem would deliver and which company would pick up some incidental costs that ate into profit margins.

Strains early in the relationship are evident in hindsight. CMS suffered some embarrassment last year when it debuted its pen-based computer to the press in November.

Engineers in South Korea tinkered with the model up to the last minute, sending only one working model to CMS marketing officials one day before the Comdex computer show began in Las Vegas. That forced CMS officials to take a crash course in operating the new gadget while on the exhibit floor.

And although Farooquee announced the TriGem joint venture in late 1990, the product launch didn’t take place until June, 1991, nearly a year into the recession. Many analysts wondered why Farooquee was entering the market with a “me-too” product when many players were already being forced out.

CMS’ brand of computers, ESP, never became established, one computer executive said. And a marketing strategy to supply complete systems and components to dealers under a package deal aimed at cutting dealer costs never really got off the ground, because dealers chose not to participate in large numbers.

“Getting into computers was the right idea,” Farooquee said with a sigh. “But getting into computers very late was very difficult. We didn’t have the right product, and we weren’t quick to market with it. There was a crash in the market around the corner. Another expensive lesson.”

The cost of that lesson became evident starting last December and February, when CMS carved away at its work force, reducing the employee count from 549 to about 215 now.

After fizzling in the marketing of complete computer systems, CMS is again concentrating on its core business of shipping disk drives and other personal computer components.

“I think they can continue to exist,” said Mark Matheson, a securities analyst at Crowell Weedon & Co., a Los Angeles investment bank. “But as far as potential for fast growth, I doubt it will ever happen.”

Farooquee said he believes that CMS has a breakthrough product in its so-called AnyBus, a standardized adapter designed to speed the flow of data from a computer’s main processing unit to its video display components. The adapter would be compatible with any IBM-type architecture, even if the system is upgraded with more advanced processors.

Farooquee says that a true turnaround for CMS, however, depends on its continued success in marketing storage components, such as disk drives.

“Survival comes down to spending less than you make,” Farooquee said. “If you spend more, it is definite suicide. We are hedging our bets and are not betting our company on this product.”