The Rise and Fall of a Computer Firm That Could Do No Wrong : Electronics: CMS Enhancements of Irvine rode the success of the personal-computer revolution before a single venture almost destroyed it. The company's losses since 1990 are more than it has made in profit since going public in 1986.

TIMES STAFF WRITER

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 since 1990.

Another year of such losses and CMS may have to seek bankruptcy protection, the company disclosed 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, a $115-million company with operations in Irvine, Singapore and Pakistan, may sound familiar. CMS is the latest example of a computer peripheral company that 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 developed a career as a 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."

Now, 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 continue as a business. The company acknowledged in the filing that if the losses continue at this level, CMS may have to file for Chapter 11 bankruptcy protection.

"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 laying off 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, which collectively has grown wary of overproduction. Disk drives account for 70% of CMS sales, and Farooquee said the company expects to report a profit in its first fiscal quarter ended Sept. 30.

Farooquee also said CMS now has a 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.

But, acknowledging that his dreams of creating a billion-dollar computer company have been dashed, Farooquee is too gun-shy to predict a comeback, and said he won't bet the company's future on a single venture again.

"I'd rather be successful as a small company than be a broke billion-dollar company," he said.

The soft-spoken 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.

They shared the same entrepreneurial visions as the immigrant founders of AST Research Inc., which started in 1981 and has become Orange County's biggest computer company.

"Jim was a very good salesman," said Ong, now retired and living in Newport Beach. "His eyesight is very wide and his reaction very fast. He was like a wild horse, and he needed us to support him. I hoped CMS would keep expanding, and I believed that Jim Farooquee could make it do that. But as you know, any business relies 50% on fortune."

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.

In those days, most computers came without much memory for storing programs, so customers quickly found they needed to add hard disk drives to their machines to run increasingly complex software applications. CMS supplied those drives--with high volumes and low profit margins--as well as the myriad adapters required to make PCs more versatile.

Investors flocked to the company's stock, sending CMS' price to a record of $36 a share in early 1987, well above the $2.12-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-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 into research and development.

Other firms sprang into the void to compete with CMS. One of these was Procom Technology Inc., an Irvine company founded in 1987 by Alex Razm'joo, a former engineering chief at CMS.

While CMS concentrated on shipping products manufactured by other companies to the retail market, Procom stole market share in the higher end of the market by offering custom-designed storage equipment for networks of computers, Razm'joo said.

Another unexpected spinoff from CMS, MicroNet Technology Inc. in Irvine, took a large share of CMS' business by targeting customers interested in enhancements for computers made by Apple Computer Inc.

"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.

Ong, 64, said he left the company partly because of friction in upper management, partly because he was tired of the punishing 12-hour days that the younger Farooquee worked.

"For the past few years since I left, everything went to Jim's shoulders, and I believe he has suffered quite a bit," Ong said.

Farooquee agrees.

"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 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 in South Korea.

Competitors at AST had successfully made the transition from making computer add-on boards to building complete computers in the mid-1980s. But when Farooquee announced his TriGem venture in November, 1990, he was four years behind AST.

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 also had clout; it was South Korea's biggest computer manufacturer with $300 million in sales in 1990, largely by making computers for Epson Corp.

TriGem had invested more than $15 million in a new line of computers for the U.S. market, including several low-priced models and a novel computer workstation that was a clone of Sun Microsystems' popular system.

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. "I don't want to blame Jim Farooquee because he was our partner. But we could not read his mind" on particular details that were not spelled out under the general venture agreements.

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. 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.

One computer executive said the CMS-TriGem venture never really materialized into serious competition for AST Research.

CMS' brand of computers, ESP, never became established, the 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. Computer sales were only about $17 million for the year, barely 16% of sales and not nearly enough to support a high volume, low-profit strategy.

"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 since last December, when CMS carved away at its work force, reducing the employee count from 549 to about 215 now.

With the exception of Farooquee and engineering chief D'Jen, the entire executive team of CMS has been purged or jumped ship. Some who left said they got tired of the difficulty in pinning Farooquee down.

"I think we have a good team now, with lots of shared responsibility," Farooquee said.

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 enhancements.

"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. The air has been let out of the balloon, and you have to wonder if it's worth pumping up."

Yet it is likely that CMS will survive despite its mistakes, says Gilson, the L.H. Friend analyst, who estimates that CMS could earn 20 cents a share for the 1993 fiscal year.

Farooquee said he believes 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 type of IBM-compatible architecture,

even if the system is upgraded with future generations of processors, Farooquee said. The timing may be right because PCs often require video component upgrades to make full use of emerging software applications with high-quality graphics. Farooquee said more than 50 customers have placed orders for the device, which would carry a high profit margin.

CMS may market the product under its name, but to reduce risk and cut its costs the company is seeking to license manufacturers to make the product.

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."

Gilson said he thinks that CMS may be buoyed as long as sales of hard disk drives remain strong and the company's network of 1,500 computer parts dealers--which is shrinking as the recession claims more victims--remains loyal.

"He's a fighter, and the company has no debt," Gilson said. "He should do well as long as he doesn't wander off in some direction again. . . . I don't see any risk of bankruptcy."

Close Up: Jim Farooquee

Position: Chief executive and president of CMS Enhancements Inc., Irvine.

Age: 39.

Education: Degree in civil engineering from Karachi Technical College, Karachi, Pakistan.

Experience:

1983--Founded Professional Computer Consultants Inc. and CMS Enhancements Inc.

1982 to 1983--Vice president of sales for Orange County Computer Systems, seller of hard drives and business application software.

1979 to 1982--Owner of Consumer Carpet, retail flooring business in Fullerton.

1977 to 1979--Insurance salesman, Equitable Life Assurance Society.

1975 to 1977--Technician and engineering aide, Systems Magnetic Co. of Anaheim.

CMS Enhancements Inc. Chronology 1983 July: Founded in Santa Ana by Jim Farooquee and Mason Tarkeshian. They are joined later by Tom Ong and Jimmy D'Jen. The company's original business focused on sales of computer enhancements to retailers. 1984 November: Begins manufacturing its own hard disk drive upgrade kits to piggyback on the success of the personal computer revolution. 1985 March: Acquires a line of tape backup subsystems, which duplicates data stored on a computer in case of accidental loss. 1986 April: Goes public by a reverse acquisition--it allows itself to be acquired by a publicly traded shell company. October: Acquires a developer of hard disk drives for Apple computers. 1987 May: Opens manufacturing plant in Singapore. June: More than 73% of hard drives sold by CMS are supplied by Seagate Technology Inc. 1988 June: Acquires tape division of North Atlantic Industries Inc., adding another plant in Singapore 1989 January: Co-founders Mason Tarkeshian and Tom Ong leave. December: Acquires disk drive repair unit; CMS stock lists on New York Stock Exchange. 1990 April: Acquires tape assets of Alloy Computer Corp. in Marlborough, Mass. November: Announces deal with Korea's TriGem Corp. 1991 April: Launches master integrator strategy to provide small computer dealers with one-stop service and supplies for computer systems.June: Launches ESP brand of computers; CMS loses $8.5 million; Company moves to new headquarters in Irvine. December: Begins reducing its work force.

1992 September: Announces $8.5-million loss; reveals TriGem venture ended in June; layoffs reduce work force to 215 employees. CMS introduces AnyBus line of enhancement products. The company also warns that continued losses could force it to seek bankruptcy protection.

Downward Trend

CMS Enhancements showed promise as a young company, quadrupling revenue and profits at its peak in 1989. Since then, however, it has been on a downward trend, losing $8.5 million in each of the last two years, and more than 350 employees since 1990. (Fiscal year ends June 30; dollar amounts in millions.) Revenue 1986: $41.1 1987: 100.2 1988: 151.5 1989: 200.4 1990: 187.7 1991: 130.1 1992: 112.7 Profit/Loss 1986: $1.0 1887: 1.6 1988: 2.5 1989: 4.8 1990: 0.4 1991: 8.5 (loss) 1992: 8.5 (loss) Employees 1987: 150 1988: 347 1989: 515 1990: 572 1991: 549 1992: 215 Source: CMS Enhancements Inc. Researched by DEAN TAKAHASHI / Los Angeles Times

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