Cromemco's Never Taken A Dime From Anyone

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Argabright, too, was concerned with inventory control. The trick, he advised, was to cut back on inventories as soon as possible when orders dropped off. "I continually preached that we ought to keep inventories down. High-tech companies get into trouble by building inventories too fast."

To help those involved keep inventory in line with growth projections, the company now shares its financial planning with the purchasing department, feeding it as much data as possible. "Information can get buried in a system," Garland explains. "It's not that it's being hidden on purpose; sometimes it's simply not provided." With Cromemco's fact-supplying guidance, purchasing people now can measure their own performance against management goals. The approach is working: Cromemco's 1981 inventory turn was a healthy 3.3 times.

Cromemco's approach to receivables, however, contains only one bare fact: Pay up within 30 days of shipment. The age of the company's receivables, financed through its revolving bank line, has rarely exceeded this interval, since its products are highly sought, backed now by national advertising. In turn, Garland and Melen are happy with their network of independent dealers and original equipment manufacturers (some 10% of Cromemco products go into OEM machines). Predictably, they enjoy the idea of working with entrepreneurs like themselves.

Though all seems tranquil in Cromemco's corner if Silicon Valley, like the mountains in the distance the company has had some ups and downs. Curiously, as a breather, management would just as soon have it the latter on occasion. "After all," explains Garland, "if the market softens, that just helps. To keep growing requires funding." On the other hand, when the growth rate exceeds return on equity (by Cromemco's measure, equity is simply the amount of money in the company), management cuts back on expenses, rather than seek new financing or extend borrowing. "Since it's our money," the owners say, "we tend to be more conservative. It's no one else's money that we're going to lose."

Cromemco's unusual, ESOP-like profit-sharing plan has also been a factor in cash-flow control, inasmuch as it deals in corporate shares rather than direct cash investiture. The company "buys" stock from its own treasury, then "sells" it to its profit-sharing trust, which in turn holds it for employees. Though for tax purposes the company has made a deductible contribution, in effect, no money has actually been used.

Another advantage of using stock instead of cash for vestment is that the employees like it better. An amount based on 15% of their salaries is used to acquire stock, whose value is independently appraised; after 4 years of employment they are 40% vested, and after 11 they are fully vested. Thus employees not only share profits, but as a result are able to participate directlt in the fortunes of a dynamically growing company. An employee who cashes in after 11 years is apt to come out very well indeed, and still be young enough to start a new career -- or company. Not surprisingly, employee turnover at Cromemco has been low.

And Garland and Melen remain faithful, too. They have been wooed by venture capital firms and underwriters from coast to coast, but have spurned all offers. Yet Cromemco is at a crossroads. If it continues to reject outside capital, its growth will slow; if its growth slows, Cromemco may lose its market share within a still-exploding industry. A decision has to be made: more capital with dilution of ownership, or just another closely held business whose owners are doing well enough, thank you.

Melen and Garland would like to stay private. It's all under their control, and that's the way they like it. "We see it as a lifelong career," they say. Going public, Garland argues, would only cause a distraction. "We just want to deliver a product and keep our employees happy," he insists. "From the beginning we didn't want other shareholders." Cromemco likely can maintain a reasonably strong pace -- 30% to 50% annually -- for the near future, somply by operating under the philosophy that a small company can be run more efficiently than a large company. To this end, Cromemco recently has opened markets in Europe (where, to avoid currency disparities, payments are made in U.S. dollars) and is among the first computer manufacturers to move aggressively into China.

Argabright, however, would rather see much more rapid expansion. "I think they're growing too slowly," he says, "and I've told them so. They're on the threshold of dramatic growth within an industrial revolution. To grow rapidly, you need outside capital." He recommends that they at least consider a private placement of equity "with somebody who would complement their product line, not a pure venture capitalist." He feels Cromemco's weakness now is in marketing, and is urging them to bolster this area. The private placement, he points out, might well be with a firm that has strong international marketing outlets.

But Argabright is still apprehensive. "To grow rapidly," he insists, "you need outside capital for dynamic growth. You've got to go public. I'm sure they will." If they do, he foresees, Cromemco could become another Hewlett-Packard; if not, he rues, "they'll just have to find a niche in the market and stay there."

Whoever wins out in the developing battle between conservative management-owners who want to grow within the parameters of available cash and an activist adviser counseling additional financing, both agree on one thing: The Cromemco story could not happen again today. "The industry is too mature now," says Garland. "Cromemco already has millions of dollars invested. No one could self-finance to this stage again." To be sure, Garland and Melen happened to be there with the right product -- an expandable microcomputer that allowed customers to buy only what they could afford and add on to it later -- at the right time. "But in any venture," Argabright reflects, "luck is a factor. Nonetheless, you have to take advantage of that luck."

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