Jodee had this fundamental belief that he could do no wrong … he just wasn’t prepared for things not going well.
Dan Keller, Imagineering manager
By the middle of 1988, Jodee’s rocket was heading off into the stratosphere. Sales for the six months to February had doubled from the previous year, forecasts were being revised upwards again, and everyone had their eyes firmly on the heavens.
The latest great success was hardware, which now made up more than two-thirds of the company’s sales. Having introduced its own IBM clone, the Ultra PC, in 1987, and opened a new factory in Taiwan, Imagineering was selling the machines as fast as it could put them together, and still had a huge backlog of orders.
The share price was also climbing, so Jodee and his father took the opportunity to reward themselves by granting the Rich Family Trust a couple of million share options which would be triggered if the share price hit $2.00. They also took advantage of the sunny outlook to raise $17 million from the company’s shareholders and place $7.2 million worth of new shares with Australian institutions, almost all of which were snapped up by Bankers Trust at $1.50 apiece.
According to the company’s broker, the shares were still an outstanding buy: Imagineering was predicting another record year, had extended its exclusive agreement with Lotus till 1990, and was embarking on yet another program of expansion. It was opening new offices in Bangkok, Manila, Seoul, Jakarta, Adelaide, Canberra and Perth, and had just tripled warehouse space in Sydney to cope with the huge demand for its PCs.
But even as 1989 began, interest rates and inflation were shooting skywards, the boom was going bust and business was getting tougher by the day. By May, Imagineering shares were falling fast, but Jodee was still relentlessly upbeat, boasting in the half-year results that the company was still growing rapidly and that profits had risen by 46 per cent. Even more growth was on the way, he promised, and there wasn’t a cloud on the horizon.
The truth was otherwise, as Jodee should have known. A closer reading of the accounts showed Imagineering had actually made a loss for the six months to February. And inside the company, all systems were stretched to the limit. According to one of the senior finance people, ‘it had grown so fast there were no structures in place. You just couldn’t keep up. The structures just couldn’t handle the size of the business’.
It was not only in the finance area that Imagineering had problems. One of its promises to dealers in 1985 had been to get goods on their doorsteps in under 24 hours, but this was now a distant memory. The huge demand for the Ultra PC meant it was taking a week to fill orders. And when the computers arrived, they often didn’t work.
Joe De Simone, who by now was one of the company’s biggest dealers, had begun to experience difficulties in early 1988. He was selling batches of 50 computers to TAFE and other colleges and getting seven or eight of them back. Then he was finding it impossible to get the machines fixed, because Imagineering had no spare parts. ‘It created a huge amount of work for us and caused us a lot of anguish’, he says.
The root of the problem was in Sydney, where Imagineering was supposed to test the Ultras after bringing them in from Taipei. Instead of running the machines for 24 to 48 hours to ensure that the components were compatible and everything was working, the company was rushing them out to customers. De Simone reckons they were being tested for only two hours, resulting in a shocking failure rate.
In September 1988, dealers had begun complaining to journalists that it was taking a week to get a new PC delivered, and three weeks to get it put right. One reported that Imagineering was so overloaded he could not get any sense out of them. ‘The lines of communication seem filled to capacity. We had to continually reintroduce ourselves. It seemed at times the left hand didn’t know what the right hand was doing.’
Rich had responded publicly that everything was under control. They were fixing the problems—by taking on staff and boosting production—and the critics were just being negative. ‘There’s an attitude out there that implies a company can’t keep up with explosive sales growth without getting to the point where it can’t cope internally any more. That’s nonsense.’
It wasn’t only Imagineering’s customers who were telling Jodee to slow down. At board meetings, his fellow directors had been begging him to do the same. As one of his most senior managers, Graham Pickles, told BRW after the crash, ‘Jodee has an extremely strong personality and enormous energy. He worked around the clock and pushed very hard for the company. It was like he wouldn’t take his foot off the accelerator. Others in the company weren’t so comfortable with that pace. There were some extremely heated boardroom debates’.
Back in December 1985, at the time of the public float, Jodee’s father had recruited three of Australia’s best businessmen to keep an eye on the company and provide a steadying hand. Their presence as non-executive directors was supposed to reassure investors that the business would be run in a disciplined fashion, but by 1988 these grey-haired captains of industry were shouting from the back seat of Jodee’s rocket and not being heard. The young space cadet was at the controls, and he wasn’t stopping for anyone.
One of the old hands trying to get Jodee to ease back the throttle was the then boss of McDonald’s Australia, Peter Ritchie, who was widely regarded as one of Australia’s top managers. ‘The company was growing far too fast’, he says today. ‘It couldn’t service the dealers, it couldn’t get the product out, it didn’t have the people or the finance. There were creaks and groans all over the organisation. We all told Jodee that it couldn’t go on the way it was going. We told him for two years. But we weren’t able to get through to him. The outside directors were just talking among themselves.’
Another of the hugely experienced minders was Brian Scott, whose career spanned Harvard, Stanford, a family business and a host of government inquiries. But he, too, was ignored. ‘The business was travelling too fast. It didn’t have the controls we would have liked. We told Jodee he had to consolidate, slow down. He didn’t listen.’
Scott and Ritchie had two detailed sessions with Jodee on top of the regular board meetings, but it was to no avail. ‘He wasn’t exactly rude’, says Scott, ‘but he made it clear that he was only there because he had to be. He thought anyone over 35 who didn’t understand computers had no role to play’.
If Scott or Ritchie had been chairman of the board, they might have been able to enforce their views, but this position was held by Jodee’s father. As the arguments raged about the company’s course, Steven Rich consistently took his son’s side, making it easier for Jodee to keep gunning the engines. ‘It was a mistake for Steven to be chairman’, says Brian Scott today. ‘It should have been someone who was completely independent.’
It was not just his fellow directors that Jodee ignored. According to Dan Keller, ‘At the end of the day, Jodee would do what Jodee wanted to do’. Or, in the words of Imagineering’s general manager, Chris Spring, ‘He wouldn’t listen to suggestions of slowing down, even from the executives he respected a great deal. He would say that we were defeatist’.
Arguing with visionaries is never easy, and taking on the Messiah is several degrees harder, so many did not bother to speak up. According to Peter Ritchie—and many others since—this is why Jodee will always get his way. ‘Nobody’s ever strong enough to stand up to him. He doesn’t want to hear the truth and no one wants to tell him, because he’s so dominant.’
I tell this to Jodee in 2001 and he looks genuinely surprised, as if no one has ever mentioned it before. Yet it’s certainly not the first time it’s been said, and he could have read it many times in countless articles. In a way it illustrates the point—that listening is not his forte.
At our next two meetings he brings it up again. It has really hurt him, he says, to think that people might say this about him. He has canvassed several friends and they have all told him he’s an excellent listener. He can’t understand how others don’t agree. I suggest that maybe it’s because it’s almost impossible to get him to change his mind about anything—as I myself am discovering. He doesn’t accept that either: ‘That is absolutely wrong’.
In mid-1989 the storm arrived. With a sudden slump in demand came price-cutting and savage competition. Everywhere you looked there was pain. Dealers were going bust, and the Ultra’s name was mud in the marketplace. As rates soared and stocks of the PC piled up in the warehouse, Imagineering’s interest bill took off. From $300,000 a month it was soon pushing $1 million. Yet still Rich appeared unconcerned. Instead of battening down the hatches, cutting staff and getting costs down, he continued to forge ahead.
Inside the company the problems were obvious. According to a couple of senior Imagineers, cash was incredibly tight, bills weren’t being paid on time, and the pile-up of old stock was ‘horrific’. Much of it was six months old, which made it unsaleable or very hard to shift. The new telecommunications division, which had only just been opened, had a warehouse full of brick-sized mobiles that were twice the size and twice the price of rival brands—Jodee and his Imagineers had not realised how fast technology was moving.
The company’s exclusive contracts with US software suppliers had also become a handicap. To win and keep their business Jodee had committed to buying huge quantities, which now could not be shifted. When confronted with the problem, Jodee didn’t want to know about the details. ‘Just get rid of it’, he told his managers. Positive as ever, he commissioned a Ghostbusters-style poster with a Jodee caricature bursting forth from a red-crossed circle, proclaiming ‘I ain’t afraid of no slow stocks’.
He had once told Dan Keller that he wasn’t interested in Imagineering unless it was growing at 100 per cent a year, and he still seemed to think that was possible. ‘Jodee had this fundamental belief that he could do no wrong’, says Keller, who had been a real disciple in the early days. ‘He just wasn’t prepared for things not going well.’
To add to the company’s difficulties, the sins of the past were coming back to haunt them. In previous years Jodee had given instructions to hide old stock by parking it with dealers like Joe De Simone on a sale-or-return basis, then counting it as sold. This had only postponed the crunch, and was now making it worse.
‘That was Jodee’s management style’, says one senior Imagineer. ‘Everything we did was like a stay of execution. Everything was a day-to-day proposition. And towards the end it got harder and harder.’
With the dealers also swamped with stock, there was no way they could be persuaded to take more. In fact, several of the biggest ones were going bust, so bad debts were also a worry. Much of the money owed to Imagineering had been outstanding for 90, 120 or even 150 days and was clearly not recoverable—a problem that would also plague One.Tel a decade later.
As the company’s shares dived still further, Imagineering announced at the end of July that it would put its year-end back four months. This meant that Jodee and his team could put off telling the world how bad things were until December.
Then, suddenly, salvation was at hand. For months, Jodee had been looking for a rich investor, or ‘Big Brother’, to ride to the company’s rescue. He had targeted ten companies in the USA and Asia, and eventually persuaded one to buy into the business. In September, Imagineering informed the Stock Exchange that it was negotiating for ‘a significant investment’ in the company. Four weeks later it announced that a Hong-Kong-based multinational, First Pacific, had agreed to pump in $18 million. Without this money, as soon became clear, Imagineering would have been unable to survive.
Typically, Jodee had struck a remarkable deal with his saviour. In addition to injecting $18 million (in exchange for around a quarter of the company) First Pacific had agreed to buy one-fifth of everyone’s shares at double the market price, which would allow the Rich family to take out $3 million in cash. It was also granting Jodee three million options and signing him up for a new two-year service agreement.
The documents filed with the Australian Stock Exchange (ASX) revealed that Jodee had promised the purchaser a small profit for the year—somewhere between breakeven and $4 million. He had also given a raft of guarantees that nothing had been covered up—specifically, that Imagineering’s finances were accurately portrayed in the audited accounts to August 1988 and the unaudited accounts to June 1989.
There was nothing unusual in these guarantees but First Pacific was wise to have demanded them because the due diligence process, in which any purchaser is allowed to examine the books, had been most unsatisfactory. Jodee had told the investigating accountants, Price Waterhouse, that they had only 14 days to look at the company—a ridiculously short time—and had instructed them that they could only talk to him or one of his executives, whom we shall call Ken White, although that is not his real name.
These were extraordinary conditions to work under and had caused the accountants great grief. They had been denied access to board minutes, which are normally considered vital because they give clues to the real issues in the company, and had not been allowed to set eyes on many of the documents they wanted. As a consequence, they had been unable to throw much light on the true state of the business. The accountants recorded that questions had been asked about various matters, and answers received from management. But they could not say whether the answers should be trusted. In the absence of supporting documents or discussions with line managers, it was simply not possible for them to verify what they were being told.
On the occasions that they did talk to people below Rich and White’s level, they received the impression that the Imagineers had been told what to say, and in at least one case this was true. One senior manager told me in 2001 that he was briefed on the story to tell, and provided with false documents to back it up. He told me: ‘I used to get a computer-generated report every month that told me what stock I had. One day, in late 1989, Ken White came to me quietly, he was looking very sheepish, and he said to me, “Look, we’re selling the company, the auditors are here to review a few things. Do you have a current report?”. I said, “yeah”. “Well, when you sit down and talk about it, don’t use yours, use this one”’.
The manager acted out the process for me, including an awkward-looking White surreptitiously slipping him a document.
‘He called it a revised report. He didn’t say “This is a forgery” or anything like that, but the way he looked at me I knew there was something amiss. He said, “Have a read through it, and then come and see me if you’ve got any questions”. I read it, and the report said that the total value of the unsold stock was something like $10 million less than it really was. The difference between the two was enormous. I’m not the fastest guy but I thought “My God, that’s an eye-opener”. I was gobsmacked. I thought, “What am I going to do now?”. I went and saw Ken White and pointed out the differences, and he said, “Just go with what it says, forget the differences”.
‘I made notes in my diary at the time, to cover my arse: that White met me and that I questioned the discrepancy. I wrote that White explained to me, “Disregard the original report and work off this one”. I also remember really clearly writing, “Basically, I’m fucked”’.
The manager says he never discussed his concerns with anyone else, least of all Jodee, because he ‘knew it was pointless’. He was also sure that Jodee knew already: ‘You can’t be the managing director and claim ignorance’. This was especially true of Jodee, who had always run the company from top to bottom. He was still the largest shareholder, still the managing director, and still at the controls. In the words of another top-level manager: ‘It was still Jodee, Jodee, Jodee’.
If First Pacific had been lied to about the company’s finances, it was inevitable they would soon discover it. Two weeks after getting its $18 million, Imagineering confirmed its profit for the year to 31 August 1998 had come in bang on target, at $1 million. Three weeks later, Jodee was forced to make a special announcement that this had become a $4 million loss, because $5 million of expenditure had been improperly ‘deferred’, or left out of the calculations for the year. It was also announced that Imagineering would fork out $3 million to First Pacific in compensation.
Behind the scenes, a second firm of investigating accountants, Arthur Andersen, now went through the business for First Pacific, looked at the books, and found that the finances were drastically worse than Jodee had indicated. Or as one of them put it, ‘Imagineering was in deep shit’. The $18 million had just disappeared into a black hole.
A big debate now followed about whether the business could be salvaged at all, or whether First Pacific should just treat it as a bad dream and walk away. Not surprisingly, the purchasers were extremely angry about what they were uncovering in the company and felt that they had been, to coin a phrase, ‘profoundly misled’. There was much talk of suing the Riches, and of suing Price Waterhouse for negligence, but in the end the talk did not lead to action. It was all uncannily similar to what would happen with One.Tel a decade later.
After three months of detailed work, and several discussions between Andersens and the board in Hong Kong, First Pacific decided it was worth throwing more money at the problem, because there might yet be some value in the business. In the meantime, they started to clean up the mess.
At the end of March 1990, Imagineering shocked the market by confessing it had crashed to a $52 million loss in the 16 months to December, or roughly three times what the company had made since going public four years earlier. Undoubtedly, the business had deteriorated since August, when Jodee had claimed a $1 million profit for the year. Four extra months of losses explained some of the reversal, but the main reasons for the appalling result lay elsewhere.
The accounts showed that Jodee and his team—who were now taking orders from an angry Big Brother—had been forced to write off $14 million in goodwill and a further $17 million in bad debts and obsolete stock, which had been festering in the warehouses and rotting in the dealerships. It was hard to believe that Jodee had been unaware of this problem when he made his promises to First Pacific.
Jodee’s annual statement to the shareholders shed no light on what Imagineering’s new benefactor felt about all this bad news. Implausibly, it suggested that he and First Pacific were getting on famously. In fact, his days were already numbered.
Some journalists obviously hadn’t noticed the debacle. Or perhaps the offer of exclusive access to the talented Mr Rich was still impossible to resist. A few days after the huge loss was announced, the Daily Mirror told its awe-struck readers:
Australia’s youngest multimillionaire rides a bicycle to work … Sydney’s Jodee Rich [who] is worth about $30 million … [and] employs 600 people in a commercial empire which includes Taiwan, New Zealand and the US … said there was no better way to start the day. ‘I get to the office refreshed and relaxed’, he said. ‘But I hate it when it’s pouring with rain, which seems to be quite often lately, because I can’t ride my bike.’ Mr Rich, who works 12 hours a day, attributed his financial success to doing what he loves best—bike riding, windsurfing and sailing. ‘I never planned to be wealthy’, he said. ‘It’s just a by-product of doing what I enjoy.’
Ten out of ten for timing. It really deserved a prize. Remarkably, the Daily Telegraph would run almost exactly the same story 11 years later, after One.Tel collapsed.
Imagineering was now in severe danger of going under. According to one manager, ‘It was becoming an ugly place to be. We had been hugely successful and now we weren’t, and it was like Jodee couldn’t care less any more’.
By April 1990 only 160 employees were left in the company’s Australian computer division, compared to the 390 who had been there at the start of 1989. Worse still, the accounts had been given a ‘going concern’ qualification by the auditors, which meant that Imagineering was surviving only with the grace of its bankers and First Pacific. Its biggest creditor, the ANZ Bank, had made it quite clear it wanted its $38 million out.
In May the company’s shareholders received an expert report from Arthur Andersen telling them that their company needed lots of money and needed it quick. Imagineering’s two other banks, Westpac and the Commonwealth, were also threatening to quit. They were only prepared to throw more money at the company if First Pacific pumped in another $20 million—and First Pacific had decreed that it would only do this if it were given Imagineering on a plate.
This was bad news for the shareholders, including Jodee, who would effectively lose two-thirds of their investment. But the alternative was far worse. Without the re-financing, there would be a fire sale of assets, which would bring shareholders virtually nothing if they were lucky, and nothing at all if they weren’t. The company was hopelessly insolvent. Nor was there any hope of a miracle. Imagineering had lost $6 million in the first four months of 1990 and was forecast to lose more in the future.
Jodee and the other shareholders therefore had no choice but to agree, and in July 1990, First Pacific took full charge. Two months later, Jodee was removed as managing director and disappeared ‘on sabbatical’. At the same time, his father Steven agreed to quit the board of directors.
The endgame was now in play. In February 1991 a thumping $41 million loss was revealed. Then, in May, the company failed to lodge an annual report and its shares were suspended. By this time the Taiwan computer plant had been shut down, warehouses and offices had been closed all over the place and another huge batch of obsolete stock had been written off. A further 70 staff had been sacked.
The only way for First Pacific to save face was to privatise the company, which it did for $1 million, or just 10 cents a share. This was one-80th of what people had paid at the top of the market, one-60th of what Bankers Trust had paid in October 1988, and one-20th of what Imagineering’s shares had been floated for in 1985. But the mandatory experts’ report judged it good value nevertheless. On their calculations, the shares were worth minus 80 or 90 cents apiece, and the company faced continuing losses, which could only be met by First Pacific, who had already sunk some $70 million into the company.
Under the offer, the Riches would be paid around $350,000 in cash, or given an IOU for $417,000 that could not be redeemed until April 2001. They agreed to accept the latter, either through altruism or under duress, and pocketed an extra $10 for agreeing to cancel 750,000 stock options.
Inevitably, the post mortems now began. The whiz kid had failed in the eyes of the market; his promises had been broken; he had been proved to be fallible or worse. Rodney Adler told BRW that his old friend had wanted too much too soon. ‘Jodee’s vision built Imagineering, and he deserves credit for that. But when the economy went bad, perhaps his experience didn’t balance his gall and vision.’ Not everyone was so kind. The headline on BRW’s cover read ‘Saga of a son who failed’.
According to Adler today, the loss of Imagineering was, ‘An incredible blow to his reputation and it really, really, upset him. He didn’t become a hermit, but he withdrew into his shell. You didn’t see him, he wouldn’t return calls, he just disappeared’.
Of course Imagineering was not the only fatality in the industry because computer sales had grown at top speed for seven years and then hit the wall. But few who worked in Jodee’s team had kind words for their captain after the crash, and few remember him fondly today, even if they still find him fascinating. One told me he would do anything ‘for fame and fortune. I used to have a healthy respect for him, but I think his business skills leave a lot to be desired’.
Many criticise his lack of attention to detail. Others observe that he is pathologically incapable of caution. ‘He is an adventurer, always looking for the next peak to conquer’, says one former director. ‘He is always in danger of going too far.’
‘He’s a thrill seeker and an adrenaline junky’, says an ex-senior manager. ‘Skiing fast is one way to get it. Putting your company at risk is another.’
Jodee himself claims to have learnt lessons from the disaster, like not using debt to build a business and not tolerating managers who can’t do the job. But humility is clearly not one of them. When I ask him what went wrong, and why so many people accuse him of not listening, he assures me that he did listen, but his hands were tied: Imagineering would have lost its exclusive software contracts if he had slowed down, and none of the directors wanted that.
We move on to the company’s financial health. I suggest that First Pacific put around $70 million into the business. He says this is ‘absolutely wrong’ and he will bring the papers to prove it. I tell him that $33 million was put into the business in two rights issues in 1986 and a placement in 1988. He informs me this, too, is ‘absolutely wrong’ and he will prove it. I tell him that I believe the business was insolvent by December 1989, because it had a going concern qualification from its auditors, was haemorrhaging cash, and only surviving on First Pacific’s money. His reply is, as ever, ‘That is absolutely wrong’, and goes on to add, ‘The business was never insolvent’.
‘At no stage?’ I ask him.
‘Correct.’
The next day I produce the figures confirming what I have said, but he doesn’t want to look at them or discuss the details. So how does he explain all the criticisms? Well, to coin a phrase, they are ‘absolutely wrong’. He suspects that his former fellow directors and executives just want to blame it all on him. ‘I cannot accept for one second that all these intelligent people’, he says, pointing to a picture of his management team, ‘can maintain that they were not involved in what went on. Your accusation is that Jodee [he has slipped into third person again] was running as fast as he could and everyone else was telling him to slow down, and that’s just not true’.
Jodee may be right, of course. It seems in his eyes, he always is. He reminds me that Imagineering, now renamed Tech Pacific, is once again a successful business, worth several hundred million dollars. So it’s absolutely wrong to say that his company collapsed.
But Jodee Rich took Imagineering to the very brink of bankruptcy. The people who backed him lost millions of dollars. And he no longer owns it.