Com Systems Bets on Long Distance : Phone Business Switch Costs Firm
Getting into the long-distance telephone business isn’t cheap. Just ask Com Systems Inc. The Van Nuys company unloaded a profitable unit that sold business-phone switching systems and spent heavily on hardware to compete with the likes of AT & T, MCI and Sprint.
That allowed Com Systems to shift from the telephone equipment business to the long-distance calling business. But it also burdened the company with more liabilities than assets. And that prompted NASDAQ to remove Com Systems’ stock from its over-the-counter stock trading system last week.
Com Systems thinks changing businesses will be worth the sacrifice.
“We felt the growth would be much greater” in long-distance services than in equipment,” company chairman Rex Licklider said. He said that regular long-distance telephone calls alone make up a $50-billion-a-year market that should grow by 10% a year. Long-distance data transmission is also a fast-growing business, linked to the rise of computers in the workplace.
Negative Net Worth
A NASDAQ spokesman said the company was deleted from its system on July 23 because it did not meet the organization’s requirement that listed companies have $375,000 or more in net worth. A company’s net worth is determined by subtracting its liabilities from its assets.
Com Systems ran up a negative net worth of $1.9 million for the fiscal year ended March 31, 1984, the company said.
Licklider said Com Systems took a one-time loss of $4.8 million during the last half of that fiscal year on discontinued operations from the sale of its Interconnect unit, which sold private branch exchange equipment, commonly called PBX systems, for offices. He said the unit was sold so that the company could concentrate on long-distance business.
Com Systems also incurred heavy costs getting into the long-distance business, now its main line. Company controller Gregory Gasson said the company has spent “close to $4 million on start-up hardware” since it went into the business two years ago.
For the year ended March 31, 1984, Com Systems lost $5 million on revenue of $14.2 million. But the operating loss was just $240,000. Full-year figures for the period ended March 31, 1985, have not been released, but company officials said they will show an operating profit, reflecting a gain from the $10.4-million sale of Com Systems’ Tel America Communications Services unit, another long-distance company.
Joseph Kapka, a vice president of Bateman Eichler Hill Richards Inc. who follows Com Systems, said the sale of the Tel America unit, which he described as the company’s cash cow, “did relieve the pressure on their balance sheet quite a lot.”
Gasson said the company’s results reflect growing pains and the high cost of fixed assets needed to build a long-distance company. Start-up involves heavy capital expenditures for switching systems to route calls and screen those that don’t belong on the system. Also, long-distance lines must be rented or bought.
Normally a negative net worth is a sign that a company is in bad shape, but Licklider said Com Systems’ balance sheet should show more assets than liabilities by the end of December.
For the nine months ended last Dec. 31, Com Systems earned $1 million on revenue of $22.5 million. For the same period in 1984, it earned $531,000 on revenue of $10.6 million.
No ‘Horrendous Trouble’
Com Systems’ most recently reported net worth, last Dec. 31, was a negative $855,000.
Kapka said he thinks the company has put its worst times behind it, although it is in a very competitive business.
“They’re not in any horrendous trouble,” he said. “It’s a good company in a very difficult environment.”
Licklider also said that NASDAQ--the National Assn. of Securities Dealers Automated Quotations--had given Com Systems some time to meet its standards, but the company was unable to do so. NASDAQ is the automated market system for the 4,700 most active over-the-counter stocks.
“It will take to the end of the year to be relisted, probably,” Licklider said.
Being delisted from NASDAQ means the price of Com Systems’ stock is no longer electronically available.