Digitext’s Picture Brightens, With an Assist From Wang
A year ago, Digitext’s directors were squabbling over who should decide its destination. At the time, it wasn’t clear the company was going anywhere.
The 3-year-old company, based in Thousand Oaks, had yet to earn a dime while it developed its main product, a keyboard and writing code for rapidly entering text into a computer.
Digitext hoped the system would be embraced by court reporters, government agencies and others who convert information from one form, such as stenography notes, into computerized text. In the meantime, the company was rapidly spending its capital to complete the keyboard. Its outside auditor began questioning whether Digitext could stay alive without more cash.
The picture is brighter today. The company has struck a marketing agreement with computer giant Wang Laboratories that could trigger exponential growth the next five years. It raised cash by selling out its second public stock offering.
Keyboards are in production. After losing $8.5 million since its inception, the company turned a profit in June.
And Digitext’s directors, under the leadership of a new chairman, contend that their infighting is over.
Agreed on Unity
“We’ve agreed we’re going to act as a unified board and all pull in the same direction,” said director Martin A. Bell.
Bell is president of Service Resources Corp., a New York-based office-services concern that helped finance Digitext’s start in 1983 and remains Digitext’s biggest stockholder with a 32.7% voting stake. (Wang holds a warrant to buy 1.2 million as-yet-unissued Digitext shares that, if exercised, would dilute SRC’s interest to 26.3%).
A year ago, SRC publicly complained that it did not have the influence at Digitext that should be accorded the biggest stockholder, and that Digitext’s managers, including Lawrence W. Melquiond, Digitext’s chief executive, and LeRoy M. Lefkowitz, then its chairman, did not have its support.
It became apparent that, as the directors argued, the marketing pact with Wang--and effectively Digitext’s future--hung in the balance. The arguing began to stop. “The importance of that transaction to the company began to supersede all of the other issues, and the board began to coalesce around the importance of pulling that deal together,” said Carolyn A. Dye, a member at Troy Casden Gould Professional Corp., Digitext’s outside law firm.
In a recent interview at Digitext’s headquarters, Melquiond said he saw “only one way of unifying the board, and that was to make the company successful” by reaching the agreement with Wang.
The agreement was signed in November. With that in hand, Digitext last month sold out its second public offering, this one for 1.15 million shares. (Digitext now has 4.93 million shares outstanding, excluding the Wang warrant.)
And, earlier this month, Digitext’s board unanimously elected Monty D. Kaufman chairman to succeed Lefkowitz, who resigned that post but remains a director.
Kaufman, 34, became available because he recently left an SRC competitor, Pandick, to become vice chairman of an SRC subsidiary, Charles P. Young Management Services, on Aug. 1. He brings a background in word processing and electronic publishing and, perhaps as importantly, gives SRC the access to Digitext it had sought.
“If I perceived anything to be the calming of the storm, in addition to our business opportunities, it’s that now they have direct contact with the running of the company,” Melquiond said, referring to SRC. “And I welcome that.”
Wall Street apparently has welcomed it also. Digitext’s stock, traded over the counter, dipped 17% in the second quarter, from $9 a share to $7.50, just above the $7.25 price of the secondary offering in June. But in recent weeks it has climbed back to $9.
Digitext likes Kaufman for more than his SRC connection. He will be a working chairman and based in New York, thus close to Wall Street, to Wang’s headquarters in Lowell, Mass., and to Washington, wherein lie the government agencies and legal services Digitext is targeting.
Now for the Revenue
Kaufman said Digitext’s task now is to start generating “the kind of revenue that’s going to convince everyone that the projections that are being made for this company are realistic.”
And what projections. Digitext says it is not at all unreasonable to expect that its revenue--which totaled a paltry $1.25 million from 1983 through March 31, 1987, a period in which Digitext was essentially a research firm--could total $870 million over the next five years just from its agreement with Wang.
“It’s not a crazy number,” Kaufman said. “I’ve looked at those numbers, and it works out to a very reasonable number of sales per Wang salesperson, for example.”
Under the agreement, Wang would be the exclusive distributor of Digitext’s keyboard (the Digitext-ST) except to the education market, which Digitext will serve. Digitext also plans to have the ST work not only with Wang computers but on computers made by Wang’s major rivals.
Digitext and Wang are now testing their relationship in a pilot period that will end sometime before next May, a period in which Wang has agreed to buy $3.6-million worth of Digitext equipment.
When the pilot period ends, Wang can sign up to be either the exclusive distributor of the Digitext-ST for use on Wang computers only, or to distribute all versions of the keyboard. Or Wang could walk away from the project.
If Wang elects to be Digitext’s distributor, it would do so for one year, after which it could renew for one more year and so on over the five years of the agreement.
Should Wang opt to be Digitext’s distributor for Wang equipment only for all five years, it is obliged to buy $300 million of Digitext equipment over that period, if a variety of conditions are met by both sides. If it elects to sell all versions of Digitext’s keyboard, it must pay Digitext $870 million over five years.
That’s a lot of ifs. Moreover, Digitext said in the prospectus for its recent stock offering, a major problem will be overcoming its potential customers’ reluctance to adapt to this new technology. Digitext’s aim is to convince them that the ST’s $14,500 list price is justified by its ability to enter text into a computer rapidly.
Wang, meanwhile, gives every indication that it plans to support Digitext, at least at first, for two reasons: The ST helps Wang offer its existing customers a new technology, and it could allow Wang to call on customers using computers made by Wang’s rivals.
The success of the joint marketing agreement “depends on the market, whether the marketplace is ready for the product, which we feel it is,” said George Solas, who runs the Digitext program for Wang.
Solas would not comment on whether Wang will sign up to market all Digitext brands, or whether it plans to extend the agreement beyond just one year. He said Wang’s intention is to be able to maintain exclusive rights to distribute the Digitext-ST across the board, “but our initial plan is to support Wang customers.”
Wang’s involvement can’t be underestimated, said Alan Loewenstein, vice president of American Fund Advisors, a New York money manager that bought 25,000 Digitext shares at last month’s public offering to double its Digitext stake. “Wang is very committed to the product, and you’re tying yourself in with a very good customer base,” he said. But even Wang will need help. Customers that buy Digitext-STs will need trained people to operate the keyboards, which is why Digitext itself will be trying to sell the machines to computer-training schools.
Digitext has an ally in that area as well. Control Data Institutes, an arm of computer giant Control Data Corp., has agreed to buy $700,000-worth of STs to put in 14 of its 16 computer-training schools so that it can teach Digitext’s system.
That, too, is a temporary agreement that ends Dec. 31, after which Control Data can sign a longer-term deal or end the project. But Kenneth F. Kutz, vice president of Control Data Institutes, said, “We think there’s a very high potential for the product. In looking at the high-volume text- and data-entry market, there’s been no significant breakthrough in years.”
DIGITEXT INC. AT A GLANCE, MATT MOODY / Los Angeles Times
Founded in 1983, Digitext makes a machine that rapidly converts shorthand, such as that taken by court reporters, into computerized text. The Thousand Oaks-based company has 32 employees and, after going public in February 1986, now has 4.93 million common shares outstanding.