Alpharel Pays the Price of Relying on One Customer

Times Staff Writer

Six months ago, Michael McGovern said he felt a twang every time stock in his company, Alpharel Inc., dropped an eighth of a point.

If only the stock had fallen that little.

Alpharel, a computer data storage firm, went public in June at $11 a share, but it has since plunged to a recent price of $3.125 and has earned a place on Forbes magazine's list of worst-performing new stocks.

"I feel very bad for our investors," said McGovern, 58, Alpharel's founder, chairman and largest shareholder with 24% of the stock.

Part of Alpharel's nose dive can be blamed on the Oct. 19 stock crash. But Alpharel's stock started dropping well before the crash, as investors started realizing the company's largest source of revenue was about to dry up.

For the last three years, the company has been dependent on a contract with AT & T, which bought Alpharel computer systems and packaged them with its own gear to fulfill a contract with the Army and Air Force.

$1-Million Profit

In 1986 Alpharel made a profit of $1 million, or 17 cents per share, on $13.9 million in sales. But the AT & T deal accounted for 91% of Alpharel's revenue.

The problem is that both military branches say they have all the equipment they need, and the AT & T contract will expire in September. Between now and then, Alpharel will receive $1.5 million when the last computer is installed for the Army.

Relying on a single customer can be fatal. Another local computer firm, Computer Memories in Chatsworth, once enjoyed a $100-million contract with IBM. For the year ended March 1985, sales to IBM accounted for nearly 80% of Computer Memories' revenue. After IBM canceled its contract, Computer Memories never recovered. It went from a thriving entity with 1,600 employees to nothing more than a shell company with a handful of employees.

Alpharel is not on the critical list yet. It has approximately $18 million in cash and it has sold products to other customers besides AT & T, including Pacific Gas & Electric, Lockheed and American Savings & Loan Assn. It can also count on additional revenue of $50,000 to $100,000 a month, maintaining and adding onto the systems already sold to the Army and Air Force.

Nevertheless, during the first nine months ended in September 1987, Alpharel lost $244,000 on revenue of $10.7 million. Its marketing costs have risen as the company tries to hustle up new business.

The loss of the AT & T revenue is not Alpharel's only debacle. After its June stock offering, Alpharel invested $18 million of the $20 million it raised in a single mutual fund specializing in government bonds and lost $747,000 before it was able to get out. And that was before the stock crash. "It was a mistake we made," McGovern said.

"We're not thrilled with it," said Stephen Dexter, an analyst with Kemper Financial Services in Chicago. Kemper is an Alpharel shareholder. "When you've got to protect your assets, you hedge yourself. They were not hedged the way they should have been."

The root of Alpharel's business is a complex optical disk storage system. It uses a laser scanner to read material on a printed page, then stores the information on an optical disk. Once on the disk, users can retrieve or update the information as they wish. Alpharel's system ranges in price from $150,000 to more than $2 million.

Corporations and government agencies like the optical disk system because of its versatility and speed. The disk also has enormous storage capacity--it can hold all of the data in a tower of papers 92 stories high.

The optical disk storage industry still is in its infancy, with about $100 million in sales last year. Coopers & Lybrand, the accounting and consulting firm, is optimistic that by 1996, industry sales will soar to $2.4 billion.

Predictably, bigger and better-capitalized firms than Alpharel have announced plans to sell optical systems.

Facing Big Competitors

So Alpharel must not only concern itself with the loss of the AT & T contract, but now faces the prospect of competing against Eastman Kodak, Wang Laboratories, 3M and Toshiba to find new business.

"Alpharel will have to be adroit. They'll have to make some good choices because the game is going to get tough," said Phillip Brannon, an analyst with Merrill Lynch in New York, the brokerage firm that brought Alpharel public.

There are a couple of hopeful signs. IBM has said it may refer some of its customers to Alpharel. And General Electric bought an Alpharel system and is trying to sell more systems to utilities with GE nuclear plants. Alpharel is counting on connections like these to help it break into the commercial market, where analysts say the real opportunity for profit lies.

Alpharel's fortune should be decided sometime next year. The company has bid on $21 million worth of commercial orders, McGovern said, and will bid on another $20 million by mid-January.

It will need to win a few. "I think a lot of contracts they did not close this year should be closed next year," said analyst Dexter. "The customers are telling them they are very high on these systems and they have every intention of purchasing the systems."

Meanwhile, the Navy wants to buy the same kind of optical systems that Alpharel and AT & T sold to the Army and Air Force. In 1988, the Navy will pick a supplier to provide it with 45 systems that Brannon estimates will be worth $70 million in revenue.

Brannon believes Alpharel is the leading contender because the company already has done work with the Navy. But, as McGovern points out: "The bad thing about the Navy contract is that it won't be awarded until mid-year, and the big bucks won't come in until 1989."

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