1988 a Do-or-Die Year for Maker of Lab Computer Systems
Right in the center of Steven Besbeck’s desk is a gigantic, plaster aspirin. “I need it,” said Besbeck. “There are a lot of headaches in business.”
Particularly in Besbeck’s business. He is president of Creative Computer Applications, a Calabasas company whose recent stock and financial performance could give any executive a migraine.
Two years ago, CCA’s stock was trading at more than $2 a share. But Monday, with the stock trading at 16 cents, stockholders would have needed three shares just to buy a cup of coffee. The company has been “more or less forgotten by the securities firms and investing public,” Besbeck conceded.
The company designs and sells computer hardware and software to commercial and hospital laboratories. The labs rely on the computer systems to organize the results of medical tests, such as blood counts and urinalyses, which used to be transcribed manually. The products range in price from $1,595 to more than $300,000.
But it’s a fragmented, competitive business, with about 60 companies chasing after a small piece of a $270-million-a-year niche in the medical industry. Unfortunately for CCA, over the last two years, cutbacks in health-care funding by government agencies have meant some labs are canceling or at least delaying computer purchases.
“The health care industry is thinking long and hard now before it makes a purchase,” said Dr. Tom Lincoln, a consultant with Arthur Andersen & Co. in Los Angeles.
For the fiscal year ended Aug. 31, CCA piled up a staggering $1.8-million loss on revenue of $3.3 million. “The results of the last year have been disappointing,” said Besbeck.
As a result, in November, CCA had to ask for an extension of a $649,000 loan from Union Bank. The bank extended the repayment deadline to March 3. Will CCA make its payment?
“It’s uncertain at this point,” said Besbeck. “We are involved in a number of meaningful discussions with other financial institutions and other sources of capital. And we are hoping that we will reach an accord to either replace the financing, extend it or something along that line.” The bank note is secured by almost all of CCA’s assets, but a Union Bank official refused to comment on the debt.
Not all of CCA’s problems, however, can be blamed on outside market conditions. The computer packages CCA sold also suffered constant breakdowns. The major problem was in the disk drives--which store information--that CCA didn’t manufacture, but sold as part of its system.
Besbeck said the hardware failed “over 100%,” meaning that every system broke down at least once, and some systems broke down more than once. “On our own dollar, we replaced some of the systems and ate the inventory, essentially, and that’s what some of the losses resulted from,” said Besbeck.
CCA also suffered because joint agreements it signed with several conglomerates didn’t live up to expections. Hospital Corp. of America, for example, the nation’s largest hospital chain, agreed to buy CCA equipment and software. But the deal amounted to less than $200,000 in sales, according to Besbeck. “It never really got off the ground,” he said. A similar agreement with McDonnell-Douglas Corp. has been “an on-again, off-again situation,” Besbeck said.
But, as the bigger companies reduced their interest in the laboratory computer market, smaller firms kept popping up to compete. “Somebody’s brother-in-law or cousin might do a system for a hospital and then market the system after that,” said James Pearson, a vice president of a CCA rival, Citation Computer Systems in St. Louis.
Among the new entrants is Keith Berman, a former CCA executive who runs Sys Dev in Canyon Country with 23 employees. Berman said it cost him only $500,000 to pay for the programming, inventory, marketing program and 13 original employees.
Berman has sued CCA in Los Angeles Superior Court for damages of more than $100,000. He claims that CCA failed to honor his employment contract. CCA has countersued Berman, claiming that he is using trade secrets that belong to CCA. A trial is scheduled in June.
Dennis Winsten, a medical computer consultant in Phoenix, said time has proven that it’s a lot easier to get into the lab computer business than it is to stay in it. “There have been many companies in this industry that have gone bankrupt or gone out of business,” he said.
CCA got its start in 1978. Bruce Miller, the company’s chairman and a former medical systems director for a New Jersey firm, worked in the bedroom of his Calabasas home to get CCA going. In 1983, CCA went public and, for a while, it looked hot. Sales doubled every year between 1981 and 1985. In early 1986, CCA was included on the PennyStock News list of “10 Stocks Poised to Double in Value During the Coming Year.”
As it turned out, fiscal 1985 has been the only year the company made a profit--$147,310 or 2 cents a share.
The next year, lab budgets started to tighten up and expected sales never materialized. In December, 1986, the company disclosed that it had overstated its fiscal 1986 sales by nearly $1.5 million because of accounting changes, delays in expected orders and outright cancellations. Besbeck said 30% of total orders that year were canceled.
“In the past, there were a number of purchasers who were very well-intended, but found after they committed to an order that there was no money in the kitty,” he said.
Despite all of CCA’s problems, there are a couple of hopeful signs. CCA is very close to signing an agreement with Curtin Matheson Scientific in Houston to distribute CCA products. Curtin Matheson, with more than 250 sales representatives in 19 cities, has been selling CCA systems for the last three months while the deal is finalized. If the deal goes ahead, it would greatly strengthen CCA’s small sales staff of eight.
Besbeck said an agreement with Curtin Matheson also would help solve CCA’s order cancellations because Curtin Matheson charges a penalty for canceled orders.
Besbeck also has lined up two new computer suppliers that he claims will end an era of system breakdowns. One of those new computers is IBM-compatible, which should broaden CCA’s potential market.
To keep costs down, Besbeck has trimmed personnel costs by 30% by reducing salaries and laying off several workers. Both Miller and Besbeck have taken a cut in pay.
There was an improvement for the quarter ended Nov. 30, with CCA’s sales up 25% from a year earlier to $874,000. But the company still lost $103,000.
Both Miller and Besbeck said the coming year is do or die. They refuse to make any projections and would not necessarily recommend the stock. “I think it’s a risky investment,” said Besbeck. “The company has not proven its worth entirely to the investing public.”
