Public Trust : Investors Find Reasons to Back Truvel Corp. Despite Memories of Oct. 19 Crash

Edward J. DeBartolo Jr. knows a thing or two about investing. He and his father preside over one of America’s richest families, worth about $1 billion, whose holdings include 60 shopping malls. The younger DeBartolo owns the San Francisco 49ers football team.

So where did he invest after the worst stock market crash in history? Among other things, DeBartolo bought 50,000 units (each includes one common share and one warrant to buy another share of common stock) of Truvel Corp. in Chatsworth, a fledgling maker of computerized scanners that take electronic “pictures” of documents or objects and then store the images in a computer.

In other words, DeBartolo spent $125,000 for stock in a company with no operating history, competing in the volatile high-technology market, and he did so after a market collapse Oct. 19 that laid waste to most other recent initial public offerings, or IPOs.

He wasn’t alone. Investors bought Truvel’s entire offering of 1 million units priced at $2.50 each, raising $2.25 million for the company. (The other $250,000 went to the brokerage firms that handled the sale.) The units closed Monday at $2.625 bid per unit in over-the-counter trading.

Truvel planned to go public in November. But because of the crash, the company had to wait until Jan. 29, and it raised only about half of the $5 million it had hoped to get from investors. Yet it is noteworthy that Truvel went public at all, because IPOs--which have a nasty habit of dropping in price soon after they start trading--are not what most investors seek in a troubled market.

Indeed, another scanner producer, ECRM Inc. of Tewksbury, Mass., also planned to go public last fall but scrapped the idea because after the crash it was clear that investors would pay much less than what ECRM hoped to raise, said William Givens, ECRM president.

But Truvel showed how a new company can attract heavyweight investors like DeBartolo--even after a market collapse--if it can convince them that it has a product in demand, a sound marketing strategy and veteran management.

DeBartolo, who sees hundreds of investment proposals a year, bought into Truvel because he likes the fact that the company already had more than $10 million in orders lined up, said C. Robert Cusick, DeBartolo’s financial adviser. “Truvel has a very firm grasp on their marketplace,” Cusick said.

Another investor was Worden Management Corp. in Cambridge, Mass., a money-management firm that bought 100,000 Truvel units. Andrew Worden, its president, said he sees Truvel as a future takeover target of a computer company looking for a competitive edge. “It’s not worth it to Apple to develop the product on their own when they can buy the technology that Truvel has,” he said.

For most of its 15-year history, Truvel was a consulting firm owned by Richard K. Gerlach, an electronic engineer. (The company name comes from an instrument he planned to develop--but never did--that would measure an object’s true velocity.) Gerlach, 56, also worked at RCA and NCR and helped start two other small computer companies.

But in late 1986, Gerlach and Robert D. Chisum decided to produce the scanners and turn Truvel into a manufacturing concern. Chisum, 48, had held marketing posts at four other start-up companies, including Micropolis, now a thriving Chatsworth-based maker of computer storage systems. Gerlach became chairman and president of Truvel, and Chisum was named executive vice president for sales.

Truvel, with 42 employees, is just now starting shipments of its scanners. And Truvel’s officers say it is too early to estimate the company’s 1988 sales, although Truvel has lined up major orders.

Linotype AG, a West German publishing concern, and Digital AV, a seller of computer systems based in Knoxville, Tenn., have agreed to buy at least 1,000 and 600 scanners, respectively, over the next three years--at a cost of about $6 million. Pennine, an electronic-products distributor in England, signed a $2.5-million contract to sell Truvel’s scanners in that country.

Think of Truvel’s scanners as computerized cameras. In essence, they take an electronic picture of a document, photograph or three-dimensional object such as an electronic circuit board, convert the picture to digital signals and then store those signals in a computer’s memory. The image can be narrowed, enlarged, have its colors changed or be edited in other ways by the computer.

The publishing, advertising and medical industries are expected to be major users of scanners. A publisher could use a scanner to store the pages of an auto manual--including photographs--in a computer. Then, if one of the car’s parts is changed, the publisher needs only to find the page with that part, change the part’s picture or related text, return the page to the computer, and the entire updated manual is ready to be printed.

Truvel is aiming for the middle to the lower end of the market for scanners. Truvel’s scanners cost between $5,495 and $9,995, depending on whether they scan images in black and white, in color, or X-rays. The lower end of the market includes so-called utility scanners with few editing features that cost between $800 and $2,000. Industry sales last year for these models totaled $114 million, said Jennifer Mitchell, an analyst for Dataquest, a technology research firm in Cupertino. Major players in that group include Hewlett-Packard, Datacopy and Dest Corp., she said.

ECRM’s Givens said the scanner market’s lower price range segment has “grown rapidly in the last three years,” but that it also is “a very competitive marketplace.”

There also are premium scanners, made by companies such as ECRM, with sophisticated editing features, lots of storage capacity and a cost of $40,000 or more, Mitchell said. About $30 million of those machines were sold last year, she said.

To get Truvel up and running, Gerlach said all of Truvel’s managers, their families and friends, and other Truvel employees ponied up about $800,000. Another $1 million of seed money came from Genevest, a Swiss investment firm.

By last summer the scanner prototype was ready for production, and Truvel needed more cash to get its product on the market, so Gerlach decided it was time to go public. The company planned to sell 2 million common shares for $2.50 apiece, half of which would be sold by Genevest to European investors. On Friday, Oct. 16, Truvel filed a registration statement with the Securities and Exchange Commission announcing its plan.

The next Monday, the stock market crashed.

Amid the pandemonium, “nobody had a straight answer as to what was going on,” recalled James R. Mowry, Truvel’s vice president for finance.

Truvel’s main contact in New York was Sam Kerlin, owner of the brokerage firm Douglas Stewart, which was going to lead the sale of Truvel’s stock. Kerlin reassured Truvel executives that although the stock sale might take a bit longer than expected, he believed the sale would still go through.

But the prospective European investors weren’t as trusting. “There was a great deal of pessimism in Europe,” Chisum said. Genevest, and the European buyers it lined up to buy Truvel’s stock, wanted the price cut.

But Kerlin said he was against a price cut because he believed the market potential of Truvel’s scanners remained intact. “At that point, they had between a $6-million and $7-million backlog” of orders, he said.

Kerlin and Truvel found a compromise. Instead of cutting the price of 2 million shares, they would repackage the offer into 1 million units for $2.50 each--each containing one share of stock and one warrant enabling the investor to later buy one common share for $3.50 from Truvel.

Gerlach said that if the public offering had failed for any reason, Truvel had enough money to last until this summer. Then, if need be, Truvel could have called on several wealthy individuals that previously had invested in the company, he said.

But the offering did succeed. Gerlach and his wife, Patricia, are now Truvel’s biggest stockholders with 18% of Truvel’s 6 million common shares outstanding (excluding the 1 million shares that would be issued when the warrants are exercised). At current prices, their holding is worth more than $1 million on paper.

But the money is of secondary interest to Gerlach.

He was “absolutely delighted to get back to designing the product,” Kerlin said, “and not having to worry about talking to lawyers, and signing underwriting agreements, and having to deal with a world he wasn’t too comfortable with.”