Cost Cutting, Contracts Help Revive Imaging Company
A year ago, Alpharel Inc. almost crashed into bankruptcy.
After the small Camarillo computer imaging company failed to win an extension of a contract with AT&T; that once supplied 90% of its business, Alpharel had only $200,000 left in cash. Or enough to stay in business for two months.
Four chief executives had come and gone over a 17-month period marred by a bitter proxy battle. Alpharel’s stock, first offered to the public in 1987 at $11 a share, was trading for less than a dime.
Then in April, 1990, the company hired Robert T. Bruce as chief executive.
Bruce was an outside director on Alpharel’s board and had developed a reputation for tough cost cutting while in charge of one of General Electric’s divisions that serviced power plants and other utilities. His new assignment: Bring Alpharel back from the brink of death.
“This puppy was very, very close to insolvency,” Bruce said.
In the past year, Bruce cut overhead costs by 89%. He concluded a series of layoffs, begun by his predecessors, that left Alpharel with less than a fifth of its earlier work force of 180, and he reduced its leased office space by 80%. Bruce even volunteered to work without a paycheck, and continues to defer his $150,000 annual salary until the company can afford it.
Bruce also snagged a $4-million contract to install Alpharel’s system at Caterpillar Inc., the giant construction equipment manufacturer. Bruce personally negotiated the deal, making repeated trips to Caterpillar’s headquarters in Peoria, Ill., to persuade executives that Alpharel would be around to install and maintain the system.
As a result, Alpharel posted a $153,000 profit in 1990--its first profitable year since 1986--and its stock has now inched above $2. The good news continued in its first quarter that ended March 31 when Alpharel earned $256,000 on revenues of $1.57 million, compared to a $313,000 loss a year earlier.
Just this month, Alpharel announced that it had been selected to implement a pilot document imaging system at Pacific Gas & Electric’s Diablo Canyon nuclear power plant. Alpharel’s system was judged the most cost-efficient of 15 proposals.
As of mid-June, the company was just shy of its goal of $6.2 million in 1991 revenues, which would be a 17% increase over last year’s $5.3 million in revenues, Bruce said.
“It was the most dramatic cost cutting program that was successful that I’ve ever been exposed to,” said Edward C. Larkin, vice president, director of research for Cohig & Associates Inc. Investments, a Denver brokerage house that makes a market in Alpharel stock. “Bruce literally had to get the chain saw out and clean it up.”
Alpharel makes systems that scan large engineering documents and convert them to computer images that can be stored and retrieved on a standard personal computer. The systems range in price from $500,000 each to several million dollars.
Though Alpharel represents only a minuscule portion of the $730-million U.S. computer imaging industry, it has about 7% of the $68-million market that concentrates on large engineering drawings, said Scott McCready, director of image systems research at IDC/Avante Technology Inc., a Framingham, Mass., consulting firm.
Alpharel may be on the leading edge of computer technology, but it has some formidable competition. In the engineering drawing field, Alpharel is up against some mighty competitors, including IBM, Digital Equipment Corp., Unisys Corp. and Filenet Corp., a Costa Mesa imaging company.
What pushed Alpharel to the brink of disaster?
In 1984 the company appeared to be on its way to becoming a major player in the industry when it and AT&T; landed a $56.8-million contract to supply the Army and Air Force with imaging systems. Buoyed by the contract, which at one point provided 91% of Alpharel’s revenues, the company went public in June, 1987, raising $20 million in an initial stock offering underwritten by Merrill Lynch.
But by the end of 1987, the AT&T; contract began to dry up and Alpharel was having trouble finding new customers in a market that was also being eyed by the likes of Eastman Kodak, Wang Laboratories, 3M and Toshiba.
Alpharel, worried about being so dependent on one customer, spent millions to expand its business and built up a large sales force and support staff. But the big contracts didn’t come through and Alpharel ran up a series of hefty losses.
In 1989, Alpharel lost $12.3 million on paltry sales of $4.4 million. Those losses ate into Alpharel’s cash position--it had more than $17 million in cash at the end of 1987, but by the time Bruce took charge last year there was almost nothing left.
As a result, Alpharel was thrown into a leadership crisis. Founder and chief executive Michael J. McGovern resigned under pressure in December, 1987, as did the company’s chief financial officer. Three interim chief executives all quit after only a few weeks on the job while McGovern waged a proxy battle to regain his post.
Eventually, a new management team was selected by a revamped board of directors that included Bruce, who in 1988 was asked to seek a board seat by McGovern, an old acquaintance.
But even the new management team couldn’t turn the company around, so Bruce, who had been only peripherally involved in Alpharel as a board member while spending most of his time in retirement in Aspen, Colo., offered in April, 1990, to work full time for a month to help turn things around.
“I was there a week and a half and it became clear that the differences in philosophy and approach were so great that the best approach was for them to leave and me to take over,” Bruce said. “We had a choice. Sell the company or raise capital. It was fairly dire.”
Bruce, who rents a condominium in Ojai, said he immediately set out on a cost-cutting plan so the company could break even on $3 million to $5 million in revenues instead of the $25 million previously necessary. Bruce also tried to restore confidence among existing clients such as Lockheed, GE and Apple Computer.
“Clearly, we weren’t going to be able to live if they couldn’t in good conscience recommend Alpharel to other potential clients,” Bruce said.
Bruce also aggressively pursued new contracts, most notably with Caterpillar, which now is paying Alpharel to convert more than 5 million engineering drawings to computer images.
Bruce said a key change in the company’s operating philosophy has been to focus on reproducing large engineering drawings rather than the standard-sized business documents that are the mainstay of most competitors’ imaging business. Also, Bruce contends that Alpharel’s system is more cost-effective than others because it can be used on customers’ existing computer hardware. Most competitors sell the imaging software and hardware as a package, according to McCready of IDC/Avante.
“Many vendors try to force-fit solutions,” McCready said. “Alpharel is saying, ‘Tell me your business problem. I have software that runs on a variety of computers, and I will pick the one that your business needs.’ That’s a serious advantage.”
Bruce said banks still consider Alpharel risky, so the company has been looking for a buyer, but with little success. Alpharel may try a second stock offering if it can’t find a buyer or lender, he said.
When Bruce took the job he was granted an option to buy 200,000 shares of Alpharel’s stock at the then current price of 13 cents each. Were he to sell those shares today he’d have a pretax profit of more than $350,000 because of the stock’s increased value.
But while Alpharel has made something of a comeback, the company’s future is hardly secure. Alpharel now has more than $1 million in cash, and theoretically it can afford to pay Bruce his salary, but Bruce still hasn’t decided whether to cash his next paycheck.
“It depends on the cash position that we are in,” he said.
Alpharel Inc. at a Glance
Alpharel Inc. produces and markets computer systems that electronically reproduce documents ranging in size from business letters to engineering drawings. The Camarillo company was on the brink of bankruptcy at the end of 1989, but dramatic cost-cutting by its new chairman and a $4-million contract from Caterpillar Inc. last year helped generate the company’s first profit since 1986.
For fiscal years ended Dec. 31; in millions
Net income (loss):
‘91: $256,000*
‘90: $153,000
*For first quarter ended March 31, 1991
