Creative Computer Survives Brush With Death, Engineers a Comeback : Technology: A Calabasas company that once flirted with bankruptcy is in the black after switching to name-brand hardware.
Creative Computer Applications Inc. can’t crow about its performance over the past few years. The little Calabasas company generally posted stagnant sales and perennial losses. But CCA can say this: It apparently survived a brush with death.
Founded 13 years ago, CCA makes computer equipment that helps hospitals and laboratories store, organize and transmit medical-test data that otherwise would have to be recorded by hand. Its complete systems can cost $100,000 or more, but it also sells individual products costing a few thousand dollars that can be added to a hospital’s existing computer system.
The company got off to a good start in its early years, but by the late-1980s it was flirting with bankruptcy. Certainly that’s what CCA’s outside auditors believed. In the company’s annual report for its fiscal year that ended Aug. 31, 1988--a year in which CCA lost $761,530 on sales of $3.4 million--its auditors qualified their opinion about the company’s results by doubting whether CCA could “continue as a going concern.”
Indeed, in the four years from fiscal 1986 through fiscal 1989, CCA lost a combined $3.6 million as its annual sales dropped from $4.5 million to $3.6 million. By the end of 1988, the company’s excess cash had shriveled to a mere $6,600.
Then came fiscal 1990. CCA’s sales rose 25%, back to $4.5 million, and it finally recorded an annual profit--$132,253. Moreover, CCA earned nearly that much, $109,300, in just the first half of its current fiscal year. As of Feb. 28, CCA’s excess cash had increased to $154,000.
“Business is picking up,” President Steven M. Besbeck said. One factor: CCA’s systems are now built around the well-known Compaq personal computer, as opposed to the off-brand computers CCA previously used, he said.
“Name-brand hardware has helped our market penetration,” Besbeck said. He predicted that CCA would post an even higher annual profit for fiscal 1991, although he declined to be more specific.
But lest anyone get carried away, it will require several quarters for CCA to prove it’s on a growth track. CCA remains a tiny company with just 43 employees, and certainly investors remain skeptical. CCA’s stock, which went public in 1983 for $5 a share (adjusted for a recent 1-for-5 split) now trades for about 60 cents on the over-the-counter market.
Also, CCA’s sales in the six months that ended Feb. 28 were flat, at $2.3 million, largely because some customers had trouble getting outside loans to buy CCA’s systems, Besbeck said. Most of those sales, totaling $200,000, have since been completed and will boost the current quarter’s results, he said.
“Money is tight right now because of the economy,” Besbeck said. “Lenders are a lot more careful. We have not had any transactions canceled for financing reasons, it just takes longer.”
Regardless, even Besbeck said CCA still must battle with about 40 competitors in its various markets, and CCA remains so obscure that the company is little noticed by Wall Street analysts or other observers such as James McCamant, editor of the Medical Technology Stock Letter in Berkeley.
“The problem is that the market is so segmented” where CCA competes, McCamant said. The market, he said, “is a fairly small subset” of the entire multibillion-dollar medical technology industry.
Thomas Culligan, president of Biovation Inc., a Hercules, Calif.-based company that’s one of CCA’s primary rivals, estimated that the overall U.S. market in which he and CCA compete totals about $400 million a year.
“Is CCA head and shoulders above the other competitors? No they’re not,” Culligan said. “It’s hard to do that in this business. Everybody has fairly good systems.”
Other novel features, however, do make CCA stand apart. For instance, it hasn’t had outside members on its board of directors--that is, directors who don’t work for CCA--for the past three years. That’s highly unusual for a publicly held concern, where the outside directors are ostensibly hired to provide checks and balances to management’s actions and otherwise represent the company’s stockholders.
Besbeck said CCA doesn’t have outside directors because it would first have to get liability insurance for them. (Such insurance is meant to shield directors from personal liability stemming from shareholder lawsuits and other claims.) Yet CCA can’t get coverage because it’s so small or if it did, the cost would be $50,000 or more a year--which CCA can’t afford, Besbeck said.
“We really haven’t been that concerned about it,” he said.
Also unusual is CCA’s habit of changing its outside accountants, much as George Steinbrenner used to change managers of the Yankees. Public companies hire independent accountants to audit their financial results and report to shareholders whether the numbers conform to generally accepted accounting rules.
Until fiscal 1986, CCA used the San Diego office of J.H. Cohn & Co., a New Jersey-based firm. Then for the next three years it switched to BDO Seidman in Los Angeles. In fiscal 1989 it switched back to Cohn, then switched back to BDO Seidman last year.
Frequently changing auditors can be a signal to stockholders that a company and its accountants are having major disagreements about how the company keeps its books. But Besbeck said that wasn’t the case at CCA.
He said CCA initially chose BDO Seidman over Cohn because BDO Seidman’s people were closer to CCA’s headquarters. Besbeck said it tried going back to Cohn hoping “to save money in fees. It just didn’t turn out that way,” so CCA went back to BDO Seidman again.
In its fiscal 1990 annual report, filed with the SEC in November, CCA disclosed that Cohn had again been replaced and added that Cohn had questioned how CCA was valuing some of its inventory on its balance sheet. But the matter “was resolved to everybody’s satisfaction,” Besbeck said.
Cohn and BDO Seidman declined comment.
In any case, CCA is confident enough about its prospects that it’s shopping around for additional financing. Besbeck said “we’re evaluating a couple of proposals,” including one that would involve raising cash from both private and public sources. He declined to elaborate.
But it’s fair to say that if CCA does approach the public for more funds, the company might quickly become more concerned about first getting outside directors on its board.
Creative Computer Applications At A Glance Creative Computer Applications in Calabasas sells computer equipment that hospitals and laboratories use to record, organize, store and transmit the results of medical tests. Founded in 1978, the company currently has 43 employees and 2.2 million common shares outstanding.For fiscal years ended Aug. 31; In millions
