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Digitext Outlook Clouded by Problems With Keyboard

November 24, 1987|JAMES F. PELTZ | Times Staff Writer

Only three months ago, the outlook for Digitext Inc. looked bright indeed. Not anymore.

Last week, the fledgling Thousand Oaks company said in an announcement that initial shipments of its major product, a machine that rapidly enters text into a computer, have been delayed for several months because the machine's keyboard was defective.

The machine, called the Digitext-ST, is meant to help court reporters, government officials and others quickly transfer vast amounts of text from stenography notes, typewritten pages and other media to a computer's memory banks.

Digitext, which was founded four years ago, said it has developed a replacement keyboard that should solve the problem. But the new part will require extensive testing and, in the meantime, Digitext's biggest potential customer, computer giant Wang Laboratories, has postponed taking delivery of the product until the bugs are worked out.

A year ago, Wang agreed to be the exclusive marketer of the Digitext-ST, priced at about $14,500 each. In the first stage of that agreement, Wang is supposed to buy $800,000 worth of the machines for resale--provided they work.

Digitext had hoped Wang would have purchased the first batch of machines by now, enabling Digitext to post its first full-year profit since it was started in 1983.

But that will not happen. After losing $8.5 million between its inception and March 31, the production delays left Digitext with another $1.4-million loss for the six months ended Sept. 30 on revenue of only $988,000. And, last week, the company said the problems "make it highly unlikely" that it will earn a profit for its current fiscal year ending March 31.

Digitext's chairman, Monty Kaufman, did not return telephone calls requesting comment on the production problems.

Last week's announcement, as well as other production delays and changes in the executive suite, have hit Digitext's shareholders hard. The company's stock, which peaked at $15 a share in late 1986 and was still at $9 a share in July, has since tumbled to a $1.875 Monday in over-the-counter trading.

One injured stockholder is American Fund Advisers, a New York money manager whose holdings in Digitext include 25,000 shares bought June 22, when Digitext sold 1 million shares for $7.25 each in a secondary offering. The stock's subsequent plunge has cost American Fund about $137,000 on that last investment alone.

Alan Loewenstein, an American Fund vice president, said that, although he is disappointed by Digitext's performance, he still believes in the product and considers his firm a long-term investor in Digitext. He also noted that Digitext's cash reserves total about $5 million, giving it some breathing room to sort out its problems.

Nonetheless, he is worried about Digitext's future if Wang's own business should start to falter. "If we go into a recessionary environment, then Wang could put some things off," Loewenstein said. Digitext's product "is probably not one of their top-priority projects," he said.

Analysts expect Wang to post a $33-million loss this year on about $2.8 billion in sales.

Wang's marketing agreement with Digitext technically does not start until Wang takes its first shipment of Digitext machines. Therefore, Wang could walk away from the project anytime before then.

For now, Wang remains publicly supportive of Digitext.

"We're working with Digitext to assure that the testing and a better-quality product will result from our efforts," Wang spokesman Paul Henning said in a telephone interview from Wang's headquarters in Lowell, Mass. "People here are dedicated to that project."

There were signals before last week that Digitext's production plans were in trouble.

A month ago, the company said some test models of the Digitext-ST had defective parts, including the keyboard. After the flaws were discovered, Lawrence W. Melquiond stepped aside as Digitext's president and chief executive, although he remained with the company as executive vice president of sales.

The company is looking for a president with a strong manufacturing background. In the meantime, Kaufman, who took over as Digitext's chairman only last summer, is interim president. He is also an executive of Service Resources Corp., an office-services concern based in New York.

His incentive to turn Digitext around needs no elaboration. Kaufman's employer, Service Resources, is Digitext's biggest stockholder with a 33% share--a stake whose value has plunged more than 80% since July.

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