Fledgling Company Finds Tribulations Amid Profit

A couple of Los Angeles court stenographers had the idea not long ago that a new steno language and some unique software might quadruple the speed at which typists feed text into a computer. They formed a company, went public and grew rich, at least on paper.

But, of course, there is more to it than that.

The company’s stock, once high-flying, has dropped. The firm that provided initial financing now plans to launch a proxy fight. And the two founders aren’t on speaking terms.

The company, Digitext, is a good example of the potential for both profit and recrimination in a new business. It is too soon to tell whether the company will take off, but already the people at this fledgling Thousand Oaks concern have learned that there is as much room for enmity as excitement.

Its two founders, Jerrold P. Lefler, 31, and William A. Cuff, 52, are on opposite sides of a fight between two factions for control of the company. Lefler, who invented the steno theory that is central to the system, remains with Digitext as senior vice president for product development, while Cuff isn’t working.

Both Men Prosper

Despite all the dissension, both men have prospered. Each has about 410,000 shares, or a stake of about 11%, and each stake is worth about $1.75 million.

Digitext grew out of Computerized Shorthand Reporters, a company formed by Lefler and Cuff in 1979 after Lefler joined Cuff’s court-reporting venture. The two started using their stenographic skills to do computerized typesetting, and when they did a job for Jeffries Banknote faster than Jeffries thought possible, Jeffries’ parent, the Charles P. Young printing concern in New York, got interested.

The new business was born in March, 1983. Charles P. Young, also known as CPY, gained 50% ownership and eventually advanced the venture $4.5 million, which was converted into non-voting stock and long-term debt last February when Digitext went public.

The idea behind Digitext is straightforward: Computers get faster and faster, but typists don’t. Thus, keying information into a computer can be labor-intensive work.

To speed things up, Digitext followed other firms by marrying the steno machine to the personal computer in a technology called computer-aided transcription, or CAT, which is already commonplace in courtrooms.

High-Paced Work

Stenotypists, such as court reporters, record 240-250 words a minute--four or five times faster than regular typists--by using standard, 23-key machines allowing words to be written as abbreviations with quick, simultaneous keystrokes.

But there are inevitably steno abbreviations that can only be read by context, confounding the dictionaries computers use to translate steno writing. So Digitext added its new steno language that, it says, eliminates the problem. And, instead of a standard computer dictionary, it uses proprietary translation software that enables any personal computer to understand the new shorthand language.

For example, in one steno theory, ARB means “as she” or “ash,” and a computer would be hard pressed to tell which homonym is which. In Digitext, “as she” is written AZ SHAOE, which is two keystrokes. “Ash” is written with the single keystroke ARB.

Digitext’s setup also is supposed to eliminate many operator errors, since it beeps when a meaningless abbreviation is keyed in. The goals are speed and accuracy, so that text can be keyed into a computer quickly for data bases or typesetting.

Idea Looked Good

To investors, the idea looked good. When Digitext went public on Feb. 27, its 1.4-million shares were offered at $4.25 but climbed to $6.25 by the end of the day. The stock stayed hot for a while, hovering mostly between $7 and $8. But it started falling in June and closed Monday at $4.25 bid.

Digitext has other troubles, too. A deep rift on its board led two Digitext directors, Martin A. Bell and former Chairman Jack R. Hubbs, to sue for a shareholder list in Delaware, where the company is incorporated. They want the list to mobilize shareholders against management.

Meanwhile, Digitext must struggle with the problems of any start-up. Revenue in the fiscal year ended March 31 totaled just $362,000, mostly from sales of a handful of units, and the company is losing money fast. Official results for its first quarter ended June 30 aren’t yet out, but Bell said Digitext lost $680,000 in the period.

Thanks to its public offering, which raised $4.7 million, Digitext had $4.2 million in working capital on March 31, and a net worth of $2.9 million, plus $3.7 million in tax losses to offset future income.

Lost $834,000 for Year

But the company lost $834,000 for the year ended March 31, $1.3 million the year before and $2.6 million the year before that. Bell is worried that the money will run out before Digitext even gets off the ground.

Bell is president of Service Resources Corp., the New York parent of CPY, which now holds a 32% voting stake in Digitext but remains the largest shareholder. CPY and Cuff, its ally on the board, together have a 43% stake. But, because Digitext has a staggered board and a voting system that dilutes the influence of major shareholders, Bell and Cuff can’t take control at the annual meeting Sept. 25. Chairman LeRoy Lefkowitz and his allies outnumber Bell, Hubbs and Cuff six to three on the board.

Bell accuses management of squandering funds on expenses and first-class air travel, while ignoring the shareholder majority.

“They have a very high overhead that is eating up, gobbling up, devouring funds from the offering,” he fumed.

Abuses Denied

Digitext President Larry West Melquiond, target of the allegations, denies any abuses. He says Bell’s faction just wants control of the company. He says he has always flown first class in the job, and no one objected before, while Lefler has the privilege in his contract. He added that they’ve limited it to flights of over two hours.

He also denied allegations of unauthorized payments that he said have been leveled against company executives. Digitext has agreed to hire Charles Woodmansee, a retired Superior Court judge, to investigate the allegations.

Lefkowitz, a San Diego management consultant, became chairman after Hubbs was ousted at a May 30 board meeting. He said Hubbs’ job as president of CPY keeps him based in New York, and a majority of the board felt that the chief executive should be in Southern California. As for the overhead, Lefkowitz said it is needed to generate and support anticipated sales.

Digitext’s main hope appears to be that its system will catch on with firms doing a lot of text entry, much of which is done overseas. American companies now use key-punch operations as far away as the People’s Republic of China, where typists who don’t speak English just copy what they see into a word processor at a fraction of the cost here.

Cheaper in United States

But Digitext says its $14,500 systems, which include a keyboard and software, would make inputting cheaper in the United States.

Half of the nation’s about 28,000 court reporters already use some form of CAT, and several companies are way ahead of Digitext, including Baron Systems, a San Leandro firm that claims 60% of the market. Baron says CAT systems provided 90% to 95% of its $24.3 million in sales for the year ended March 31.

Another competitor is Stenograph, the only remaining manufacturer of old-fashioned steno machines. The Chicago firm already has a CAT system, and is working on one with simultaneous translation, just like Baron’s and Digitext’s, that would let judges and lawyers consult computer screens in court.

Digitext’s steno theory poses a barrier for existing courthouse users, because stenographers would have to spend months learning it. The company views the dropouts from court-reporter training, who might not be quite fast enough to gain certification, as potential users of Digitext for text entry.

The Digitext system is also being taught to new operators at a handful of schools nationwide.