Little more than seven years ago, C-3 Inc. was dead in the water, marked by its poor performance in a rapidly expanding industry.
Sales for 1973 stagnated at $1 million, and the company lost money along with some key employes. Worse yet, the firm had begun to focus on a complex product line, data entry systems, in which its technology was not up to par. At the beginning of 1974 its financial condition was so questionable that the U.S. Army, mulling whether to sign a contract with C-3, demanded it obtain a financial bill of health from the Small Business Administration.
The turnaround of this small computer equipment company, of the more dramatic stories in the annals of corporate finance. In the five years following 1976, C-3's sales skyrocketed at an average annual rate of 58 percent. Over the same period, earnings have more than sextupled from $751,000 to around $4.85 million, or $1.30 a share. Last December, the company went public with a 600,000-share, $18 million new issue. C-3's order backlog stands at $80 million, or more than 2 1/2 time its sales last year. And after being issued at $32 last December, C-3 shares now trade over the counter at more than $40.
Not surprisingly, C-3's prospects have generated a burst of optimistic projections. The New York securities Donaldson, Lufkin & Jenrette projected last month that for its 1981 fiscal year, which ends March 31, 1982, sales would rise to $52 million, net income to $8.3 million and share earnings to $1.95. John Vazzana, C-3's 37-year-old finance vice president, last week called these "good numbers. I'd like to think these are obtainable results." By the following year, Donaldson, Lufkin puts C-3's sales at $80 million and earnings at $13 million.
Nowadays, the key to C-3's business -- and to its success -- is the company's comfortable niche in the federal government's market for customized computer systems. In bidding on the government jobs that are its stock in trade, C-3 "looks for uniqueness in the specifications," says Chairman and President John Ballenger. "We look for contracts where C-3 can add value, where the challenge is providing the government with exactly what they want from a technical stand-point."
On example came last week in the form of a $41.1 million contract to supply the Coast Guard with computer equipment to aid in telecommunications. The 15-year contract, the largest in the company's history, is worth more than C-3's total 1980 sales of $31 million. The Coast Guard's system will have a range of applications, including search and rescure, payroll and antipollution enforcement.
The firm's name originally stood for "computers, communications and control," said Ballenger. Although he wanted to change the name as he began to change C-3's corporate focus, Ballenger says one unifying thread in the company's business is a continuing emphasis on communications. But C-3 has begun to move beyond even that broad label.
"It's really a unique little company," says Aristide Vitolo, a stock market analyst who wrote the Donaldson, Lufkin report. And C-3 is, at least, distinctive. It spurns the private market to concentrage on government contracts. Although it supplies complete computer systems, it purchases almost all the components of those systems from other companies. And in its zeal for customization, it rarely builds anything more than once.
Founded in 1968 by refugees from an RCA unit that dealt primarily in federal contracts, C-3 always has had an eye on the government market. Ballenger has intensified that emphasis. With 20 years' experience in managing computer companies, Ballenger was what C-3 needed when he assumed the presidency in early 1974. Aided early on by a $1 million Army contract for what he now admits was an "antiquated" data entry system, he began to bid almost exclusively for federal business. Ballenger's interest in the government market was drawn from his experience with marketing to the military while at Sperry Univac, a division of Sperry Corp.
"Our company's been growing so fast in the government area," says the 49-year-old Ballenger, "that we haven't had time to come up for breath to think of the commercial world." C-3 has tentative plans to enter the private market with some of the systems it develops for government applications. Even then, says Ballenger, "I don't think we'll ever be the kind of company that develops a large sales organization and a product line, per se. We'll probably end up selling those products through distributors or representative."
One reason for the company's complacence is that the government market knows no bounds, at least as far as C-3 is concerned. "It's a huge market. We understand it, we know it, we're loved in it. I just see additional business forthcoming year after year," says Ballenger. Analyst Vitolo estimates that the federal government last year bought $15 billion in computing equipment, and he says about $7 billion was spent on the kind of customized equipment that is C-3's specialty.
For C-3, "government" generally means "Defense Department," since military agencies account for the lion's share of sales. But the company is sensitive about being pigeonholed as a defense contractor. "To an outsider," admits Ballenger, "we look more and more like a DOD company. But that's just because a good percentage of the data-processing dollars are spent at the Department of Defense."
Company officials point to contracts C-3 has won with Internal Revenue Bureau of Standards. They also stree that the company's systems generally fit into a support equipment category rather than actual weaponry. "People who deal in highly visible weapons systems," says finance vice president Vazzana, "are in an unstable marketplace. We, on the other hand, deal in the things that make government run, things that the government basically needs."
Even though it bridles at the military-contractor label, C-3 looks kindly on the Reagan adminstration's defense buildup. "'d be lying to you," says Vazzana, "if I said I wasn't excited about it." Still, Vazzana points out that the company saw phenomenal growth during the Carter administration, when he judges "defense was really the low man on the totem pole." He resolves this apparent paradox by saying, "We provide the basic things for those agencies," he says, "not the exotic things."
Company officials like the government to spend on defense, but they are even more excited by what Reagan wants to cut.
"The emphasis on austerity in government," says Ballenger, "whether it be just chopping programs or cutting back people, will give us a boost. We offer a way for people to become more productive." Many of the company's custom-designed systems concentrate on helping to regulate and reduce paper flow. C-3 also draws comfort from a report by the government's General Accounting Office, published this spring, which recommended massive new computer equipment purchases to replace outdated equipment.
Vitolo says C-3 is "designed to save the federal government money." The savings, he says, result from C-3's "broad technological capability" -- which C-3 uses to design mini-computer systems rather than large "mainframe" computers -- combined with a maintenance force that small computer firms rarely have.
Here, says Vitolo, C-3's maintenance network is critical. "The large contracts require multisite maintenance. When they bid on a contract, the incremental maintenance cost of serving an additional unit is relatively small."
Of the company's 170 employes, some 100 are "field service representatives" charged directly with maintenance. Ballenger swears that the seven years spent building up the service organization was worth it, despite the fact that maintenance bring in only about 15 percent of total revenues. "It's not that difficult to win government contracts if you know how to go about bidding, if you know people," he says. "But the proof of the pudding is servicing what you sell, and that's where a lot of the companies, even the big companies, fall down."
"In government, that gets around quickly from agency to agency: 'Hey, this company can sell you something, but once you've got it, you've got a hell of a time getting service from them.' You're thought higher of if you've had a contract with an agency before and you've done good work." The maintenance net has spread to some 30 locations in the United States and western Europe, generally near military installations. t
For C-3, customization goes hand in hand with its practice of manufacturing almost nothing itself. The Donaldson, Lufkin report says the company purchases almost 75 percent of its contracts' value "off the shelf," that is, from among other manufacturers' mass-produced units. Even when C-3's team of 20 engineers designs completely new components, the company usually farms out the work of production to other firms.
"We stay flexible by keeping our production lines to a minimum," says Ballenger. Having no standard products of its own, C-3 is free to integrate other producers' components so that the end result closely fits the government's specifications.
The company also maintains that by supplying only customized systems, it minimizes head-to-head competition with the computer industry behemoths. Companies such as IBM tend to put their resources into development of new products for large-scale production.
For the future, C-3 plans to grow into its niche.
Of course, growth was one key aim of the stock issue last December. The added capital so obtained, company officials say, allowed C-3 to compete in the growing government market for leased computer systems. To lease systems, a company must have a heftier financial base because the stream of payments under a lease is more spread out than it would be under a purchase agreement. And in general, the added capital may allow C-3 to bid for larger jobs.
In paying for its expansion over the next two or three years, says Ballenger, C-3 will take on little if any debt. At the end of 1980, long-term debt stood at only $167,000, only three-10ths of one percent of total capitalization. C-3 bolsters its internally generated funds by paying no dividends.
"For this size of company, the available debt financing is all floating rate money," says Vazzana, "and that kind of money is very dangerous." The finance officer says C-3 will rely on rapid increases in the value of the company's stock to give its investors a capital gain.
Ballenger and Vazzana are C-3's largest shareholders. According to the prospectus published for the December stock issue, Ballenger and his family owned 31.1 percent of C-3's shares immediately after the new issue, while Vazzana and his family held 16.9 percent.
Donaldson, Lufkin's Vitolo says that, selling at 22 times the next 12 months' projected earnings, "the stock to me seems considerably undervalued." C-3 officials agree, and they say the reason is that the company is misunderstood.
"If you make a widget, it's an easy thing to understand," says Vazzana. "But if you make a customized product, there's an understanding problem." For his part, Ballenger stresses that the company sells computer "hardware" rather than "software." In general, hardware means actual computer equipment and software is the programming, or instructions that tell the equipment how to operate.
Ballenger says the problems of investor understanding can be overcome "with time." Anyway, he has other things on his mind. "We've never had a $100 million contract," he says. "It's something to look forward to."