We are not a financially troubled minicomputer company – so says James MacDonald who heads Prime Computer Inc. He expands by adding that not only is Prime not financially troubled, it operates in half a dozen businesses. The interview is spent explaining how a company with a CAA debt rating can claim to be free of financial troubles, and whether the company has a viable future. MacDonald is a tall, genial man with a habit of hiding behind accounting sophistries when the going gets less than favourable. He leaves you with the impression that the company has had an unfairly bad press, but also with the impression that there are so many imponderables when it comes to discussing Prime’s future that it would be a wise man indeed who could claim to know its future destiny.
Prime has no worries
When asked about whether the Shearson Lehman Hutton loan was a sensible move for Prime, MacDonald replies that if you go to buy an asset worth $100,000 and you take out a 90% debt to do so, you should get worried if your income is $10,000 per month; however, if it is $300,000 per month, then you have no worries. He argues that it is not the 90% debt that is important but the ability to service it. Here, he believes that Prime has no worries. This year it has a research and development budget of $135m which has declined by around 20% on the previous year’s budget. However, MacDonald says that the reason the budget is down by 20% is because the group is shifting more towards software and away from hardware. He says that the budget cut simply reflects the loss of a minisupercomputer project for which there was no likely customer base anyway. On the other hand, he claims that investment in the computer-aided design and manufacturing business has increased. In future only growing business areas will get research and development depending on how much business they are doing. But research and development budgets will go up across the board as revenues go up. As for that debt burden that Prime carries, to which there are three elements – the bank debt, the subordinated debt to Shearson Lehman Hutton and the junior preferr-ed debt at Prime’s parent company DR Holdings Inc – MacDonald says that the bank debt will be paid first and then the others will be addressed. In this, the company’s third quarter it negotiated a revolving credit facility of $180m and as from the fourth quarter it will start to pay back its bank debt at $25m per quarter. It was widely believed that J H Whitney’s strategy for Prime was to service Prime’s debts with revenues from the minimaker’s maintenance business, repay the debts with cash flow from the computer business, and take a profit on the flotation of Prime’s computer-aided design division Computervision. All of these statements MacDonald claims are false to some degree. For a start he says it has never been Prime’s intention specifically to service the debt with maintenance revenues – rather, the company is looking to all the businesses that generate its annual $1,500m revenues to generate returns for the debt, and, he emphasises that better asset management is the key here. For example, he says that when he arrived at Prime the group was taking 124 days to process receivables, while payables were paid in 35 days. Obvious-ly, this was out of balance and has now been rectified. Maintenance is simply a component of Prime’s business, and although MacDonald says it is a growing part of the business, he is under no illusions about the longevity of the 50 Series user base. He counters the argument that Prime is only really strong in the computer-aided design and manufacturing market by pointing to Prime’s position as a leading supplier in the Pick marketplace – around 40% of Prime’s computer systems business is derived from the Pick community. The company also says that it is one of the largest players in the Unix market with more than half its business being in this market. MacDonald strongly refutes the suggestion that there is any connection between Prime’s debt rating and its credibility as a Unix vendor. You migh
t imagine that users would weigh up the financial viability of the vendor before they plump for their new Unix system. And indeed they might, but this holds no terror for MacDonald.
By Katy Ring
He says that Prime’s debt structure is dependent on global decisions through which the company has ways to generate a significant buffer between the debt and the computer business. He believes that Unix customers make a purchase decision based on factors such as who supplied them with their old proprietary systems, who has the most appropriate application software for which machines and so on. For the six months to July 1 Prime saw revenues rise by 5.7% to $773.2m while operating profit was up 400% to $154.7m. All well and good but how does the interest payment hit this profit growth? MacDonald says that the interest payment doesn’t come directly from Prime’s pocket, but is booked with DR Holdings Inc – Prime directly services the debt each quarter with cash and if all this is taken into consideration Prime made an operating profit in the region of $70m for the first half of the year. Per quarter MacDonald reckons Prime makes around $50m in operating profit, spends $38m in expenses, and once the interest is deducted from profit, it still turns in a net profit. Basically, says MacDonald, Prime is generating cash at twice the rate needed to service the debt. The bombed out CAA rating is apparently not causing him sleepless nights, since, he says, it is only ameasurement of what shape the company would be in if it placed junk bonds, it is not indicative of security against the assets of the corporation. Although, he adds, grinning, that if Prime had an A rating it would expect a much different interest rate. MacDonald is adamant that there are no plans whatsoever to float off or sell Computervision – reports of such a move were described by him as being totally inaccurate. Indeed, Computervision appears to be the lynchpin in the Prime strategy for growth. Prime stresses its commitment to offering CAD/CAM software on a variety of hardware environments, but obviously it would like to sell its own products. In some countries Computervision software is sold 90% and above on Prime hardware – Germany and Japan are two instances where this is so.
Leading light is CAD/CAM
However, in the US where Computer-vision had a DEC strategy, a mere 20% of software sales pull through Prime hardware deals. MacDonald reckons that Prime’s proprietary 50 Series line has an expected lifespan of around 30 years. The future obvious-ly lies with the new EXL 7000 Series Unix boxes bought in from MIPS Computer Systems Inc, and in this market Prime believes it is as strong a contender as anyone because: it claims to have one of the 10 largest service organisations in the world, it has an installed user-base of 17,000, it has been in the Unix business for a long time, and it offers Pick applications for this market. As for its new systems integration business, this too will be driven by Prime’s CAD/CAM business. Turning to Prime’s future, MacDonald said that the group’s leading light is the CAD/CAM business which has huge opportunities world-wide. Prime will offer a dual approach to its customers via 50 Series and Unix with systems integration providing a bridge for both businesses. Finally, Prime will also move into third-party maintenance, disaster recovery and so on. In terms of sales, Prime’s business is swinging to the international market. At present approximately 57% of revenues come from international sales, but this figure is pulled down by Prime’s service business in the US, since in terms of new product shipments international sales bring in 65% of revenues. When asked if Prime would be in the hardware business long term MacDonald replied that over time the content of the business would change more and more. Prime may be in a position to become a publically-quoted company once more in around four years’ time. For now MacDonald is confident that the company has left its turbulent past behind it. He finds proof that the business has a future in t
he fact that J H Whitney provided financing in the first place. He declined to comment on the Wall Street Journal’s allegations that Whit-ney came through with the cash because of the politics of an old boy network. Geniality and optimism aside, it would seem that Prime will live or die by its CAD/CAM business and, sadly, it may prove that here the J H Whitney loan has given Prime management enough rope to swing by.
