Continental Information Systems’ big enchiladas have gone on a money hunt. As part of their quest, they have engaged controversial Wall Street firm Drexel Burnham Lambert to stalk potential buyers of the lessor’s securities. Alternatively, Drexel might set up a spin-out fund that would enable the Syracuse, New York, leasing company to dispose of some assets profitably. Meanwhile, CIS, the second largest US computer leaser, which got Wall Street thoroughly worried about its prospects last month (CI No 1,063) is doing some looking on its own. The latest development on that front, say sources close to the company, is a parlay with General Electric’s finance group. GE is already a significant player in computer leasing; it is viable and hungry for more business. GE has been making acquisitive noises in the offices of several computer lessors and CIS just happens to be on the itinerary. But a takeover of CIS would be expensive. While the $35m market value of the company’s total equity is small compared with its nearly $2,000m in assets, a purchaser would also have to shoulder a huge burden of debt something in the neighbourhood of $300m. Of that, $110m came from Prudential via a deal finalised on October 13. In order to obtain that refinancing package, CIS had to agree to meet some stringent tests, among them a promise to maintain its tangible net worth at specific levels. For the purposes of their agreement, CIS and Prudential defined tangible net worth as total shareholders’ equity less goodwill, copyrights, patents and deferred charges. To avoid default, CIS had to show a tangible net worth of at least $15.5m on November 30. If the company has met this test, which it almost certainly has, it still must improve its balance sheet in the future to stay ahead of Prudential’s requirements. CIS is required to have a tangible net worth of at least $25m on February 28, 1989; of $25m on May 31, 1989; of $28m on August 31, 1989; of $31m on November 30, 1989; and of $40m on February 28, 1990 and thereafter as long as the deal remains in force. On August 31, the date CIS closed its books for the second quarter of fiscal 1989, the firm’s tangible net worth as defined in the Prudential pact was about $18.6m. Went into the red During that quarter, CIS went into the red to the tune of $2.7m, bringing its net loss for the half year to $10.3m. Results for the third quarter ended November 30 may not be available until January 15, and the company has said that there are no assurances it will return to profitability in the near term. But even if CIS loses $3.1m in its most recent quarter, it will still have adequate tangible net worth to satisfy this part of its credit agreement. While Prudential apparently feels it has no cause for alarm, CIS’s shareholders do not necessarily share this confidence. On Thursday November 17, CIS stock fell from $3 to $2 on a rumour that the company was caught between the Rock of Gibraltar and a hard place – the bankruptcy court. The lessor’s president, Harry Goetzmann, tried to reassure the investing public. Bankruptcy, he said, is not a desired alternative for this company and no steps have been taken to effectuate any such filing. On Friday, November 18, CIS stock gained half a dollar. In this atmosphere, GE may not actually be interested in acquiring CIS lock, stock and barrel. It might instead want to purchase some of the Syracuse, New York, company’s holdings which include computers, telecommunications equipment and a ton of aircraft. In addition, investors and lessees should keep an eye on CIS’s most underestimated asset, the shrewd and able Mr. Harry Goetzmann. We wouldn’t bet against him unless the odds were real good. – Hesh Wiener Copyright (C) 1988 Technology News of America Co.
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