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Continental Information Systems, the second largest independent computer lessor in the US, filed a Chapter XI bankruptcy petition on Friday, January 13. The company, headquartered in Syracuse, New York, sought protection from its creditors because of continuing cash flow problems and other difficulties in its business. Details of the filing are not immediately available; Continental will supplement its initial court documents with specifics about its financial condition during the coming days. Generally known as CIS in the trade, the company reported nearly $2,000m in assets last August 31, the end of its second fiscal quarter for the accounting year ending February 28, 1989. During the six months, CIS reports a loss of more than $10m on turnover of $361m. This filing is the most recent publicly available. Data for the company’s third fiscal quarter, which ended on November 30, is technically due to be made public today, January 17, but it could well be delayed as a result of the bankruptcy filing. In recent days, the company reported that it had been unable to make a $3.8m interest payment to Prudential Insurance. That payment, part of a $110m financing arrangement completed October 13, is only one of many outstanding bills left unpaid by the beleaguered company. Among the other payments outstanding are rentals due by CIS to users and other computer lessors from which the company subleased equipment. In addition, CIS is believed to have amassed as much as an additional $200m in bank debt. Some of this debt is tied to leases, but much of it may comprise general obligations of the company. CIS appears to have choked on a bone it fought over in 1987, another computer leasing company called CMI. More than a third of CIS’ debt is directly related to that acquisition, one of several mergers in the computer leasing industry that have occurred during the past two years. The CIS acquisition of CMI is similar, on the surface, to other consolidations in computer leasing. But there are significant differences, too, among them the size of the deal. CMI was nearly as large as CIS when it was acquired, compounding the difficulties associated with the merger process. Additionally, CMI was available to CIS primarily because it had done poorly. CIS acquired CMI from Torchmark after a battle for control with the founders of CMI. Torchmark, a Birmingham, Alabama, conglomerate primarily in insurance, had bought CMI but left the Detroit area lessor in the hands of its old management. The managers had the right to buy back their firm on terms tied to CMI’s financial performance. When CMI failed to meet certain accounting tests, Torchmark gained the right to force CMI’s management out. At that time, Torchmark determined that it preferred to sell the firm rather than install new management and continue in leasing.

Sticky and secret CMI’s managers contested Torchmark’s takeover in court, but lost. This left open the opportunity for CIS, a longtime rival of CMI, to buy CMI under what at the time were said to be favourable terms. CIS did’t have enough cash to complete the deal, however, and Torchmark loaned CIS some of the money with which to buy CMI. The Torchmark loan was due to be repaid by CIS late August, at which time CIS was looking for an alternative source of funds as it still did not have the funds required to clear the debt amassed during the takeover of CMI. Prudential, which had previously invested heavily in the obligations of CIS, consolidated its former funding with the amount CIS owed Torchmark – this is how the total got to $110m – and became CIS’ largest single creditor. While CIS has other debt that exceeds Prudential’s $110m, the borrowings are believed to be in large measure syndicated bank loans in which no single institution has anywhere near $110m of direct participation. Even after the refunding completed during the second half of 1988, CIS was never able to consolidate CMI’s business into its own. One reason involves a sticky and thus far secret deal between the lessor an a Detroit bank, Manufacturers National. Manufac

turers National was a lender to CMI, and at the time of the acquisition by CIS was owed a sum reckoned at $15m to $25m by various sources. The bank had the right to attach certain receivables of CMI, and threatened to do so unless it was repaid. Negotiations with CIS resulted in some compromised, but not in terms that freed the acquiring company from the bank’s lock on funds due the acquired one. Nor, apparently, was Prudential willing to provide additional money that would enable CMI’s old debt to Manufacturers National to be cleared and thereby permit a more complete consolidation of the two lessors. This complication may have added to the stresses on CIS that led to its bankruptcy filing.

Ironically, the stock of the never-consolidated CMI Holding Corp is part of the collateral accepted by Prudential as part of its $110m loan agreement. Should Prudential wind up owning the CMI portion of CIS, it would have to assume the obligation to Manufacturers National anyway. CIS has leased equipment to a large number of prominent American organisations. Its mainframe clients include AT&T, Allstate, Caterpillar, Exxon, Newsweek, Pepsi, L F Rothschild, Texaco, Time, numerous banks and insurers, and even the financial operations group of the Oral Roberts evangelical movement. In addition to mainframes, CIS has a huge clientele that leases disks and other peripherals and a significant aircraft leasing business. Outside the US, CIS has what is said to be a well-run Canadian operation and dealings in several other countries, too. Initially, current management, led by founder and chairman Harry Goetzmann Jr, is hoping to stay in control. The outcome is unpredictable, but sources familiar with the bankruptcy laws say that CIS’ present leaders have a good change to retain control as they try to cure their company’s ills. In favour of management’s retention of power is CIS’ past history. Until the CMI acquisition, CIS was a profitable, fast growing and respected lessor. Harry Goetzmann even served as elected head of the Computer Dealers and Lessors Association three and four years ago. CIS’ problems, while visible because of the company’s size, are unfortunately not isolated. Several smaller lessors have reported that their profits are under pressure and, during the past year, a few have filed for bankruptcy. In the past, no large computer leasing company has every emerged intact from Chapter XI bankruptcy. The only comparable situation during the past decade is the bankruptcy of Itel, which did emerge from Chapter XI, but as a transport equipment lessor. The initial speculation in the leasing business surrounding CIS’ next course of action – once the dust has cleared on the expected scramble for control – concerns the way the bankrupt lessor will pare its business down to a profitable core, possibly via the sale of some operations and the liquidation of other parts of the business. Along the way, some lenders and customers will undoubtedly have to accept a participation in CIS’s losses.

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