Commodore Falls Short of Its Loan Terms
Commodore International, battered by the long slump in home computer sales and still awaiting revenue from its newest machine, said Tuesday that it has fallen out of compliance with certain terms of its bank loans but that the banks have agreed to look the other way for now.
Commodore is expected shortly to announce an $80-million loss for the quarter ended June 30. Sources said the non-compliance arose in connection with the company’s announced plans to take a $50-million inventory write-down, but details couldn’t be learned.
The West Chester, Pa.-based firm, which dominates the weak market for inexpensive home computers, said it is “currently engaged in discussions with its principal lending banks regarding amending its loan arrangements.”
Commodore said it is “in non-compliance with certain financial tests imposed under the loan agreements, but . . . in view of these discussions, the banks have presently agreed to waive such non-compliance.”
Loan agreements normally set minimum requirements for debt-to-equity ratios and other measurements of the borrower’s financial health. Falling below such minimums can be a prelude to bankruptcy or merely reflect temporary problems. In Commodore’s case, the big write-down of the value of its inventories would reduce the company’s net worth substantially and possibly trigger a review process by the lenders, although analysts aren’t forecasting imminent failure for the company.
Commodore, whose lead lender is Manufacturers Hanover Trust of New York, had a total debt of $266 million on March 31, more than double the debt of nine months earlier.
In a brief statement, the firm said it expects that a satisfactory agreement will be reached with the banks but that it “might take some time.” A Commodore official said the company has not missed any payments on its debts.
A former Commodore executive said that, although lenders might be in a position to force the firm into bankruptcy proceedings, Commodore officials hope that they will instead wait to see how the new Amiga personal computer does in the market. The machine is scheduled to be shipped to dealers later this month.
Mark Manson, an analyst with Donaldson, Lufkin Jenrette, said: “In choosing to take the write-downs they took in the fourth quarter, it became relatively clear that they were approaching the situation where those covenants (with banks) would have to be renegotiated. The issue is not whether or not it’s a solvent company. . . . We do not view this as an imminent bankruptcy.”
Reflecting the continued dismal market for computers that cost less than $1,000, Commodore is expected to report revenue of less than $150 million for the fourth quarter ended June 30--a drop of more than 50% from the year-earlier $300 million. Commodore has said the $80-million loss will include the $50-million write-down, a $25-million operating loss and $5 million due to “other” factors.
That would throw Commodore about $69.9 million into the red for the fiscal year, versus a year-earlier profit of $143.8 million or $4.66 a share. Sales would be about $901 million, off 29%.
“I think clearly the September and December quarters will be better, but that will be seasonal,” the former Commodore executive said, referring to the normal Christmas-related improvement in personal computer sales. “I don’t know anybody who will believe anything about the credibility of this company until sometime later in 1986.”
The Amiga, Commodore’s bid to enter the market for small-business computers, was introduced in July and has been praised for its speed, power and graphics capabilities. The basic Amiga starts at $1,300 and is to compete against the Apple Macintosh, among others.
However, some analysts are skeptical about Commodore’s ability to find many independent retail dealers willing to take on yet another product, such as the Amiga.
By midsummer, Commodore was telling analysts it had about 300 dealers lined up and expected to have 500 by the time the machine is shipped. That would be about 11% of all retail computer outlets.
“It’s too soon to know,” said Richard Matlack, president of Infocorp, a Cupertino, Calif.-based market research firm. “The only thing we can say to date is we have not seen a significant number of dealers sign up for the product.”
COMMODORE INTERNATIONAL AT A GLANCE Fiscal years ended June 30 In millions
REVENUE NET INCOME 1981 $186.5 $25.4 ’82 304.5 40.6 ’83 681.2 91.7 ’84 1,267.2 143.8 ’85 901.2* (69.90)*
*Estimated, based on company’s fourth-quarter projections of $80-million loss and revenue of $150 million.