thestreet.com on COMDISCO (1 of 2 reports)
Comdisco Mum on Coyote, Crescent Ties
By Alex Berenson
Senior Writer
12/18/98 9:09 AM ET
In the middle of the deal between Crescent Communications and Coyote Network Systems (CYOE:Nasdaq) is a $3 billion company that doesn't want to talk.
The company is Comdisco (CDO:NYSE), a fast-growing computer leasing company based in Illinois. Comdisco, which has come under fire in the past for allegedly using aggressive accounting tactics, has relationships with both Crescent and Coyote, raising questions about its role in the Crescent/Coyote deal.
As TSC reported last week, Westlake Village, Calif.-based Coyote stated in quarterly disclosure documents filed with the Securities and Exchange Commission that last quarter it recognized sales of roughly $11 million worth of telecom equipment to Crescent. After TheStreet.com raised questions about Crescent, such as why the company had no listed phone number where Coyote said it operates, no business license in Long Beach, Calif., where it was said to be located, and no California tax records, Coyote said Comdisco actually bought the equipment and leased the gear to Crescent. Comdisco owns warrants that at the time of issue entitled it to buy Coyote stock at a discount, and one analyst says Comdisco also may have warrants in Crescent.
All this leaves unresolved the issue of why Comdisco, which does much of its business with much larger companies, is involved in a deal between two tiny businesses with sketchy histories.
Comdisco isn't getting near that question, at least publicly. The company hasn't disclosed its connections with Crescent and Coyote, and a Comdisco spokeswoman declined to comment after numerous inquiries over several days. But Comdisco's refusal to respond to TheStreet.com hasn't stopped the company from discussing the situation with at least one analyst.
Bear Stearns analyst James Kissane says Comdisco told him it was "providing financing for this Crescent company, which I think is just a vehicle for some guy, an entrepreneur."
Kissane says Comdisco may have received warrants in Crescent in return for providing financing for the networking equipment it bought from Coyote and leased to Crescent. So it's possible that Comdisco had stakes in both the buyer and the seller of the equipment.
(In a previous version of this story, TSC incorrectly reported that Comdisco had told Kissane it has an ownership stake in Crescent. Comdisco did not tell Kissane that it has an equity stake in Crescent. Kissane was saying generically that it would be typical for Comdisco to receive options or warrants in small companies for which it provided lease financing.)
Coyote referred all questions regarding Comdisco back to Comdisco. As for Crescent, TSC wondered if Comdisco had an ownership stake in the company, which is run by Gene Curcio. But "my client's a private company, and is not inclined to give details of its shareholders to outside investors," says Curcio's attorney, Sa'id Mosteshar of La Jolla, Calif.-based Mosteshar & Mackenzie.
Founded in 1969 by a former IBM (IBM:NYSE) sales rep, Comdisco leases computer and networking equipment to businesses that don't want to carry expensive and fast-depreciating technology assets on their balance sheets. After stumbling a bit in the early '90s, the company has righted itself under Chairman Jack Slevin, who took over after founder Kenneth Pontikes died in 1994.
Last month, Comdisco reported that it earned $40 million, or 25 cents a diluted share, on revenue of $904 million for its fourth quarter ended Sept. 30. The results marked Comdisco's 26th straight quarter of record earnings. For the fiscal year that also ended Sept. 30, Comdisco earned $153 million, or 93 cents a diluted share, on record revenue of $3.2 billion.
Comdisco's steady growth has endeared it to analysts. A.G. Edwards analyst Mark Jordan cites the "very steady and predictable pattern" of the company's earnings as one reason he rates the company's stock a buy, with a price target of 26. Comdisco closed Thursday at 15 1/2. (A.G. Edwards does not have an underwriting relationship with Comdisco.)
But Comdisco has also been accused of using aggressive accounting to make its results look better. In 1995, Forbes reported that Comdisco Chief Financial Officer John Vosicky "is a clever man with a profit and loss statement. When Pontikes died last year his insurance company paid Comdisco $20 million. Rather than designate it as an extraordinary item, Vosicky lumped it into Comdisco's $47 million in other revenues."
Forbes also focused on Comdisco's Venture Leasing division, the unit that now appears to be at the heart of the deals with Crescent and Coyote. The Venture Leasing unit enables small high-tech start-ups to get leases on computer and networking gear they might otherwise not be able to finance. In return, Comdisco gets warrants in the start-up. If the company succeeds, those can turn out to be extremely valuable.
It is that division that apparently got Comdisco a stake in Coyote. Comdisco disclosed in a Dec. 3 SEC filing that it has warrants to buy 193,000 Coyote shares at prices between 4 and 9. That day, Coyote shares closed at 16.
What those shares will be worth in the long run is open to question, given Coyote's sketchy history. The stock climbed from 6 in late summer to clear 16 early this month, and then slid below 7 after TheStreet.com published stories last week. Coyote is the second incarnation of Diana, the onetime meatpacker whose stock made a quick roundtrip from around 10 to 100 and back over the course of 1996 after it aggressively promoted its plans to get into the networking equipment business. Diana's rush to fame and glory ended when the New York Stock Exchange delisted the stock. Now renamed Coyote, the company has recently moved up from the over-the-counter bulletin board to the Nasdaq National Market System.
But Coyote wouldn't have much business if not for Comdisco. Coyote's $11 million sale of networking equipment to Crescent represented the vast majority of its $15.2 million of revenue for the September quarter. But Crescent, a company that's most easily found on incorporation papers in Carson City, Nev., didn't pay for that equipment itself. Comdisco did.
In addition, much of the equipment that Coyote sold Comdisco wasn't even made by Coyote. Instead, it was produced by Canada's Newbridge Networks (NN:NYSE), a much larger and better-known networking company. Given Comdisco's size and market power, the company could easily have bought that equipment directly from Newbridge -- and presumably gotten a better deal than Coyote did. So why didn't it?
That's yet another question Comdisco won't answer. Nor will it reveal whether any of its officers own stakes in Crescent or Coyote. Nor will it discuss the extent of due diligence it performed on Crescent before agreeing to finance the company.
All that might suggest something is not quite right.
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