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Altantic Leased Its Last System

The collapse of Atlantic Computers, the world’s third largest computer lessor, has left users painfully aware that it is they who will pay for Atlantic’s collapse.

Champagne flowed, party streamers were tossed out of windows and Porsches slipped quietly out of the company parking lot to their drivers’ lavish homes. This was the picture painted by British newspapers, as staff members at Atlantic Computers PLC in Staines, England, learned of the computer-leasing giant’s collapse.

Within hours after the public address system announced to the staff that they were being laid off, there were reports that people walked out the door with PCs, customer lists and paintings. One director was quoted as saying that anything of value not physically locked down disappeared.

Within days, many staffers at Atlantic had found new jobs, mostly in the computer-leasing industry. According to one executive, some of the employees have gone on to other companies that sell leases similar to Atlantic’s Flexlease.

The crash of the world’s third largest leasing company and its London-based parent, British & Commonwealth Holdings PLC, has left in its wake complaints by investors of lost millions and criticisms of Atlantic’s standards that allegedly allowed companies to virtually write their own account of profits and losses.

Despite early warnings from the British legal community and other computer lessors about the validity of Atlantic’s Flexlease contracts, users found the price advantages of the Flexlease irresistible. Customers that included the U.K. Atomic Energy Authority, Hanson Trust and Penguin Books found themselves pulled along in the company’s rapid growth. Between 1983 and 1985, Atlantic’s pretax profits soared from about [Br pound] 2 million to nearly [Br pound]15 million (or about $3.4 million to $25.5 million).

Now users are all but forgotten in their misery amidst the corporate ruin. Most of them are saying nothing until they have worked out the scale of their potential liabilities, but privately they admit to anger at having been taken in by the company’s apparent success and its salesmanship.

Some users are more embarrassed than vengeful. They anticipate having to answer some difficult questions from boards of directors as to why, with all of the warnings in the marketplace, contracts with Atlantic were signed in the first place. And their unease will not be mitigated by allegations that some Atlantic staff members offered inducements to users to sign contracts. “I know that a number of DP managers are worried about their jobs,” says Michael Moore, chairman of the IBm Computer Users Association.

Besides the low initial rental charges on the Flexlease, users were attracted by its provision that allowed them to buy a more powerful machine about half-way through the term of six or seven years by swapping their contract for a new one. The remaining payments, in particular the higher sums due near the term, were written into the new lease. As before, the new lease allowed for low initial payments. The highest payments were due in the final two years, but as long as customers continued to upgrade equipment, the final year’s payments never arrived. One of the problems of this type of pyramid selling was that there needed to be a supply of new clients to defer Atlantic’s liabilities. Several users with large sites may have seen the trouble coming, as some of them were trying to negotiate their way out of their Atlantic leases at the time of the collapse.

Legacy of Anguish

The others are left with an inheritance of anguish, forced to prepare additional budgets requesting board approval for hundreds of thousands of pounds in extra lease charges. Users may also have to keep equipment they want to replace for longer than anticipated, and they may no longer receive any financial benefits when they finally return the equipment. They forecast that extra-leasing liabilities ultimately will appear on their balance sheets and that the leases will be changed so that they are less flexible. Users also predict that they will have to meet additional tax liabilities. Compounding the humiliation for many users are the warnings that emerged as long ago as 1980 about the dangers of signing flexible leases of the type Atlantic marketed. In 1987, the Royal Bank of Scotland was one of several users that went on record declaring that Atlantic’s Flexleases were unsatisfactory because the cost of upgrading was unspecified and left to negotiation with Atlantic.

Nevertheless, the Flexlease, devised by founder and motor-racing enthusiast john Foulston, continued to attract hoards of users even after his death in a crash in September 1987. In 1988, Atlantic wrote about [Br pound]400 million ($680 million) worth of Flexleases, each of them unique.

But as IBM’s leasing arm became increasingly aggressive, the growth in Atlantic’s business started to slow down. A growing number of users tried to cut their ties with Atlantic by exercising the lease’s walk option. This allowed customers to return their computer and terminate their agreement after four or five years, usually a year or two before the lease was due to expire. Under this arrangement, Atlantic undertook to settle the outstanding payments with the owner of the equipment, usually a third party such as a bank. This meant that Atlantic’s contingent liabilities grew as more customers exploited the walk terms. Profits began to dwindle, and on April 16 of this year, British and Commonwealth called in High Court administrators to take control of the company. What, Me Worry?

At first, users were not unduly worried. They had thought Atlantic would be bought by a large financial institution, which would honor the company’s commitments to users.

It was only at a recent gathering of Atlantic users in London’s Cumberland Hotel, organized by the IBM Computer Users Association, that users had their worst fears confirmed.

First, Atlantic’s administrators surprised delegates by grimly telling them the company’s affairs were so complicated and the liabilities so enormous that a wholesale takeover of Atlantic’s business was highly unlikely. In effect, the administrators said, users who had signed Atlantic’s unique Flexlease agreements would not be able to either upgrade their computers or walk away from the leases early, as Flexlease terms had stated. Some were in the midst of hard drive repairs, while many other systems had all out data loss or hard drive failure.

It was after this conference that many of the U.K.’s 1,000 Atlantic users began to scrutinize their 2,500 leases with a diligence that perhaps had been missing when they first signed the contracts.

To some, it was a revelation that the lease comprised two sets of documents.

The first set was an agreement between a bank and the customer. In this, the user would agree to make leasing payments over a period of typically six or seven years. The user also signed a separate agreement with Atlantic that promised the upgrade and walk options. What many users did not realize was that, in the event of Atlantic’s collapse, the agreement with the bank stood firm, while the contract that it had with Atlantic was worthless.

As things stand today, users are tied to the original lease wit6 the bank for the full term of up to seven years, which means users cannot exercise the flex or walk options,

Car manufacturer Volkswagen AG believes it will have to make another year’s payments on an IBM 3081 that it want to dispose of now. When it buys a bigger processor, it also may have to pay second user software license fees because its new machine will be a second mainframe, not a replacement one.

Vetco Gray, a supplier of underwater oil-drilling equipment in Aberdeen, Scotland, faces a similar problem and is concerned that it may have to pay for equipment it has already returned to Atlantic. It fears that it will be unable to upgrade its IBM System./38 and start a new lease on a bigger machine next year. Instead, it may have to continue paying the rental stream, maintenance and service on a redundant System/38 for another four years.

Another Aberdeen-based company, Baker Oil Tools U.K. Ltd., is particularly concerned that payments it made to Atlantic may not have been passed on to the third party to the lease, which owns the equipment and is often called the head lessor. Baker returned a System/38 to Atlantic more than a year ago and replaced it with an AS/400. “We have been told by the administrators that they cannot give us any answers yet. They are still unraveling Atlantic’s affairs,” says a Baker Oil spokesman. Tony Collins is executive editor at Computer Weekly in Sutton, U.K.

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