For more than a decade, Peter S. Redfield assiduously nurtured a dream which associates now say developed into an obsession.
Redfield, the president of Itel Corp. here, dreamed that his leasing company would attain $1 billion in sales faster than an other firm in the history of American business. And for a time, it looked as if Itel would reach Redfield's goal in 1979, just 12 years after it was created.
Itel leased a wide variety of products all financed by massive bank borrowing - ocean vessels, jet planes, rail cars, giant computers. The staff, which quickly grew to 6,400, matched the growth in the leasing industry. Itel's beautiful secretaries became the talk of this town which places a high value of physical attributes.
Itel became a company of salesmen, mostly in their early 30s, motivated with paychecks of several hundred thousand dollars a year. Redfield, who Forbes magazine praised in its May 28 issue as a "whipcracker over a harddriving army of salesmen and deal makers," was also given to temper tantrums, according to former employes. But the young exectutives put up with being yelled at, one recalled, because they "couldn't afford to leave. Nobody else paid that kind of money.
But in the past few months, Redfield's dream has turned into a nightmare.
Instead of the growth envisioned by Redfield, Itel has been shrinking. Two weeks ago, the company announced it would lose $60 million in the second quarter, far worse then earlier predictions. Some 500 employees - many of them top executives - have been axed. Itel's stock, which traded as high as $37.50 a share this year, has plunged to about $8.
Itel suddenly has become a company struggling for its very corporate life. And Redfield, 47, who former associates say gloried in his role of empire-builder, now is being blamed for Itel's disastrous turn and probably will be forced out of office by the company's numerous creditors.
According to leasing industry sources, Itel's fate may not be decided at the company's extraordinary plush headquarters at 1 Embarcadero Center, 37 floors above San Francisco Bay. Instead, the decision probably will be made thousands of miles from here at the offices of venerable Lloyds of Londos.
The complex circumstances leading to this curious state of financial affairs were described in detail in the July 3 issue of the Washington Post. Briefly, here is what happened.
A major part of Itel's business is leasing computers, which it buys chiefly from IBM, using borrowed funds. The computers are leased to businesses, governments or any other institutions which, for tax or other reasons, don't want to own the expensive equipment.
Because IBM's aggressive development program can turn today's computers into tomorrow's antiques, banks have been hestant to lend money on computers for longer than four years. But in 1974, to the leasing industry's amazement and delight, Lloyds offered a unique insurance policy that caused the banks to extend the credit on computers for up to seven years.
The policy provided that, if between years four and seven, a lease was canceled by a user for any reason, Lloyds would pay the lost revenues after taking into account the proceeds from placing the computer with a new user.
In fewer than four years that the policy remained in existence, Lloyd's insured $550 million worth of computers and $500 million worth of supporting equipment, according to London sources. Itel was the biggest user of the Lloyd's policy among leasing companies, employing it to borrow an estimated $250 million to finance the purchase of computer equipment.
Then in January of this year, IBM announced its new 4300 series of computers that are faster, more powerful and up to 30 percentcheaper than anything already on the market. As a result, Lloyds now estimates that cancellation of leases could produce claims of $220 million - by far the biggest figures in its 291-year history. Other sources say the claims could reach half a billion dollars.
But so far, Lloyd apparently has been slow to pay the claims already filed. One policyholder, Federal Leasing Inc. of McLean, filed a $627 million damage suit against Lloyds in June, alleging that Lloyds wasn't paying the claims it was filing.
In Itel's present precarious circumstances, any prolonged delay by Lloyds in paying off its claims could be the company's undoing, sources say. What is worse, Itel still doesn't know exactly how much its claims will amount to because most of the leases haven't run the four years provided for in the policy. One estimate is that Itel's claims could run as high as $180 million.
In preparing this article and the earlier one on Lloyds, repeated attempts were made to interview Redfield and other Itel executives. But the company has refused all interviews. All of the sources who did agree to be interviewed - former employes, banker,s competitors - requested anonymity.
Redfield's rapid rise was characterized by one San Franciscan as a typically Western busines story. "Back East, you/ve got to be someone's son," he said. "But out here, you're your own man once you've shown you can do something."
In the mid-1960s, Redfield, then a middle-level executive at Transamerica Corp., proposed that the company get into the computer-leasing business and make him head of the division. When management demurred, Redfield decided to do it on his own.
His plan was to lease big IBM 360 computers, the most advanced systems available at that time. In 1968, Redfield and two other investors each put up $32,000, but that still left them short of necessary capital to begin the news business. So they sold 91.2 percent of the company's common stock to the Fund American Companies for $10 million. (That company is now owned by American Express, whic changed its holdings in Itel to nonvoting preferred shares.)
To one close observer of Redfield and Itel, this initial deal with Fund American 12 years ago was the underlying cause of the company's current problems. Redfield, who was to build Itel almost single-handedly, was left with less than 3 percent of his creation's stock.
According to this theory, Redfield figured that if he made Itel into a billion-dollar company, the board of directors would reward him with additional stock.
By 1971, the young company had quadrupled its sales and seemed to be well on its way. Then, suddenly, IBM came out with a whole new line of computers called the 370 series. Itel's income plunged, its stock dropped to $6 a share from $37, and creditor banks began to worry about Redfield's grand design.
The first clash with IBM forced Itel to take a $30 million write-off on its inventory of computers. But the company began to fight back. Redfield even hired a psychologist to provide him with a profile of the perfect salesman, according to former employes.
Enormous salaries were paid to attract salesmen who fit the image; many were lured away from Itel's nemesis, IBM. One self-described third-level executive claims he earned $300,000 a year at Itel, as well as lavish frings benefits such as a Mercedes-Benz. He said "the whole package - salary, stock, saving plan, etc. - was unparalleled in the history of business."
Each, January, hundreds of Itel staffers boarded a ship for an eight-day cruise which was one long motivational seminar, according to several participants, and one competitor recalls that, when the cruise was over, "Those guys would charge off the boat like a herd of elephants."
One former executive recalls: "I called it the "ship of fools." It was nothing more than an ego trip for Redfield. He'd sit on th e upper deck and watch us perform."
According to this executive, Itel had planned to spend $5.5 million for the 1980 cruise. It would have cost Itel stockholders about 45 cents a share.
In the mid-1970s, Itel diversified away from computer leasing to leasing rail cars, vessels and aircraft. Even so, in 1978 more than two-thirds of the company's revenues still came from the computers. What is more, Itel's ratio of debt to equity was a startling 4.9 to 1, far higher than other leasing companies that handled much-less-vulnerable merchandise than computers.
In 1974, Itel made another serious error that still haunts it today. Redfield entered into agreements with Hitachi and National Semiconductor Corp. to market computers manufactured for it by those companies. In the months since the IBM announcement of its new line, Itel reportedly hasn't been able to find markets for those machines. And one knowledgeable source estimates the company has about $228 million worth of computers stored in warehouses near Salt Lake City.
Itel's books may be in even worse shape than they look now. The company already has posted a profit of $48.7 million it had expected to make from reselling or releasing the IBM 370 computers. But now that profit may never be realized because IBM's new computers have dramatically depressed the market for the 370 line.
All of this makes the outlook for Itel and its leading banker, Manufacturers Hanover Trust Co., decidedly bleank. Last week, in a retrenching effort, Itel sold substantially all of the assets of its rail car manufacturing subsidiary for an undisclosed sum.
The bank and Itel must be careful not to incur a slew of stockholder suits by selling too many of the company's valuable assets. But clearly the company needs cash to survive, which is why Lloyds looms large in the company's future. The big question is: If, as expected, Itel's customers who are using the 370 computers cancel their leases and move to the faster, cheaper IBM 4300 line, will Lloyds be quick to pay Itel's claims, giving the company much-needed cash?
In the meantime, Redfield lost out in an executive shuffle last June to cofounder Gary B. Friedman, who now in running the company. Redfield, for hispart, is shuttling round the world trying to preserve what's left of the empire that he created in record time. CAPTION: Graph 1, Net Income, Itel Corp. statistics. Graph 2, Revenue; Picture, Peter Redfield; By Bill Perkins - The Washington Post