Winloss/20″/mike1st/mark2nd

By ANN DONAHUE

Staff Reporter

Start with a heaping dose of mergers, mix in Asian financial woes, add a dash of downsizing and toss them all together with some technological innovation, and you get a recipe for a very chaotic year.

These four elements combined to cause earnings at several Los Angeles-area public companies to fluctuate wildly in 1998, a year that defies easy analysis.

Some companies, profitable in 1997, fell far into the red in 1998, while others that posted big ’97 losses climbed to profitability in ’98.

One factor hurting profitability recently has been the one-time charges related to mergers.

Beverly Hills-based automobile manufacturing machinery producer Unova Inc. suffered a net loss of $171.4 million in 1997 as a result of charges related to its acquisition of Cedar Rapids, Iowa-based Norand Corp. and the Swedish company UBI.

Then in 1998, Unova soared back into the black, posting $69.7 million in net income the largest turnaround of any public company in the area.

Other companies whose bottom lines were hit by merger-related charges in 1997 and 1998 include Vertel Corp., First Consulting Group Inc., Panavision Inc. and MRV Communications Inc.

When it came to profit downturns in 1998, none was steeper than that suffered by Atlantic Richfield Co.

In 1997, Arco posted net income of $1.8 billion, but last year that profitability went up in smoke, as the oil giant recorded a net loss of $655 million.

What forces conspired to create a $2.5 billion drop?

“Oil prices were in decline,” said Arco spokeswoman Linda Dozier. “All the oil companies were impacted heavily and certainly it was the biggest single reason our profits were down.”

Chief among the factors that created the worldwide oil glut, sending crude prices to their lowest level in years and pummeling Arco’s bottom line, was a decision by OPEC in early 1998 to increase production. Also, there was the United Nations Security Council’s decision to loosen restrictions on Iraqi oil exports, the Asian financial crisis and a warm winter.

The Asian financial crisis also hit PacificAmerica Money Center Inc., which originates and sells home equity mortgage loans on single-family residences. The Woodland Hills-based company went from net income of $17 million in 1997 to a net loss of $9.9 million in 1998.

According to its annual report, the troubles began with the Asian economic crisis and losses incurred by several large U.S. hedge funds.

PacificAmerica bundles its loans and sells them on the secondary market. But hedge funds, which normally are major buyers, became less active over several months, leading to an oversupply of loans and thus pushing down prices. This forced PacificAmerica to discontinue its wholesale loan division in October.

While some L.A. companies saw their profits disappear in 1998, others saw dramatic profit rebounds.

One example was Spelling Entertainment Group Inc., which attributes its turnaround to a corporate restructuring.

By closing its feature film division, exiting the home video distribution business and selling its entertainment television channel in Latin America, Spelling was able to cut costs and thereby increase profitability, said spokeswoman Nancy Bushkin.

In 1997, Spelling posted a net loss of $12.3 million. Last year, it posted net income of $8.9 million, translating to a $21 million bottom-line turnaround.

Other companies put their faith in technology.

Merisel Inc. of El Segundo increased profits by relying increasingly on automation in its business as a distributor of computer hardware, software and networking equipment.

Merisel has a computer system that allows its service representatives to give customers immediate updates on the status of their accounts such as the balance owed or the status of equipment orders. It also allows customers to track the shipping progress of products they’ve ordered.

Enhanced productivity resulting from such advances helped Merisel turn its $12 million net loss in 1997 into a $18.5 million net profit in 1998.

“As a whole, Merisel will continue to focus on what the customers need,” said Tim Jenson, senior vice president for finance. “We have more upside potential than anyone else in our industry.”