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Merisel

Merisel Inc.’s Fiscal 1996 Figures

Revenue in billions: $5.52

Net income in millions: ($140)

Earnings per share ($4.68)

Assets in millions: $706

Long-term debt in millions: $268.9

By JOE BEL BRUNO

Staff Reporter

Strapped for cash and weakened by competitors, one of the world’s biggest computer-wholesaling operations is teetering on the brink of bankruptcy.

For the past year, El Segundo-based Merisel Inc. has been wrestling with how to wipe out $150 million in debt against its North American division.

Company officials say failure to come up with a viable restructuring plan could force the El Segundo-based company into Chapter 11 reorganization.

“We have already stated in the past that Merisel would file for … bankruptcy unless a restructuring plan is approved,” said Karen Tallman, the company’s vice president. “We can’t delay the restructuring any further.”

Last week, company officials thought they had found the answer. New York-based Stonington Partners Inc. agreed to acquire a 70 percent stake in the company for $152 million.

The proposal would allow stockholders to retain 30 percent of common stock and all bonds would remain outstanding.

But one day after the offer was announced, Merisel officials said holders of its senior notes rejected the plan. Those bondholders said they would rather convert their holdings into equity than keep the bonds outstanding.

Tallman said an earlier plan would do that, but would be less favorable to the company. She said both plans would be considered at the company’s shareholder meeting next month.

No date for the meeting has been set. The Stonington offer expires Sept. 4.

Merisel’s plight has been long in the making. The company began showing signs of financial stress after forming six years ago when Softsel Computer Products Inc. (a software wholesaler) and Microamerica Inc. (a hardware wholesaler) merged.

The new company had problems in its first year. Net income in 1990 fell to $35,000, compared with combined net income for both companies the year before of $10.2 million. Revenue nearly doubled to $1.2 billion from $629.4 million.

Once the initial growing pains were over, Merisel’s numbers did jump back temporarily. In 1992, the company earned $19.7 million, followed by $30.4 million in 1993.

But the problems resurfaced in 1994 when Merisel purchased Computerland Inc. for $80 million. At the time, the company issued $125 million in debt to cover the purchase and to provide working capital for the company.

Revenue in fiscal 1995 hit $5.9 billion, but there was a loss of $84 million after the purchase of the computer chain.

In 1996, losses totalled $140 million.

Wall Street has reacted brutally to the company’s misfortunes. At one point, the shares traded as high as $22.50 and now hover at about $3.

“They came in at the wrong time,” said Robert Anastasi, an analyst with Robinson-Humphrey Co. in Atlanta. “Computer wholesaling was changing people who were going to places like Circuit City or Best Buy to get computers. There was more competition. They were never able to recover, and they’ve been tailspinning ever since.”

Merisel’s internal struggle to stay afloat has also left the door open for competitors like Santa Ana-based Ingram Micro Inc. and Clearwater, Fla-based Tech Data Corp.

Ingram Micro nabbed a lucrative position last year as a “master reseller” of Sun Microsystems Inc. products. (This is basically a middleman function in which a reseller markets and sells product from a manufacturer.) The contract was previously handled alone by Merisel.

Intense competition also has seen pricing become tougher than ever with margins dwindling, said Molly Toll-Reed, an analyst with Standard & Poor’s Corp. Merisel has seen gross margins, which don’t include administrative overhead and other costs, slide 5.7 percent currently from over 10 percent in 1991.

“Merisel’s figures have just been deteriorating year after year,” she said. “If they don’t succeed in restructuring, it could mean a default on their bonds. It will mean bankruptcy.”

Standard & Poor’s downgraded Merisel’s $268.9 million in outstanding debt to a triple-C-minus the worst rating a company can have before a default.

The current restructuring proposals come just under a year after Merisel raised $160 million by selling off its big European and Latin American operations to Miami-based CHS Electronics Inc.

Both operations were losing money for the company, and at the time it was seen as a quick infusion of cash.

However, though the funds provided some more working capital, it wasn’t enough to lift Merisel out of debt.

“The transaction didn’t solve their debt problem, just postponed the inevitable,” Toll-Reed said.

The inevitable is now upon the company. She said either bankruptcy or a major restructuring must happen if the company is to reorganize, and possibly survive.

“It’s been a very tulmultuous few years, and it’s all coming to a head now,” she said.

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