Kenfil to Reduce Debt With Stock Offering : Computer software: The distributor will cut its $35 million in liabilities. But thin profit margins will continue to be a problem.


Kenfil Inc., a major distributor of personal-computer software, plans an initial public stock offering that will, among other things, help the company cut its $35-million debt.

But paring the debt won't eliminate Kenfil's other major problem: It operates against bruising competition that leaves the company with razor-thin profit margins.

Kenfil, based in Van Nuys, distributes more than 3,500 software titles from 170 publishers, which it resells to computer retailers such as the Egghead Discount Software stores, to such mass merchandisers as the Office Depot chain and to corporate accounts.

The company plans to offer 3 million common shares to the public at an expected price of between $9 and $11 a share, raising up to $33 million in gross proceeds. The offering would place about 46% of Kenfil's shares in public hands, with management and other existing stockholders retaining the controlling 54%.

Although the sale would lighten Kenfil's debt burden, the company still must protect its thin profit margins to succeed long-term. Potential investors in the Van Nuys company--which had $133 million in sales for its fiscal year that ended June 30, 1991--will see that even before subtracting debt-interest payments and taxes, Kenfil earns less than two cents per $1 of sales.

With the interest and taxes included, Kenfil lost $1.67 million in fiscal 1991. It did manage a modest $226,000 profit in its fiscal first quarter that ended Sept. 30, on sales of $35.1 million.

In its stock-registration filing with the Securities and Exchange Commission, Kenfil conceded that its slim margins, together with the see-saw nature of the computer business, "may cause the market price of the company's common stock to be volatile."

Nonetheless, Kenfil has achieved rapid growth since it was started out of a garage in 1983 by Irwin A. Bransky, who remains its president and would still personally control about 25% of the company after the public offering.

Among the products Kenfil sells are word-processing titles from WordPerfect Corp. and business programs from Peachtree Software. The titles carry suggested retail prices of $50 to $800. But Kenfil does not have distribution contracts with some of the nation's biggest software houses, including Microsoft Corp., Lotus Development Corp. and Ashton-Tate Co.

Kenfil's main rivals, such as Santa Ana-based Ingram Micro Inc., a unit of Ingram Industries Inc., and El Segundo-based Merisel Inc., do distribute for those publishers, which is why they're much larger than Kenfil.

Merisel, for instance, has annual sales of $1.6 billion, half of which come from distributing software.

Microsoft, Lotus and the others "don't see any reason to add additional distribution" to the likes of Kenfil, Merisel President Michael D. Pickett said. "They're very happy."

Bransky, a South Africa native, declined to comment extensively on Kenfil's prospects, citing the SEC-required "quiet period" during a pending stock offering.

But he said though Kenfil does not distribute for all of software's biggest players, it plays a major role in helping smaller software publishers that "don't have the resources, both financial and strategic, to allow them to get broad-based distribution."

Even so, Kenfil operates in one of the most competitive parts of the software business, particularly when it comes to pricing. "Nobody wants to pay more for product than they need to," which leads to thin profits for distributors generally, said Merisel's Pickett.

wrap,l,5p-1p6,22p6 Over the past year Kenfil has tried to focus on selling more products with fatter margins, which has helped strengthen its operating earnings in recent quarters. And the public offering and reduction of debt would certainly help Kenfil's cash position.

According to its SEC filing, Kenfil as of Sept. 30, 1991, had only $227,000 of excess cash on hand, or about half of the $480,000 in salary and other compensation paid to Bransky in fiscal 1991.

Kenfil as of Sept. 30 also had a negative net worth--that is, its debts exceeded its assets by $8.7 million. But that deficit would probably evaporate after Kenfil's stock offering.

Kenfil's two main debts are a credit line from American National Bank (a unit of First Chicago Corp.), of which $25.3 million had been drawn down as of Dec. 31, and a $10-million loan from Chrysler Capital Corp., a finance unit of the auto maker.

Both debts stemmed from a recapitalization by Kenfil in 1990, at a time when Bransky owned 100% of Kenfil's stock. But in the recapitalization, Alexander Papakyriakou, Kenfil's senior vice president, exercised an option to acquire 15% of the shares.

Then a Los Angeles investment group called Grubstein Holdings Ltd. arranged for both the American National credit line and for the Chrysler Capital loan, Bransky said.

In exchange, Grubstein got 50% of Kenfil's stock from Bransky and Papakyriakou, who were paid $6 million and $1 million, respectively, for their shares with cash from the Chrysler loan. The remaining $3 million of the loan was invested in Kenfil, Bransky said.

In addition to that $6 million, Bransky's remaining stock after the public offering--assuming the offering is priced at, say, $10 a share--would be worth an additional $8 million on paper.

Bransky won't have lots of time to count it, though. In addition to Kenfil's current competition, the software-distribution business in general is changing, with some software publishers striking sales pacts directly with large retailers and skipping the need for middlemen such as Kenfil.

The publishers "may intensify their efforts" to sell directly to the retail market, Kenfil added, which could cause big headaches for the company.

But Bransky said the constant introduction of new computer technology and related software means Kenfil's "distribution channel will continue to strengthen."

Kenfil Inc. at a Glance Kenfil Inc., which plans an initial public stock offering, is one of the nation's largest distributors of personal-computer software. Founded in 1983, the Van Nuys-based company now carries about 3,500 software titles from 170 publishers.

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