June 6, 2008, 12:00 AM

PC Universe in talks with IBM over financing default

PC Universe is in talks with IBM Credit in hopes of renegotiating terms of a financing agreement. IBM notified the online computer retailer late in 2007 that it was in default of loan repayment terms, says PC Universe president Tom Livia.

PC Universe Inc. is in talks with IBM Credit LLC in hopes of renegotiating terms of a financing agreement. PC Universe has been in default of debt repayment terms since December 31, 2007, and IBM reduced the computer retailer’s credit line from $4 million to $2 million in April.

As of April 24, PC Universe owed IBM about $900,000 under terms of financing related to inventory purchases, according to PC Universe’s recent 10Q filing with the Securities and Exchange Commission.

If refinancing is not worked out, payment of the bank debt could be demanded immediately by IBM, according to the filing. If IBM made such a demand, PC Universe could not produce the cash to pay its bank debt in full and thus would “raise substantial doubt about our ability to continue as an ongoing concern,” the document says.

Although PC Universe has been unable to obtain a waiver from IBM for the financial agreement defaults so far, talks are continuing, PC Universe president Tom Livia tells Internet Retailer. “We are now in limbo. We’re trying to raise additional capital, and have done a lot of restructuring. Both are going to have positive effects on our debt-to-equity ratio.”

PC Universe, No. 366 in the Internet Retailer Top 500 Guide, is discussing a waiver and amendment of the financial covenants with IBM in line with the company’s expected financial performance during fiscal 2008. According to the 10Q document, IBM says that additional equity funding in the company “in an amount sufficient to meet the debt to equity covenant would be required in order to enable IBM to waive the covenant default.”

Restructuring has involved cutting PC Universe’s work force almost in half, from about 40 employees to a current count of about 26, Livia says. The cuts have not affected sales, Livia says.

PC Universe has invested in web technology upgrades which have contributed to a steadily rising conversion rate so far in 2008. Conversions have gone from 1.4% to more than 2% to date, Livia says. Web site upgrades include more uptime, fewer error messages and improved page-load times. A new blade server center from Hewlett-Packard Co. has been the key to an improved user experience, he says. “For instance, the time it took customers to check out used to average about 90 seconds,” Livia says. “Now it’s down to 30 seconds.”

PC Universe also reorganized its product categories and taxonomy to make search results more focused and thus more relevant. Combined with a redesigned home page – a work in progress – the results have been a “pretty large increase in natural search traffic,” Livia says.

Most key metrics are going in the right direction except for a big drop-off in corporate sales. “Buying among our large corporate customers has slowed,” Livia says. “We’re finding it tougher to close larger deals.” The mix of revenue from consumers and corporate customers is about 50/50, he says.

PC Universe is seeking alternate sources of financing, although the borrowing environment is difficult today, Livia says. Additional funding will enable further investment in operations and inventory, which could sway IBM regarding waiving the loan default provisions, he says. Without additional funding, IBM’s actions will be based on PC Universe’s profitability, Livia says.

PC Universe reported that total sales for the first quarter ended March 31, 2008, were down about 12% to $7.2 million from $8.2 million in the prior year quarter. Some of the decline was attributed to a reduction in business from Océ North America Inc. and Eclipsys Corp., two corporate customers.

Consumer sales helped counter the overall sales decline, increasing about 16% to $4.4 million in Q1 2008, from $3.8 million in the same quarter of 2007. Some of those gains came from PC Universe’s revenue sharing relationship with Amazon.com, the company says.

Net loss for the first quarter of 2008 was $519,000, compared with a net loss of $148,000 in the prior year quarter.

There’s no timetable to resolve the IBM credit situation. “We’re taking it one month at a time,” Livia says. “We’ve been through tough times in this industry and we will survive this too.”

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