Jul. 12--Three months into its Chapter 11 bankruptcy case, MicroAge Inc. barely resembles its old Fortune 500 self. The Tempe-based computer distributor, in a bid to reverse a string of hefty losses, has quietly but swiftly cut 1,600 jobs, closed all but one of its giant warehouses and shut down more than half of its computer integration branches. The company even moved its headquarters from MicroAge Way to a nearby company office to save money.
Still, there are substantial questions about whether MicroAge can survive.
Experts point to a crushing decline in sales an internal memo pegs the company's current annual sales at $1.5 billion vs. $6 billion last year -- a drop in its already razor-thin profit margins and a limited pool of cash. The cash crunch looms largest. The company drew down $146 million of a $210 million bankruptcy credit line just a couple of weeks into the Chapter 11 case, according to recently released results for the February-April period.
The remaining $64 million, added together with $28 million in the bank, gave MicroAge just $92 million in available cash as of the end of April, the most recent date for which financial information is available. That won't cover too many more quarters of $65 million in operating losses, as the company posted in the most recent period.
"If they don't stem the losses they're going to be out of cash in the next 1 1/2 quarters under their current financing facilities," said Grant Lyon of Odyssey Capital Group, a Phoenix financial advisory firm specializing in distressed companies. He's the court-appointed financial adviser for the Baptist Foundation of Arizona, which filed Chapter 11 late last year.
Jeffrey McKeever, MicroAge chief executive officer, said the company's current cash position is "very stable."
He said MicroAge is raising cash by collecting accounts receivable, reducing inventory and selling assets.
A sale of MicroAge Teleservices, a call center outsourcing operation with about 1,200 employees, is expected soon, McKeever said.
More job cuts are also expected. More than half the cuts so far have come from attrition.
"I'm not concerned about running out, based upon our current plans," McKeever said.
The company says it believes it has enough cash to cover operations through October, the end of its fiscal year.
Not too long ago, MicroAge was forecasting that it would be out of cash by the end of July, the end of its current quarter, according to a recent memo sent to employees.
It erroneously included that nerve-racking forecast in a memo last week recapping recent employee meetings with management. A clarification was quickly issued. "Actions have been planned and implemented that will ensure that we will not run out of cash by the end of July. This includes recent actions taken to reduce expenses," the memo said.
Cash problems are inherent in bankruptcy cases, of course. What makes MicroAge's situation so precarious is that the company's core business is crumbling.
Its largest subsidiary, computer middleman Pinacor, saw its sales plunge 70 percent in the second quarter, to $454 million.
There's a variety of factors at fault, from sweeping changes in the ways computers are bought and sold in the Internet age to MicroAge's financial problems, which caused many suppliers to cut the company off.
While MicroAge had hoped the bankruptcy filing and the protections it provides would ease the supply problem, its recent financial report with securities regulators suggests otherwise.
"Pinacor revenue has continued to decline (this quarter) due to product supply issues," the company said. "Pinacor has begun streamlining its operations to become a smaller and more focused distributor."
McKeever said Pinacor's focus now is on equipment for computer telephony integration. He said the sector, which has higher profit margins than the traditional computer wholesale business, focuses on hardware that links computers and telephones.
Most in the industry have written off Pinacor, until recently one of the top five distributors in terms of sales. In recent Wall Street research reports, analysts credit improving results of industry giants Ingram Micro and Tech Data to the "exit" of Pinacor and struggling competitors Inacom and CHS Electronics. All three are in Chapter 11. Inacom filed last month and immediately said it was ceasing operations. That company had about 650 workers in the Valley.
The liquidation question regularly comes up in discussions of MicroAge's future, especially among employees. The company, which has been candid with its employees about its struggles, said in an employee memo Monday that rumors of a pending Chapter 7 filing are incorrect.
McKeever notes that MicroAge is still winning new business. Its integration business, MicroAge Technology Services, this week said it was selected to outfit Arizona's 228 school districts with 30,000 to 50,000 computers over the next few months.
And the company is still counting on its new e-business strategy, where it's an electronic middleman, though it hasn't ramped up as quickly as hoped.
"It's a little early to write us off," McKeever said. "We're still a $1.5 billion company."
Lyon, who has no ties to MicroAge and reviewed the company's financial filings at The Arizona Republic's request, is less sanguine about the company's chances unless things turn around quickly.
"The game is to try to reorganize while you still have, one, a core business to reorganize and, two, the liquidity to do it," he said. "There may not be a business here to reorganize if they don't stem these losses."
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(c) 2000, The Arizona Republic, Phoenix, Ariz. Distributed by Knight Ridder/Tribune Business News.
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