The first sign that something was wrong with MBI Business Centers appeared 18 months ago, when the Rockville firm's merger with Businessland Inc. fell through at the last moment. At the time, MBI was a star of computer retailing, a once-tiny company that rode the crest of the computer boom to become the largest chain of company-owned computer stores on the East Coast and the most profitable firm of its kind in the country.
But with words that were to take on new meaning in the following months, Businessland said that information received during the 11th hour of negotiations made the deal with MBI unacceptable. What that information was soon became clear.
In January, MBI announced that it had lost $5.1 million in the three months ending Oct. 31, 1986. In March the company laid off a fifth of its work force and shut 12 of its 34 retail outlets. In September MBI was in bankruptcy court, and its corporate officers were facing a class-action lawsuit filed by angry stockholders.
MBI's fall was as dramatic as its rise. Along with Entre Computer Centers, a McLean franchise chain whose revenue rocketed from $269,000 in 1982 to more than $400 million three years later, MBI was one of the Washington area's entrepreneurial success stories.
Entre, too, went into a slump last year. It posted a loss of $8 million after earning $8 million in 1985, and its stock tumbled to a low of $3 a share from its 1985 high of almost $18.
MBI and Entre, which has since reversed its losses, are contrasting examples of how computer retailers have struggled to deal with the growing pains and increased competition brought on by their own success.
About 1,000 of nearly 4,500 computer retailers have filed for bankruptcy during the shakeout of the past two years. The industry's problem was too much inventory -- a glut that worsened as manufacturers continued to churn out new products even as demand slackened, and as retailers found themselves saddled with a growing burden of obsolete merchandise.
The relative inexperience of many retailers didn't help, nor did the inexperience of many of the manufacturers.
Noted Bert Helfinstein, Entre's chief executive, "Well-established manufacturers in mature industries are careful when they announce new products to see that their old product is either largely sold through, or they are prepared to reimburse dealers who are stuck with it. They time product announcements carefully." The start-ups in the computer industry weren't nearly as careful.
MBI has taken steps to deal with the slump, bringing in experienced new management and undergoing a painful restructuring.
But while Entre and others in the industry have recovered from the disasters of a year ago and are expecting profitable years, MBI is staggering.
Analysts say that one of MBI's problems was that it owned the stores in its chain. In contrast, Entre is a franchisor, and grew by charging a flat fee plus royalties in exchange for supplying franchisees with equipment at wholesale prices, along with training, technical advice and national advertising.
That arrangement helped Entre ride out the storm by isolating the parent company from the mistakes of individual store owners.
"As a franchise organization we only had to see to it that the majority of our franchisees did well," Helfinstein said.
Entre had a financially disastrous chain of franchises in Europe, which Helfinstein closed within three months of assuming the top post in June 1986, but its performance was offset by a number of successful stores in the United States.
"When company-owned stores haven't got enough money to survive, the company fails," Helfinstein said. "Failure for us isn't all or nothing."
Entre officials also maintain that their franchising arrangement breeds more careful managers. "If you're an individual franchise owner who's both the owner as well as operator of a store, it's your own dollars at stake in inventory," said Margaret Rodenburg, Entre's vice president for marketing.
In contrast, she said, managers of company-owned stores mainly work on compensation plans "geared much more heavily toward revenue and sales than toward absolute profit," and as a result may not be as sensitive to problems building in their stores.
In the past year the Entre network has recovered strongly, reporting a 25 percent sales gain. The firm has been hit with lawsuits from disgruntled franchisees, but analysts say the threat from those suits is largely over.
In the first nine months of this year, revenue rose 13.4 percent and operating earnings jumped to $3.9 million, compared with a loss of $7 million a year ago.
MBI, on the other hand, has yet to get a grip on its inventory problem. Although Businessland will not comment, there is speculation that the company's first close look at MBI's books must have been a shock.
"It used to be that each store had its own inventory, and if a product was old it just stayed there," said one MBI store manager, who asked that his name not be used.
But in the summer of 1986 the firm took a comprehensive look at its assets for the first time. "When we went to a centralized computer inventory, we discovered all that merchandise," the manager said. "We've never really recovered from that."
MBI Chairman Ronald Watkins, who joined the company a year ago after serving as Businessland's president for nine months, tried to salvage MBI's prospects in March with massive layoffs and store closings, saying at the time that the moves reflected "a major effort on my part to get better control over the inventory."
Neither Watkins nor any other senior MBI executives could be reached for comment last week.
Figures released by the company when it filed for Chapter 11 bankruptcy protection showed that it took additional action in the second quarter of this year, writing off $5.5 million after an inventory revaluation and auctioning $3.4 million of obsolete, damaged and excess inventory at a $2.4 million loss. But the action apparently could not keep it out of bankruptcy court.
"They did everything else right. They had great market position," said Medi Rashidian, president of the rival Microland Inc. in Arlington. "Every time we went to a new market to reach a customer, they were already there. They just couldn't control their inventory."
MBI's problems did not end there. It also suffered from a dependency on a three-year government contract, won in June 1983, under which it set up three Office Technology Plus retail outlets -- in Washington, Atlanta and Philadelphia -- to fill the computer needs of government agencies in those cities.
The stores were a gold mine for the company at first, accounting at their peak for more than a third of total sales and -- according to some analysts -- an even larger portion of its profits. During the duration of the contract, computer prices fell dramatically. Because MBI negotiated its pricing structure with the government in 1983 and was under no obligation to adjust it, the stores enjoyed profit margins well above those in the commercial market.
According to a General Accounting Office study two years ago, the government by 1985 was paying an average of 12.8 percent more for computer equipment from the OTP stores than it would have paid elsewhere. In one case, MBI was charging 76 percent more for certain software than other retailers.
Analysts say MBI's experience with the government stores had two negative effects: First, it contributed to a misleading picture of MBI's competitive strength, and second, the profits didn't last.
The OTP contract ended in September 1986, and for four months the firm went without any government sales at all.
MBI got the OTP stores back in December 1986, but this time the contract was hotly contested.
In order to win what turned out to be a brutal bidding war involving 10 major computer retailers, MBI committed what is known in the industry as patriotic suicide.
"They wanted to serve the government so badly they bid lower than they could afford," said one local retailer.
MBI offered a 35 percent discount on all computer equipment, leaving it with about a 7 percent profit margin, according to Terry Miller of Government Sales Consulting Inc. of Annandale, who added: "That isn't enough to survive."
Businessland, the next lowest bidder, offered a 30 percent discount, and in the original contract MBI had given the government just 22 percent off.
Worse still, the sales volume at MBI's government stores has dropped sharply, due in part to a change in federal regulations that sets stiff new limits on the amount of merchandise an agency can buy at the stores.
In fiscal 1986 the firm's direct sales to the government slipped to $8 million, down from $27 million in the previous year. In the second quarter of this year government sales were $1.4 million, down from $2.6 million for the same period the previous year.
According to a report in Government Computer News, MBI executives do not believe the GSA will renew the OTP contract when it expires Dec. 16.
Because of difficulties in obtaining merchandise, MBI had $6 million in backlogs by the middle of September on orders from the stores, and in August was late in delivering 101 of the 274 orders received.
None of this was expected when Watkins took over the top spot at MBI from Avner Parnes, the man who had guided the firm for the previous five years.
During his nine-month stint at Businessland, Watkins earned high marks from analysts.
"He hired a lot of good people. He did a lot of things to improve their management and sales force," said Paul Evans, who follows Businessland for S.G. Warburg.
But his tenure at MBI has been a different story. "Watkins is a very personal guy. He needed time to do things his way," said John Dean, a computer industry analyst with Montgomery Securities in San Francisco. "But if you're fighting fires every day you've got no time to talk about your style, your long-term plans. He's had no time to work his magic."
Since its troubles began the company has had three treasurers, and five directors have left the board -- including Armen Manoogian and Avner Parnes, the two men who guided the firm until the arrival of Watkins in November 1986.
Between them, Parnes and Manoogian have sold 337,000 shares of MBI stock since December 1985.
The class-action lawsuit, filed two weeks ago on behalf of all those who bought MBI stock between December 1985 and the bankruptcy filing in September, charges Watkins and four other past and present MBI officers with fraudulently representing MBI's prospects.
The suit alleges that management made "materially false and misleading statements" about the firm, which artificially inflated the price of the stock and lured unwitting investors into buying.
Among the statements cited in the complaint was a comment by Parnes that the loss of the government contract in September 1986 "would have a very, very minimal impact on MBI and will not cause layoffs."
Also cited were Watkins' statement that the firm's layoffs would enable it to do its job "better and more efficiently" and his vow in the annual report that "MBI's setbacks are temporary and ... the company is being firmly placed on a path of new levels of achievement."
The critics complain that only 18 months ago MBI was a profitable company. Now it has assets of $31.2 million and liabilities of $38.3 million, and has been in violation of loan covenants from Maryland National Bank since July 1.
"It's almost inconceivable to me that a company could go down that fast," said a disgruntled investor.