INTELLIGENT ELECTRONICS, INC. History

Address:

411 Eagleview Boulevard
Exton, Pennsylvania 19341
U.S.A.

Telephone: (215) 458-5500
Fax: (215) 458-8454

Public Company
Incorporated: 1984
Employees: 4,000
Sales: $1.91 billion (1991)
Stock Exchanges: NASDAQ/NMS

Company History:

Intelligent Electronics was founded in 1982 by Richard D. Sanford, who had retired from his position as executive vice president of Commodore International a year earlier at the age of 38. Sanford hired a management team and approached Peter Strawbridge of Strawbridge & Clothier's department stores in Philadelphia, proposing to lease floor space to sell computers using the name Todays Computers Business Centers (TCBC). Strawbridge agreed to give Sanford both floor space and financing assistance. By the end of 1983 Sanford had established dealer relationships with computer product manufacturers and secured a second agreement with Kaufmann's Department Stores in Pittsburgh, giving TCBC seven locations in two well-known Pennsylvania department store chains. Intelligent closed the year posting $9 million in revenues.

In 1984 Intelligent was priced out of the department store market by Computer Depot, which doubled the leasing fee it paid to host stores in an effort to gain sales space. Sanford shifted his efforts to franchising and decided to incorporate, becoming chairman, president, and chief executive of the company. TCBC was made a wholly owned subsidiary intended to serve as the basis for a franchised computer reselling network. A computer reseller does not rely on traditional retail sales, but uses a sales force to establish accounts with corporate customers instead.

In building that network, Sanford targeted independent office-product dealers who had yet to capitalize on the growing microcomputer market. By not asking dealers to make extensive changes to their existing operations, simply requiring that they display the TCBC name next to their own on their storefronts, Sanford made establishing a franchise an inexpensive option for the dealer. Targeting office-products stores located outside of major metropolitan markets, Sanford established franchises in areas where leading computer chains were not competing. Going against industry standards, Sanford charged no royalty fee on a franchise's total sales, profiting instead from a 'middleman' markup on products and services. Sanford also gave the franchises an unprecedented degree of flexibility, allowing them the option of not carrying some Intelligent products or to purchase additional goods and services from other sources if they so desired. Sanford further enticed independent dealers by pioneering the 'cost-plus' formula, with franchisees offered sliding scale discounts based on purchase volume.

Intelligent's product offerings and its outlet network were quickly expanded: by 1986 Compaq computers were added to the company's product line, the number of TCBC outlets had grown to 68, and annual revenues topped $57 million. With its success in franchising and reselling, Intelligent Electronics withdrew from department store locations and discontinued its related direct sales operations to corporate customers.

Until the middle of 1987, Intelligent had funded its operations through proceeds generated from private placement sales of preferred and common stock. In July of that year Intelligent made available to the public one million shares of common stock, the sale of which generated nearly $9 million. By the end of 1987, 100 TCBC franchises were operating, Intelligent's revenues had climbed to $81 million, and its net income had grown to $2.2 million. In 1988 Intelligent Electronics was listed by Business Week as one of the 'Best Small Companies' and by Inc. magazine as one of the top 100 fastest growing small public companies.

Having achieved a significant record of growth in four years, Intelligent sought to diversify using its expanded capital base. As the computer retailing industry experienced numerous consolidations late in the decade, Intelligent made its first major acquisition in December 1988 with the $63 million purchase of Entré Computer Centers--a network of 180 franchised centers specializing in microcomputer sales to businesses. The Entré centers, together with the TCBC network, which had nearly doubled in 1988, gave Intelligent more than 375 outlets. The acquisition opened up new markets to Intelligent, since Entré's operations were located primarily in major metropolitan areas and other regions largely outside of TCBC's territory.

Intelligent was operating a national computer sales network second only to ComputerLand when, in July 1989, former ComputerLand U.S. Division President Michael R. Shabazian joined Intelligent as president, with Sanford remaining chairman and chief executive. One month later, Intelligent acquired Connecting Point of America, a Denver-based computer retailer that had emerged from bankruptcy to grow into a 305-outlet chain. The $54 million acquisition gave the company more than 700 retail outlets in the United States--more than any other computer dealer.

With the acquisition of Connecting Point, the Apple Computer line was added to Intelligent's product offerings. Intelligent also brought Xerox Imaging Systems into its line in 1989, adding Xerox-manufactured optical scanners to increase sales of scanning systems, which had become one of the company's fastest growing business segments.

By the end of 1989 Intelligent had more than 710 franchised dealers in its combined network of TCBC, Entré, and Connecting Point stores, and had developed from a medium-sized trend-setting company into the largest domestic network in its industry, controlling 20 percent of all personal computer retailers in the United States. Largely as a result of its acquisitions, Intelligent's sales in 1989 increased by more than 450 percent to $711.7 million and its net income grew to $10.6 million.

Intelligent continued to expand its product offerings in 1990 with the addition of Sun Microsystems products. As Intelligent's franchise network expanded to more than 1,000 outlets the company's growing distribution system kept pace, utilizing three recently acquired warehouses in Virginia, Colorado, and Canada. A 'just-in-time' product delivery system was established to allow franchises to avoid having cash tied up in inventory, and Intelligent claimed that this system was the most cost-efficient in the industry, with operating expenses held to 4.2 percent of revenues. Intelligent was again named to Inc. magazine's list of the top 100 fastest growing small public companies as net income nearly tripled to $29.2 million and revenues more than doubled to $1.4 billion.

In March 1991 Intelligent completed a public offering of an additional 3.34 million shares of common stock, generating revenues of $96.1 million. Three months later the company directly entered the consumer retailing business with the $192 million purchase of BizMart, a Dallas-based chain of 57 high-volume office products outlets located principally in the southern and western United States. Immediately following the acquisition Intelligent was reorganized around two separate but complementary computer sales market segments: the Consumer Retail Group, responsible for the operations of the BizMart retail outlets, and the Systems Group, which provided wholesale distribution services to the network of more than 1,500 franchised computer resellers.

The acquisition of BizMart reflected a growing trend in the industry to market computers through high-volume discount outlets. Soon after their purchase, Intelligent began expanding the number and the scope of the BizMart office products stores, adding name-brand computer products including Apple, Compaq, Hewlett-Packard, IBM, NEC, Toshiba, and others. Within four months all BizMart centers had been re-merchandised to include nearly 2,500 computer products along with their general office products, as the company promoted what it called the 'first computer superstore and office products superstore under one roof.' In November 1991 the company began franchising the operation of the computer departments within its BizMart stores.

In December 1991 Intelligent's stock increased 23 percent with an announcement of strong fiscal-year earnings contributed to by the rapid growth of the BizMart chain. By the end of the year the number of BizMart stores had reached 69, and Intelligent reported year-end earnings of $1.91 billion and an annual net income which had nearly tripled to $29 million. Earlier in the year Intelligent's rapid growth had been a source of wide-ranging commentary and speculation from analysts and business publications. In the January 14 issue of Fortune magazine, Ret Autry had dubbed Intelligent the 'new king' of computer retailing. But in an article in the June 10 Forbes, Thomas Jaffe suggested that the company's apparent success was at least partly due to its accounting methods. Jaffe pointed out that much of Intelligent's net worth was derived from 'goodwill,' an accounting item that results from purchasing a company for a price greater than the book value of its tangible assets and which can cause a short-term distortion of the purchaser's income. Following Intelligent's increased earnings later in the year, however, Richard A. Shaffer stated in the December 23 Forbes that fears over Intelligent's accounting practices had been 'overblown.'

In 1992 Intelligent instituted several programs designed to stimulate product demand, including a nationwide retailer link-up to provide better service to multi-regional accounts, assistance for minority- and women-owned businesses in securing government contracts, and a targeting of 'niche-specific' retailers. The company's product line was expanded as well. In the early months of 1992, Intelligent signed agreements with two highly regarded manufacturers of business computer products: the Acer Group and the Santa Cruz Operation (SCO). The agreement with Acer allowed its Altos line of fully-integrated UNIX systems to be marketed through Intelligent's Advanced Technology group, while the agreement with SCO involved a line of open systems software.

The company's accounting practices again became a focus of attention in February 1992 when Intelligent's chief financial officer, Garland Asher, resigned without signing the company's quarterly financial report. The next month Intelligent's stock fell 34 percent after Merrill Lynch downgraded the stock in the wake of Asher's resignation and following an acknowledgement by Sanford that he and Asher had disagreed about the company's accounting practices. Asher was replaced by Edward A. Meltzer, a former vice president and treasurer of Intelligent.

In a reorganization of personnel that followed, Sanford appointed a new vice president, Gregory A. Pratt, who two months later became company president as Shabazian became vice chairman. Pratt, like Sanford, had worked with the accounting firm of Arthur Andersen early in his career and had held the position of vice president of finance at Commodore International. Pratt had been president of Atari Corporation.

With more than 80 BizMart stores operating by April 1992, the company announced plans to open an additional 50 outlets by the end of January 1993. In May, the company reported that its first quarter revenues were up 57 percent from the same period of the previous year, largely due to the acquisition of BizMart and a subsequent increase in its System Group sales.

One month later, Intelligent announced it had reached an agreement with EduQuest, the IBM Educational Systems Company which provides administrative and classroom computer technology to schools. The agreement called for Intelligent to handle customer fulfillment services such as order entry and product distribution for IBM's kindergarten through 12th grade customers. Sanford announced the creation of a new division of Intelligent intended to capitalize on the growing demand for such logistical services in the marketplace.

In July 1992 Intelligent sold its Company Center Division with its nine company-owned reseller centers to one of its major customers, The Future Now, in exchange for a seat on its board of directors and approximately 31.1 percent of its common stock, making Intelligent the largest Future Now shareholder. While the deal marked the end of Intelligent's directly owned computer reselling operations, the company remained a major distributor of computer products through its franchised reseller network.

Intelligent Electronics appeared likely to maintain its position in the computer sales market through the 1990s. The company anticipated a continuing increase in revenue from its superstores, which were expected to account for a growing percentage of sales in the computer market, and planned to expand its wholesale distribution business by gaining new vendors and customers.

Principal Subsidiaries: Todays Computers Business Centers, Inc.; Connecting Point of America, Inc.; Entré Computer Centers, Inc.; BizMart, Inc.

INTELLIGENT ELECTRONICS, INC. History

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