ENTRE BESIEGED WITH LAWSUITS BY FRANCHISEES -

In 1982, Georges Nicolas quit his job at the Federal Home Loan Mortgage Corp. to try his luck in the fledgling personal computer retail business. Nicolas paid a $20,000 franchise fee, borrowed more than $300,000 in needed capital, and opened up doors in Rosslyn as an Entre Computer Center, one of dozens of Entre retail outlets established around the country.

"I thought I was right in line with my education and training, and I saw an opportunity to work very hard as an entrepreneur," Nicolas said last week. "It turned out to be a nightmare."

Five years later, Nicolas says he is still more than $200,000 in the hole. And earlier this month, he filed a $20 million lawsuit against Entre, accusing the Vienna computer store franchiser of reneging on numerous promises it allegedly made to help get his business going.

Entre officials say the accusations are without merit. A company spokesman said Entre had been attempting to negotiate its differences with Nicolas, and that the lawsuit reflected "the threat he made during these negotiations to file a suit and seek publicity if the company failed to meet his demands."

Nicolas's suit is the latest salvo against Entre, once a shining light in the PC industry but whose fortunes turned in the wake of the computer industry slump and a bitter legal imbroglio with Nicolas and other franchisees.

Founded in 1981, Entre grew meteorically by offering entrepreneurs an opportunity to invest in franchises selling IBM and other personal computers. The franchisees would pay an initial franchise fee plus royalties on sales, while also investing the necessary capital to get the business up and running. In return, Entre said it would supply the computers at wholesale prices, provide necessary training and technical advice, national advertising and other support.

The formula took off, as Entre rode the crest of the personal computer boom in the early 1980s to become one of a handful of major U.S. franchisers. The company put together a network of more than 250 stores across the United States, which were selling more than $400 million worth of computers, software and peripheral equipment annually by 1985. Entre carved out a valuable niche, industry officials say, by appealing more aggressively from the very beginning to the business user, as opposed to the consumer -- thus tapping a market that has consistently returned higher profit margins.

In 1985, however, the rapid growth of Entre and other dealers trailed off, as the supply of PCs began to outpace the demand. The widely publicized industry slump that ensued resulted in reduced margins and drove hundreds of computer stores, including two dozen Entre centers, out of business. Some of the failed Entre businesses lost their entire investment, which often ran as high as $300,000-to-$400,000. One California franchisee lost his house and his mother's house.

For Entre, the slump showed in its 1986 fiscal year ending last August, when it lost $8 million, after reporting profits in each of its previous three years, including $8.1 million in earnings in 1985. The losses also belied a special problem for the company: a rising tide of litigation with its franchisees.

In November 1985, an Alexandria jury assessed Entre $4.9 million in damages in connection with charges of fraud and breach of contract brought by two franchisees in Kansas City. The case has been appealed, but more than a dozen lawsuits have been filed against the company by other disgruntled franchisees, contributing to litigation costs which totaled $8.4 million in fiscal 1986 -- more than 12 percent of the company's $66.9 million in revenue. Several other cases have been settled out of court for undisclosed amounts, and the company won one case against a New Jersey franchisee.

While details of the cases differ, the allegations are similar: that Entre misrepresented what it would do to help the franchisees and breached its contracts with them. Some suits allege that Entre told prospective franchises they would enjoy higher profit margins than the company had reason to expect.

"They promised us all the product we could use, and they promised we could buy it at the same cost they purchased it for," said Peter Faltings, who operated two Entre stores in New Jersey. Instead, Faltings said, Entre was always behind on his orders of equipment and habitually marked up the cost of computers beyond what it paid the manufacturer.

Faltings, who last fall settled a lawsuit out of court with the company, said as result of these promises being broken, his stores lost hundreds of thousands of dollars -- despite sales that approached $15 million annually.

Like several other franchisees, he charged that the royalty fees charged by the company -- 8 percent of sales -- were exorbitant. At a time of big profits for Entre, Faltings added, he was paying as much as $1.2 million in annual royalties to the company, even though his stores were losing money.

"We were doing all the work. We put in all the money. And they were making all the money," Faltings said.

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In interviews last week, Entre officials denied the lawsuit allegations and portrayed the plaintiffs as a small minority of Entre's generally satisfied franchise network. They noted that a new management team took over the company last summer from founders Steven Heller and James Edgette, who reportedly antagonized numerous franchisees, and has taken dramatic steps to improve relations with Entre store owners.

The key step was Entre's agreement to cut the royalty fees paid by the stores from 8 percent to 5.5 percent -- in exchange for the franchisees waiving their right to sue Entre. Company officials said all but 14 of the firm's 210 North American centers agreed to the change in what they termed Entre's "New Beginning" program.

As for the remaining lawsuits, corporate officials and lawyers said they are taking a tough line. The said that they set aside a reserve last year of "several million dollars" -- largely in case they lose their appeal -- but they expressed confidence that the litigation should not have a major impact on future earnings.

Bert Helfinstein, Entre's president and the architect of the rebuilding effort, attributed the rash of lawsuits in part to the general slump in the industry.

"It is inevitable that some people who fail in business have a need to blame someone else and pursue litigation against whoever is a target," Helfinstein said. "I think that our defenses {against the allegations in the lawsuits} are very meritorious."

Helfinstein said blame for much of the company's problem could be attributed to the $4.9 million judgment against the company, which he called an "unusually outrageous jury award" that "created a climate that suggested that other franchisees could hope to obtain similar results.

"The legal profession," he added, "has got a number of practioners who aren't out to see justice done, but who are seeking out opportunities where they believe they can convince a jury to make a large award."

When told of these statements, Dennis Powers, who represents six New England franchisees suing Entre, said Helfinstein "has a hyperactive imagination."

Warren Mosby, a Massachusetts franchisee represented by Powers' law firm, said a group of more than 20 store owners gathered a year ago to discuss their grievances against Entre. "Entre had a tendency to tell each of us that 'You're the only one who has this problem,' " Mosby said. "When we began discussing it, we discovered that a lot of the problems were common."

When Entre announced its New Beginnings program last July, some members of the group signed up, but Mosby said that even the reduced royalties were not enough to persuade him to drop his complaints.

"I just didn't feel competitively I could live with that," said Mosby, who along with seven other store owners joined a new network of franchises formed by DOS Computer Centers of Columbia.

Entre subsequently sued DOS, accusing the company of interfering with its franchise agreements, and obtained a temporary injunction in November preventing DOS from signing up additional Entre store owners. DOS President Bruce Grewell denied the charges, and said that the franchisees had approached DOS on their own accord.

Despite the continuing legal morass, Helfinstein expressed confidence that Entre has begun the recovery process, reporting "overwhelming acceptance" by dealers of the company's new programs. In addition to the royalty reductions, the company recently unveiled a new national advertising campaign touting iself as "the brains behind business computers." It is also planning new seminars for franchisees on how to improve business.

The results seem to be starting to show. In its first quarter that ended Nov. 30, Entre moved back into the black, albeit at reduced levels. The company showed net earnings of $579,000, compared with $1.5 million in profits during the same period a year ago.

Tim Bajarin, who tracks the PC industry for Creative Strategies, a California market research firm, said Entre should benefit from IBM's expected introduction of more powerful equipment. "I think Entre has probably a very strong opportunity going into the next generation of computers," he said.

Not all franchisees are dissatisfied, moreover. Irvin Cox, who runs successful Entre stores in Richmond, Charlottesville and Roanoke, said he's been pleased with the company's support during the industry recession and in the last years. "They bent over backwards to help a franchise out who was in trouble. But you can only do so much," he said.

"No one at Entre Computer ever promised a franchisee that it is was going to be a rose garden," Cox said.

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