New 'Geeks' owners cool tension with franchisees

VIRGINIA BEACH

Geeks on Call America was in trouble. Its losses continued to swell, and its net worth was long gone. Frustrated franchisees, meanwhile, battled with Geeks' management in court.

That didn't deter Glenn R. Davis. He figured the Norfolk-based franchisor of on-site computer services had something valuable: a network of skilled, if frustrated, franchise owners.

Davis, who helped build a Virginia Beach company that managed telecommunications services, decided that he and business partner John Finguerra could enhance the operations of Geeks' franchisees. They could add telecom and information-technology services for franchisees' business customers.

Last year, Geeks On Call America defaulted on a bank note secured by its assets. Davis bought the $469,000 note from Bank of Hampton Roads and foreclosed. In the process, he and Finguerra formed On Call Holdings International, a new Virginia Beach-based parent company.

Before pursuing Geeks' assets, the pair combed company documents, including its filings with the Securities and Exchange Commission, and talked with individuals familiar with Geeks' history. The one uncertainty, Davis said, was how franchisees would respond after wrestling with the possibility that Geeks' operations would shut down.

Franchise owners reacted with relief and wariness.

"Initially, everyone was very skeptical," said Laura McInerney, a franchisee who owns Geeks territories in the Baltimore area, Washington and Northern Virginia. She wondered whether the strained relations and inflexible franchise rules would remain.

Davis won her support, McInerney said, by improving the communication with franchisees, easing some of the restrictions on how they must operate and allowing franchise owners to choose how some of their advertising dollars are spent.

"I feel that for the first time, there are business people making decisions," said McInerney, a franchise owner since 2003. The company has 54 franchisees and franchise territories in 20 states.

Organized in 1999, Geeks began selling franchises two years later. Attracting attention was easy. It had a catchy name, and on-site computer repair was much less prevalent than it is today. Computer support meant bringing a machine to a store or shop for any repairs or upgrades.

Geeks did a good job promoting its franchisees' services for the residential computer-user, said Shep Bostin, a franchise owner in Montgomery County, Md. But the market changed, and small businesses emerged as more lucrative customers than the home user. Geeks' previous management, however, "never found the right way to help us go after businesses," Bostin said.

Friction between franchise companies and their franchisees isn't unusual. In return for a business plan and marketing support, franchisors require that their franchisees adhere to specific standards and pay royalties and fees. Independent-minded franchisees sometimes challenge a franchisor's marketing decisions or balk at restrictions on how they can operate.

At Geeks On Call, the friction grew severe. In 2008, at least 10 franchise owners sued Geeks on Call America, some alleging fraud and breach of contract.

By the time Davis took control of Geeks' assets last year, "things couldn't have gotten worse," Bostin said.

Richard T. Cole, a co-founder of Geeks and its longtime chairman and CEO, did not return phone calls seeking comment on franchisees' concerns and the sale of Geeks' assets.

To raise capital for expansion, parent Geeks On Call Holdings converted its ownership structure two years ago to a company with publicly traded shares. The change added to the company's costs but failed to generate the amount of capital its management sought. Squeezed by slumping sales and rising expenses, the company continued to lose money and capital. For its fiscal year ended Aug. 31, 2008, Geeks On Call Holdings reported that its operating loss ballooned to almost $5 million from a loss of slightly more than $1 million a year earlier.

In its 10-K filing with the Securities and Exchange Commission for fiscal 2008, Geeks' outside auditors said the company "suffered recurring losses and is experiencing difficulty generating sufficient cash flow to meet its obligations and meet operations."

That "raises substantial doubt about its ability to continue as a going concern," auditing firm RBSM LLP cautioned. Geeks failed to file a 10-K for its 2009 fiscal year.

The company's deteriorating finances came at a time when franchisees were feeling the recession's effects. As the economy weakened, customer demand for repairs rose, but sales of other, more profitable, services slackened, McInerney said. The attitude among some cash-strapped customers was, "Maybe I can get by with something less," she said.

After Davis took over, he began hosting conference calls every Thursday with franchise owners, which Bostin and McInerney said they appreciated.

In addition, Davis revamped the Geeks' Web site and began sharing data from the company's call center - two changes that franchise owners had been clamoring for, said Bostin, chairman of Geeks' six-member franchise advisory council. "The old franchisor," he said, "was very possessive about data."

To date, On Call Holdings has invested slightly more than $700,000 buying Geeks' assets and expanding the operations, said Davis, its 36-year-old CEO.

That amount is likely to climb as the company consolidates Geeks' call center and headquarters at a single location in Virginia Beach. The company also will add remote customer support via e-mail and toll-free phone lines this spring for its information-technology services, said Davis, also a member of the Virginia Beach City Council.

Putting Geeks on a profitable course will require time. While the heavy losses have been stemmed, "it will take 12 months to have a positive cash flow," he predicted.

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com