Charles Muench never wanted to be president of his own company. "I do some things very well," he says. "I'm a conceptualizer and a planner -- but I don't like getting involved in day-to-day operations." Muench prefers to hang out in a quiet workshop, fiddling with soldering irons and printed circuits and trying to invent better products that can be sold for less money.
Watching from the sidelines while others manage his enterprise is an approach that has paid off nicely for Muench and for Intelligent Systems Corp., the company he and a partner founded back in 1973 in Norcross, Ga. "My strategy has always been to find the best guy I can -- and then to make him president," says Muench.
Muench's hands-off strategy has taken ISC out of a basement workshop to sales last year of $18.8 million and a compound annual growth rate over the last five years of 73%. ISC has become a hot property in the hot "color graphics" industry. (The company makes computer terminals with CRT screens that display data and charts in a rainbow of colors.) Muench and his presidents have managed to build a company that ranks #14 in INC.'s 1981 roster of the country's fastest-growing smaller companies, and Muench is already thinking about what happens when ISC hits $100 million in sales.
Muench, who is ISC's chairman and owns 30% of the company's stock, says that a major reason for the company's success is his knack for finding the right manager at the right time. Each of ISC's three presidents brought the company the special blend of talents it needed at a particular stage in its growth, while leaving Muench free to design products and think about the future. "I think too many people confuse the time they spend in their offices with the number of hours they work," he says. "There have been weeks when I never stopped working -- and only went to my office three times."
Even before he launched ISC, Muench learned the hard way that innovation and management were not skills he possessed in equal measure. His first company, Integrated Systems Inc., manufactured remote alarm and control equipment for the electric utility industry. It had grown to $1.6 million in sales when Muench sold it to Esterline Corp. in 1972, Esterline asked him to stay on as president of the new division. After a year and a half of watching Muench's rather easy-going style, though, Esterline had second thoughts and fired him.
Recognizing that he wasn't cut out to be a corporate manager, Muench was delighted when Terry Hughey, his former research and development director at Integrated Systems, suggested they team up to start a company that would manufacture low-cost color CRT terminals for the general market. The color graphics industry was in its infancy, and both men saw the opportunity for great growth.
"Those were some days back then," says Hughey. "We spent the first year down in my basement. Then we moved to Charles's cellar, because he had more space. He also had a sewage pipe that broke and a boxer dog that gave birth to a litter of puppies while we were talking to a customer. I just put my head down on my desk, and Charles kept soldering. I don't think he even noticed."
Hughey and Muench made an ideal team for starting a high-technology company. Both put money and technical expertise into the venture, and both were comfortable with a division of responsibilities that left Hughey in charge of most management decisions. "Charles is a brilliant person, with a real knack for putting technology into the market-place," says Hughey, "but he'd rather stay away from the mundane aspects of management."
In the spring of 1976, Muench and Hughey's Intelligent Systems Corp. had sales of $383,000, and for the first time, business was really taking off. However, the two men's interests began to diverge. Says Muench: "When you put two good engineers in one company, you're bound to have some differences of opinion." Muench saw the low-cost low-resolution market as the key to future growth. Hughey was convinced that the more expensive high-resolution units were the answer.
"We saw that there was enough business for two companies," says Hughey, "and we saw no point in trying to pull ISC in two directions."
The men agreed to split both the company and the market. For $1.1 million, Muench bought Hughey's stock in ISC in October of 1976 and gave him a free hand to start a high-end color graphics company.
Before Hughey left, Muench brought in financial consultant Ezra Mintz to develop a costing system for his adolescent company. Although Mintz's background as a manager was limited, Muench quickly saw that he had the potential to run a business, as well as the financial expertise ISC desperately needed. Mintz became ISC's second president.
Money, Mintz realized, was becoming a critical problem for ISC. The company's cash flow was good, because about a quarter of ISC's orders were prepaid. "Sometimes we had $300,000 or $400,000 in customer cash," says Muench. And no matter how big a customer was, ISC insisted that bills be paid within 20 days. Since the company had no competitors, sales didn't depend on easy credit.
Nevertheless, banks were skeptical about the company's fast growth, and Mintz had constant problems getting enough bank financing. That meant that growth would have to be financed internally with extremely tight controls. "I knew it wasn't going to be easy to take this company from $2 million to $14 million and to pay off Hughey," Mintz recalls. "But I was able to do it even though I broke a few eggs in the process. It was a hell of a job."
Thanks to Mintz, ISC was able to further increase its momentum. From fiscal 1978 to fiscal 1980, sales increased 254%. Unfortunately, marketing and general and administrative expenses kept pace, rising 207% in the same period.
In the meantime, Muench was busy in his workshop, designing a new product -- a personal computer called Compucolor II. Both Mintz and Muench admit that Compucolor was a bad idea. "The margins were terrible," says Mintz, "and the units were yo-yos. We shipped them out, and they bounced right back." ISC's marketing expenses got even higher, because they weren't used to selling to consumers. Still, Muench was convinced the Compucolor could succeed. Mintz could do nothing to dissuade him.
The problems with Compucolor II distracted Muench and Mintz, and then a management oversight made things worse. Ever since Muench started the business, the prices of components had been decreasing, permitting ISC to lower the cost of its units. "Everything worked great until 1979," he says, "and then we got crunched. Semiconductor prices started to sneak back up, and they did a job on our margins." It took ISC nearly three months to catch on.
The two unrelated problems had a significant impact on the company's earnings for fiscal 1980. Although sales increased from $9.5 million to $14.5 million, net profit plunged from $679,000 to $487,000.
Muench began to realize that ISC had reached a new phase in its growth and that it required a different kind of management style. "When you make mistakes you shouldn't have made," says Muench, "you have to get by yourself for awhile and ask yourself why it happened. That's what I did. I didn't think we had the kind of management structure that could anticipate problems. I thought we needed to make a change if we were going to have high growth and steady earnings."
Mintz had done the job of taking the company to $14.5 million, but the strengths he had brought to ISC were not necessarily the ones the company needed to keep growing.
In January of 1980, Muench and his wife took a business trip through the western United States and to Hawaii. There, Muench decided he was unhappy enough with Mintz to make a change. "I guess I realized that the company was out of the infant stage. We were reaching the point where we were obviously going to face some competition, and where we had old-time customers who needed to be handled with kid gloves," he says. "We couldn't afford not to go out and hire the guy who could take it to $100 million. But I didn't know how to break it to Ezra. I'm terrible af firing people. I'd rather take a whipping."
Instead of dismissing Mintz, Muench tried to avoid the issue by making him chairman of the board. It was an unusual move, but Muench thought it would work. "Charles came into my office," says Mintz," and handed me a folded-up piece of yellow foolscap. Then he stood there while I read it. It said something like, 'It is with great difficulty that I have to make this decision, but I want to find a way for you to step down as president of ISC. I still want your friendship, but I believe this will serve the company best in the years to come. I am sorry."
When Muench asked him to be chairman of the board, Mintz was surprised, but he agreed. He had substantial money invested in ISC stock, and he was a guarantor on two outstanding loans. He had a strong personal interest in the welfare of the company.
Muench thought he had made the right move, and began his search for a new president. "I had a pretty good idea of the kind of guy I wanted -- someone with marketing experience, and someone who was really good with people," says Muench. "But most important, he had to be capable of running the company. He couldn't look to me for day-to-day decisions."
Muench interviewed half a dozen people, but he couldn't find one who fit the bill. In the back of his mind, he measured Mintz's personality with the applicant's. Would they get along? If his chairman feuded with his president, Muench would never have any peace.
Then, one morning, Mintz came into the office. "He said, 'I know a guy, and I think you'll like him. He could do the job.' I was delighted," says Muench. "I figured, if Ezra already approved of him, I had half the battle won."
Mintz's candidate for his replacement was Peter Curnin, a marketing executive at IBM. Mintz telephoned Curnin one night to ask him if he'd consider leaving IBM to become president of ISC. Curnin asked for time to talk it over with his wife. Later that evening, he returned the call. If Charles Muench wanted to talk to him, he'd talk.
"The one thing I really wanted to know," says Curnin, "was whether Charles wanted to give up his role as leader of ISC. I thought maybe he just wanted an operations manager -- a front man. In fact, he really did want to get out of management. It just wasn't an ego problem for him."
Muench thought he'd gotten a great deal. Curnin was an outstanding manager. He had all the smoothness both Mintz and Muench lacked. He was personable and professional, and although he pronounced his "r's" like the native New Yorker he was, he'd adapted well to southern ways. Curnin had helped take the general systems division of IBM from small to large. He was a marketing pro. He'd even dealt with personal computers, which meant perhaps he could salvage ISC's troubled Compucolor II line. But there was an extra benefit that pleased Muench. "Surprisingly, at least from my standpoint," he says, "Peter was quite financially conscious. He thought about things like cost and budget. I didn't think I could get someone like that from IBM."
Curnin started work in February 1980, and almost immediately Muench's careful plans began to fall apart. Mintz was supposed to concentrate his efforts on arranging for ISC to go public, and Muench took off for a vacation, convinced he'd managed to keep two top managers happily under the same roof.
During the next two months, though, Mintz and Curnin disagreed on just about everything. "We didn't solve anything by making Ezra chairman of the board," Curnin says. "We had major differences in style."
Clearly, it was going to be impossible for Mintz to switch from running the whole show to running only the public offering. He continued to visit the production facilities, insisted upon reviewing incoming orders for credit, and occasionally confronted customers and suppliers on less than cordial terms. Curnin was upset, and Mintz knew it. "I was, I admit, an absolute stickler about who we sold to," says Mintz. "I looked at orders every day. One day, I saw that an order had been approved for a company that I had already denied credit. They were deadbeats. It took 60 to 90 days to collect, and the amount of business wasn't worth it. When I found out, I really pitched a fit."
Curnin didn't take well to Mintz's display of temper. "Several more conflicts occurred during the next couple of months," he says. "In most cases, Ezra apoloized to me, but not to the person he'd offended. The last straw involved our bank. We owed them $1 million on personally guaranteed notes. Ezra was one of the guarantors. I told him that if he involved himself in the company's banking relationship without going through the executive committee or the board of directors, I'd have to seek his dismissal. But Ezra continued on a collision course, unfortunately."
It wasn't surprising. Mintz had a great deal of money tied up in ISC, and he wanted to get it out. He feard for the security of the notes he had guaranteed. Finally, he took matters into his own hands, and went directly to the bank. Curnin and Muench didn't take it lightly. Mintz received a letter that informed him that he was about to be removed as chairman.
Curnin and Muench asked Mintz to step down from the board and to leave ISC. For Muench and Mintz, it was the end of a long friendship, as well as a partnership. In addition, Mintz announced that he wanted to sell his ISC stock and finally get his name off the two bank loans he'd guaranteed. Muency agreed, though the deal put new strains on ISC's slender resources.
As the man in charge of finance, Peter Curnin was becoming more concerned every day with ISC's heavy load of debt. "In April of 1980, we paid 21% interest on a $1.1-million six-month demand note," he says. "That didn't disturb Ezra, but it made me dammed nervous. The company was still living on customer deposits and liberal vendor credit. That was a reasonable strategy when ISC was small, but at $14.5 million, it made us too vulnerable. Our accounts payable were up to $1.5 million. I knew we needed permanent financing, but I didn't think we were ready to go public. The underwriters weren't going to like the drop-off in earnings for the previous year. We required time to prove we were stable."
Says Muench, "Peter insisted that we needed money, and he was right. We were playing it too close to the edge. He wasn't used to operating with $1.8-million debt and one week's payroll in the bank. IBM is a company that keeps some bucks available."
Curnin knew that ISC had to get two things -- money and credibility. He saw a venture capital deal as a way to get them both, and he finally arranged a deal with a firm called Oak Investment Partners. ISC diluted total outstanding shares by 350,000 out of 2 million, and received $2.6 million in return.
The moment the venture capital deal was done, ISC's credit situation improved. "People who didn't want to talk to us before wanted to lend us money," says Curnin. "Our balance sheet changed overnight from practically no equity to a small bank debt and several hundred thousand dollars cash. The New York banks started to come down to ask us if we wanted to open accounts. People were handing us lines of credit. Believe me, money gives everybody a very different perspective."
Investors started to look at ISC in a new light, and the company was hungry for more money to help it pursue its 30% to 50% growth objectives. The time seemed right to try the public offering. "We invited the underwriters down in the middle of October," says Muench, "only two or three weeks after we closed the venture capital deal. On the first of November, we decided we were going full steam."
ISC went public on December 31, 1980, and raised $7 million. Finally, says Curnin, he began to feel as though he could run the company like a major-league operation. "Before we went public, the undercapitalization was affecting every conversation," he says. "Do we sell to him or don't we? Do we spend money or don't we? It made us very reactive -- very short range in what we were doing. Now, with adequate capital, if we see a good opportunity we can do something about it. Before, we had no choice. Cash availability dictated the final decision."
During 1980, Muench and Curnin decided to discontinue the Compucolor II line. This allowed them to focus their resources on color graphic terminals and desktop computers for business and industrial markets, their original targets. In fiscal 1980, the company increased sales in these enough to offset the Compucolor losses, ending 1981 with sales about 30% over the previous year.
As for Charles Muench, he's comfortable letting Peter Curnin figure out how to handle the day-to-day problems of management. His job, as he sees it, is to continue to keep the company right on course. "I provide the focus," he says. "I deal with the long-range planning. I have the singlemidedness and the stubbornness not to allow things to go astray. That's what I'm good at." In the meantime, Muench has made sure that his office is a good long walk from Curnin's -- and that everyday hassles are kept to a minimum.ISC still garners most of his attention, but in his spare time he's developed a color-ink jet printer that's ready to go on the market. And true to form, Charles Muench has already found a president to manage the operation for him.
ISC: THE GROWTH PATTERN OF A MATURING COMPANY
1977 1978 1979 1980 1981
Annual sales ($000) 2,135 4,095 9,481 14,492 18,775
Number of units shipped NA 1,244 3,483 6,254 6,561
Marketing & G&A ($000) 656 1,355 2,282 4,159 5,144
Number of Employees 52 144 176 199 202
Receivables ($000) 240 411 817 1,203 2,204
Short term debt ($000) none none 651 1,239 615
Long term debt ($000) none none 17 29 50
Net profit ($000) 100 164 679 487 1,591
Net income per share ($000) .04 .06 .27 .24 .70
Under three different presidents, Intelligent Systems Corp. has moved out of its infancy in a basement workshop, through a high-growth adolescence stage, and now stands on the brink of maturity. Typical of maturing companies, ISC last year showed a modest increase in sales, but made dramatic gains in profitability, productivity, and cost control efforts.