Inside The Inc. 500

Although they were the pacesetters of the recovery, this year's growth leaders were not immune to the nation's economic changes.

 

These have been neither the best of economic times -- nor the worst. Washington proudly announced that the deepest recession of the past 10 years was officially over, but the balanced budget promised in 1980 had become the skyrocketing federal deficit of 1983. The Fed let interest rates come down, but executives were forced to admit that the days of low-cost money were past. Inflation was reined in, but unemployment stayed high. The dollar firmed on foreign markets, but not without significant effect on the national trade deficit. The bond market stumbled into its largest default in history, but stocks on the big board reached record heights, NASDAQ came into its own, and bulls pumped up the mnrket for new issues. And the papers reported news of change, of leveraged buyouts and unprecedented numbers of bankruptcies, of the turmoil in the video-game industry, the bloodletting among air carriers, the shakeout in computers, of the collapse in oil and the rebound of the auto makers. Is the recovery real, commentators asked, and if it is, can it last?

The INC. 500 -- and thousands of small, dynamic companies like them -- have been the pacesetters of the recovery. They are America's growth leaders, recording major increases in sales, profits, employment, and productivity. But the picture in December 1983 is different from that of last December. The companies on this year's list have grown faster than last year's counterparts, but they are less likely to be profitable. Larger in total sules, they are leaner in staff, and reflect shifting industry strengths and market opportunities.

The INC. 500 is a gauge of growth -- 500 of the fastest-growing privately held companies in the United States have been ranked according to percentage of sales increase from fiscal 1978 through fiscal 1982. As a group, they have seen meteoric growth, with sales shooting up 770%. In 1978, sales for the 500 companies were just over $500 million; the average company generated slightly more than $1 million in sales, and only 13 topped the $5-million mark. In 1982, sales for the 500 totaled almost $4.5 billion. The average volume was $8.8 million, and more than half exceeded the $5-million mark. Eleven companies climbed to more than $50 million in sales, while the sales leader -- Investors Management (No. 339) -- had revenues of almost $162 million in fiscal 1982- The diversity of the 500 testifies to the remarkable variety of market opportunities available for an entrepreneur to seize -- from manufacturing five different pet-food flavors at Morgan Manufacturing Co. (No. 159) to training prospective refrigeration, TV, stereo, and air-conditioning repair personnel at Vocational Training Center (No. 418). John Nady was a young rock and roller who created a cordless microphone for his band -- then turned his innovation into Nady Systems Inc. (No. 23) and a compound annual growth rate of 139%. Seventy-three-year-old Dr. Robert Martin developed Gravity Boots -- metal cylinders to clamp around your ankles, allowing you to hang upside down from a chinning bar, thereby relieving back strain -- as part of his Pasadena, Calif., orthopedic practice. Founded in 1971, Gravity Guidance (No. 2) languished in obscurity until 1980, when American moviegoers saw heartthrob Richard Gere using Gravity Boots in the movie American Gigolo. Public awareness was aroused, and sales took off.

The travel industry, with six companies on the list, reported the most dramatic aggregate growth, a five-year increase of 2,234%. The key, in many cases, was vertical expansion. Gary Archer, for example, got into the travel business in the 1960s, when he bailed out a friend whose one-office travel agency was overdrawn by $2,700 at a local bank. Today Archer owns 75% of TravelCenter Inc. of Alaska (No. 267), now that state's largest retail and commercial travel center, boasting gross sales in 1982 of $53 million from 16 retail offices in Alaska and Hawaii, two national wholesale tour companies, three fishing lodges, a hotel, a limousine service, a snow-removal service, two small air services, and a school to train travel professionals. Not that such expansion is without perils, however: Jim Shaw of Professional Travel Inc. grew 1,109% -- to No. 148 on this year's list -- with the same vision of vertical integration, only to founder on cash-flow problems and end up filing for protection under Chapter 11 of the Federal Bankruptcy Code. In addition to travel, other industry growth leaders on the list include eight real estate companies, up 2,161%, and 17 telecommunications companies, up 1,580%.

For 4 out of 5 of the INC. 500 companies, growth has been internal. Of the 98 businesses making acquisitions, most were in the service sector, usually of a single, similar company. Real estate companies were most active in the acquisition arena, topped by Mast Realty Group's (No. 279) 23 and Windham's (No. 253) 20.

Besides a record of rapid growth, most of the INC. 500 entered fiscal 1983 with a healthy bottom line: 464 of the companies were profitable in 1982, including 58 that earned 16% or more of sales. Another 64 companies recorded profits between 11% and 15% of sales, 123 were between 6% and 10%, and 219 were 1% to 5%. Over the five-year period from 1978 to 1982, 184 companies saw their earnings grow, 125 saw an earnings drop, and 191 stayed the same. Eighty-eight reported losses in 1978, while only 18 ended 1982 in the red. Among the industries, cable TV had the largest earnings, followed by reul estate and finance. Travel, the sales-growth leader, was the least profitable.

The INC. 500 are primarily young companies, all but 54 born since 1970, most from 1975 to 1978. The date of origin can be deceptive, however. John Nageldinger & Son Inc. (No. 158) was founded in 1880, but didn't experience its growth spurt until the late 1970s, when it changed from manufacturing industrial regulators and gas compressors to oxygen-therapy equipment for home medical care. W. B. Wood Co. (No. 409), on the other hand, has been selling office furniture since 1905. Chief executive officer David Kopelman theorizes that "lots of people are buying office furniture now."

Company founders, in 89% of the cases, have held on to the reins and serve as CEOs; 157 of the 500 CEOs hold 100% of their company's equity, while over half hold controlling interest. Of the 213 with less than 50% equity, all but 91 share in at least a quarter of the company, although 60 -- including 51 company founders -- hold no equity at all.

The ability of the INC. 500 to generate new jobs is as impressive as their growth in sales. Employment at the 500 companies has increased 516.6% in the past five years, from 11,448 to 57,499. The average company has 115 employees -- 92 hired in the past five years. Average productivity as measured in sales per employee is $62,467.

As a group, the class of 1983 is significantly different from the class of 1982. The companies on this year's list are only marginally larger in total sales -- up some $200,000 per company from last year -- but they have been growing much faster, up just about 200% over last year's average growth rate of 571%. Last year, Altos Computer Systems, now public, topped the list with 14,164% growth. This year it took Sigal Construction Corp. a growth rate of 20,214% to claim the No. 1 spot Last year only 115 companies cleared the 1,000% growth mark; this year 178 companies had passed that mark.

This increased growth rate, more than any other consideration, has changed the membership on the list; the pace was simply more intense. This year the cutoff rate for membership in the 500 was 397%, up from last year's 235% cutoff. Of the more than 300 members of last year's list that failed to return in 1983, more than half were still growing, but no longer fast enough to qualify. There were 182 companies that did return, but only 27 climbed in their rankings.

An increased growth rate hasn't been the only change. California -- ranked No. 1 in terms of capital resources, as well as No. 2 all around, in INC.'s "Third Annual Report on the States" (see October, page 139) -- registered the largest increase in INC. 500 companies, up by 16 companies. Demographic growth leader Florida, ranked No. 6 in the States Report, was the other leader, adding 6 companies. Four states lost 6 companies each: Massachusetts, Ohio, and oil-dependent Texas and Oklahoma.

 1 | 2  NEXT