Marc Bingham, president and chief executive officer of Phone Directories Co., remembers waking up in the middle of the night with a chilling thought: "My company had $5,000 in the bank and a $27,000 payroll to make the next day. "Bingham's company, a Provo, Utah, publisher of independent telephone books that ranked #444 on last year's INC. 500 list, had registered sales of $3.2 million in 1982, and was sporting a 443% five-year growth rate. But, says Bingham, "the pressure was too much. I was becoming an animal of the system, and growth was getting out of hand. Either I had to do something about it or have a nervous breakdown, and I didn't have time for a nervous breakdown."
Bingham resorted to drastic measures to save his sanity. He broke his company up into four divisions and sold three of them to some of his former employees. That reduced his own work force from 65 to 7 and cut his output from 85 directories to 22. He also stopped pumping all of his own earnings back into the company, took more time off for family matters, and soberly marched "back to where I was 10 years ago." This year his sales are projected at about $3.5 million, down from a high of $5 million in 1983.
Not every retrenchment is so much a matter of choice. For Crisstad Enterprises Inc., of La Grande, Ore. (#180 last year), it was market factors, not psychological ones, that kept the company off this year's list. The problems faced by Crisstad, a vendor of logs and wood products, reflected downturns in the homebuilding and paper industries. Like many of its Oregon neighbors, the company closed down its sawmill when lumber demand dropped.
The outlook, however, isn't wholly bleak: Crisstad has been channeling capital into a new chip-burning power plant, and hopes to boost its own production of wood chips. "The chipping market is just now beginning to pick up," says spokesperson Lorna Weller, "and, depending on the lumber market, we should have our mill reopened by June of '85."
All told, 208 companies from last year's fast-growth list returned to this year's, including 63 that appear on the list for the third straight time. What accounts for the 292 nonreturnees? Of the companies that INC. was able to contract, some 162 did well enough to meet almost any performance standard save qualification for this year's honor roll; a dozen of these registered a 400% growth rate or more, and Texas Tumbleweed Inc. (#118), an Austin-based steakhouse chain, hit 430% on $16.9 million in sales.Another 55, including Phone Directories and Crisstad, posted sales figures lower than the previous year's. And then there were 2 that really went the other way: into Chapter 11. One of these, Pied Piper Industries, a Cleveland manufacturer of electronic bug-killers and auto-security systems, reported last summer that it was a victim of an "unfriendly takeover" move; the company resisted the move, and one of its warehouses mysteriously burned down. Now a caller to Pied Piper gets a "telephone disconnected" recording, and the company's hopes for recovery presumably lie in ashes.
The 15 class members bought out by other companies report a mixed bag of experiences. Anadex Inc. (#454), a manufacturer of dot-matrix printers in Chatsworth, Calif., decided it couldn't grow fast enough to keep pace with the marketplace and so entered acquisition talks with Printronix Inc. These talks were successfully completed in September, and Anadex CEO John Weaver foresees no change in top management or basic operations. On the other hand, Mission Home Health Inc. (#65) of San Jose, Calif., a home-nursing-care service business, sold its assets to Beverly Enterprises Inc. of Torrance, Calif, "for over 10 times projected earnings," according to CEO Gene Cochran. But Cochran now has some regrets.
"All of a sudden we had a national flavor instead of a local one," he reports. "Our employees probably aren't as motivated as they were before. And while [Beverly] has done its best to maintain local autonomy, that hasn't been achieved." Cochran adds that part of his personal stake in the deal, a stock transfer from the parent company, has been devalued by a drop in Beverly's price on the New York Stock Exchange.
The 14 INC. 500 veterans that took the plunge into the initial public offering market also report some troubles. Bio-Analytics (#242) of Palm City, Fla., formerly an employee-owned manufacturer of medical testing kits, raised $2.3 million with its February stock sale, paying "not a nickel up front," according to CEO Clyde Patterson. The stock opened at 5, rose to 8, and has since leveled off at 5.5. But only about 15,000 shares a month are changing hands, says a somewhat disappointed Patterson, who adds that life after an IPO is "sort of like moving into a glass house -- it's not that we've changed how we operate, but we're aware that we have to explain a lot more."
The stock value of HCW Oil & Gas Inc. (#41), of Boston, is down as well -- from 12.5 to 8 -- since last November's $13-million offering, although CEO Bob Glassman boasts of "one of the strongest balance sheets in our industry." HCW's IPO followed two rounds of mezzanine financing, in 1978 and '82. Vie de France Corp. (#372) of Vienna, Va., a bakery wholesaler and restaurant chain, floated a stock offering in February of this year, hoping thereby to maintain liquidity for projected expansion. President Lloyd Faul cites '84 net earnings up 35% (to $5.8 million) and overall revenues jumping more than $12 million (to $55.1 million).
Still, says Faul, "The roadshow [leading up to the offering] took an awful lot of our time. We 'went public' in every sense of the term."
Roadshows and sideshows, acquisitions and inquisitions -- it was that kind of year, as usual, for graduates of the INC. 500 list. Now meet four others that are worth a longer look.
Through the Wringer
Who was going to tell me anything? Some accountant? My wife? Hey, I was doing it."
Brian Stutt loved being the bad boy of appliance retailing in boom-town Houston. Every Saturday, both city newspapers carried full-page advertisements for his Warehouse Appliance Inc.'s heavily discounted televisions, freezers, and washing machines. Stunned competitors, accustomed to getting full price for their goods, remored that Stutt's merchandise was hot.
Sales seemed not just to grow but to multiply, reaching $8.9 million by 1982, only the company's fifth year of operation. Stutt and his wife, Sharon, who handled the administrative end of the business, added more staff, moved their first store to a better location, then added a second store.
The personal perks also grew more lavish. On New Year's Eve, Brian's birthday, Sharon threw a lavish party for her husband at a Houston hotel; the crowd was too big to accommodate in their own new half-million-dollar house. Only a few weeks earlier, Sharon and Brian had taken their two sons to New York -- first class, of course -- where they hired a limousine for two days and dropped $5,000. During a fete at the Hotel Pierre, they heard themselves celebrated as creators of the #5 company on the 1983 INC. 500 list.
Two weeks later, the Stutts got a letter from Texas governor Mark White, which now hangs, framed, on the office wall."Clearly, your superior management and personal commitment to excellence have paid handsome dividends," wrote the governor. "I wish you a satisfying and profitable 1984 and even higher ranking in next year's INC. 500 listing." The day the governor's letter arrived, however, the Stutts had something else on their minds: the possibility of bankruptcy.
In 1977, Brian, then 29, had left Brooklyn, N.Y., and the family appliance business "so I could see if I was worth a crap on my own." Houston, fueled by oil and gas money, was exploding. Brian saw the growth and, he recalls, "that was the end of my market research."
He worked eight months for an appliance wholesaler, then two months for a retailer. Two days after buying his first house, he quit his job. Houston was a hustler's dream. Old-line wholesalers were selling appliances to dealers for what retail customers were paying in New York -- or more. Brian decided to rock the boat. He bought appliances in New York. Then he sold them, at deep discounts, from his garage, to customers willing to put up the cash when they ordered. He even sold to some retailers at prices below local wholesale levels.
In 1980, Sharon and Brian leased their first retail store, 2,000 square feet in a freeway shopping center soon enveloped by Houston's sprawl. They began to advertise aggressively. "I was going to show those hicks how to do it," he remembers. "A year and a half after opening on Katy Freeway, we were doing $8.5 million."
Unfortunately, it took nearly another year for the Stutts to discover that the business had been consistently losing money, and a while longer for them to understand why. By December 1983, Warehouse Appliance had accumulated a balance-sheet deficit of nearly $1 million. The Stutts owed the bank, their vendors, and the newspapers. The cash that had always been there to pay the bills suddenly wasn't.
In hindsight, their error seems glaring, obvious, and not even very original. As long as the business was growing rapidly, cash from this month's sales had always covered last month's bills. "What we never realized," says Sharon, "was that we were spending $60 to make $50."
Brian was just as slow to see the light. Although he had sold appliances before, he had never run a company, and Sharon had never seen a profit-and-loss statement. They paid no attention to costs, because their cash flow always covered them. And professional "help" was not always all that helpful. Their banker didn't demand financial reports on a routine basis. The company that financed their inventory asked for -- but neither demanded nor got -- formal statements regularly. Their accountant, says Sharon, never told them they had a problem. "We were paying out bills," says Brian. "Who worried?"
Oh, there were small warnings. Brian's mother, for one, knew the limited cash potential of a retail appliance business, and she also knew that the new house, the BMW, and the Mercedes-Benz 450 SEL were more than her son could afford. Sharon began to suspect that something was wrong, but she lacked the experience to understand what. In truth, Brian paid no attention to either woman. "I trusted her," he says of Sharon, "but it was also easy not to listen, because she was my wife."
"I'd yell and scream," counters Sharon, "but I'd never call the vendor and cancel the order."
This year, Warehouse Appliance is back in its original showroom, projecting sales of just $4.5 million; it is dwarfed by the huge new discount appliance outlets that now dot the Houston commercial landscape. So far, vendors, the newspapers, and other creditors are being patient with the Stutts, whose sales force has declined from 28 to 5. The expensive cars are gone, and the house is listed for sale. After a close brush with dissolution, Brian and Sharon's marriage is strong again, but she has left the business to pursue her own interests. Brian has cut expenses, hired an experienced consultant, and now has a five-year plan and a budget.
"In January," Brian recalls, "everybody said, 'Close it up. File.' I said, 'Screw it. We're gonna make it. . . .' The house is listed, but I tell you, we're not going to sell. . . . I refuse to accept that fact that I've failed. . . .
"The more I talk about it, the better I feel about it. For me to sit here and tell you, a stranger, about it amazes me. I guess I hope that if I talk about it, maybe somebody will pick up on it and it won't happen to them. As invincible as I thought I was, I found out just how invincible wasn't. . . . Growth for its own sake . . . you see where it got us."