It's hard to imagine that companies growing between 97% and 317% a year for five straight years -- as the members of this year's Inc. 100 did -- have ever known hard times. Such companies must be blessed, we think. They must each have found the right market at the right time, and then exploited it in the right way. A graph of their monthly sales must look like one smooth, steep, blood-thinning ascent. But the truth is different. As sometime Inc. columnist and growth-company observer David L. Birch has pointed out, even the most successful companies don't climb uninterruptedly upward. They're volatile. Among their peaks are valleys. Sometimes the valleys are bad.
When Your Sales Staff Defects
Company: Tech Data Corp., Clearwater, Fla.
Sales: $149.1 million
Profits: $4.2 million
Business: Distributes microcomputers and related peripheral products
CEO: Steven A. Raymund
It took place nearly seven years ago, but Steven Raymund remembers the scene as if it was yesterday. He chanced to come by the office one Saturday in late summer only to see the company's best salespeople huddled around the copying machines, working frantically. On a weekend? That's odd, he thought.
Then 26, having taken the title of operations manager only a month or so earlier, Raymund didn't ask any questions. "It never even occurred to me that they might be copying proprietary records of the corporation," he says. "But that's what they seemed to be doing: copying all the customer records and vendor information.'
When he came to work Monday, on his desk were letters of resignation from five of the company's eight salespeople, the backbone of the field force. Raymund came to think of this episode of corporate treachery as "the palace revolt." And he played the role of crown prince.
Tech Data Corp. was a distribution company, selling computer supplies to large end-users in central Florida -- hospitals, government agencies, and the like. Edward Raymund, Steve's father, started the company in 1974, and by 1982, the year of the rebellion, sales were running about $2 million a year.
Steve had gone off to the University of Oregon for an economics degree, following up at Georgetown University's School of Foreign Service. He then did a brief stint on the South American loan desk at Manufacturers Hanover Trust Co., in New York City. "I came back to Florida just to prepare a rÃ©sumÃ©," he says. "I wanted to get into international economic development. My father was getting interested in catalog sales, and he asked me to put together a catalog. That piqued my interest in the company, but I had no plans to work there indefinitely.'
Steve's appearance on the scene did not go unnoticed by the sales team. Ed Raymund, increasingly devoted to his other company, Tech Rep Associates, was spending about one day a week at Tech Data. The salesmen, Steve says, "had not unrealistic expectations that they might be able to purchase the business from my father." But as Steve moved deeper into the operation, publishing the catalog and gradually taking charge, the salesmen grew restive.
Seeing their buyout hopes eroding as the heir apparent eased into power, the five salesmen fled with copies of the files to a competitor in Tampa. "I could have been a saint, I think, and there would have been resentment," Raymund says. "I was an obstacle between them and their goals. I just had no idea how duplicitous some people can be. There had been no grumbling, as far as I knew, before they quit. We were caught broadside.'
It wasn't long before the company felt the impact. "Our customers suddenly weren't calling much anymore," Raymund says. He considered legal action against the traitors, but decided against it. "You need at least one deep pocket, and I don't think any of them had much money," he says. "Plus, I didn't think we had enough money to vigorously press a lawsuit.'
Nor did he have money to replace the sales force. "Field salespeople typically earn more, and cost the company more, than inside salespeople, and we couldn't afford to hire new ones," he goes on. "Their commissions were on the order of 40% of gross profit. That was part of the reason the business wasn't going anywhere -- it was being plundered by the salesmen.'
But the turncoats had left behind a more troublesome legacy. By 1980 personal computers had arrived on the scene. Ed Raymund tried to expand his two-person telemarketing team to handle microcomputer supplies. That effort had been sandbagged by the field sales force. "They viewed it as a threat that might eclipse their importance to the company," Steve Raymund says. "These were professional, charismatic people, and they ended up dictating the focus of the company: large institutional sales. They had a strong grip on the customers and in turn a strong grip on my father. When they left, the customers left with them.'
In the wake of the uprising, Tech Data's sales spiraled swiftly downward, from $200,000 a month to less than half that. The ledger edged into the red. Ed Raymund, already pained by the betrayal, considered shutting down the company. "He had another, very successful business that didn't cause him any headaches," Steve says. "And here's this one costing him a lot of money. We were borrowing money, and he was personally on the hook for it. We were really in jeopardy of going out of business.'
Until this point, Steve says, he hadn't felt much emotional commitment to the business. But now, presented with a challenge, he concentrated on bringing the company back to life. He wanted to have a go at a rescue operation. And with his father's guidance, he set a recovery in motion.
"We began to explore very aggressive telemarketing to dealers as well as end-users," he explains. "We hired a few telemarketing people very quickly. We started buying mailing lists, calling people, and sending out the catalog. We also ran ads in some of the computer trade magazines. We were able to recruit a pretty healthy number of dealers through that process.'
Over the next 18 months, Tech Data withdrew completely from the end-user market. "As we resurrected a new company from the ashes, it forced us to reevaluate our business and go in a different direction," Steve remembers. "Had this incident not occurred, I don't know if we would have had the impetus to explore other avenues for growth. It was a hard, nasty push off the bicycle. The bicycle got broken, and we had to find a new one. Fortunately there was lots of action in the microcomputer market at the time.'
By mid-1983 the turnaround was in full swing. Tech Data started moving into PC products -- disk drives, printers, keyboards, and the like. "By the middle of that year, we were making money again," Steve says, "and I purchased a majority share of the company.'
Today, with 10 distribution facilities from coast to coast, 430 employees, and fiscal 1989 sales of $245 million, CEO Steve Raymund no longer needs to revise his rÃ©sumÃ©. As for Tech Rep Associates, Ed Raymund sold that two years ago. Ironically, it was purchased by his employees.
When Your IPO Is Shelved -- and the Money's Already Spent
Company: Jacor Communications Inc., Cincinnati
Sales: $78.5 million
Profits: ($6.2 million)
Business: Owns and operates radio stations
CEO: Terry S. Jacobs
It was in the summer of 1982 that Terry S. Jacobs began to fear that his dream might come apart. Then 40, Jacobs just a year earlier had abandoned a six-figure salary in the insurance industry to become an entrepreneur. "Starting your own company is a way to get to the top in a hurry," he says. " If it works.'
An actuary by training, he had become intrigued by the broadcasting business. His former employer, American Financial Corp. (AFC), had invested in John Kluge's Metromedia Inc., and Jacobs watched as Metromedia stock soared from $5 a share to $550 before splitting 10 for one. Kluge then took it private, and by selling off pieces he became a billionaire.
"That got my attention," Jacobs says. "As I started researching, I noticed that broadcasting always placed in the top five in profit growth, revenue growth, and return on equity in industry group rankings. I had always wanted to do something on my own, and this was a business where you could start small and grow into a big company. Lots of people had done it.'
And so in January 1981 Jacobs bid farewell to AFC to try his hand at radio. He put together $1.9 million -- $600,000 from savings and friends and $1.3 million from the Bank of America -- and purchased three small religious-programming stations, in Cincinnati, Baltimore, and Toledo. Religious stations, he explains, are less expensive and less complicated to run than mainstream operations, a good place for a newcomer to cut his teeth.
With interest rates topping 20% in those days of galloping inflation, Jacobs found he needed to raise more capital quickly to pay down his bank debt. Although the economy was in recession, he decided on an initial public offering of some 1.1 million shares of his fledgling firm, Jacor Communications Inc. He selected the New York City investment banking outfit of D. H. Blair to underwrite the deal. "This was in the spring of 1982," Jacobs says. "It took a while to get a small company like ours in a legal and financial position to go public. You need three years of prior audits, and we had to go back and put together financials on stations we hadn't owned three years earlier, and that was real difficult. We didn't have much money, but we spent most of what we had on lawyers and on getting the prospectus written and printed.'
Meanwhile, the recession deepened. And that summer, lacking confidence that it could accomplish the deal, Blair informed Jacobs that it was going to put the IPO "on the shelf" and wait for better timing. Markets would improve, Blair predicted, in nine months.
But Jacor couldn't wait nine months. "We had used most of our capital getting ready for the IPO, and we couldn't borrow any more," Jacobs recalls. "And if we couldn't raise any equity money, we'd be out of business by then." The company was losing $50,000 a month -- half of it to interest payments -- and had a cash cushion of just $270,000. "So we had no choice but to go forward.'
Jacobs found a small Cincinnati brokerage house called Blank, Conger & Sena that was willing to bet on him, putting its name on the prospectus. Lacking size and marketing muscle, however, the brokers were unable to sell much of the stock. The markets were impossible. Instead, it fell to Jacobs himself to perform what he calls a self-underwrite. "This was the most critical period in the life of Jacor," he says, "but I absolutely refused to give up on my dream.'
Jacobs quickly borrowed $350,000 to buy a third of the stock himself. "I found a nice, friendly bank that was willing to loan it to me," he says, "but I had to pledge everything, including my kids, the future of the company, and my house. I was the first purchaser because I felt it was important, when I was going around trying to sell the stock, that people know that I had already stepped up and put my money in, that I was a believer. I thought that would be an inducement for other people to do it.'
Then he hit the road. He went to New York City and knocked on every door where he might possibly get an appointment, all the small and midsize brokerage firms. He traveled to Atlanta, Chicago, Pittsburgh, Phoenix, and Denver, anywhere he could find regional investment houses. "Most were names I'd never heard of and haven't heard of since," he says with a laugh. "I'd be ashamed to show you the places that wouldn't even let me in the door.'
It didn't help, he admits, that the prospectus was one big risk factor. "If you looked at it, you would not have bought the stock. I was selling a dream, really. I kept getting the same question -- what was an actuary, a financial guy, doing trying to operate a broadcasting business? My reply was that management skills transfer between industries, and that as long as you know what you don't know, you can find people who do know it. That was a constant battle. I ran into literally hundreds of people who said, 'You'll never make it -- this company won't be around next year.' It was tough to get anyone to believe in me.'
Undaunted by the skepticism of the investment firms, Jacobs tried another tack. "I met with a lot of individual investors to try to convince them to buy some stock," he says. "I was introduced to them by friends and friends of friends. I did anything I could think of, including calling people cold. It was the toughest selling job I think anybody could have done, trying to sell shares in a company that owned very small stations, with no good prospects of becoming a big broadcasting company."
Back home in Cincinnati, Jacobs liquidated almost everything he owned except Jacor stock and put it all into the company. His wife, Susan, and their three children, long accustomed to his six-figure salary, were reduced to a Spartan budget -- no vacations, no new cars or new clothing. There was money for bare necessities only -- groceries and mortgage payments.
"My wife thought I was nuts when I left AFC making the kind of money I was making, and now I wasn't making anything," he says. "In fact, I was loaning money to the company out of my own savings and investments. So we went from having all the money we could spend to not having much to spend at all. Fortunately the kids were not yet in college.'
The pressure was tremendous. "There was this constant fear that this might not work and I might lose everything," he recalls. "You can never be comfortable, you can never relax, the business is always on your mind. I went through periods of not sleeping very well, which created health problems."
Time was running out. Under the terms established for the IPO, Jacor had set a "best efforts" minimum sale of $1.1 million. The Securities and Exchange Commission allowed 90 days to complete an S-18 filing, permitting one 30-day extension. Jacobs had taken the extension. And it was only at 5:00 p.m. on November 4, 1982, the very last day, that he got the part that put him over the hump, a $50,000 sale to a private investor.
"That $1.1-million offering netted us just over $800,000, because we had huge expenses," Jacobs says. "But it allowed us to pay down our bank debt by $500,000. It also allowed us to go out and buy another station, in a little bigger market. That station made some money. So we could then do another public offering -- a real public offering -- in October 1983."
That one brought in $3.5 million, netting $3.1 million. Jacobs paid off the rest of his bank debt and was able to buy his first major station, an AM-FM combination in Jacksonville, Fla., in May 1984. "The Jacksonville buy was critical," he says, "because had those stations not performed well we probably would have gone under.'
But they prospered, and with new cash flow and added borrowing capacity, Jacor began an impressive acquisition spree. Over the next few years, it added stations in Cleveland, Atlanta, Cincinnati, Nashville, Knoxville, Tampa, and Denver, where its big-signal KOA-AM is "the voice of the Denver Broncos." The biggest of these purchases came in 1985 -- a three-station deal in Atlanta including WPCH, an easy-listening station. That involved a $20-million private placement with Shearson Lehman Brothers. "By then, New York investment bankers were coming to us without my going and begging," Jacobs says. He's already been offered more than $70 million for the Atlanta property -- not a bad return in less than four years.
No, money isn't really a big problem for Terry Jacobs anymore. Company revenues have escalated from $896,000 in 1981 to $78.5 million in 1988. This year marks Jacor's fourth straight appearance on the Inc. 100. And Jacobs enjoys encountering those doubters he met during the dark days of 1982. "I take great pride in showing them that not only did we make it, we are now the 13th largest radio broadcasting company in the United States.'
When Your Only Customer Goes Belly-Up
Company: Neoterik Health Technologies Inc., Woodsboro, Md.
Sales: $6.5 million
Business: Manufactures industrial respirators
CEO: Kenneth Vaughan
Imagine for a moment that you've left a good job with a big corporation to start your own company. A year later you have a great product and an order worth $360,000. Now, imagine that the customer -- your one and only -- runs into serious trouble, leaving you with an uncollectible receivable of $150,000. You owe suppliers $80,000, but you have no money. Your life savings are gone. Your company, your hopes -- they all lie on the brink of ruin. If you can imagine all that, you know how Kenneth Vaughan felt six years ago, when a spot on the Inc. 100 looked as distant as another galaxy.
A Welshman, Vaughan came to the United States with Racal Corp., a British defense contractor, and he rose to the post of general manager of Racal's U.S. safety company. But in 1981, yearning for a business of his own, Vaughan left Racal to set up shop in the basement of his house an hour north of Washington, D.C.
Then 41, degreed in electrical and mechanical engineering as well as mathematics, he had spied a niche in the hazardous environment-respirator business. Battery-powered industrial respirators were made chiefly by 3M, Mine Safety Appliances, and Racal itself. "These were specialized items, marketed and priced accordingly," Vaughan says. "The other manufacturers wanted to add more bells and whistles to further drive up the price. I saw the opportunity to provide a lowcost alternative.'
With $120,000 in savings and outside investment, Vaughan and his partner, engineer James R. Wiggins, established Neoterik Health Technologies Inc., derived from a Latinate word meaning "modern." By early 1982 they had their first product, and the company sold its first batch -- several hundred respirators for radiation-detection workers -- to Three Mile Island, the infamous nuclear power plant in Pennsylvania.
Searching for distributors that autumn, Vaughan came across the owner of Portable Air Supply Systems Inc., a Cleveland wholesaler. "I liked this guy," he recalls. "He had a lot of money behind him. He was in the same kind of industry we are in. Our product and the one he wanted to make -- a bottled-air respirator -- would not compete with each other, but they were for the same kind of users and distributors.
"He was getting ready to hire eight or nine salespeople but didn't yet have a product. On our side, we had a product but essentially no resources. What we needed was time to concentrate on design and perfect our manufacturing processes. So we agreed to sell our products exclusively through this wholesaler, who would become our sales and marketing representative."
Portable Air contracted to buy at least $30,000 worth of Neoterik's product each month, about 150 respirators, and Vaughan eliminated the need to establish an in-house sales staff. He was quite pleased. The deal "was an easy way to ensure that we brought in some money," he says. "The surface analysis indicated this was a good thing to do." And for six months the arrangement worked beautifully. In the late summer of 1983, however, it disintegrated. The principals of Portable Air had run into financial and legal difficulties.
"In a matter of 10 days," Vaughan says, "I realized something was seriously wrong. We had a receivable from them of nearly $150,000, because they were running us about 90 days late. They were our only customer, and now there was no way they could pay us. So suddenly we had no cash and no salespeople. What we did have was $80,000 worth of payables. Having used up our start-up cash and our $70,000 credit line, we were essentially bankrupt.'
Vaughan and Wiggins sat down stunned, angry, and bewildered. Are we in this business or are we out? they asked themselves. Vaughan wanted to hang tough, but he also had his family to consider. His wife, Jolanta, was a homemaker; they had two young children. "I had to go to her and say, 'Look, there is no paycheck,' " Vaughan remembers. "I involved her in the whole process. We decided to draw no money whatsoever, but just knuckle down and see if we could turn this around.'
Like many a strapped entrepreneur before him, Vaughan stripped the family budget to a war footing. There would be no money for new clothes or frills. A $6,000 savings account was earmarked for mortgage payments. As for groceries and other necessities, they borrowed that money from Jolanta's parents.
"It was one horrendously difficult period," he reflects. "I went without pay for 10 months. If I were to say we were paupers, that'd be wrong -- we weren't. We were able to feed the kids, keep them comfortable and cozy. They still had toys at Christmas and their birthdays. We're a very tight family, and this just cemented it. I think that the warmth and the hugging that went on is the kind of thing that makes a lot of this possible.'
Determination played no small role, either. "Jolanta believed in it because I did, and I was able to keep going because she supported me," Vaughan says. "It was absolutely symbiotic.'
Vaughan took his decrepit Buick on the road, scouting for new customers. He ended up at a Con Edison nuclear plant on Long Island Sound. Vaughan learned that it needed respirators almost identical to those he'd sold to Three Mile Island. He could construct them from parts already stockpiled. "What I then had to do," he recalls, "was find a distributor to finance the job the way we wanted it financed.'
He found one, a Maryland company called Radiation Service Organization (RSO), and struck a deal -- RSO would pay Neoterik as it delivered the gear. The Con Ed order ultimately brought in $120,000. Searching for more capital, Vaughan turned to a small-business investment corporation, a venture firm called Suburban Capital Corp., in Bethesda, Md.
"I said, 'Look, guys, I have something going here. Come in and put a debenture into this company so we can keep it going.' And that's what they did. It turned out that Suburban Capital's president had spent some time as a welder and had been exposed to industrial fumes. The need for adequate protection just clicked with him immediately." The firm invested $350,000 in Neoterik, adding another $300,000 a year later.
It was about this time, late 1983, that the asbestos-abatement industry took off, and Vaughan quickly spotted the opportunity. Asbestos workers needed the kind of respirator Neoterik specialized in and constituted a much larger market than radiation workers. "That's when we got onto the growth path that's brought us where we are now.'
In retrospect, Vaughan says, the Portable Air fiasco taught him an important lesson. "The things I did wrong were so clearly wrong that it makes me wonder why I did them. I had always thought that even if this [Portable Air] arrangement didn't work out, I could take the wholesaler out and deal directly with the distributors. Logically, you'd expect that to happen. But it doesn't work.
"As far as I'm concerned, it is imperative for a young manufacturing company to stay very, very close to its customers. If you put anything in the way -- however beneficial it may appear -- it's going to hurt you. Unless you sit there on the equipment user's doorstep and listen to him, you'll never be in the right place at the right time.'* * *
When You've Bet Your Company on a Process that Fails
Company: LifeCore Biomedical Inc., Minneapolis
Sales: $3.6 million
Business: Manufactures and markets high-purity biomaterials
CEO: James W. Bracke
As corporate crises go, LifeCore Biomedical Inc.'s looked terminal. James W. Bracke, the 42-year-old scientist-turned-CEO, likens it to "that first brush with death, when mortality suddenly has a different realism for you. It made me understand," he says, "that the line between victory and defeat can be crossed quicker than you think.'
In 1984 victory had seemed close. A newly installed, million-dollar fluid-handling system would enable LifeCore to realize the vision Bracke had brought to it three years earlier, becoming the only commercial manufacturer of a material it had nursed through nearly four years of R&D. The material would -- the company hoped -- become a major medical commodity. LifeCore even had its first big order in hand, from Cilco Inc., a subsidiary of a giant pharmaceutical concern, which had committed itself to a substantial annual purchase.
LifeCore's breakthrough had to do with sodium hyaluronic acid -- or simply HA -- a basic substance of all living tissue. HA is the thick, syrupy fluid that coats every soft-tissue cell, providing lubrication and flexibility. It plays a critical role in cataract surgery, among other procedures. Before LifeCore, the only commercially available HA was derived, strangely enough, from rooster combs. And so complicated was the production process -- it took thousands of combs to produce minute quantities of HA -- that it cost $9 million per pound. "In the history of the world," Bracke says, "there probably had been only a few pounds of pure HA made.'
A Ph.D. microbiologist specializing in infectious diseases, Bracke had come up with a bioengineering technique to make HA. He'd observed that streptococcus bacteria -- the same germs that cause some sore throats -- somehow coat themselves with HA; they actually manu-facture it. "Just like yeast makes beer, strep bugs make HA," he says. "We wanted to scale it up and produce it commercially.'
And so by July 1984, in new quarters and with expensive systems in place, LifeCore was ready. The trick in the production process was in the filtering. "This material is harder to purify than any drug that's ever been made," Bracke explains. "HA is intertwined with all the biochemistry in your body. All the proteins and everything else react with it very intensely. So when you purify it you have to remove all those elements. That's extremely difficult, but if you don't, they'll cause a reaction when they're injected into the body. Purification is the battle.'
Over the next few months, Bracke came to the bitter understanding that the battle was going badly. "We discovered we couldn't purify the water in our system, and as a result there were microorganisms in it. It was impossible to make clean product." By December 1984 the outlook was grim. Earlier that year, poorly capitalized LifeCore had sold its only other revenue-generating business, diagnostic kits, to former company officers. Anticipating a smooth transition, Bracke had not foreseen additional funding needs. By his estimate, the company had only $6,000 left. It couldn't survive another month.
LifeCore teetered on the edge of oblivion, which was bad enough. But Bracke also felt a profound sense of personal failure. "I was the one who'd had the vision for this whole thing back in '81," he says. "I had a lot of good friends who bought stock in the company when I joined it. I had a banker who backed me early on because he believed in me. There were a lot of people who trusted me, who were convinced I would deliver.'
He also had his six employees to reassure. If his scientist bolted, all hope was gone. But keeping a cool head was not easy. "A lot of people say, 'You can't let them see you sweat.' Well, I didn't do a very good job at the time. I was not being as perfect as a leader should be, because it had me lathered. I didn't know what to do. It was a real panicky time." He depended on Mozart to provide what little peace of mind he could find.
The folks at Cilco, his only customer, were not exactly crazy about the situation, either. They had made a lot of noise in the industry about the HA breakthrough, and had invested $4 million researching the product's possibilities. They were ready to begin testing. Doctors and patients were lined up, awaiting clinical samples. "In a medical company, it's very bad to announce that something is coming and then have to admit that it's late," Bracke says. "But that's the position we were putting Cilco in.'
He brought in a consultant, and together they fashioned a corrective plan -- one requiring a major cash infusion, and fast. Bracke felt he could handle that. "I was always a pragmatic scientist, not so much the esoteric guy in love with the thing because it's a neat idea," he says. "I helped pay for grad school by playing the stock market. So I've always been interested in business and finance. I find it far more challenging than pure science.'
This time the challenge was more than he'd bargained for. He met with bankers, venture capitalists, and investment firms. Everyone turned him down. "Nobody could see it," Bracke recalls. "This was so new. There were people willing to invest in biotech in things like proteins and hormones and antibiotics, things they understood. But this stuff looks and acts like mucus. That didn't turn a lot of people on.'
Finally, in desperation, he resorted to Cilco. "I didn't want to have to tell them, but they were the only ones who would understand. They had already invested heavily in getting ready for the product, and we had a worldwide, exclusive contract with them. They were my only shot.'
He met with Cilco executives to explain the situation. They had high expectations for the product, believing that the surgical market for HA, then $50 million, was headed much higher. Lacking access to the rooster-comb variety of HA, they had no source besides LifeCore. It was worth a chance, they reckoned, to bet on the fledgling manufacturer. Before long LifeCore received a rescue package of $800,000.
Back in Minneapolis Bracke hired new engineering talent and brought in state-of-the-art filtration and pumping equipment -- an entirely revamped system. Within three months, he had turned the situation around and was supplying Cilco with material. With the new process proving out, Cilco added $1.7 million more to ensure success. For its total $2.5-million investment it received 30% of LifeCore's stock.
Today, LifeCore produces more HA than eye surgeons need, and its product is rapidly gaining market share. Already used in skin-care creams, HA may soon be used in general surgery, where it is expected to impede or eliminate the growth of scar tissue. A possible application: surgery on the female reproductive system, which scar tissue can render infertile.
And Bracke? "I'm confident again, but not the way I was. After being shaken like that, you