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BusinessWeek: June 1, 1998 |
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Special Report -- Hot Growth Companies
HOT GROWTH COMPANIES Business savvy, the right focus, and a little bit of luck are a potent combo The education is paying off. Schuff Steel has a lucrative niche in "fast-track" contracts, where construction begins before the design is finished. Schuff has landed several large projects in the past few years, including jobs for Las Vegas' Mirage Resorts Inc. and MGM Grand Inc. hotels. Now it is tackling its toughest job to date: a half-scale Eiffel Tower replica for Hilton Hotels' Paris Las Vegas hotel. Schuff's performance proves you don't have to be in high tech to generate scorching growth. Over the past three years, the steelmaker has racked up annual earnings and sales growth of 48.3% and 30.1%, respectively. With 1997 earnings hitting $7.2 million on sales of $138.2 million, Schuff barreled its way to No.40 on BUSINESS WEEK's list of the 100 fastest-growing small companies. And while any construction company is vulnerable to downturns, so far Schuff's key markets, including Arizona, California, and Nevada, continue to boom. "They're in a pretty sweet part of the market right now," says David Fondrie, an analyst at Heartland Advisors, Schuff's largest outside shareholder. That combination of business savvy, relentless focus, and discipline is behind the success of each company on our Hot Growth list. These tiny operators have outgunned their larger rivals, generating average annual sales and earnings growth of 59.8% and 102.8%, respectively, over the past three years. That compares with 7.6% and 9.8%, on average, for companies in the Standard & Poor's Industrial index. And return on capital for these 100 companies averaged 31.1%, while the S&P average was just 11.9%. So how do companies make the list? Often by being in the right place at the right time when bigger companies farm out key work. That's how Kendle International Inc., which helps test new drugs for pharmaceutical giants such as Parke-Davis and Bristol-Myers Squibb Co., grabbed the No.1 spot. Another big recipient of drug-company outsourcing is Boron, LePore & Associates Inc. (No.24), whose marketing and promotional services include organizing doctor conferences and providing field-sales support. Of course, many winners did ride the high-tech boom. About half of the 100 provide computer or telecommunications products or services. Dunn Computer Corp. (No.6) is a personal-computer maker that sells largely to U.S. government agencies such as the Justice Dept. Last year's No.1 company, Yurie Systems Inc., which makes equipment for high-speed transmission of data, voice, and video, was No.3 this year. Yurie's success didn't go unnoticed: In April, Lucent Technologies Inc.--Yurie's biggest customer--said it would buy the upstart for $1 billion. NO GLAMOUR. While high-tech equipment is hot, software and services may be even hotter. JDA Software Group Inc. (No.32) specializes in retail supply chain software, including inventory management and point-of-sale systems. Hall, Kinion & Associates Inc. (No.9) recruits high-tech workers, including some from places such as Russia and India, to provide much-needed information technology workers to Silicon Valley. And Medical Manager Corp. (No.8) develops software to automate doctors' offices. "Health care is one of the last areas to become more efficient," says Paul J. Rasplicka, senior portfolio manager at AIM Capital Development Fund. "There's a huge market here." But plenty of entrepreneurs hit pay dirt in less glamorous fields. Take Coast Dental Services Inc. (No.12) and Monarch Dental Corp. (No.29), which compete in the crowded field of operating and managing dentists' practices. Or OMNI Energy Services Corp. (No.13), which provides drilling, helicopter, and surveying services to oil companies in the swamps and marshes of the Gulf Coast and Alaska. And PJ America Inc. (No.11) serves up sizzling results as the largest franchisee of Papa John's pizza restaurants. All these companies seek to follow in the footsteps of the more elite graduates of the BW Hot Growth 100. Back in 1985, then-unknown Computer Associates International was No.14. Today, it is the third-largest software company, with 1997 revenue topping $4 billion. Networking titan Cisco Systems, which made the list in 1991, has seen its stock soar more than 5,000% since. New Line Cinema Corp., No.11 in 1987, is now owned by Time Warner Inc. and has released such hits as Austin Powers. Before they make it to the big leagues, however, small growth companies want a little respect on Wall Street. In 1997, the fourth year in a row, small caps trailed their big-cap brethren in stock market performance. Market pros say large caps' continued strong earnings performance gave investors little reason to venture into smaller, less liquid stocks. And when small caps seemed to be rallying in the second half of 1997, Asia's financial crisis cut them short. So while the S&P 500-stock index rose nearly 32% in 1997, the Russell 2000, a barometer for small-company stocks, rose just 22%. "We've been sailing against the wind for a number of years," says David J. Evans, portfolio manager of the Robertson Stephens MicroCap Growth Fund. The wind may yet shift. That's because small-cap stocks are simply a lot cheaper than big-company stocks. The price-earnings ratio of the S&P 500 is now 22.4, based on projected 1998 earnings growth of 10.2%. The p-e ratio of the Russell 2000 is 20.4, but with much higher expected earnings growth of 20.6%. If small caps gain ground, that should help keep the market for initial public offerings chugging. According to S&P, 529 IPOs in 1997 raised $43.6 billion. That's down from 1996, in which 737 deals raised $49.2 billion, but it beats 1994 and 1995 levels. IPOs are rife on this year's list--more than 35 of the 100 Hot Growth companies went public after January, 1997. The boom continues: In the first four months of 1998, 109 IPOs raised $8.9 billion. The flow of venture-capital funds is also robust. A record $10.4 billion was raised by 138 funds in 1997, with another $5.1 billion raised by mid-May of this year. Some clouds remain. If the Fed hikes interest rates or the Asian situation worsens, small caps probably will take a big hit. And of course, some highfliers will burn out, unable to manage such growth (page 88). Investors who are drawn to the high growth rates should also factor in the high attrition rate. If ever there was a case of past performance not guaranteeing future results, this is it. But for those who can handle the speed and dodge the swipes of giant competitors, the race has just begun. Return to top | |
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 TABLE Hottest of the Hot SALES MILLIONS* MEADOWCRAFT $145.1 COMPLETE BUSINESS 142.8 MIAMI COMPUTER 142.4 SCHUFF STEEL 140.1 SYNTEL 139.6 *Latest four quarters SALES GROWTH AVERAGE ANNUAL GROWTH* YURIE SYSTEMS 192.4% KENDLE INTL. 168.9 MEDICAL MANAGER 166.3 JAKKS PACIFIC 162.7 BRASS EAGLE 147.0 *Latest three years MARKET VALUE MILLIONS* LHS GROUP $3,085 VERITAS SOFTWARE 1,668 VISIO 1,379 SYNTEL 1,131 SAPIENT 968 EARNINGS MILLIONS* MEADOWCRAFT $26.6 VERITAS SOFTWARE 26.4 OCULAR SCIENCES 24.7 VISIO 21.8 DOVER DOWNS ENT. 20.8 *Latest four quarters RETURN ON CAPITAL AVERAGE ANNUAL RATE* DELTEK SYSTEMS 79.0 MEDICAL MANAGER 76.2 OPTEK TECHNOLOGY 67.7 INTEST 66.8 RETROSPETTIVA 62.9 *Latest three years EARNINGS GROWTH AVERAGE ANNUAL GROWTH* HURCO 722.6% ADVANCED DIGITAL 439.4 SUPERIOR ENERGY 346.8 BRASS EAGLE 341.5 THQ 294.3 *Latest three years DATA: STANDARD & POOR'S COMPUSTAT, A DIVISION OF THE McGRAW-HILL COMPANIES Return to top KENDLE INTERNATIONAL: THE $44 MILLION MOM-AND-POP Can good marriages be made in the boardroom? Candace Kendle Bryan, head of Kendle International Inc., a fast-growing Cincinnati drug-testing company, says so. Her secret: knowing how the personalities fit the task at hand. Bryan's husband, Christopher C. Bergen, is impulsive and well-suited to short-term operations, says Bryan. So he's president and runs testing. "I like long-term strategy, so I'm CEO and chairman," says Bryan. The union seems blissful. Buoyed by a $6 billion global market for clinical drug testing, Kendle topped BUSINESS WEEK'S list of Hot Growth companies. Revenues have expanded at a stunning annual pace of 168.9% over the past three years, to $44.2 million in '97. Net income grew 158.8% annually, to $3.7 million last year. And this people-intensive business, with low equipment costs, boasts a sky-high 59.3% annual average return on invested capital. The granddaughter of a coal miner, Bryan, 51, never dreamed of such numbers 17 years ago, when she set up shop. Then the director of pharmacy at Children's Hospital of Philadelphia, she joined forces with Bergen, 49, a Wharton School MBA and administrator at the hospital. Best friends, the pair had grown tired of office politics. Bryan took the lead, and 55% of the shares. Bergen got 45%. "Somebody has to make the decisions," she explains. Bryan's idea was simple. Big drugmakers were increasingly farming out research to smaller labs. Kendle offered its services overseeing clinical drug development, testing human reactions to new drugs. This data, which drug companies rely on for FDA approval, has to be bulletproof. Kendle quickly developed a reputation for reliability. "They do thousands of things right every day," says J.C. Bradford & Co. analyst Andrew L. May. Bryan and Bergen were not yet married when they launched Kendle, but from the start the company was family-oriented. It located downtown in Bryan's hometown, Cincinnati, so she could be close to her two sons from a previous marriage and pursue such interests as competitive rowing. Working together eventually led to romance. Ten years into the partnership, the pair married. By the early '90s, Kendle faced exploding demand--and competition. Big drug companies, spooked by price pressures, outsourced rapidly to cut costs. But Kendle began losing business to bigger-name rivals. "The marketplace was changing hugely," says Bryan. "It was either grow or sell." Neither wanted to sell, but there was no plan for growth, either. Bergen had no marketing background, and Bryan's scientific know-how couldn't help. So she enrolled in a crash program at Harvard business school, which she later persuaded Bergen to attend. Afterward, they reorganized, with an emphasis on marketing. Realizing they needed to get bigger, they also set plans to go public to raise the capital to acquire other labs. The changes appear to have paid off. Kendle went public last August, and its stock has since jumped from 16 to 25. Expansion is also well under way. They bought a Dutch lab and a German lab in 1997 and this February added their first U.S. acquisition: Acer/Exel, a New Jersey tester with operations in Asia too. "When you get a plan and stick to it, it's amazing what you can do," says Bryan. Kendle isn't yet among the biggest testing labs, but Wall Street thinks such moves will get it there. Analyst May sees sales nearly doubling this year, to $84.5 million, with earnings growing 148%, to $6.2 million. Bryan and Bergen don't plan to stray far from Cincinnati or her 140 nearby kinfolk. But there is one trade-off to mixing business and family: "When I go home," says Bergen, "I can't exactly bitch about my boss." Return to top BRASS EAGLE: GREAT BALLS TO FIRE If you thought paintball was just for gun-crazy, camouflage-clad kids, think again. Wayne K. Loek, 43, a nurse anesthetist in Woodridge, Ill., has been playing it for four years. "If you play it right, there's a lot of strategy involved," he says of the sport, in which players chase each other around a field and shoot guns loaded with colorful, gel-filled balls. Adds Douglas J. McKeown, 48, a lawyer in Joliet, Ill., who plays with his two sons, daughter, and wife: "I would not hesitate to recommend it to anybody." The growing mainstream appeal of a previously fringe sport helped propel Brass Eagle Inc., which markets the guns, accessories, and paintballs that players use to blast each other, to No.39 on the BUSINESS WEEK Hot Growth list. Since splitting from air-gun maker Daisy Manufacturing Co. last year, the Rogers (Ark.) company has become the key player in the $250 million industry. Thanks to Daisy's established retail ties, Brass Eagle has been the only paintball equipment maker to crack such mass merchants as Wal-Mart Stores Inc. and Kmart Corp. By yearend, its stuff will be sold in 3,500 such outlets, as well as major sporting goods chains. That's all the more impressive since Brass Eagle is new to the party. Recreational paintball has been around for some 15 years, and Daisy had made paintball guns to mark trees and cattle for commercial purposes starting in the 1970s. But it didn't get serious about tapping the sports market until 1993. When market research showed the game's potential, Daisy linked up with tiny Canadian paintball company Brass Eagle through a royalty arrangement. In 1995, it bought the company's name, patents, and other assets. Then, to help finance its growth, Brass Eagle became a separate, publicly traded company last November. Its stock opened at 11 a share; it now trades at about 16. By applying Daisy's expertise in high-volume manufacturing, Brass Eagle made cheaper paintball guns, with retail prices starting around $35. A popular semi-automatic sells for about $100, vs. $250 for similar guns several years ago. "It's a new product category. It has tremendous potential," says E. Lynn Scott, 44, Brass Eagle's CEO. Scott, a Mississippi native who began his career as a Kmart management trainee, was Daisy's vice-president for marketing and sales when Daisy and Eagle split. He has had no qualms about leaving well-established Daisy for Brass Eagle. "We started with basically nothing," he says. "It's an opportunity to participate in literally building a business." With his increased marketing efforts, which have led to paintball coverage on ESPN and MTV, the company's sales for the past three years have grown at an annual rate of 147%, to $36 million in 1997. Profits leaped at a 341.5% annual rate during that time, to $3.6 million. But Brass Eagle's dependence on one sport raises the question: Is growth sustainable? John P. Hughes of Dain Rauscher Wessels, a division of brokerage Dain Rauscher in Minneapolis, which co-managed Brass Eagle's initial public offering, sees revenue growth slowing to 44% this year, and profit growth to 78%. "Like any extreme sport, [paintball] could go in or out of favor," he says. Scott, who predicts Brass Eagle can grow at least as fast as the industry's estimated 25% rate for the next few years, sees plenty of untapped territory. He's trying to expand in international markets, which accounted for 5.2% of 1997 revenues, particularly in Europe and South America. He also aims to expand the sport's appeal by marketing a paintball-field setup that can be used in amusement centers, carnivals, and other urban settings. Down the road, he doesn't rule out diversifying. But for now, chasing this market is enough of a thrill. Return to top MELITA INTERNATIONAL: A BEST FRIEND TO TELEMARKETERS Aleksander Szlam hates it when his family's dinner is interrupted by telemarketers. That, says Melita International Corp.'s CEO, is why he invented software that tells callers when to get in touch with customers and the best way to do it. Melita's software dials a number at the preferred time, or prepares a letter, or even sends an E-mail message. "We've been working overtime to give the customer the upper hand," Szlam says. Of course, for some junk-weary consumers, no call is a good call. But the success of Melita's new Magellan software is indisputable. Telemarketers clamor for the product, which helps them target calls--and reduces hang-ups. The payoff for Melita: average annual earnings growth of 58.2% over the past three years and a high 49.8% return on invested capital, which landed the Norcross (Ga.) company the No.26 spot on the Hot Growth list. BUSY FINGERS. Melita is riding a surge in demand for telemarketing services--and hardware and software for them. Szlam, 46, has over 40 patents covering most of the technology found in call centers. His specialty: "outbound" systems that continuously dial from a list of numbers, feeding calls to telemarketing agents and managing the calls' pace. His new Magellan software takes telemarketing a step further. It is based on consumer profiles packed with information the company buys from other databases. Much of the data come from customers through surveys. When called for the first time, they are asked questions such as when it is most convenient to talk, or what language they prefer. Magellan then matches customers with telemarketers. Calls to Spanish-language customers, for example, are automatically routed to Spanish-speaking operators. An energetic executive who often dons brightly colored suits, Szlam emigrated from Poland at 19. He took up with a pop band and became interested in musical electronics. With encouragement from professors at Georgia Institute of Technology, he majored in electrical engineering. On graduation, Szlam went to work designing communications networks and software. By the late 1970s he was an engineer at Lockheed Corp., but he knew he wanted to set out on his own. Toiling nights and weekends in his garage, he designed one of the first multi-line automatic dialing systems. Szlam and his brother-in-law formed the company to sell the systems in 1983. They sold early versions to schools, which used the technology to track down truants' parents. The technology is now in 600 telecom systems, mostly with retail and credit-card companies that use them to track and collect delinquent accounts. Today, though, Melita's new direct-marketing software provides most of the growth. Industry analysts applaud a distribution agreement Melita recently signed to have Williams Communications Solutions, a $1.5 billion equipment provider, sell Melita products. "Melita has a good combination of advanced software solutions and strong distribution partners," says Donald H. Newman of Ladenburg Thalmann & Co. in New York. He sees revenues jumping a further 32% this year. Meanwhile, Szlam is working on software to assemble multiple call centers with hundreds of phone lines to create one huge virtual center. Then, telemarketers could work from home. Szlam may never make telemarketers lovable. But for his company, the quest so far has been lucrative. Return to top ARIS: A SOFTWARE TUNER AND COACH The ascent of network PCs, the Internet, and Year 2000 terrors have brought headaches, confusion, and huge expense to companies around the world. But for Paul Song, chairman and CEO of software consultants ARIS Corp., such problems are the stuff profits are made from. ARIS' specialty is making the latest software from Microsoft Corp. and others easy for companies to use. It must be good at it. Although the Bellevue (Wash.)-based company competes head-to-head with giants like Andersen Consulting, revenues have soared 96.8% annually over the past three years, and reached $55 million in 1997. Earnings have raced ahead at a 75.1% annual clip, and hit $5.3 million in 1997. That makes ARIS No.41 on BUSINESS WEEK's Hot Growth list. It has been a fast rise for Song, 35, the son of Korean immigrants. Having completed a master's in computer science from MIT, he was working as a software consultant at Oracle Corp. in 1990. But fears of management turmoil, and a longing to strike out on his own, persuaded Song to launch ARIS. At the time, Song had just $1,000 in savings and an answering machine. But that didn't stop him from bidding on a project to help timber giant Weyerhaeuser Co. implement an extensive computer system that would track information from the mills to its box plants. Competition was stiff, and included EDS and Oracle, Song says. Initially Weyerhaeuser thought ARIS too small. Song countered that if he were still at Oracle, he would be heading up the project. "What, did I just get dumb because I left Oracle?" Song demanded. BIG WINS. The blunt talk won him the job. To complete the three-year project, Song persuaded his wife and college sweetheart, Tina, to also quit her engineering job at Oracle. His brother John came in to handle finances and billing. Today, Tina heads human resources and internal computer systems at the 600-person company, while John runs training programs for U.S. clients. Song logged big wins at Boeing, the IRS, and Lockheed Martin. Today ARIS even trains Microsoft's marketing staff on its own Exchange E-mail program. Result: Analyst Wayne Segal of DMG Technology Group expects ARIS to hike revenues 64%, to $90 million in 1998. Profits should rise 36%, to $7.2 million. The key to success, says Song, is cross-selling. In 1993, he realized that while ARIS was often hired to help a company fine tune its software, good money could be made offering training once the software was up and running. By 1997, 39% of ARIS' revenues came from these classes. "One business feeds the other," says Rob Owen, an analyst with Pacific Crest Securities. To boost revenue, ARIS is spending heavily on its own information systems. Classroom enrollment is maximized by a yield management system similar to one used by airlines to fill their seats. But ARIS still faces a big challenge: attracting and keeping the skilled software engineers and teachers it needs. One reason ARIS went public last summer was to be able to offer stock options to its employees. The IPO raised $31 million, money that now fuels expansion. The stock has risen 43% to 31, and ARIS has acquired four rivals and doubled its U.S. offices. It recently bought two consulting and training outfits in Britain. Analysts say those buys look smart so far. More offices in Europe and the U.S. are likely. "We want to be the No.1 player," says Song, who with his wife now owns 45% of the company. Given his track record capitalizing on change, the opportunities look vast. Return to top DOVER DOWNS ENTERTAINMENT: SPEED DEMON Dover Downs Entertainment Inc. wasn't exactly fast out of the gate. The privately held company opened its horse-and-motor racetrack in Dover, Del., back in 1969. But sports fans in the mid-Atlantic region weren't clamoring for auto racing back then. And within a few years, the energy crisis hit, curtailing visits from many out-of-staters. "It was a tough go," recalls Dover CEO Denis McGlynn, who joined the company's promotion department in 1972. These days, however, Dover is setting land speed records. Thanks to the booming gaming and motor-sports business at its Dover Downs complex, it has racked up average annual revenue and earnings growth of 99.8% and 70.9%, respectively, over the past three years. Along with a 31.6% return on invested capital, that was enough to earn Dover the No.20 spot on the BUSINESS WEEK Hot Growth list. And since going public in October, 1996, at 17 a share, the stock has soared 85%. "They've evolved from an undervalued little company into a real growth story," says Kevin C. Holt, a research analyst at Strong Capital Management Inc., which holds nearly 130,000 Dover shares. Dover Downs, founded by private investors including trucking titan John W. Rollins Sr., can thank the state of Delaware for some of its good fortune. In 1994, the state passed a law allowing its horse-racing tracks to put in slot machines. That law--which Rollins, a former Delaware lieutenant governor, actively supported--was a boon to Dover Downs. The company's gaming revenues jumped from less than $1 million in 1994 to $81 million in the fiscal year ended last June. And there's no sign the party will end: In March, Delaware passed a law doubling, to 2,000, the number of slot machines permitted at any one location. While he is overseeing breakneck growth at Dover Downs, McGlynn himself doesn't race cars or horses. A former lieutenant in the Air Force, he wasn't even a flyboy. Instead, he spent three years overseeing the maintenance of cargo planes. McGlynn came to Dover Downs on the recommendation of a retired lieutenant colonel and was promoted to president in 1979. He became CEO in 1996. The 81-year-old Rollins, who serves as chairman of the board, still holds 39% of the company's shares, with family members holding a further 17.5%. He also remains heavily involved in dealmaking, advertising, and setting promotions strategy with McGlynn, whom he speaks with seven days a week. McGlynn, a sports buff--he played basketball and baseball in his youth--says he can't believe his luck in building a career in the sports business. "Coming to the office has never been like going to work for me," he says. "It was always something I couldn't wait to do." Now, McGlynn is using cash flow from gaming to fund an aggressive expansion. Last fall, Dover agreed to buy auto track operator Nashville Speedway USA for $3 million. With Gaylord Entertainment Co., it is building a $40 million racing complex outside Nashville. And in March, Dover struck a deal to merge with Grand Prix Association of Long Beach, which runs the popular road race in Long Beach, Calif., and owns tracks in St. Louis and Memphis. Those deals give Dover a coast-to-coast presence, vaulting it into the auto racing big leagues. Today, it's nipping at the heels of better-known operators such as International Speedway Corp. and Penske Motorsports Inc. "We are keeping our eye open for other opportunities," says McGlynn. There are plenty of potential roadblocks, however. For one thing, neighboring Maryland and Pennsylvania may allow gambling. If that happens, Dover's Delaware operations, which gets about 40% of its gaming traffic from those states, could take a big hit. That's one reason McGlynn wants to pump money back into the Dover site, in hopes of making it a full-scale entertainment complex. One idea being considered: building a hotel at the raceway. "We want to make Dover Downs a destination, not just a day trip," says McGlynn. If he can make that happen, maybe Dover Downs can keep up its torrid pace. Return to top APEX PC SOLUTIONS: SERVING THE SERVERS A children's book called Something From Nothing by Phoebe Gilman is proudly displayed in Kevin J. Hafer's spartan office. The tale of how a family of mice forged a feast from table crumbs is akin to Hafer's own story. Now CEO of Apex PC Solutions Inc., he built the company from the scraps of a computer-service business, turning it into a successful hardware manufacturer that has grown fat on the red-hot market for PC servers. Simply put, Apex eliminates clutter that has built up as corporate computer networks grow larger and more complex. Its switching equipment allows information from multiple servers--the powerful PCs that control networks of individual computers--to be displayed on one screen. This means the servers can also be stacked in cabinets--low-tech equipment Apex also sells. Today, manufacturers such as Compaq, Hewlett-Packard, Dell, and IBM offer Apex equipment to networked customers. Partnering with such prime manufacturers helped Apex reach No.4 on BUSINESS WEEK's Hot Growth list. Over the last three years, its revenues have soared an average 93.7% annually, to hit $55.4 million in 1997. At the same time, earnings have more than doubled on average, to $10.5 million. Even more impressive, the company--based in Woodinville, Wash., a suburb east of Seattle--returned an average 57.1% on its invested capital. Hafer, 41, a high school graduate, learned electronics while working on a U.S. Navy destroyer. He then parlayed the experience into gigs as a computer technician, working as a manager at electronics giant Harris Corp. for 10 years. In 1990, he landed a job as general manager at Apex Computer, a computer services company. While maintaining servers at Microsoft Corp. for Apex, Hafer foresaw the need for a more efficient way to manage the machines. Microsoft employees were running from server to server to administer the giant's own internal network. Hafer figured he could find a way to hook them all up to one monitor and keyboard. In 1992, he persuaded Sterling Crum, his boss and Apex' owner, to fund a spin-off that would go after this network-management niche. TIGHT SHIP. Hafer assembled a small team of engineers to design the software that enabled one machine to monitor several servers. With only 12 employees its first year, Apex PC Solutions rang up $1 million in sales--including a contract with Microsoft. "This was a bootstrap company," Hafer says. There are now 72 workers, but the ex-Navy man still runs a tight ship. To trim costs, manufacturing is outsourced to smaller companies around Puget Sound. Apex focuses on assembly, testing, and design. Most sales are closed by fax and phone. And to keep major computer makers happy, Hafer is obsessed with filling orders promptly. "Kevin has a fanatical belief in customer service and knows every detail of the business," says Jeffrey T. Chambers, an Apex board member and managing director of TA Associates, a private equity fund that bought half of Apex PC Solutions in 1995. That has clearly paid off. Today, Apex has captured 41% of a market that's growing at a rate of 35% a year, according to International Data Corp., a research firm in Framingham, Mass. Sales should nearly double again this year, analysts say, to $106 million, while earnings are expected to rise 50%, to about $15 million. Hafer already is staking out new territory. While Apex dominates sales to companies shipping new servers, it has barely touched the jumble of server networks already out in the field. "Imagine what we can do in a market that has been virtually untouched," Hafer says. Hafer also wants to invade the European market--and recently raised the cash to do so. The company has $51 million in working capital and no debt, thanks to its February, 1997, initial public offering and a second offering a few months later. The stock went public at 9 1/2 a share and trades today around 27. Once content to collect scraps left by others, Apex now anticipates a feast of its own. Return to top WHAT'S STILL SIZZLING--AND WHAT MELTED Two years ago, Parlux Fragrances Inc. exuded the sweet smell of success. The perfume maker had turned in double-digit profit increases throughout the 1990s, fueled by its Perry Ellis line. Under the leadership of Ilia Lekach, a Russian immigrant who began his American business career selling watches, Parlux garnered $8 million in earnings on $68 million in sales for the year ended March, 1996. That was enough to land the company in the No.32 spot on BUSINESS WEEK's 1996 Hot Growth list. Since then, though, Parlux' performance has been stinko. After losing $6.7 million for the fiscal year ended Mar. 30, 1997, it expects to report red ink for the 1998 year, too. The stock is down 81%, to 2 1/4, as of Apr. 30. Lekach, whose family owns about 15% of Parlux, admits it "suffered from a series of mistakes." One problem was Parlux' mid-1996 launch of Perry Ellis America, the latest in the Ellis line. The fragrance, named after the clothing designer who died in 1986, couldn't compete with a similar product that appeared at the same time--Tommy, from the very much alive and in-vogue designer Tommy Hilfiger. Lekach says Parlux' woes are history and predicts a comeback this year. WRONG WAY. Parlux' sorry situation is a cautionary tale that shows just how quickly a hotshot small company can fizzle. If Wall Street's lofty earnings expectations are dashed, the outcome is often bloody. Indeed, the losers on our 1996 list outnumbered the winners 3 to 2. Dragged down by a large number of high-tech and health-sciences companies that got slammed in those fast-changing fields, the class of 1996 managed a cumulative total return of only 2.6%. That compares with a 38% rise for the small-cap Russell 2000 index over that period. The large-cap Standard & Poor's Industrials returned an even better 71%. The worst performer was Lafayette Industries Inc., whose stock plummeted 99.9%, to 0.5 cents. Why? The onetime maker of display cabinets for stores moved into such things as debit-card vending machines, but the shift did not work out. Lafayette hasn't filed 1997 results, and the 1996 filings had sparse financial information. In March, 1997, NASDAQ delisted the stock from its Small-Cap Market. Attempts to reach the company were unsuccessful. Another casualty is Netmanage Inc., whose leading-edge software allowed desktop PCs to access the Internet when it ranked No.44 on our list two years ago. An ocean of red ink followed as Microsoft Corp.'s popular Windows 95, which bundles in the same Net feature, gobbled up Netmanage's business. So Netmanage is switching gears, with a product that lets employees with Windows view data on their company's IBM mainframe. GLOVES AND CHIPS. Of course, the '96 roster also had highfliers that kept soaring. At the top of the class: Safeskin Corp., which sells latex gloves to medical professionals. Thanks to concerns about the transmission of AIDS and other contagious diseases, sales have soared. The stock, too, has taken flight, surging 387%, to about 36. Not far behind was Micrel Inc., with a 362% gain. The San Jose (Calif.) maker of analog integrated circuits for cellular phones and PCs showed great agility as it sidestepped the meltdown in South Korea and elsewhere in Asia. Micrel, which had relied on Asia for close to 40% of sales, recognized the threat early, when December orders from the region fell short. So CEO Raymond D. Zinn ramped up other lines, particularly its foundry business, which manufactures other companies' products in Micrel's U.S. factories. The quick reaction kept the damage down. "Nobody moved as fast as we did," he says. Zinn also acted swiftly to protect Micrel's stock, offering an early warning to Wall Street of its Asian troubles. "They kept the Street tuned in," says Mark F. Fitzgerald, a Merrill Lynch & Co. analyst. Employees control half Micrel's shares, so sensitivity to investors comes naturally to Zinn. He personally owns 15% of the company. Despite the troubles, Micrel's last two quarters proved its best ever. Such prowess keeps Wall Street happy, and buoys faith that small caps can be gold mines. Return to top TABLE The 1996 Winners...And the Losers THE 1996 WINNERS...
TWO-YEAR TOTAL RETURN*
SAFESKIN 387.2%
MICREL 361.8
INNOVEX 268.3
APPLIED VOICE TECHNOLOGY 239.4
CIBER 227.0
VERITAS SOFTWARE 171.5
COHERENT COMMUNICATIONS 155.5
GENERAL EMPLOYMENT ENT. 154.9
CAMBRIDGE TECH. PARTNERS 133.1
CUTTER & BUCK 120.8
...AND THE LOSERS
TWO-YEAR TOTAL RETURN*
LAFAYETTE INDUSTRIES -99.9%
GLOBAL VILLAGE COMM. -94.0
ASTEA INTERNATIONAL -89.8
EUPHONIX -83.3
PARLUX FRAGRANCES -81.1
FIRST TEAM SPORTS -80.3
NETMANAGE -76.3
APAC TELESERVICES -75.5
MOVIE GALLERY -73.8
ESS TECHNOLOGY -72.1
*Calculated on the basis of stock price as of Apr. 30; excludes companies no
longer trading
DATA: STANDARD & POOR'S COMPUSTAT, A DIVISION OF THE McGRAW-HILL COMPANIES
Return to top 1998 HOT GROWTH COMPANIES To win a position in this table, a company must excel in three ways. The selection process begins by ranking companies according to their three-year results in sales growth, earnings growth, and return on invested capital. The ranks in the table are calculated from these numbers. A company's composite rank is the sum of 0.5 times its rank in return on total capital, plus 0.25 times each of its growth ranks. Standard & Poor's Compustat, a division of The McGraw-Hill Companies, which has computerized financial data on 10,000 publicly traded corporations, provided the pool of companies from which winners were selected. To qualify, a company has to have annual sales of more than $10 million and less than $150 million, a current market value greater than $1 million, a current stock price greater than $5, and be actively traded. Banks, insurers, real estate firms, and utilities are excluded. So are companies with sharp declines in current financial results, as well as companies where other developments raise questions about future performance. SALES and EARNINGS are the latest available through the most recent 12 months. Earnings include net income from continuing operations, before gains or losses from extraordinary items. INCREASES in SALES and PROFITS are calculated using the least-squares method. If results for the earliest year are negative, the average is for two years. RETURN ON CAPITAL is earnings plus minority interests and tax-adjusted interest expense expressed as a percent of total debt and equity. For ranking purposes, the maximum allowable annual return on invested capital is 100%. If companies have made substantial accounting restatements, long-term returns may be averaged for two years instead of three years. Time periods vary according to the month of a company's fiscal yearend. Profitability and growth are calculated based on the most recently available data. STOCK PRICE data are as of May 8, 1998. A l indicates that a company also appeared in last year's rankings (BW--May 26, 1997). Return to top TABLE Alphabetical Index of Companies The number that follows each company name indicates its ranking in the table Abacus Direct 14 Actrade International 80 Advanced Digital Info. 60 American Coin Merch. 90 American Science & Eng. 91 Apex PC Solutions 4 Arbor Software 61 ARIS 41 Arrow-Magnolia Intl. 94 ASI Solutions 37 AVTEAM 25 Ballantyne of Omaha 92 Bio-Technology General 68 Boron, LePore & Assocs. 24 Brass Eagle 39 Coast Dental Services 12 Coherent Communs. Sys. 53 Complete Bus. Solutions 65 Curative Health Svcs. 66 Datastream Systems 62 Davox 22 Deltek Systems 34 Digital Power 59 Dover Downs Ent. 20 Dunn Computer 6 Eltron International 78 Excel Switching 36 FactSet Research Sys. 88 FARO Technologies 84 Forensic Technologies 87 Forrester Research 19 General Employment Ent. 45 Great Plains Software 79 Hagler Bailly 85 Hall, Kinion & Assocs. 9 Healthworld 58 Henry (Jack) & Assocs. 69 Hi-Shear Technology 57 Holt's Cigar Holdings 5 Horizon Health 46 Horizon Pharmacies 74 Hurco 50 Information Mgmt. Res. 15 Integrated Systems 76 Intl. Microcomputer 64 inTEST 18 JAKKS Pacific 55 JDA Software Group 32 K V Pharmaceutical 67 K&G Men's Center 100 Kendle International 1 LECG 48 LHS Group 75 Meade Instruments 47 Meadowcraft 54 Medical Manager 8 Melita International 26 Miami Computer Supply 98 Micrel 77 Monarch Dental 29 Myers (Steven) & Assocs. 7 NCO Group 49 OAO Tech. Solutions 28 Ocular Sciences 56 Omni Energy Svcs. 13 ONTRACK Data Intl. 82 Optek Technology 31 ORBIT/FR 72 OSI Systems 97 Performance Tech. 96 PJ America 11 Powerwave Tech. 33 Procom Technology 10 Profit Recovery Group 99 Q.E.P. 86 Reliability 81 Retrospettiva 16 Sapient 23 Schuff Steel 40 SeaMED 42 Seattle FilmWorks 95 Semtech 30 Shoe Pavilion 38 Signature Eyewear 43 Specialty Teleconstructors 52 Strayer Education 63 Superior Energy Svcs. 51 Syntel 70 THQ 17 Tier Technologies 21 Timberline Software 83 TMBR/Sharp Drilling 93 U.S. Physical Therapy 89 Universal Stainless 71 VDI Media 35 Veritas Software 44 Visio 27 Westower 2 Winston Resources 73 Yurie Systems 3 Return to top |
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