Concerned about shrinking margins and slack demand, fastest growing U.S. product companies increase credit and borrowing, Coopers & Lybrand L.L.P. finds.

NEW YORK--(BUSINESS WIRE)--March 12, 1996--

Coopers & Lybrand's "Trendsetter Barometer" interviewed CEOs of 434 product and service companies identified in the media as the fastest growing U.S. businesses over the last five years. The surveyed companies range in size from approximately $1 million to $50 million in revenue/sales.

Concerned about slack market demand, shrinking profit margins and sluggish growth in revenues, America's fastest growing product companies are expanding their credit and seeking more loans than their peers in the service sector. These are the results of a just-released Coopers & Lybrand L.L.P. "Trendsetter Barometer" survey.

More product than service firms increased their credit and completed bank loans last quarter, the survey showed. Product sector growth firms increased their overall credit availability by 21.6 percent in fourth quarter 1995, compared to only 16.3 percent among service firms -- a 33 percent differential. Similarly, 38 percent of product firms completed bank loans in the period, while only 27 percent of service companies did so -- a difference of more than 40 percent.

Says Coopers & Lybrand National Director of Entrepreneurial Advisory Services George Auxier, "Typically, product firms require more capital for expansion than do service firms. But now, product companies' needs for bank borrowing and increased credit availability are even greater than under ordinary conditions."

Slack Demand, Shrinking Margins Top Reasons For Increased Borrowing

Several factors are driving the desire for additional financing among product companies: lack of market demand, tighter profit margins and slower growth in revenues. Although almost half of the CEOs of fast-growth product sector companies (49 percent) believe slack market demand will be a barrier to growth in year ahead, only 35 percent of CEOs at fast-growing service companies expect slow demand to block growth this year.

Tightening profit margins is another factor driving product companies' desire for more financing. In the fourth quarter of 1995, 28 percent of fast-growth product firms saw their profit margins increase, while 20 percent saw margins decline. In the same period, 32 percent of fast growth service companies saw profit margin gains, while just 13 percent saw slumps in margins.

"Profit margins of fast-growth product sector companies are showing a real weakness compared to those of rapid growth service sector companies," Auxier observes. "One year ago, net margins were more closely comparable."

Slower revenue growth is a third factor behind product companies' drive for more financing. Product sector firms offer gloomier revenue growth projections for 1996 than do their service sector counterparts. Product company chiefs anticipate revenue growth of 25.7 percent while service sector CEOs project 30.9 percent growth in revenues -- a 20 percent differential.

"Although revenue growth projections have softened in both the product and service sectors during the past year, the optimism of fast growing product companies has declined markedly," notes Auxier. "A year ago, product sector CEOs were projecting revenue gains of 30.5 percent, while service sector chiefs were planning for 32.1 percent revenue growth--a mere 5 percent spread between the sectors. Today, however, product and service sector chiefs are moving along very different tracks."

Also contributing to product firms' more overcast view is business competition from overseas. Auxier explains, "Some of the squeeze felt by certain fast-growing product companies may be due to low-priced competition abroad, particularly from countries where costs of production may be somewhat lower."

And, to a degree, the stronger dollar may play a role. A greater proportion (54 percent) of product sector companies is involved in exporting, compared to service sector firms (38 percent). Thirteen percent of product company CEOs cite the relative strength of the dollar against foreign currencies as a barrier to future growth, while just seven percent of service sector chief executives see the stronger dollar as a growth inhibitor.

Product Firms Pay Higher Rates For Financing

In the fourth quarter of 1995, "Trendsetter" companies' bank financing rates were 9.72 percent -- or 97 basis points above the prime lending rate before the most recent Federal Reserve decreases. But product firms paid higher financing rates than did their service sector peers. Product firms borrowed at rates 9.77 percent, compared to 9.65 percent for service firms -- a difference of 12 basis points. In both sectors, smaller firms paid above-average financing rates, Coopers & Lybrand found. These companies with fewer than 100 workers paid bank loan rates of 9.94 percent, 58 basis points more than their larger counterparts.

Product sector fast growers expect to make new capital investments at a composite rate of 14.1 percent of revenues in 1996, Coopers & Lybrand found. Service firms expect to invest at a comparatively lower level, 13.1 percent of revenues -- seven percent less than their product sector counterparts.

But Other Financing Options Are Considered

Auxier of Coopers & Lybrand notes that while bank financing contributes to nearly two-thirds of "Trendsetter" companies' increased credit availability, an array of other credit and financing sources is contemplated by America's fastest growers. He explains, "Many fast growth firms (15 percent) are considering a private placement of stock in the year ahead. Fourteen percent are considering turning to `angel' investors. And eight percent are considering venture capital financing in 1996."

Auxier adds, "By far, more product sector firms than service sector firms plan activity within these financing alternatives over the next 12 months."

Coopers & Lybrand's "Trendsetter Barometer" is developed and compiled by the firm's Entrepreneurial Advisory Services (EAS) practice with assistance from the opinion and economic research firm of Business Science International. At each Coopers & Lybrand office, an Entrepreneurial Advisory Services team is available to serve the needs of growing and midsize companies.

One of the world's leading professional services firms, Coopers & Lybrand L.L.P. provides services for enterprises in a wide range of industries. The firm offers its clients the expertise of more than 16,000 professionals and staff in offices located in 100 U.S. cities and, through the member firms of Coopers & Lybrand International, more than 70,000 people in 125 countries worldwide.

                     AMONG "TRENDSETTER" COMPANIES,
                             A BORROWING GAP

                                 Percent of companies completing
                                           loans 4Q '95

"Trendsetter" product companies                 38%
"Trendsetter" service companies                 27%

CONTACT: Coopers & Lybrand

Adam Brecht, 212/536-1664

Maggie O'Donovan Bolton, 212/536-3174