THE TIMES 100: THE BEST COMPANIES IN CALIFORNIA : THE BOTTOM LINE : TOP PROFIT : Leaders Found the Winners in Niche Markets

The smell of old money pervades the corporate headquarters of mutual fund manager Franklin Resources in San Mateo. The armchairs are leather and the desktops mahogany. “We want people to feel their money is safe with us,” says Charles B. Johnson, president and chief executive.

Apparently, they do. With $33 billion under management and a stellar two-year average return on equity of 80%, Franklin Resources emerged on top of The Times 100 as the most profitable publicly traded company in California.

Franklin was far ahead of the next three companies on the list. No. 2 tape drive maker Rexon Inc. posted a two-year average return on equity of 53%; No. 3 Neutrogena had an ROE of 41%, and specialty lubricant manufacturer WD-40 posted a 36% return.

In general, small companies in niche markets were the stars of The Times 100, and service companies tended to outperform manufacturers.

“A manufacturing company, even if it is terrific, generally won’t do as well as a service company,” notes Franklin’s Johnson. “An investment advisory firm like ours doesn’t need a lot of fixed assets.”

The Times 100 is the result of a carefully screened, computer analysis of every publicly traded company with its headquarters in California, a universe of more than 900 companies. Return on equity over a two-year period was used to come up with the 100 most profitable companies.

ROE, which is expressed as a percentage, is calculated by dividing net worth into net income minus preferred stock dividends. The figure provides a key measure of how effectively a company is using its shareholders’ money. A 15% ROE means that for every dollar shareholders have invested in a company, the firm has earned 15 cents in profit.

Overall performance, of course, is more complex and multidimensional. But ROE is considered by financial professionals to be one of the most accurate measures of profitability.

“ROE is as good a single truth as you can get, but there is no single measure,” says Steven Kerr, a finance professor at USC and interim director of its program for entrepreneurs.

In compiling the list, companies with more than twice as much debt as equity were deliberately excluded; ROE is not regarded as providing an accurate measure of strength for such highly leveraged concerns.

Additionally, to be ranked on The Times 100, a company had to have revenue of at least $50 million in 1987 and it had to have been public for at least three years and profitable for the past two years.

The first billion-dollar company on The Times 100 was disk drive maker Seagate Technology, whose ROE of 34% ranked fifth. Seagate was one of seven high-tech companies among the 25 most profitable companies in the state, evidence of the rebound in that sector as technology exports boomed and a new generation of vastly more powerful desktop computers won wide consumer acceptance.

“We’ve always had a pretty good ROE,” says Alan F. Shugart, chief executive and founder of Scotts Valley-based Seagate. “We didn’t borrow a lot of money, and we didn’t sell a lot of stock. If there are any other secrets, I’m not going to tell them.”

It is no secret that the state’s big banks failed to post strong ROEs or much of anything on the plus side of the ledger last year, chiefly as a result of billions set aside to cover expected losses on Third World debt.

The only banks on The Times 100 were Beverly Hills-based City National, which has no foreign debt and represents a classic example of niche marketing, and mid-sized Central Bank in Walnut Creek.

Despite the big banks’ absence from The Times 100, Joseph J. Pinola, chairman and chief executive of First Interstate Bancorp, argued that “the basic earnings power of the bank” was unchanged from the year before. He said he expects much better performance from most big banks in 1988.

With their lack of investment in expensive factories, retailers tended to fare well on The Times 100 list, garnering four spots among the top 25.

The ROE standout among the group was The Gap, which placed seventh on the list by posting a two-year average ROE of 33%. The San Bruno-based clothing retailer made the list despite the hard times that have afflicted it and other specialty clothing sellers in the last couple of quarters.

Another retailer with a strong ROE was Anaheim-based Clothestime, the fast-growing specialty retailer of women’s apparel. Leasing space for its stores and turning over merchandise quickly helped keep overhead low and contribute to an average ROE of 31% during the past two years, good for 11th on The Times 100 list.

Yet Clothestime’s figure was less than half the return posted by the leader, Franklin. The mutual fund manager has been on a profit roll since 1980, when high interest rates lured investors to the single-state tax-free municipal bond funds that Franklin pioneered. Since 1980, Franklin’s assets under management climbed to $33 billion from $500 million, including $7.5 billion in Cal Tax-Free, the largest tax-free fund in the country.

About 95% of Franklin’s assets under management are invested in money market securities and bonds, while only 5% are in stocks. This allowed the company to emerge relatively unscathed from last October’s stock market collapse.

Still, Johnson acknowledges that investors remain jittery and that sales of all types of funds have slowed this year. “Things have slowed down. It’s not the straight up, off-the-chart growth we are used to,” he says.

THE TIMES 100 Ranks companies by income as percent of equity over two years.

Rank Company Industry 1 Franklin Resources Investment management 2 Rexon Inc. Computer storage products 3 Neutrogena Soaps & skin products 4 WD-40 Specialty lubricant 5 Seagate Technology Computer storage products 6 Syntex Corp. Pharmaceuticals 7 The Gap Clothing stores 8 Ashton-Tate Computer software 9 Downey S&L; Savings & loan 10 Countrywide Credit Mortgage bankers & brokers 11 Clothestime Inc. Women’s clothing 12 Pic ‘N’ Save Variety stores 13 Times Mirror Media 14 Western Digital Computer products 15 Stanline Wholesale building material 16 Apple Computer Computer products 17 AST Research Computer products 18 Intl. Lease Finance Corp. Leasing 19 First Amer. Financial-Calif. Title insurance 20 Cherokee Group Apparel & other products 21 Diceon Electronics Electronic components 22 Price Co. Variety stores 23 Lockheed Corp. Aerospace & defense 24 SPI Pharmaceuticals Pharmaceuticals 25 Wyse Technology Computer products 26 Walt Disney Co. Films & theme parks 27 Micropolis Computer storage products 28 Telos Corp. Computer software 29 C & R Clothiers Clothing stores 30 Community Psych. Cntrs. Psychiatric centers 31 Kit Manufacturing Transportation equipment 32 City National Corp. Banking 33 Superior Industries Intl. Motor vehicle parts 34 Science Applications Intl. Management consulting 35 Farmers Group Insurance brokerage services 36 Clorox Consumer products 37 Telecredit Credit reporting services 38 Teledyne Aircraft engines & parts 39 Kaufman & Broad Real estate development 40 Dionex Industrial measurement equip. 41 For Better Living Concrete products 42 3COM Corp.* Office automation systems 43 American Ecology Waste management services 44 Products Research & Chem. Chemical products 45 Arden Group Grocery stores 46 Equitec Financial Group Security & commodity brokers 47 Hilton Hotels Hotels & motels 48 Atlantic Richfield Oil & gas 49 Great Western Financial Savings & loan 50 Adia Services Personnel supply services 51 H.F. Ahmanson & Co. Savings & loan 52 Anthony Industries Sporting goods 53 Bio-Rad Laboratories Optical instruments & lenses 54 Watkins-Johnson Defense electronics 55 Beeba’s Creations Womens’ & misses apparel 56 Calmat Co. Concrete, asphalt & other 57 Gottschalks Department stores 58 Measurex Industrial measurement equip. 59 Bridgford Foods Food products 60 Eldon Industries Office furniture 61 Castle & Cooke Food products 62 Caesars New Jersey Casinos & hotels 63 Calif. Water Service Co. Water utility 64 Transtechnology Fabricated metal products 65 National Medical Enterprises Hospitals 66 Jefferies Group Investment services 67 Amdahl Corp. Computer products 68 Zero Corp. Metal forgings & stampings 69 Southern Calif. Edison Electric utility 70 Tandem Computers Computer products 71 System Industries Inc. Computer storage products 72 P. Leiner Nutritional Prods. Vitamin products 73 San Diego Gas & Electric Utility 74 Earl Scheib Auto repair services 75 Plantronics Telephone & telecomm. 76 Sizzler Restaurants Intl. Restaurants 77 Altos Computer Systems Computer products 78 DEP Corp. Soaps & cosmetics 79 Longs Drug Stores Drug stores 80 CP National Telecommunications 81 Lucky Stores Grocery stores 82 Caesars World Casinos & hotels 83 SJW Corp. Water utility 84 Fleetwood Enterprises Motor homes 85 Homestake Mining Gold & silver ores 86 Tab Products Office furniture 87 Southern Calif. Water Water utility 88 Farmer Bros. Food products 89 Computer Sciences Computer software 90 Collins Foods Intl.** Restaurants 91 Raychem Electronics, specialty chem. 92 Pacific Telesis Group Telecommunications 93 Central Bank Banking 94 Zenith National Insurance Property-casualty insurance 95 Home Federal S&L-SD; Savings & loan 96 United Television Radio & TV broadcasting 97 Hewlett-Packard Computer products, equip. 98 System Integrators Office automation systems 99 Gradco Systems Computer products, office equip. 100 McKesson Drugs & medical products

% change 2-year average Debt-to- 1987 sales 1987 income in income Rank City return on equity equity ratio ($ millions) ($ millions) from 1986 1 San Mateo 80 0.02 206.5 58.9 83 2 Culver City 53 0.17 101.4 6.2 203 3 Los Angeles 41 0.00 135.1 14.9 83 4 San Diego 36 0.00 70.9 11.0 -5 5 Scotts Valley 34 0.85 958.1 139.7 305 6 Palo Alto 33 0.21 1,129.2 248.8 20 7 San Bruno 33 0.04 1,062.0 69.6 2 8 Torrance 33 0.04 254.7 40.9 36 9 Costa Mesa 32 1.99 265.6 33.2 -42 10 Pasadena 32 0.77 141.9 16.3 6 11 Anaheim 31 0.00 179.2 7.9 -34 12 Carson 29 0.01 361.7 47.3 19 13 Los Angeles 28 0.60 3,154.6 266.5 -35 14 Irvine 27 0.12 462.5 42.8 108 15 Norwalk 27 0.46 64.9 1.9 23 16 Cupertino 27 0.00 2,661.1 217.5 41 17 Irvine 26 0.00 206.0 13.0 -52 18 Beverly Hills 26 1.35 173.1 47.5 44 19 Santa Ana 25 0.37 415.0 32.4 9 20 North Hollywood 25 0.02 139.6 10.4 53 21 Irvine 24 0.76 111.1 9.5 37 22 San Diego 23 0.52 3,305.7 73.3 24 23 Calabasas 23 0.42 11,321.0 436.0 7 24 Costa Mesa 22 0.23 74.6 10.1 50 25 San Jose 22 0.76 392.8 25.4 40 26 Burbank 22 0.29 2,876.8 392.3 59 27 Chatsworth 21 0.54 288.3 27.2 49 28 Santa Monica 21 0.01 91.9 3.7 74 29 Culver City 21 0.36 74.3 1.3 -11 30 Laguna Hills 20 0.12 285.3 60.0 17 31 Long Beach 20 0.00 68.1 1.8 52 32 Beverly Hills 19 0.01 308.6 35.5 19 33 Van Nuys 19 0.53 157.9 8.9 4 34 San Diego 19 0.00 640.6 20.1 11 35 Los Angeles 18 0.13 1,133.0 290.0 32 36 Oakland 18 0.04 1,126.0 104.9 10 37 Los Angeles 18 0.00 135.8 13.5 42 38 Los Angeles 18 0.28 3,216.8 377.2 58 39 Los Angeles 18 1.97 1,518.0 60.6 37 40 Sunnyvale 18 0.00 56.3 8.9 20 41 San Juan Capistrano 18 1.06 78.5 2.5 9 42 Santa Clara 17 0.02 171.1 15.0 34 43 Agoura Hills 17 0.07 68.1 4.6 43 44 Glendale 17 0.46 95.1 7.9 8 45 Los Angeles 17 1.59 359.9 7.4 61 46 Oakland 17 1.29 57.8 6.3 35 47 Beverly Hills 17 0.37 815.4 139.9 43 48 Los Angeles 17 1.07 16,282.0 1,224.0 99 49 Beverly Hills 17 1.10 3,969.0 210.1 -27 50 Menlo Park 17 0.13 390.3 11.4 82 51 Irwindale 17 1.27 2,639.0 200.0 -34 52 Los Angeles 16 0.25 264.2 7.5 6 53 Hercules 16 0.64 159.5 7.7 33 54 Palo Alto 16 0.22 264.2 17.1 -1 55 San Diego 16 0.00 107.6 4.1 28 56 Los Angeles 16 0.13 602.1 78.1 77 57 Fresno 16 0.57 156.6 5.0 23 58 Cupertino 16 0.03 227.4 26.8 27 59 Anaheim 16 0.00 56.5 1.6 156 60 Inglewood 16 0.00 84.2 6.2 25 61 Los Angeles 16 0.50 1,749.1 88.9 18 62 Los Angeles 16 0.29 304.4 18.1 22 63 San Jose 16 0.72 112.8 15.0 10 64 Sherman Oaks 16 0.85 209.4 11.9 12 65 Los Angeles 15 1.56 2,987.3 157.6 13 66 Los Angeles 15 0.46 150.9 11.3 -18 67 Sunnyvale 15 0.13 1,505.2 142.0 261 68 Los Angeles 15 0.12 133.3 12.8 5 69 Rosemead 15 0.81 5,492.7 788.6 3 70 Cupertino 15 0.01 1,035.5 105.6 66 71 Milpitas 15 0.20 119.5 4.9 60 72 Torrance 15 0.00 68.7 3.2 -8 73 San Diego 15 0.86 1,904.2 179.1 -16 74 Beverly Hills 15 0.00 65.0 3.0 -40 75 Santa Cruz 15 0.17 111.5 9.1 8 76 Los Angeles 15 0.22 285.0 17.4 27 77 San Jose 15 0.22 153.9 9.7 -52 78 Rancho Dominguez 15 1.93 66.8 1.8 -22 79 Walnut Creek 14 0.00 1,772.5 49.2 28 80 San Francisco 14 1.12 246.1 17.7 -19 81 Dublin 14 0.52 6,924.8 119.4 140 82 Los Angeles 14 0.22 779.7 40.4 -1 83 San Jose 14 0.57 65.7 8.9 -5 84 Riverside 14 0.00 1,380.9 45.8 15 85 San Francisco 14 0.05 516.2 146.4 549 86 Palo Alto 14 0.01 127.1 7.2 5 87 Los Angeles 13 0.83 77.7 9.9 41 88 Torrance 13 0.00 210.4 18.0 184 89 El Segundo 13 0.27 1,133.8 40.5 26 90 Los Angeles 13 0.56 582.6 20.7 -1 91 Menlo Park 13 0.04 944.4 73.6 51 92 San Francisco 13 0.67 9,131.0 950.0 -12 93 Walnut Creek 13 0.35 172.1 10.1 48 94 Encino 13 0.11 459.7 41.1 49 95 San Diego 13 1.97 1,299.6 103.0 0 96 Beverly Hills 13 1.03 93.8 3.6 -56 97 Palo Alto 13 0.02 8,090.0 644.0 25 98 Sacramento 13 0.05 58.8 4.1 -58 99 Irvine 13 0.41 76.2 2.7 53 100 San Francisco 13 0.61 7,112.3 88.7 -6

* Merged with Bridge Communications in September, 1987.

** 1986 income results reflect $5.7-million after-tax gain related to public offering of Sizzler common stock and classification of Collins Foodservice Inc. as discontinued. Prior year results not restated.