The Times 100 : The Best Performing Companies in California : INDUSTRY REPORT : In Some Industries, the Few Affected the Many : Spectacular losses by a handful of financial services companies put a heavy drag on the average earnings of California firms in ’89.

Call it the Case of the One Bad Apple, the kind of caper in which a small group of bad guys can ruin it for everyone else. The financial services sector is a textbook case, and you don’t need to call in Ellery Queen for an explanation.

Consider: In 1989, the financial services sector was the biggest loser of any industry in California, with net income dropping a grisly 52.8%. It lost more than aerospace and defense, more than energy, more than high tech, according to MZ Group’s survey of 830 companies for The Times.

All told, net income in financial services dived to $2.1 billion in 1989 from $4.4 billion in 1988. Does that mean that the industry is headed for the morgue? No. It was injured by a plunging stock market, a junk bond market that failed and troubles in the state’s savings and loans--but it’s not dead.

Sure, rising interest rates squeezed profit margins for all savings and loans, but not enough to explain a $2.3-billion drop, said James F. Wilson, financial services analyst for Montgomery Securities in San Francisco.

“S&Ls; generally on average had earnings declines,” Wilson said. “But when you’re throwing in companies like Columbia Savings & Loan, maybe comparative numbers aren’t that meaningful.”

With that kind of clue, it is suddenly easy to explain a $2.3-billion slide. In 1989, four of the five companies with the biggest losses in the Times survey were financial services companies. Nine of the 25 biggest losers were in financial services, which includes banks, S&Ls;, insurance and securities companies.

First Executive Corp. lost $831 million; Columbia Savings & Loan Assn., $591 million; Great American Bank, $263 million; Imperial Corp. of America, $164 million. So those four companies alone are responsible for a $1.85-billion free fall.

“In 1989, California S&Ls; lost $1.9 billion,” said Kathy Wedeking, senior vice president of the California League of Savings Institutions. “But there were 108 associations that earned $456 million out of a total of about 180 institutions in California. So 72 were responsible for all of those losses.”

Utilities comprise another sector skewed by a small number of companies. That number is one, in fact, and the culprit is Pacific Gas & Electric. In 1989, utilities’ income jumped an amazing 63.9%. Of the 830 companies surveyed, three of the top five in terms of absolute profits were utilities--Pacific Telesis Group, Pacific Gas & Electric and SCEcorp.

But the evidence is misleading, because SCEcorp’s net income rose only 2% between 1988 and 1989, and Pacific Telesis’ grew only 5%. But at PG&E;, income grew 14-fold, from $62 million in 1988 to $900 million in 1989. That’s an $838-million jump and accounts for nearly all of the $900-million increase in income for the utilities sector in 1989.

The reason can be found in 1988, when PG&E; resolved a rate-setting case stemming from its Diablo Canyon nuclear generating plant and took a pretax writeoff of $1.22 billion. In 1989, business went back to normal at the power company.

Retail was another industry in which a small number of companies in the state had great effect on the final numbers, said Sarah Stack, a retail analyst with Bateman Eichler, Hill Richards Inc. in Los Angeles. Overall sales for retail companies rose 19.1% in 1989 to $22.5 billion, up from $18.9 billion in 1988. Income rose 7.9% to $371.7 million, up from $344.5 million.

“Retailing is extremely polarized right now,” Stack said. “Those retailers with a strong customer preference and a strong concept are doing better. . . . Discounters like Price Club are doing very well. Specialty stores like the Gap are doing very well. Gap sells style. Price Club sells low cost. Everything in between does not seem to be doing so well.”

The aerospace and defense industry was the only sector in which sales and assets dropped along with corporate income in 1989. Sales slipped 3.3%, assets fell 3.9% and income dropped 42.7%--the second-largest decline of the industries surveyed. In addition, the aerospace and defense work force fell 5%--the largest decline in employees in any sector.

The slowdown in military spending is one reason for the troubles. Others include changes in Pentagon regulations that cut profits for defense companies. In addition, many firms took large writeoffs on fixed-price contracts in 1989. But the outlook for 1990 is not entirely bleak, because orders for commercial aircraft are up. This should help cushion the shock.

The real bright spot in California industry last year was in entertain ment and leisure, where sales rose 13% and income jumped a very healthy 31.7% to $1.5 billion.

“It was a great production year in the movie business,” said Alan Kassan, an entertainment analyst at Shearson Lehman Hutton in New York. “It’s not only because of ‘Batman’ but because a lot of movies did big business: ‘Honey I Shrunk the Kids,’ ‘Look Who’s Talking,’ ‘Parenthood.’ A lot of films doing a lot of business.”

In fact, 1989 was the top box-office year in movie history--a $5-billion year when many analysts thought the motion picture business could not get bigger. Ticket prices were up, too, which didn’t hurt. They rose only 7% to 8%, but box-office receipts were up 13% because more Americans were going to the movies, Kassan said.

It was more than a boom in the box office that made the entertainment industry shine, said Christopher Dixon, an entertainment and broadcast analyst at Kidder, Peabody & Co. in New York. Through the 1980s, Dixon said, use of videocassettes and cable television was growing.

“By 1989, many of these had matured,” he said. “Much of the strength we saw at companies like Disney was the ability to be able to sell their products into these rapidly developing new markets.”

But in looking back at corporate performance in 1989, not everything can be explained so clearly. Overall, sales at the 830 companies showed an 8.8% increase; income, however, plunged 17.5%.

It’s a mystery, says Pauline Sweezey, chief economist for the state Department of Finance. It’s happening in other states, she said.

“We’ve noticed less (income) than we’ve expected given the level of sales,” Sweezey said. “Nobody knows quite why.”